A year in the Philippines has convinced Chris Moriarty of Flat Planet that Australian's have little to complain about when it comes to their banking system, or the tax office for that matter.
I have done business in Australia for many years and, like most Aussies, have spent a lot of time complaining about fees and service levels. Now that I have a year or more experience in the Philippines, Australian banks seem incredibly cheap and intensely focused on customer service.
Perhaps the Philippines today is what Australian banking used to be like – back when I was a kid and ignorant of such things. Whatever the case, it is not until experiencing the Philippine banking system that you truly realise how critical a good banking system is to business.
Let’s talk about payroll.
In Australia here is what you do. First, punch the numbers into the payroll system and check all is in order. Then you press a button and create an ABA file complete with amounts and bank details of employees. Employees are free to bank with whoever they choose – if they are not with your bank they have to wait an extra day for the funds to arrive, but who cares.
You then log into your internet account and upload the ABA file. Then you punch a button, type in a security code and bingo – the job is done. Fees are free for the first 100 or so transactions a month and from there on a few cents each.
In the Philippines payroll itself is interesting. It is standard to pay bi-monthly – once on the 15th and once on the last day of the month. This is fascinating as people get paid the same for each of the 24 pay periods in the year – but each period is of a slightly different length. For example, the Feb 28 pay might be for 13 days whereas the October 31 pay is for 16 days. So if a staff member is absent for a day – what is their daily pay? Do you deduct a day’s pay based on an average annual rate or some floating basis? If the former... what happens if it is a 16 day pay period and they are sick for the full period? Do they owe you money? (This is the mandated solution based on the annual salary divided by 260 days) And do you accrue entitlements like annual leave by the day or by the pay period or what?
Our company is actually bucking the trend and has made a decision to pay weekly. Staff love the idea (it is completely novel to them) and it will fix a heap of problems in terms of accuracy. But the problem is finding a payroll system to support it. We have only found one – but it does not pay weekly rather it lets you set four specific dates each month for payroll (48 pay periods a year). They thought this was weekly until we pointed out the obvious. They are now re-writing their code to give us the ability to pay on a certain day of each week as opposed to a certain date in the month.
The idea of weekly pay is also foreign due to the incredibly paper-intensive approach to process up here. The basic rule in the Philippines is that you have to make everything as complicated as possible. Most payroll systems can only be rolled over twice a month for the simple reason it is not physically possible to get through the workload in any shorter time period. The idea that you just design a more streamlined process is alien.
Let me give you a trite example on how bad paperwork is in the Philippines. Yesterday I enrolled my kids in one of Manila’s elite private schools Colegio San Augustin. It is a stunning school with amazing facilities. It took me two weeks to assemble the paperwork with myself plus my wife and my executive assistant spending solid days on the task. We have spent around $500 in fees getting various documents authenticated by various authorities. When I arrived at the school to enrol it took me three hours (I left with it still not complete and have to go back). At one point I had to walk to a ‘print office’ window and stand in line behind sundry students and others and pay $1.50 to get two pieces of paper photocopied. The registrar made me do it even though it was her process and she had a photocopier sitting next to her (I would have happily made a $2 donation to the school). Next I had to fill out a health information card for each child. I had to fill out complete name and address details on both sides of the one physical card – and she handed one card back for me to complete all over again when I omitted a middle name on the back side of one card. They were surprised when I was unable to answer one question – a detailed table where I was supposed to fill out vital statistics like height, weight, circumference of crown etc. of my children at various stages in their growth over the past 7 years – my lack of knowledge required the intervention of a senior officer who fortunately let this vital omission slip through the cracks. At all times I was incredibly polite and never once lost my cool.
Anyway, back to payroll. Once you have done your paperwork the fun starts.
First of all – interbank transfers do not really happen in the Philippines. There is no central electronic clearing agency (there is the BSP but it does not appear to offer electronic clearing services) and all transfers from one bank to another bank are done by telegraphic transfer. As far as I can tell there is a manual process – you enter transactions into your internet portal, then it spits out a bit of paper in a back office and the transaction is dealt with by a clerk who issues the telegraphic transfer. The fee for all of this is around 300 pesos or just over $7. Therefore, if you have 25 staff and pay each of them weekly you are up for $700 in bank fees. (NOTE: some banks even charge this transfer fee if moving money from one branch to another within the same bank.)
The bank fees are unsustainable so therefore each company requires all staff to open a ‘payroll account’ at a bank and branch of the company’s choosing. In the provinces many companies still pay cash but due to pure logistical reasons not to mention the risk of fraud this is not an option for a modern business.
Or you can pay by cheque. Cheques are also expensive plus take days to clear. Fraud is also an issue (coupled with logistics). Staff hate cheques as everyone up here lives from day to day plus depositing a cheque means spending time standing in a bank queue or depositing via an ATM which means an even longer delay plus living under the constant nagging doubt that the cheque will vanish.
Back to the payroll account solution; First trick is only certain banks do it. If you are with, say, the ANZ which has a branch presence in the Philippines you will be disappointed. ANZ does offer payroll in partnership with MetroBank – but MetroBank requires a company to maintain a constant minimum balance of 1,000,000 pesos in the payroll account (about $23,000).
There are a couple of key points to consider. First, some banks require each member of staff to maintain a minimum balance in each individual pay account. Given many people live on the bones of their arse – this is not practical. Secondly, many banks have a poor ATM network outside of the central CBD areas – meaning staff either have to withdraw all their cash at once and then carry it home on public transport or run the risk of running out of cash on the weekend.
Now you have all your staff with accounts at a single bank (and single branch) and you have processed your payroll. You have two choices. First, you can go the bank and stand in line and fill out a transfer slip for each transaction. Second, you can create a floppy disk and hand that in, with a detailed transfer slip and leave it there for the bank to process when they get around to it. Either way you have to physically attend the branch, queue up (the queues are huge around payday) and fill out heaps of paperwork.
There is a final alternative. You can integrate your accounting system with the banks and do an electronic transfer. To do this you have to engage with the bank’s IT team and enter into a proper development cycle. You will also have to engage and fund a development team on your side plus get the whole implementation audited by the BIR (ATO equivalent). This can cost a bomb – that is even if the bank agrees to do it. (You can outsource payroll to a firm that has done this already – but that is another minefield.)
Once you have done payroll you have to submit funds to the BIR, SSS (kind of like Super in the vaguest of senses), PhilHealth (like Medicare) and PAG-IBIG (some kind of discretionary housing slush fund). Each is non-trivial but let’s talk BIR.
When you register your firm with BIR you are given an RDO or a Revenue District. You have to pay your withholding tax monthly and you have to do it at a certain bank and that bank has to be in the correct RDO. We are in RDO 50. There is a BPI (Bank of the Philippine Islands) across the road – but it is in a different RDO. I have to attend a different BPI branch up Paseo de Roxas. Once again it is a manual process which involves standing in two lines.
If withholding tax is more than 10,000 pesos (AUD230) then you can only pay by company cheque – that is a local company cheque. This means that if you are one of those companies that is used to doing everything by the internet you can’t pay your tax – you must have a cheque account in the Philippines.
There are quirks. For example, you must present four copies of the 1601-C form to the bank teller to make the payment. However she only keeps two copies and gives the other two back to you PLUS the receipt of payment. Why you can’t just submit two copies and leave with just the receipt is beyond me.
The whole BIR experience compares poorly with the ATO where you have a tax portal with digital signature, you lodge your forms online and make automatic payments from your online banking system. At any time the ATO will give you a completely up-to-date statement much like a bank statement so everything can be reconciled seamlessly.
There is a lot to love about the Philippines – especially at this time of year when the weather is just perfect. The people are great, the beer is cheap and the lifestyle is fantastic. However, it is more than a little bit disturbing that you can actually start thinking warmly about the sweet pleasure of dealing with Australian banks and the ATO.
The other sage advice is that you should not tread up here lightly. You have to be committed to making a considerable effort to not just do the paperwork but also to make a million mistakes on the way through. There is no manual on this stuff – you just have to bump into frustrations and learn to work your way through them – it takes days to do what should only take a few hours. And if you lose your cool you are dead. Put a smile on the face and just work with the system.