The “2008 Doing Business In The Philippines” report of the International Bank for Reconstruction and Development / The World Bank contains issues that have implications to the Philippine legal and justice system.
I wish to summarize the salient points of the report, for legal research purposes.
Business regulations and their enforcement vary widely across Philippine cities. The Local Government Code of 1991 places business regulatory authority such as business permits, licenses and business tax in the hands of local governments. While all local governments share the same legal and institutional framework, they also “interpret and implement national regulations differently”.
Some local governments like Taguig and Marikina have used their authority to simplify procedures and reduce regulatory costs for businesses—and other Philippine cities could learn from their example.
Second, much reform, both at the national and local level, is needed “to reduce the high number of procedures to start a business, deal with construction-related activities and transfer a property title” across Philippine cities. Although most procedures can be completed relatively quickly, the large number of them “increases the hassle for businesses and creates opportunities for corruption”.
There are some reasons for optimism in the Philippines. The Anti–Red Tape Act was passed in 2007, although it still needs to be implemented. The law introduced penalties for “fixers,” mandated that complete information about procedures and fees be publicly displayed at government offices and required the introduction of performance-based tracking systems for public officials. The national government has also embarked on an ambitious project to create an online one-stop shop to start a business—the Philippine Business Registry. If successful, this would put the Philippines among the world’s top performers in this topic.
The Bureau of Internal Revenue’s (BIR) regional district offices in Parañaque and Las Piñas created One Time Transaction (ONETT) teams that facilitate the property registration processes by requiring officials to issue the tax clearances within specified time limits. Reforms need to go beyond national policies. They need to be implemented in branches of the national agencies in all cities.
Local governments must also do their part to reduce the burden of red tape on businesses. Some good examples already exist. Taguig and Marikina simplified and consolidated procedures to obtain a business permit.
Makati, Marikina and Valenzuela shortened the maximum statutory time limit to obtain a building permit to 6 or 7 days, appreciably less than the 15-day period set by national law.
When compared internationally, cities in the Philippines do well in respect to the time to change the title of a property, but lag behind in the number of procedures to start a business or deal with construction licenses. It takes on average 32 days to register property across the 21 cities, the same as Austria, which ranks 56 globally in this category. In contrast, the 18 procedures required on average to start a business would put Philippine cities toward the bottom of the 178 economies ranked by the number of procedures to start a business. Different local government requirements and local practices drive the variation in procedures, time and cost across cities.
Local-level requirements account for 12 of the 23 procedures to start a business in Davao, but just 4 (of a total of 15) in Marikina and Taguig. Most procedures can be done relatively quickly, but the time adds up due to the high number of procedures; time needed to start a business ranges from 27 days in Taguig to 52 in Manila.
The cost of local-government fees and taxes also varies— amounting to 3.7% of income per capita in Lapu-Lapu and 29% in Las Piñas—but in all places there is a multitude of local fees and taxes, making for a complex system that requires entrepreneurs to first obtain assessments of the fees that are later paid at different offices. Other fees, required by national-level regulation, are equivalent to about 10% of income per capita and are the same for all cities. The cost of printing the receipts and invoices ranges from 2% to 5% of income per capita.
The procedures to obtain construction-related authorizations also vary by location. The process is easiest in Taguig, with 23 procedures, but more cumbersome in Mandaue and Pasig, with 33 procedures. There are also variations in time, due mainly to the time it takes to obtain a permanent electricity connection, only 5 days in Tanauan, but 3 months in Metro Manila cities. Regarding costs, construction-related procedures represent on average 243.1% of income per capita. Electricity transformers are the main source of costs for constructionrelated procedures in some cities. They represent an upfront cost for the business even if they are reimbursed at the end of the contract.
The same 8 procedures are required to register property in all 21 cities. Yet, different local practices and levels of administrative efficiency lead to wide differences in time and cost across cities. Registering property is fastest in Mandaluyong, where it takes 21 days; an entrepreneur in Mandaue needs 6 weeks to do the same. The main sources of delays are the procedures required by national agencies— the BIR and the Registry of Deeds. These institutions account for about 75% of the time to register property.
Starting a business in a Philippine city takes on average 18 procedures and 35 days, and costs 27% of income per capita. This is the same time as in China— which ranks 100 of 178 economies on the time to start a business—and a similar cost to that in Fiji, ranked 97 in the cost to start a business. The number of procedures compares to Brazil and is only 2 procedures fewer than in Equatorial Guinea, the country with most procedures to start a business. Yet, there are wide differences in the procedures, time and money an entrepreneur has to spend to complete the process across Philippine cities.
When compared globally, Philippine cities stand out in terms of the high number of procedures, which varies from 15 to 23 across cities. Compare that with an average of 9 procedures in East Asia and Pacific. No wonder that entrepreneurs in the Philippines resort to intermediaries who can speed up the process with informal dealings. In the Philippines, 11 procedures are required by national level regulations and are the same in all cities. These include the verification of the availability of the company name and registration at the Securities and Exchange Commission (SEC), as well as procedures to register the company for taxes, social security and health care.
Some of these nationally-mandated requirements are redundant. For example, entrepreneurs need to buy specialized accounting books, obtain authorization to print receipts and have the printed receipts stamped by the Bureau of Internal Revenue. The legalization of books and receipts is an outdated practice as enterprises increasingly use electronic means of accounting. It has been argued that having books and receipts registered and stamped minimizes tax evasion. However, this is not necessarily the case. Companies can find alternative means of accounting to hide revenue from the tax authority. Portugal eliminated the mandatory registration of company books in 2007. Already, 89% of countries do not require this procedure.
Other cities have brought all relevant agencies under one roof or service center, the so-called “one-stop shops.” Yet, the success of their implementation remains to be proved. According to a recent government report, 74% of the cities have such one-stop shops, but the level of implementation and efficiency varies. The Department of Trade and Industry has also set-up National Economic Research and Business Assistance Centers (NERBACs) in Cebu and Davao that bring together national and local government agencies. This is a start, but entrepreneurs still have to go from counter to counter to obtain their permits and clearances unlike in real one-stop shops where the applicant interacts with a single official, thus reducing procedures and opportunities for corruption. Also, some of these service centers operate only during the business permit renewal period at the beginning of the year.
The report asks why not eliminate the requirement to obtain a business permit for low-risk general commercial activities all together? Top-performing countries, like Australia and Canada, do not require a business license separate from registration for general commercial activities. Only licenses for specific sectors with health, environmental or other risks exist. Another way to cut procedures would be to eliminate the inspections required before the business starts operations. Cebu created a joint team of inspectors that visits the business after it receives the business permit. The next step is to classify businesses by risk levels, as Quezon City is starting to do, and focus the inspections on those with higher risk instead of inspecting all businesses.
In Denmark, entrepreneurs pay nothing to start their business. Money to pay for government services is raised with taxes. In the Philippines, new businesses face multiple fees both at the national and local government level in a nontransparent system. Cutting fees would also reduce the need for obtaining the assessment of fees. At a minimum, all fees could be combined into a single fixed fee and information on costs should be made easily available.
The address and website of the International Bank for Reconstruction and Development / The World Bank are:
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
E-mail: feedback@worldbank.org
By:
Atty. Manuel J. Laserna Jr.
