Overview

Metro Manila is the commercial capital of the Philippines.  It is made up of 17 cities and is where Philippine national importers and distributors are located.  Within Metro Manila, Makati City, Ortigas Center in Mandaluyong City, Bonifacio Global City in Taguig, Asiana in Pasay City are considered central business districts (CDB).  These CBDs are homes to many multinational company headquarters, commercial bank head offices, and high-end shopping establishments.

Outside of Metro Manila, other major regional commercial centers are Province of Pampanga, Baguio City, Cebu City, Iloilo, Davao and Batangas.  Cebu City, the third largest city, and Iloilo are the primary trading centers for the middle portion of the archipelago (the Visayas Region).  Davao, the second largest city in the Philippines, enjoys a near-trade monopoly in Southern Mindanao, due to the numerous land and water connections to nearby provinces. 

The Port Statistics data released by the Philippine Ports Authority shows total foreign ship calls of 5,490 as of second quarter 2023 (from 5,646 in Q2 2022).  Here is the breakdown of the Q2 2023 foreign ship calls per region: Manila/ Northern Luzon: 2,332; Southern Luzon: 1,141; Visayas with 528; Northern Mindanao: 499, Southern Mindanao: 990.

Most of the international cargo traffic is handled at ports located in Manila, the Manila International Container Terminal (MICT) and South Harbor.  MICT is operated by the International Container Terminal Services, Inc. (ICTSI), a Philippine-based international port operator with operations in 20 other countries (including the U.S.).  South Harbor is operated by Asian Terminals, Inc. (ATI), a Dubai-based company.

The use of local agents or distributors greatly improves the opportunity for market success.  There are currently two types of importers in the Philippines: stocking distributors and indenters.  Stocking distributors are bound by a contract to buy and sell a prescribed number of items as stated in their agreement with the foreign supplier.  Indenters, on the other hand, act as brokers between foreign suppliers and the end user, thus saving on capital outlays for expensive equipment and avoiding the need to stock high-priced products.  Usually, a buyer who orders from an indenter already has the financing for the goods.  Customers will often open a letter of credit (L/C) for direct purchase from a foreign exporter.  Under these arrangements, the local representative or agent gets a commission for the sale, known as an indent sale.  Indenters also handle after-sales service support.

In selecting local firms as agents, a U.S. firm should consider whether the local firm is an accredited vendor of its target customer(s).  Several large Philippine corporations have a “vendor accreditation process” in place.  Only those listed as an accredited vendor are informed of upcoming procurement projects.  For Government projects, potential local distributors should be knowledgeable on relevant Philippine and U.S. laws, specifically, Republic Act (RA) No. 9184 or the Government Procurement Reform Act (GPRA), and the U.S. Foreign Corrupt Practices Act (FCPA).  U.S. companies should work with a local firm that has experience participating in Philippine Government bids.  Many U.S. firms use the U.S. Commercial Service’s International Company Profile (ICP) program to assess a prospective agent’s capability and reputation in the market.

Using an Agent or Distributor

Agent/distributor arrangements are common in the Philippines.  Local companies are often eager to pursue discussions once they have examined a U.S. firm’s website/product literature and have determined that there is a market for the product.

Contracts between U.S. manufacturers and their Filipino agents/distributors typically contain the following key elements:

1. General Provisions:  Identification of parties to the contract, duration of the contract, conditions for cancellation, definition of covered goods, definition of territory or territories, and, whenever necessary, sole, and exclusive rights,
2. Rights and Obligations of Manufacturer:  Conditions of termination, protection of sole and exclusive rights, sales and technical support, tax liabilities, conditions of sale, delivery of goods, prices, order refusal, inspection of distributor’s books, trademark/patent protection, information to be supplied by the distributor, marketing, advertising and sales promotion, responsibility for claims/warranties, and inventory requirements,
3. Rights and Obligations of Distributor:  Safeguarding manufacturer’s interest, intellectual property rights, payment arrangements, contract assignment, customs clearance, observance of conditions of sale, after-sales service, and information to be supplied to the manufacturer.

There are no laws that impede termination of an agent/distributor contract, should either party wish to do so.  Contracts usually specify that 30-day notice be given in the event of cancellation, or as mutually agreed upon by both parties.  Standard agent commissions range from 5% to 10% but vary by industry.  Legal assistance in drafting and enforcing contracts is highly recommended.  Other companies wish to engage in initial non-disclosure agreements (NDA) to start exchanging information on pricing modeling and other project specifications.

A prototypical Philippine agent or distributor profile does not exist.  Firms can range in size, from small (fewer than 25 employees handling a few specialized products on behalf of a limited number of manufacturers) to large trading companies handling a wide range of products and suppliers.  Some firms focus on the Metro Manila area, whereas others provide additional service to provincial commercial centers such as Angeles/Clark City, Bacolod, Cebu, Cagayan de Oro, Davao, Iloilo, and Baguio, either directly or through a network of dealers, retailers, sub-agents, and/or re-sellers.

Local agents and distributors working with foreign suppliers often employ forward sales or indent arrangements.  In a forward sales arrangement, distributors place an order from the foreign supplier and then sell the product to the local end-user or customer.  Under an indent arrangement, end-users or customers directly place orders with the supplier.  The indenter then receives a pre-determined commission for each successful sale.  In some instances, distributors and/or their respective dealers also maintain inventories to serve the recurring requirements of major customers.

Corporate agents/distributors must register with the Philippine Securities and Exchange Commission (SEC).  Sole proprietorship agents must register with the Department of Trade and Industry (DTI).

U.S. firms selecting a Philippine representative should consider, among other factors, the following: (a) whether the distributor has sufficient financial strength to maintain appropriate stock, provide effective after-sales service, or offer competitive payment terms; (b) whether the representative’s geographic sales area covers strategic markets in the Luzon, Visayas, and Mindanao regions; and (c) their experience in the sector or with similar products or services.

U.S. firms seeking agents or distributors in the Philippines are encouraged to use the services of the U.S. Commercial Service Philippines, which include International Partner Search (IPS), International Company Profile (ICP), and Gold Key Service (GKS).  More information is available at: https://www.trade.gov/export-solutions.

Establishing an Office

The principal forms of business organization in the Philippines are sole proprietorships, partnerships, and corporations.  Other less common business structures include joint stock companies, joint accounts, business trusts, and cooperatives.

Multinational firms, depending on the nature of their intended business activity in the Philippines, may avail of the following modes of entry into the Philippine market: subsidiary, regional headquarters (RHQ), regional operating headquarters (ROHQ), branch office, and representative office.

For more information on business registration requirements, and incentives for each mode of entry, you can access the information from the Philippine Board of Investments.

The State Department’s Investment Climate Statements provides information on investment and business environments in foreign economies pertinent to establishing and operating an office and to hiring employees.  To access the ICS, visit the U.S. Department of State’s Investment Climate Statements website.

Franchising

Franchising has proved to be, still a powerful tool for economic development as the Philippine franchise sector continues to expand and is expected to grow by 12-15% by end of 2023.  The sector contributed 7.8% to the country’s GDP and generated roughly 2 million jobs.  Contributing roughly 7.8% to the country’s GDP and generating around 2 million jobs.

Franchising is still a powerful tool for economic development as the Philippine franchise sector continues to expand and is expected to grow by 12-15 percent by the end of 2023, contributing roughly 7.8 percent to the country’s GDP and generating around 2 million jobs.

According to the Philippine Franchise Association, they expect an even higher growth than the number projected, primarily driven by new concepts, including foreign brands entering the Philippines for the first time and expansion of successful brands outside of Metro Manila.  The influx of new concepts and brands is helping offset some heavy losses caused by the pandemic.

Food franchises contributed 80 percent of total revenue for the sector, valued at $10.8 billion, while the non-food category generated about $2.68 billion.  The growing middle class helps the upward trajectory of this sector with the population’s increasing purchasing power.  There is a shifting trend toward consumer preference for sustainability, convenience, and innovation.

Under the Foreign Investment Act 1991, amended in 2015, most industries in the Philippines are entirely open for overseas investment, allowing 100 percent foreign ownership in most cases.  Additionally, in December 2021, Republic Act 11595 was amended.  This sets a minimum paid-up capital requirement of US$500,000 for all foreign-owned retail trade enterprises and lowers the minimum investment requirement per store to US$200,000.  The UNCTAD World Investment Prospects survey positions the Philippines as the 11th most promising host country for investment. 

There are no formal requirements for pre-contractual disclosures.  However, the Department of Trade and Industry (DTI) and the PFA have provided guidelines that encourage potential franchisees to request from franchisors.  Before any agreement is made, parties should prepare some pre-contractual disclosures based on that list provided by the DTI and the PFA.

Direct Marketing

Foreign businesses can operate in the Philippines through joint ventures with local enterprises.  The Philippine government does not require the submission of licensing/technology transfer arrangements for approval and registration by the Intellectual Property Office.  Voluntary submission is strongly encouraged to ensure compliance with Sections 87 and 88 of the Intellectual Property Code, since non-conformance with Section 87 on Prohibited Clauses and Section 88 on Mandatory Provisions automatically renders the arrangement unenforceable.  The Intellectual Property Office (IPOPHL) may allow exemption from conformance with Section 87 and 88 after an evaluation under the provisions of Section 91 on Exceptional Cases.

The Intellectual Property Code of the Philippines defines technology transfer arrangements as contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment, or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for the mass market.  Distributorship agreements will be included in the coverage if this includes the licensing of trademarks.

Joint Ventures/Licensing

Foreign businesses can operate in the Philippines through joint ventures with local enterprises.  The Philippine government does not require the submission of licensing/technology transfer arrangements for approval and registration by the Intellectual Property Office.  Voluntary submission is strongly encouraged to ensure compliance with Sections 87 and 88 of the Intellectual Property Code, since non-conformance with Section 87 on Prohibited Clauses and Section 88 on Mandatory Provisions automatically renders the arrangement unenforceable.  The Intellectual Property Office (IPOPHL) may allow exemption from conformance with Section 87 and 88 after an evaluation under the provisions of Section 91 on Exceptional Cases.

The Intellectual Property Code of the Philippines defines technology transfer arrangements as contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment, or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for the mass market.  Distributorship agreements will be included in the coverage if this includes the licensing of trademarks.

Express Delivery

Major global express delivery firms are available in the Philippines—the average delivery time from large U.S. cities is one to three business days depending on the type of parcel.  However, it may take longer depending on the specific origin and destination, customs clearance procedures, and express delivery service capabilities.

The Philippine Bureau of Customs has published a guide for MSMEs for de minimis importation. Link here: CUSTOMS101: Guidelines on De Minimis Importation | Bureau of Customs.

Due Diligence

It is wise for a U.S. company to perform appropriate due diligence on their potential business partner, agent or representative.  To help with this important process, the U.S. Commercial Service in the Philippines offers the International Company Profile (ICP) service.  The ICP provides information on Philippine companies, including general business information, background and product information, key officials, references, financial data/creditworthiness information, and reputation.  For more information or to order an ICP, please contact the U.S. Commercial Service Philippine office at BusinessPhilippines@trade.gov.  Alternatively, you may visit a U.S. Department of Commerce office nearest you.

After carefully selecting partners, U.S. suppliers should be prepared to support and work closely with their local distributors, agents, or representatives.