Report Topics:
1:- General Information
2:- Cooling-off Period
3:- Pyramid Schemes
4:- Multi-Level Marketing
5:- Prohibition on Products
6:- Credit Restrictions Country
7:- Money Collections
8:- Licenses
9:- Status of Direct Sellers
10:- Earnings Claims
11:- Taxes and Fees
12:- Social Security
13:- Others
- 1. General Information
There is no law devoted solely to regulate Direct Selling. Republic Act No. 7394 otherwise known as the Consumer Act of the Philippines (the “Consumer Act”), provides protection to consumers against deceptive, unfair and unconscionable sales acts and practices. ( Title III Chapter1, Consumer Act. The principal government agency involved in the implementation of the Consumer Act and its Implementing Rules and Regulations, is the Department of Trade and Industry (DTI).
- Cooling-Off Period
No legislation.
- Pyramid Schemes
Article 53 of the Consumer Act prohibits the use of “Chain Distribution Plans and Pyramid Sales Schemes” referring to “sales devices whereby a person, upon condition that he makes an investment, is granted by the manufacturer or his representative a right to recruit for profit one or more additional persons who will also be granted such right to recruit upon condition of making similar investments. Provided that the profits of the person employing such a plan are derived primarily from the recruitment of other persons into the plan rather than from the sales of consumer products, services and credit. Provided, further that the limitation on the number of participants does not change the nature of the plan”.
To implement Article 53 of the Consumer Act, the DTI issued Department Administrative Order No. 08, Series of 2002 (DAO No. 8) 1.) identifying those who are liable for establishing, operating, advertising or promoting the use Chain Distribution Plans and Pyramid Sales Schemes. 2.) reiterating the definition of “Chain Distribution Plans and Pyramid Sales Schemes” 3.) identifying other forms of “Chain Distribution Plans and Pyramid Sales Schemes” as follows:
“Without limiting the coverage of the term “Chain Distribution Plans and Pyramid Sales Schemes” above, business, sales or marketing plan or scheme is considered as Chain Distribution Plans and Pyramid Sales Schemes if:
- A promoter persuades recruits to purchase products, services, credit, title or rank whereby the recruits can receive income primarily from the mere introduction, recruitment or sponsorship of other participants into
the scheme rather than from the marketing and sale of products; or
- Where the profits of the person employing such are derived from the recruitment of the other persons into the plan or scheme rather than from the sale of consumer products, services and credit and said plan plan/scheme includes but not limited to, one or more of the following attributes.
b.1 revenues or income are derived from participants’ entry fee.
b.2 in order to earn income, participants must sponson a fixed number of other participants, each of whom must in turn sponsor a fixed number of participants as in a plan compensating participants balancing number of recruits than number of sales volume.
b.3 a participant’s income is dependent primarily upon the participant’s slot or position within the organization as determined by the time, date and order of participation;
b.4 participants are not allowed to return marketable and unused products for refund within a reasonable period or the conditions for such product return are contrary to the provisions of the Consumer Act and/or its Implementing Rules and Regulations (DAO No. 2, s. of 1993).
b.5 there is no fair market value for the goods received (Fair market value is a price determined in an open market system). An indictor would be that consumers would still be willing to buy a product at its quoted price even without participating in the compensation plan.”
and 4.) providing a mechanism for handling administrative complaints and imposing of penalties. Further providing that the filing of an administrative complaint does not bar the complainant from filing a criminal complaint under Article 60 of the Consumer Act.
- Multi-Level Marketing
Except for the prohibition on “Chain Distribution Plans and Pyramid Sales Schemes” abovementioned, no other law regulates Multi-Level Marketing. Moreover, the Consumer Act does not provide a definition of Multi-Level Marketing in contradistinction to “Chain Distribution Plans and Pyramid Sales Schemes”. The persuasion is that for as long as the sales scheme, device or plan employed does not fall under any of the said prohibitions, the distribution and sale of consumer products through Multi-Level Marketing is allowed.
- Prohibition on Products
There is a wide array of products, local and imported, that may be sold by direct sellers. Many, however, are subject to prior certification or registration with various regulatory government agencies, making sure that they are not hazardous to the health and safety of consumers.
For example, the DTI is empowered to determine products that are injurious, dangerous or unsafe to consumers and recall, prohibit or seize from public, the sale or distribution of these products. (Article 10, Consumer Act).
Another regulatory agency is the Food and Drug Administration (FDA), [created by Republic Act No. 3720 S. of 1963, as amended by Executive Order 175 S. of 1963 otherwise known as the “Food, Drugs and Devices and Cosmetics Act” subsequently named the “Food and Administration and Drug Administration Act of 2009” under Republic Act No. 9711] is mandated to ensure the safety, efficacy or quality of health products which include food, drugs, cosmetics, devices, biologicals, vaccines, in-vitro diagnostic reagents, radiation emitting devices or equipment, and household/urban hazardous substances, including pesticides and toys and child care articles, and other consumer products that may have an effect on health as determined by the FDA.
- Credit Restrictions Country
DTI’s Department Order No. 21-03 Series of 2021 provides the following: 1.) No person or company engaged in the sale of consumer products and services shall impose an “Installment Payment Only” mode of payment. 2.) No interest shall be due on installment payments unless expressly and clearly stipulated in writing by the seller and buyer. 3.) The rate of interest, if agreed upon, shall not be more than the market-oriented interest rate. 4.) An interest collected in advance should not exceed more than a year. (Sec. 3)
Moreover, to protect the consumer from lack of awareness of the true cost of the credit extended to him, the Consumer Act requires a financial disclosure of the sale such as the cash price, downpayment, amount of installment payments, due dates, effective interest rate, delinquency charges, deferred charges and refinancing charges. The disclosures should be in writing and signed by the creditor and borrower, before the sale is consummated.
Further, the credit instrument evidencing the transaction must contain a notice that the consumer should not sign the document if it contains any blank space and must be given an exact copy of the document. Also, the consumer is entitled to a reasonable rebate if the balance is prepaid. Finally, administrative penalties may be imposed on creditors who fail to disclose as discussed. (Title IV, Consumer Act on Consumer Credit Transactions)
Republic Act No. 3765 otherwise called the Truth in Lending Act (TILA) also mandates the full disclosure of financial charges and other terms in credit transactions to protect persons from a lack of awareness of the true cost of credit. The TILA covers a much wider range of credit transactions, and it is the Monetary Board of the Bangko Sentral ng Pilipinas that administers its implementation.
- Money Collections
No Legislation
- Licenses
Prior to engaging in business, a corporation or partnership must first register with the Securities and Exchange Commission (SEC) and secure the approval of its Articles of Incorporation or Partnership. For individuals, they must register with and secure their Business Permit from the Department of Trade and Industry. No specific license or permit is required or issued to engage in direct selling of consumer goods and services.
The Local Government Code of 1991 (RA 7160) mandates that all businesses must apply for a Mayor’s Permit or Business Permit from the Local Government Unit (LGU) i.e. a city or municipality, where their offices will be established to operate legally within its jurisdiction.
For businesses to legally manufacture, import, export, distribute, sell and offer to sell FDA-regulated products discussed above, an FDA License to Operate (LTO) is required. The LTO must be renewed within a time frame provided. Moreover, the LTO is a prerequisite to secure the registration of products with FDA (Certificate of Product Registration or CPR). To be able to import FDA regulated products, one must secure a License to Import from the Department of Health (DOH) with an Import Permit on hand from the FDA and apply for an accreditation with the Bureau of Customs (BOC), a regulatory agency under the Department of Finance (DOF).
- Status of Direct Sellers
Direct Sellers are not considered employees of direct selling companies they represent in doing the business, but are deemed “Independent Contractors”. An “employer-employee” relationship exists if the following 4 elements (“Four-Fold Test) are present: 1. the company selects and hires the person to be employed; 2.) the person is paid wages; 3.) the company can terminate the person; and 4) the company controls the time, means and methods by which the work of the person is accomplished and not only wait for the results. The 4th element referred to as the “Control Test” is what distinguishes an “employee” from an “Independent Contractor”. (Labor Code of the Philippines and Jurisprudence) The agreement of the direct selling company with their sale associates usually carries a provision whereby the latter acknowledges that they are not employees of the company.
- Earnings Claims
No Legislation
- Taxes and Fee
The National Internal Revenue Code (NIRC) and its implementing rules, circulars and other issuances require that companies and individuals must first register with the Bureau of Internal Revenue (BIR) prior to doing business. Taxes to be paid are as follows:
- Income Tax- Gross receipts/income less allowable deductions = Net Income
- Corporation-in general, 25%.
- Individual- gross income of P250,000 or less is tax exempt. Above P250,000, the tax is graduated depending on the net income. Tax range is 15-35%.
- Value Added Tax (VAT)-in general, 12% VAT is imposed on most goods and services once gross sales is over P3M.
- Percentage Tax-3% on goods and services if gross sales are below P3M.
Local Taxes and Fees are imposed by Local Government Units (LGUs) i.e. the province, city or municipality where the principal office and branches, if any, are located. Nature and amount of taxes and fees may vary from one LGU to another in exercise of their power to tax granted by the Local Government Code of the Philippines (RA 7160).
- Social Security
Under the Social Security Act of 2018, individual direct sellers not over 60 years of age are required to register with the Social Security System (SSS) as “Self Employed” to be able enjoy SSS benefits such as sickness, disability, death, funeral and retirement pension.
- Others
DSAP is lobbying before the Philippine Senate for the passage of a law (Senate Bill Nos. 784 and 2986) to amend the Consumer Act to empower the DTI in curtailing the growing number business companies engaged in “Pyramid Sales Schemes or Chain Distribution Plans” by expanding its regulatory powers. The salient provisions are: 1.) Registration with SEC or DTI of companies engaged in direct selling; 2. )Definition of “Multi-Level Marketing” or “Net Working” as a legitimating form of direct selling; 3.) Defining other forms of pyramid sales schemes; and 4. )Stiffer penalties for employing pyramid sales schemes.