Understanding Payroll in the Philippines: What Global Companies Need to Know About the Philippines’ Payroll System

Nov 7, 2017  | Topic: Country Payroll

The Philippines comprises of more than 7,000 islands and is a bit of a melting pot of culture due to its colonial past. Its people have certainly managed to keep their spirits alive throughout all the change, in fact emerging as one of the larger economies in Southeast Asia. With a GDP of $305 billion, Filipinos rely on electronics, agriculture, and clothing to bring in the majority of their income. 

Large businesses should note that taxes can be complicated, primarily due to the amount of reporting measures and contributions required of companies. On the plus side, those looking to set up business here will find a reasonable corporate tax rate of 30% and an enthusiastic and capable workforce ready to help the company get started. 

Business Basics

All businesses 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. Organizations must obtain permission from local officials in the village (known as barangay) in which they choose to establish their company. Businesses need to obtain a tax certificate from the City Treasurer's Office and a permit from the Business Permits and Licensing Office. In addition, companies use 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 $100). However, companies who use a third-party global payroll solution are not required to set up in-country bank accounts. 

Employment Law & Employee Rights

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. 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. Only about 5% of the workforce belongs to any type of formal organization. 

Payroll Assessment

Compensation & Severance

Minimum wage is determined by the locality in which business is conducted, though many have encouraged the national government to set a standard minimum wage. It's estimated that a worker would need at least 9,064 pesos (~$177, £135, €153) a month to make a living. In the case of severance pay, Filipino workers are entitled to one month of wages, plus one month’s wages for every year worked for the company after the first year. The employee is also entitled to at least one month of notice before being terminated, provided the dismissal is without cause.

Tax Requirements & Withholding

The Philippines has standard reporting forms and funds to which all employers must contribute, including social programs (separate from social security) that make it easier for workers to get health insurance and affordable housing. 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. 

Income is taxed on a progressive scale from 5% to 32%. Those who make less than 10,000 pesos (~$195, £149, €169) a year are exempt from income tax, while those who make 500,000 pesos (~$9,770, £7450, €8430) a year or more are taxed at the maximum rate. Taxes are generally deducted directly from the employee's paycheck. Social security taxes are capped at 13,500 pesos (~$264, £201, €228). Corporate taxes are calculated at a flat rate of 30%, while VAT is 12%. 

Time Off & Paid Leave

Filipinos are entitled to 13 paid vacation days each year, with an additional day given for each year worked after the first three years. Vacation time is capped at 18 days. There are also 17 paid national and public holidays. Any work performed on a holiday must be paid at double the normal wage. Work performed on a day of rest, meaning Sunday, is compensated at 133% the normal wage. Up to 12 days of paid sick time are generally allowed each year, with an extra day given after the first two years of work. Sick leave is capped at 15 days. New mothers typically take off 120 days around the time of the birth. During this time, they are paid their full salary courtesy of social security. New fathers can take off up to 7 days. 

Date The Philippines Public Holiday Schedule
 January 1st  New Year's Day
 January - February (dependent on lunar   calendar)  Chinese New Year
 April 9th  The Day of Valor
 Thursday before Easter Sunday   Maundy Thursday
 Friday before Easter Sunday  Good Friday
 Saturday before Easter Sunday  Black Saturday
 May 1st  Labor Day
 June 12th  Independence Day
 June (dependent on lunar calendar)  Eid-Ul-Fitr
 August 21st  Nino Aquino Day
 August 28th  National Heroes Day
 August - September (dependent on lunar   calendar)  Eid Al-Adha
 November 1st  All Saints' Day
 November 30th  Bonifacio Day
 December 25th  Christmas Day
 December 30th  Rizal Day
 December 31st  New Year's Eve

The Right Relationship 

An important thing to note about business in the Philippines is the importance of relationships. It’s not uncommon for colleagues to spend the majority of a meeting discussing non-business matters in an effort to solidify the team and interpersonal relationships. When it comes to finances, businesses may view a global payroll solution as a key relationship to nurture as a means of managing their many obligations. While there are a number of reasons to do business in the Philippines, the compliance and payroll regulations can be challenging. A strong relationship with a third-party solution can provide decision-makers with a straightforward way to satisfy obligations and maintain 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.