The Philippines routinely designs policies regarding international trade with a liberal and open economy. The country’s central bank, Bangko Sentral ng Pilipinas, does not enforce strict capital controls unlike some emerging markets where cross border transactions are more difficult. Trade-related payments are conducted with relative ease, and earnings from overseas investments may be repatriated. The BSP provides guidance clarifying banks are not obligated to sell their foreign currency only to clients who maintain deposit accounts in the banks. This guidance would be useful for treasury operations that seek the most effective method to source foreign exchange. However, in practice, a number of factors influence the ease of executing a payment transfer, including the extent to which the corporate bank account has been fully prepared to accommodate payment transfers, the supporting documents have been prepared to meet the transfer requirements, and the bank has enough assurance that the compliance file is satisfactory and would not trigger a prolonged review of the payment. The payment transfer is prepared after the corporate bank account is set up and ready to accommodate payment transfers.
Payment Rails and Transfer Methods
For corporate-related inbound and outbound international payments to the Philippines from most other countries, SWIFT payment channels through mainstream banks are still the most used channels. SWIFT, in conjunction with supporting documents, is the most BSP-compliant and auditable payment channel for large payments such as payments to suppliers and for payments related to the capital contributions and the repatriation of profits of inter-company subsidiaries. For smaller or more frequent operational payments, BSP-licensed remittance operators and/or fintech payment platforms are used as alternative payment channels. This is especially the case for payments to suppliers in currencies where the intervening bank payment pathway would be slower or more costly. Although personal remittances to the Philippines are done to a large extent through specialist remittance operators and mobile wallets, the traditional full banking system is required for corporate remittances for compliance purposes. Therefore, the various remittance channels utilized by individuals to a large extent remain unavailable to corporate users.
Like some regional currencies, the peso is not interchangeable on a free basis. Therefore, for outbound payments, the timing of the foreign exchange translation may be important from a cost perspective. The cost and certainty of rates available through, for example, a spot payment versus a forward transaction, or through the treasury services of the primary bank of the company, will vary. Companies that appreciate that they will frequently have outbound foreign currency payments will benefit more from a considered treasury policy than from opportunistic currency conversion on a transactional basis.
Inbound Capital: Remittance Registration
For foreign investors transferring equity capital or shareholder loans into a Philippine corporation, the critical procedural step following the actual transfer to the corporate bank account is the outbound remittance registration with the Bangko Sentral ng Pilipinas (BSP) via the recipient corporate bank. BSP registration of inward remittances creates the documentation trail backing the investor’s outbound capital transfer and dividend remittance requests, which the BSP will not restrict. Remittances made without BSP registration will not be restricted from domestic use, although their future repatriation may require a case-by-case approval of the BSP, rather than the ordinary bank process. This creates actual friction for the investor, particularly for dividend remittances, if this is not dealt with at the time the capital is brought into the Philippines.
Foreign investors registered with the SEC and who have documented inward remittances registered with the BSP may freely repatriate their capital and remit dividends through the ordinary course of banking, subject to the completion of the requisite supporting documentation. These usually include the bank’s confirmation of the original inward remittance, SEC registration and tax clearance or confirmation of the withholding tax remittance for the period. The Philippine Tax Code prescribes a default tax of 25% on dividends paid to foreign shareholders, while tax treaties between the Philippines and specific foreign countries may provide for a lower tax of 15% or below. These factors determine the net return to the investor.
Outbound Payments: Required Bank Documentation
Routine outgoing international payments will include payments for supplier invoices, service management fees for an offshore parent, fees to international professional service providers, etc. Banks will request commercial invoices/contracts to provide the business justification for payments, the company’s BIR certificate of registration, and registered taxpayer status, and the appropriate withholding tax documents. The payment of Philippine taxes will generally require an outbound payment to a non-resident to fulfill Philippine taxation’s requirements for withholding and remitting certain taxes for payments of royalties, dividends, and payment for the provision of technical services. Banks will also request assurance that the withholding tax requirement has been satisfied.
Intercompany loans from a Philippine entity to its offshore parent, or vice versa, will require the Philippine BSP to approve the loan, and will need the loan to be registered prior to facilitating Bank transactions to pay down the loan. The loan registration will require the loan agreement and the documents that identify the borrower and the lender, and the loan’s terms. Subsequent loan transaction payments will require the loan be registered. This will require an additional operational step. However, failing to register the loan prior to the first loan disbursement will create a retroactive compliance concern that may impede additional transactions.
Foreign Exchange Considerations
Historically speaking, in the ASEAN region, the Philippine peso has not been overly volatile. Rather, the peso has been impacted by balance of payment accounting, costs of imported goods, remittance inflows, and the general strengthening of the USD. For foreign investors in the Philippines whose operating costs are incurred in pesos and whose sales (or whose parent company’s sales) are reported in the USD, EUR, or any other foreign currency, unhedged peso exposure can lead to significant fluctuations in reported financial results even in the absence of any noticeable change in the performance of the underlying business.
Where the cost base is predominantly domestic, the simplest approach to managing risk is what is referred to as a natural hedge, and it involves the matching of peso revenues and peso costs. This is the preferred approach to managing foreign exchange risk. For businesses that are primarily exporters, or that have a high level of offshore costs, the use of forward contracts and foreign exchange (FX) swaps offers a more robust solution. Businesses with more sophisticated needs are likely to benefit from a treasury policy that prescribes what foreign exchange risks are to be hedged and the specific instruments to be used and to be of a specified tenor.
Common Issues and How to Avoid Them
Payment delays due to insufficient compliance files are the most common pain point for Philippine entities wishing to remit money abroad. If a bank cannot align the purpose of a transfer with the supporting documents, the bank will halt the transfer for a review. This adds days or weeks to a transfer that the client expects to process in real time. The best way to prevent this is to have a compliance file that is always complete and up to date. This includes SEC registration, BIR documents, BSP remittance registrations, and loan agreements, along with the last year’s audited accounts and tax clearances.
Account restrictions for mismatched activity occur when the declared business purpose for the account is not consistent with the transactions flowing through the account. A company that is registered as a technology services provider, but starts to process large volumes of payment for the import of goods, is sure to attract a compliance review if the company fails to update its bank relationship profile. The best way to prevent the restrictions to the account is to inform the bank of the changing business activities before the account is flagged.
Frequently Asked Questions
Can Philippine companies send money abroad? Yes, but they are subject to the documentation and reporting requirements of the BSP as well as the supporting documentation that banks require for each transfer. This includes invoices, contracts, board resolutions or registered loan agreements, as applicable.
Do the Philippines have any capital control restrictions? Unlike many countries, the BSP does not apply strict capital controls. Instead, the BSP requires registration for foreign exchange remittances and inter-company loans and requires documentation for overseas transfers where the BSP sets limits in order to sustain the cross-border payment and settlement audit trail.
How quickly does it take to send money internationally from the Philippines? Standard trade payment SWIFT transfers, which are supported with complete requisite documentation, typically are processed within one to three banking days. Transfers that are subject to a compliance review, for example, transfers with insufficient documentation, transfers with an abnormal or atypical transaction pattern, and/or transfers that are of a different nature or type, may take longer.
What are the normal requirements for banks to process international funding transfers? For trade payments, the supporting invoice or contract and prescribed BIR documents; for the repatriation of dividends, the remittance confirmation noting BSP’s approval, the audited financial statements and proof of payment of the withholding tax; and for other company loans, the BSP-approved loan agreement. For all, the company’s current KYC file with the bank.