SEC Security Deposit of Branch Offices in the Philippines

By: Tax and Accounting Center Philippines

Under Section 126 of the Corporation Code of the Philippines, a security deposit is required to be deposited with the Securities and Exchange Commission (SEC) from issuance of License to do Business in the Philippines for the benefit of the  present and future creditors of the Philippine Branch in the Philippines.

In simple and plain language, this security deposit is a fund set aside in SEC prescribed investments that would serve as a standby fund of the Philippine Branch for its creditors in the worst case scenario. Upon withdrawal of registration of the Philippine Branch and there remains no liabilities, then, the SEC would release such security deposit.

In relation to the above, SEC issued Memorandum Circular No. 2 Series of 2012 (SEC MC No. 2-2012) to provide “Guidelines on Security Deposit of Branch Offices of Foreign Corporations” in the Philippines and we summarized as follows:

How much is required SEC Security Deposit in the Philippines and when?

Under the rules, SEC security deposit required in the Philippines is as follows:

• Initial minimum actual market value of PhP500,000.00 (previously PhP100,000.00 under the Old Corporation Code) within sixty (60) days from issuance of SEC License to do Business; plus
• 2% of gross income in excess of PhP5M  every after six (6) months from year-end.

SEC shall also require deposit of additional securities if the actual market value has decreased by at least 10% of the actual market value at the time they were deposited. On the other hand, SEC may allow release part of the additional securities if the gross income decreased or if the actual market value of the securities increased by at least 10%.  Substitution of securities could be allowed by SEC for those already on deposit as long as the Philippine Branch in the Philippines is solvent.

Gross income for security deposit in the Philippines shall mean gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows results to increase in equity, other than increases relating to contributions from equity participant, consistent with the definition of Revenue under Paragraph 7 of Philippine Accounting Standard (PAS) 18. No deduction from gross income except the following direct cost and expenses:

A. Sales returns, discounts, and allowances;

B. Direct costs and expenses incurred with foreign entities and related parties of Philippine Branch;

• Cost of sales incurred with foreign suppliers;
• Direct cost of services attributable to related party transactions outside the Philippines;
• Direct cost incurred attributable to foreign non-related party supplier;
• Depreciation and amortization of tangible and intangible assets directly used for its manufacturing operations under certain conditions; and,
• Other foreign related direct cost and expense items.

The deductions allowed for gross income for purposes of security deposit in the Philippines shall be subject to the submission of branch office’ Audited Special or Annual Income Statement showing separately the amounts of direct cost and expenses actually incurred with foreign entities and foreign related parties. For branch office of foreign airline companies in the Philippines, SEC MC 2-2012 provides for a modified formula.

Who are required Security Deposit?

SEC MC No. 2-2012 applies to all branch offices of foreign corporations duly licensed to do business in the Philippines but does not include the following:

• foreign banking corporation including offshore banking units (OBU) in the Philippines;
• foreign insurance corporations in the Philippines;
• foreign non-stock corporations including foreign religious corporations in the Philippines;
• foreign corporations which has established representative offices in the Philippines;
• regional or area headquarters (RAHQ) in Philippines of multinational companies; and
• regional operating headquarters (ROHQ) in the Philippines of multinational companies.

What are the acceptable SEC Security Deposit in the Philippines?

SEC requires not just any securities and it should either be any of the following:

A. Government Securities – bonds or any evidence of indebtedness of the Government of the Philippines, its political subdivision and instrumentalities, or of government owned or controlled corporations (GOCCs); or,

B. Equity Instruments which could be any of the following:

• Shares of stock 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 of the Insurance Commissioner; and,
• Shares of stocks in banks licensed by the Bangko Sentral ng Pilipinas (BSP).

Cash, money market placements, time deposits and bank guaranty or standby letter of credit and similar instruments other than those falling in the above shall not be acceptable.

What are the documentary requirements for SEC Security Deposit in Philippines?

For the purpose, the Philippine Branch is required the following for the acceptance of the securities deposit and issuance of Certificate of Acceptance of Deposit:

• Written application to deposit securities mandated by law, signed under Oath by the Resident Agent in the Philippines or a duly authorized representative of the Philippine Branch;
• Proof of Securities Deposit duly endorsed by the bank;
• Payment of monitoring fee of one-tenth of one percent (1/10 of 1%) of amount of securities deposit but not less than PhP5,000.00 but not exceeding PhP50,000.00 per year to cover the payment of the space in the vault of the SEC’s secured premises;

For the substitution, the SEC will issue a Certificate of Substitution of Securities Deposit based on SEC prescribed documentary requirements. Under certain circumstances, SEC may alow partial release of security deposit and SEC will issue Certificate of Partial Release of Security Deposit and upon withdrawal of business of the Philippine Branch, SEC will return the security deposit and will issue Certificate of Return of Security Deposit.

What are the fines and penalties on non-compliance of Security Deposit in the Philippines?

A. Fines and surcharge for late deposit of securities shall be as follows:

• First violation – Initial security deposit (Fine of PhP10,000 and surcharge of PhP500.00 per month of delay) ; Additional Security (Fine of PhP7,000 and surcharge of PhP500.00 per month of delay)
• Second violation – Initial security deposit (Fine of PhP10,000 and surcharge of PhP1,000.00 per month of delay) ; Additional Security (Fine of PhP7,000 and surcharge of PhP1,000.00 per month of delay)
• Third violation – Initial security deposit (Fine of PhP10,000 and surcharge of PhP1,500.00 per month of delay) ; Additional Security (Fine of PhP10,000 and surcharge of PhP1,500.00 per month of delay)

Note: A fraction of one (1) month shall be considered as one (1) month for purposes of the computation of surcharge.

B. Failure to post the required security deposit in the Philippines shall be subject to a daily penalty of equivalent to 1/100 of 1% of the amount of security deposit in the Philippines that should have been additionally posted until fully complied.

C. License to do business as Philippine Branch shall be revoked or suspended for failure to post securities deposit in the Philippines despite notice and hearing.

D. Above penalties without prejudice to the filing of criminal charge against the persons responsible for violation in accordance with Section 144 of the Corporation Code.

Reference:

• Section 126, Corporation Code
• SEC Memorandum Circular No. 2, Series of 2012

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.