A foreign corporation who wishes to do business in the Philippines must secure the necessary license from the Securities and Exchange Commission (SEC). Should the foreign corporation secure a license, it must make the necessary securities deposit. The details on securities deposit are discussed below.
I. PURPOSE OF SECURITIES DEPOSIT
The securities deposit is for the benefit of present and future creditors of the licensee in the Philippines, to ensure that the foreign corporation shall be able to settle their obligations incurred within the Philippines, and to ensure compliance with investment requirements.
II. COVERAGE OF REQUIREMENT
The requirement for securities deposit applies to branch offices of foreign corporations. The following are not required to post securities deposit:
- Regional or Area Headquarters of multinational companies;
- Operating Regional Headquarters of multinational companies;
- Foreign banking corporation including offshore banking units;
- Foreign insurance corporations;
- Foreign non-stock corporations including foreign religious corporations; and
- Foreign corporations which have established representative offices in the Philippines.
III. WHEN FILED, ANNUAL ADJUSTMENT
The securities deposit must be posted within 60 days from the issuance of the license by the SEC. The actual market value must be at least P500,000.
Within 6 months after each fiscal year, additional securities must be deposited when:
- The licensee’s gross income for the fiscal year, as stated in the Financial Statements, exceeds P10,000,000. The additional securities deposit is equivalent to 2% of the increase in the gross income.
- If the actual market value of the securities deposits or financial instruments has decreased by at least 10% from the time it was deposited. The additional deposit is equivalent to the decrease in value.
A certificate of deposit is issued by the SEC for the securities deposit, or any additions thereof.
IV. GROSS INCOME
The base figure in computing the securities is the gross income of the licensee foreign corporation. Gross income is the “gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”
No deductions shall be allowed from the gross income of income or revenue, except the following direct cost and expenses:
1. Sales returns, allowances and discounts. A contra revenue account that reports: (a) merchandise returned by a customer; and (b) the allowances granted to a customer because the seller shipped improper or defective merchandise. These will reduce the seller’s accounts receivable and are subtracted from sales (along with sales discounts) to arrive at net sales.
2. Direct costs and expenses. The following direct costs and expenses incurred with foreign entities and related parties are allowed deductions from Gross Income:
- (a) Cost of sales incurred with foreign suppliers;
- (b) Direct costs of services attributable to related party transactions outside the Philippines;
- (c) Direct cost incurred attributable to foreign non-related party supplier;
- (d) Depreciation and amortization of tangible and intangible assets used directly for its manufacturing operations can be deducted from Gross Income under certain conditions.
- (e) Other foreign related direct cost and expense items.
The solvency ratio of the foreign corporation-Philippine Branch should indicate that it has sufficient assets to cover its obligations. No deductions are allowed if the Philippine branch is not solvent and not in sound financial condition.
In the computation of securities deposit, there is a modified formula for branch offices of foreign airline companies.
V. TYPES OF ACCEPTABLE SECURITIES
The following securities or any combination thereof are acceptable as deposit:
1. Government Debt Instruments: Bonds or an Evidence of Indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or -controlled corporations and entities; and
2. Equity Instruments:
- Shares of stocks in “registered enterprises” under the Omnibus Investment Code of 1987 (Executive Order No. 226);
- Shares of stock in domestic corporations registered in the stock exchange;
- Shares of stock in domestic insurance corporations under the supervision and regulation of the Office of the Insurance Commissioner; and
- Shares of stock in banks licensed by the Bangko Sentral ng Pilipinas (BSP).
Cash, money market placement, time deposits and bank gurranty or standby letter of credit and similar instruments other than those falling in the foregoing enumeration shall not be acceptable as securities deposit.
1. A written application to deposit securities mandated by law shall be filed with the SEC, signed under oath by the resident agent or a duly authorized representative of the licensee.
2. A monitoring fee (1/10 of 1%, but not lower than P10,000 and not exceeding P50,000) of the securities deposit per year shall be charged by the SEC.
3. The securities shall be indorsed in blank. The SEC shall determine whether: (a) the securities deposited are acceptable; and (b) the actual market value is at least P500,000.
4. The SEC issues a Certificate of Acceptance of Deposit containing an inventory of such securities. The branch office shall ensure that the securities remain unimpaired during the period that the foreign corporation transacts business in the Philippines.
VII. SUBSTITUTION OF SECURITIES
Upon proper application, the SEC may allow the licensee-foreign corporation to substitute other securities for those already on deposit as long as the licensee is solvent. Upon compliance with the requirements on the acceptance of deposits, the SEC shall issue a Certificate of Substitution of Securities Deposit.
VIII. RELEASE OF SECURITIES
Upon proper application by the foreign corporation, the SEC may release part of the securities deposited by the licensee under the following circumstances:
- If there is more than 10% decrease in gross income of the licensee-foreign corporation.
- If the actual market value of the total securities deposit has increased by more than 10% of the actual market value of the securities at the time they were deposited.
IX. INTERESTS OR DIVIDENDS
During the period of time that the securities are on deposit with the SEC, the licensee shall be entitled to collect the interest or dividends on the said securities.
10. RETURN OF SECURITIES
Whenever a foreign corporation decides to withdraw from business in the Philippines, the SEC may return the securities deposited, subject to the following conditions:
a. Filing of a written application, signed under oath bu its resident agent or by a duly authorized representative upon payment of a fee; and
b. It has ceased to do business in the Philippines by submitting a resolution of the Board of Directors of the foreign corporation to effect that they desire to withdraw the license to do business in the Philippines and that said company has no liabilities to the Government of the Republic of the Philippines, to the public or private corporations, Philippine residents and/or citizens.
If the application is granted, the SEC issues a Certificate of Return of Deposit.
11. FINES AND PENALTIES
1. The license shall be revoked or suspended for failure to post securities deposit despite notice and hearing.
2. Daily penalty. Failure to post the required amount of security deposit within the prescribed period shall subject a foreign corporation to a daily penalty of equivalent to 1/100 of 1% of the amount of security deposit which should have been additionally posted until the requirement is fully complied.
3. Fines and surcharges for late deposit of securities shall be as follows:
|Initial Securities Deposit||Additional Securities Deposit|
|1st violation||Basic fine of P10,000 and surcharge of P500 per month of delay||Basic fine of P7,000 and surcharge of P500 per month of delay|
|2nd violation||Basic fine of P10,000 and surcharge of P1,000 per month of delay||Basic fine of P7,000 and surcharge of P1,000 per month of delay|
|3rd violation||Basic fine of P10,000 and surcharge of P1,500 per month of delay||Basic fine of P7,000 and surcharge of P1,500 per month of delay|
The foregoing is culled from Section 143 of the Revised Corporation Code and SEC Memorandum Circular No. 17, series of 2019 (Revised Guidelines on Securities Deposit of Branch Offices of Foreign Corporations).