Understanding Payroll in the Philippines: What Global Companies Need to Know About the Philippines’ Payroll System
Made up of around 110 million people, the Philippines has the 13th largest population in the world, spread across more than 7500 islands in the western Pacific Ocean. A rich cultural melting pot, thanks in no small part to its colonial component, it represents an exciting opportunity for international businesses - largely thanks to its enthusiastic and skilled workforce and burgeoning economy.
Indeed, the Filipino economy has enjoyed significant and sustained growth in recent years, becoming one of the largest economies in south-east Asia. Its annual GDP has more than quadrupled since the year 2000, reaching $355.5 billion in 2019, with the global economic crisis of 2008 and 2009 having only a minimal, temporary impact on growth. Additionally, the impact of COVID-19 on the Philippines was relatively minor compared to many other countries, meaning it should be well-placed to continue its impressive growth in years to come.
All of these positive factors, combined with a reasonable corporate tax rate, makes the Philippines a highly attractive prospect for multinational businesses. However, it isn’t all plain sailing. As you’ll discover later, taxes, especially around reporting and contributions, can be complex. This guide outlines the key payroll considerations for those seeking to set-up a business in the Philippines.
A useful thing to note about doing business in the Philippines is that interpersonal relationships are enormously important. It’s not uncommon for colleagues to spend the majority of a meeting discussing non-business matters in an effort to solidify teams and relationships. Bearing this cultural trait in mind is vital to doing business successfully in the Philippines.
On a more practical level, the administrative procedures of setting up operations in the Philippines can be a long, drawn-out affair. That’s in no small part to the large number of different organizations that new companies have to set up with.
Firstly, all corporations and partnerships are required to register with the appropriate entities through the Securities and Exchange Commission, including social security and public institutions devoted to universal health insurance and housing. This can be done online using their i-Register system.
Companies must also obtain a permit from the mayor of the village, district or ward they will be based in (known as a ‘barangay’). This will require a lease contract for the premises, a community tax certificate, and other permits relating to occupancy, fire safety and sanitation.
Then, businesses need to obtain a tax certificate from the City Treasurer's Office and a permit from the Business Permits and Licensing Office, and work with the Bureau of Internal Revenue for accounting and billing matters.
All payments must be made from in-country bank accounts, which can be set up in one day with a minimum capital deposit of 5,000 pesos (approximately £80, $100, €90). However, companies who use a third-party global payroll solution are not required to set up in-country bank accounts.
Most Filipinos work eight hours a day from Monday to Friday; however, certain industries require 48 hours per week without additional overtime. The exact rate of overtime pay is customarily negotiated between employee and employer, and stipulated in an employee contract signed prior to work, but must be at least 125% of the normal wage, or at least 130% for overtime undertaken on a rest day or a holiday.
Contracts may be either oral or in writing. Probationary periods are allowed but may not last longer than six months, except when it comes to a skilled apprenticeship program. In this case, employees and employers will need to agree upon the length of the term prior to employment.
Employees are allowed to unionize, though collective bargaining is rarely practiced and union membership is low (believed to be less than 10% of the total workforce.
Compensation and Severance
Minimum wages in the Philippines vary between different regions, and also between agricultural or non-agricultural work. Rates range from 267.38 pesos per day (approx. £4.10; $5.00; €4.80); for agricultural workers in the Bangamoro Autonomous Region, to 486.85 pesos per day (£7.50; $9.20; €8.70) for non-agricultural work in metropolitan Manila.
Filipinos are also entitled to the ‘13th month’ bonus of one extra month of their usual salary, with tax applied at normal rates and usually paid in December (no later than Christmas Eve). However, staff in more senior, managerial positions are not entitled to this bonus.
In the case of severance pay, Filipino workers are entitled to one month’s wages for every year worked for the company. Any partly-served year of more than six months still counts as a full year, in terms of calculating the length of service. The employee is also entitled to at least one month of notice before being terminated, provided the dismissal is without cause.
Tax & Withholding Considerations
Personal income tax rates have undergone a significant overhaul in the Philippines in recent years. The result of these changes is that many low-paid employees no longer pay any income tax, and even full-time workers in Manila need to earn more than double the minimum wage before they cross the first income tax threshold.
As with many countries, progressively higher income tax rates are applied. The first threshold of 20% is applied to earnings over 250,000 pesos per year (approx. £3800, $4700, €4500), while the highest rate is applied to earners bringing in over 8 million pesos per year (approx. £122,000; $150,000; €143,000). The highest rate is a fixed amount of 33.2% for the first 8 million pesos earned, then a further 5% on everything beyond that. Taxes are generally deducted directly from the employee’s paycheck.
Filipinos are also required to pay social security, with contributions generally as follows:
Social Security: employer 8%, employee 4%
Health Insurance: employer 1.75%, employee 1.75%
Home Development Mutual Fund: employer 2%, employee 1-2% depending on earnings
Provident Fund: employer 425 pesos per month, employee 225 pesos per month.
The nature of the compliance regulations can make having an international payroll solution not just helpful, but necessary to keep up with the monthly contributions. Any overdue taxes are subject to a surcharge of up to 25%, which can quickly eat into a company’s profits.
VAT is 12%, but the corporate tax rates have been lowered as part of the response to the pandemic. For most larger businesses, and regional operating headquarters, the rate is now 25%.
Time Off & Paid Leave
Employees in the Philippines are only entitled to a minimum of five days of ‘service incentive leave’ per year. Most good employers offer substantial amounts of vacation leave to their employees over and above this, but they are not legally required to do so.
The Philippines has a complex system regarding payment on public holidays. There are 12 official days of ‘regular holidays’ each year, for which employees not working are entitled to their normal rate of pay plus an additional ‘cost of living allowance’ (COLA). This amount is doubled for employees who work on those days. Separate from this, there are nine ‘special non-working days’ throughout the year. On these days, workers are entitled to 130% of their usual daily rate if they work that day, but no payment at all if they take that day off, unless it’s part of their paid leave.
Maternity leave provision in the Philippines has been expanded under a new law, which came into force in March 2019. Mothers are now entitled to a maximum of 105 days’ paid maternity leave for each pregnancy, as long as they have made at least three social security payments in the 12 months - but this must precede the semester (half-year period) of the birth. The rule that previously only enabled maternity benefits for a woman’s first four pregnancies has now been scrapped. As for fathers, they are entitled to seven days’ paid paternity leave, and can receive a further seven transferred from the mother’s maternity leave entitlement.
As this guide demonstrates, there are a range of intricate nuances when it comes to setting up businesses and running payroll in the Philippines. It’s in territories like this that a global payroll solution really comes into its own, as a means of gaining third-party expertise quickly and as a straightforward vehicle for satisfying obligations, while maintaining compliance.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.