April 2019

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
29 April 2019 Mae Grace June C. Nillama

The Tax Amnesty Act of 2019: Welcome news for delinquent taxpayers

On Feb. 14, the President signed into law Republic Act No. 11213 or the Tax Amnesty Act of 2019 (RA 11213). The law provides for estate tax amnesty and tax amnesty on delinquencies. In this article, we will zoom in on the tax amnesty on delinquencies. The grant of a tax amnesty on delinquencies (TAD) is a novelty. Under the previous tax amnesty law (RA 9480), tax cases that are the subject of final and executory judgments by the courts were specifically excluded from the coverage. Perhaps aware of the delinquencies pending in the books of the Bureau of Internal Revenue (BIR) and the resources needed to actually collect on these delinquent accounts, the proponents of this law deemed it prudent to grant an amnesty for delinquent taxpayers. This will not only give the taxpayers a chance for a fresh start, but will also help clear the dockets of the BIR so that they can focus their attention on more pressing cases. While the law became effective on March 2, its implementation still required the issuance of the implementing rules and regulations to guide taxpayers and implementing agencies alike. On April 5, Secretary of Finance Carlos G. Dominguez III, upon the recommendation of BIR Commissioner Caesar R. Dulay, issued Revenue Regulations (RR) No. 4-2019 providing the guidelines on the processing of tax amnesty applications on tax delinquencies. The regulations took effect on April 24. The RR provides a huge relief for taxpayers and practitioners as it clarified some of the seemingly ambiguous provisions of the law, primarily the coverage of the TAD. Due to the term used, taxpayers may have gotten the impression that only delinquent accounts (as defined in prior BIR regulations and issuances) are covered by the law. RR No. 4-2019 addresses these issues and clarifies that there are only four instances when the TAD may be availed of: Tax assessments that have become final and executory at the BIR level; Tax assessments that have become final and executory at the judicial level; Pending criminal cases filed with the DoJ/Prosecutor’s Office or the courts for tax evasion and other criminal offenses under Chapter II of Title X and Section 275 of the Tax Code; and Withholding agents who withheld taxes but failed to remit the same to the BIR. Evidently, only the first two instances require a final and executory assessment. Moreover, only those that have become delinquent on or before April 24 may avail of the TAD under these instances. Another cause of uncertainty was the inclusion of the withholding taxes in the TAD. In RA 9480, withholding agents with respect to their withholding tax liabilities were specifically excluded. During the deliberations of the law, several stakeholders proposed the inclusion of withholding tax liabilities since it was seen as a prevalent issue in practice. Non-withholding or non-remittance of the required withholding taxes often occurs due to ignorance or the unsophisticated accounting systems used by taxpayers, but without any real intention to evade payment. It was argued that since the amnesty aims to give taxpayers a fresh start, it would not make sense to exclude withholding taxes in the coverage. A distinction was made between withholding taxes that were not withheld at all and withholding taxes that were withheld but not remitted to the BIR. The former are covered by the General Tax Amnesty and the latter are covered by the TAD and subject to a higher rate of 100% of the basic tax. The understanding then was that the withholding taxes withheld, but not remitted to the BIR, would be covered by the TAD even though the same are not technically and necessarily delinquent yet. This is now reflected in the regulations, which state that a tax amnesty rate of 100% shall apply in all cases of non-remittance of withholding taxes, even if the same shall fall under any of the other instances covered by the TAD. Moreover, the regulations state that for withholding agents who withheld taxes but failed to remit the same to the BIR, delinquent or not, and with or without Final Assessment Notice/Final Decision on Disputed Assessment, the Preliminary Assessment Notice/Notice for Informal Conference (PAN/NIC) or equivalent document will be sufficient. Clearly, this gives closure to the question of whether it is necessary that taxpayers are the subject of a final and executory assessment. Finally, the regulations also provide an expanded definition of the tax base, i.e., the basic tax assessed. The law merely provides that the tax base for all the instances covered by the TAD would be the basic tax assessed. However, due to the different natures of the instances covered by TAD, there arose some confusion as to what constituted the basic tax assessed. This is particularly relevant in cases where the delinquent taxes have been the subject of an application for compromise settlement, which requires the payment of the compromise offer. The regulations clarified that the basic tax assessed would be the tax due on the Assessment Notice, net of any basic taxes paid prior to the effectivity of the regulations. This means that any payments previously made, such as the compromise offer or the partial payments, must be deducted from the tax due in the assessment to get to the amnesty tax base. With the issuance of the regulations, taxpayers can now take advantage of a rare opportunity that could potentially provide substantial savings, not just for interest, penalties and surcharges, but also for basic taxes. All they need to do is follow the steps provided in RR No. 4-2019, and then rest easy knowing that they not only have a fresh start as taxpayers, but that they have also contributed to the country’s long-term growth by properly paying the taxes which are the lifeblood of national development. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Mae Grace June C. Nillama is a Tax Director of SGV & Co.

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22 April 2019 Shane Dave D. Tanguin

Big data and dark data: Balancing the costs and benefits

Big data is starting to become a cliché among business executives, given that almost everyone is now leveraging big data in decision making. “Big data” was defined in 2012 by Gartner (a global research and advisory firm) as “high-volume, high-velocity and/or high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision making, and process automation.” The term is often used to refer to predictive analytics or other methods of extracting value from data and information. What is often left out is its twin subset — dark data. Gartner coined the term and defines “dark data” as “the information assets organizations collect, process and store during regular business activities, but generally fail to use for other purposes.” The digital world produces information in unprecedented proportions. Based on a study by Statista in May 2018, about 47 zetta bytes (1 zetta byte is about 1 trillion giga bytes) of data are expected to be generated by 2020. This number grows to 163 zettabytes in 2025 – almost 3.5 times in a span of five years! To put in perspective how exponential the growth of data worldwide is, only 2 zettabytes were generated in 2010. While structured information can be consumed for analysis out of the ocean of big data, portions of unstructured information, the dark data, will remain untapped. The growing breadth of available data and the use of big data in business decisions and applications would mean commensurate growth in the investment needed to make sense out of the ocean of information. Revenue from big data and business analytics worldwide, according to a study conducted by Statista in August 2018, amounted to $149 billion in 2017 and is expected to reach $186 billion in 2019. Revenue from these businesses is expected to grow steadily at 12% year on year to about $260 billion in 2022. Clearly, more and more investment is going to leverage the power of big data and harness the benefits it brings to decision making. Investmenting in the right places also helps in maximizing yields. Let us look into an industry where big data and data analytics have made a massive impact — the restaurant business. Gathering information ranging from customer demographics, behavioral data and shared customer interests, restaurant owners can develop smart and specific marketing activities for targeted customers. Customer profiles and point-of-sale information also help in developing best practices in maintaining on-time delivery, menu enhancement, customer segmentation, streamlining operations and improving customer experience. A lot has been developed in this industry and big data has had a significant influence in effecting these changes. However, where does dark data go? Big data is used in the practical world starting from determining what objective needs to be met — then almost instantaneously, followed by determining the what, why, how, where and when. This is where it gets tricky. One can start defining what they need and then look for it in the big data or start from the big data to see what it offers then see what benefits to explore. In either approach, handling volumes of big data may prove to be costly both on a technological and people resources level leaving no space for investment in harnessing dark data (i.e., emails, printed reports/statistics, hard copy files, CCTV footages among others). Let’s take as an example a small restaurateur who aims to solve the single biggest issue identified by customer survey feedback — long waiting queues before waiters are available to take orders. Structured data were gathered to profile customers from the moment they enter the restaurant until an order is taken — demographics, time of day information, volume of customers, menu listing, number of waiters and ordering time. The restaurateur analyzed all this information and developed a streamlined menu and added waiters on identified shifts where customers are expected to peak. The expectation was to have the ordering time drop significantly and waiters will have a quicker turnaround for taking orders. However, while the changes all made sense, there was no noticeable drop in ordering time. This made the restaurateur go back to the drawing board and prompted a check on how ordering was done in the past. The restaurant’s CCTV footage was reviewed and customer behavior was observed comparing the order-taking sequence in the past and present. The restaurateur noted that in recent footage, an average of three visits were made by waiters before an order was placed — the first was almost immediately after customers were seated, followed by two other visits with longer intervals. In older footage, there were only two visits on an average and with shorter intervals before an order was placed. When the restaurateur investigated the interactions on the first visit and the driver of longer intervals in recent footages, it was found out that the reason had to do with their free WIFI services. Customers would ask for the WIFI passwords in the first visit of the waiter and set their phones up before they turned their attention to the menu and actually started making an order decision. The reason for longer order time had less to do with number of waiters, volume of customers and menu. The restaurateur could have saved time by analyzing the dark data in the form of CCTV footage first rather than going straight to big data that was easily analyzed. The realization of the root causes of the customer behavior made it easier to address the problem. The restaurant now has WIFI password information readily available on all their tables. Investing in big data is an edge and balancing it with investments in converting dark data will make it more effective. Breaking the constraints in analyzing dark data may require more investment but it equally provides the power of the comparative — seeing clearly what was different in the past can make better and more informed decisions. The comfort of having masses of information and the capacity of analyzing it may cause dark data and its potential to be neglected. Swimming into deep open waters just because you can may not be the wisest. But navigating these waters with the knowledge of the past brought by dark data could mean your true edge in the digital world. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Shane Dave D. Tanguin is a Partner of SGV & Co.

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15 April 2019 Ramon D. Dizon and Smith Lim

Evolving to match future markets

Traditionally, businesses have used the term “markets” to refer to economies. Hence the terms “developed market” or “emerging market” are usually associated with countries at a certain level of development. However, given the changing times and consumer paradigms, businesses may need to shift their focus to smaller “markets.” Cities, for example, are expected to grow further. A United Nations study projects that by 2050, 68% of the world’s populations will live in urban areas, with corresponding effects on infrastructure and the environment, as well as consumption behaviors. Because of new technology and needs, consumers are already changing the way they work, live and play. Smart technology is continually transforming cities and consumers, as discussed in an EY article, “Will the next global market be a country, city or individual?” The article shares some insights from EY ASEAN and Global Emerging Markets Leader for Consumer Products and Retail Chandan Joshi on his predictions for future cities, businesses and consumers. THE CITIES OF THE FUTURE Technology has brought an unprecedented wave of transformation across the world, disrupting almost every aspect of life as we knew it. Even concepts as basic as money and finance, for example, are rapidly evolving with developments such as mobile cash, bitcoin and cryptocurrency, digital banking and online shopping. Tomorrow’s cities may evolve in very different ways, and be markedly different from existing ones. While city planning has always been the purview of the government, we will see increasing public involvement in city development in the future, especially as connectivity and data-sharing increase among consumers, governments, companies and infrastructure providers. Community-based and participatory approaches to designing future cities will become increasingly popular, as ready access to data raises awareness, understanding, and involvement in urban issues among citizens. We are already seeing this with some applications that rely on crowdsourced data such as Waze, which helps manage traffic flow in the city. We are also likely to have more areas shifting from multi-use to every-use. Currently, there are spaces where commercial and residential uses intermingle. It is very likely that future cities will have spaces where the lines will blur between work and leisure, retail and entertainment, personal and communal, which means that real estate providers will have to consider ways to make developments more multifunctional, flexible and modular to meet future needs. The rise of telecommuting and other flexible work arrangements will change the way people work, and the way spaces are utilized. The optimal use of scarce real estate space will become an increasingly important theme in the future. Higher levels of connectivity will also mean more virtual interaction, making it increasingly easier for people to form virtual communities that disregard location. As people come together due to shared values and interests, traditional marketing geo-demographic indicators such as age, gender, location, economic bracket and others will decrease in relative relevance. THE CONSUMERS OF THE FUTURE While physical and virtual boundaries continue to blur, and data and technology become even more integrated into daily living, the focus on individual consumers will likely remain constant. Even if virtual communities become the norm, consumers will still expect to be served as individuals, perhaps to an even more bespoke level. The traditional sources of customer insights that companies currently rely on, such as market surveys and focus groups, may rapidly become obsolete when customers expect customized service based on their meal plans, exercise needs, social activities, medical conditions and other personal data. With the increased use of data infrastructure and analytics, future businesses may be able to identify the precise needs of consumers in real-time. One example of such services was explored in London and Los Angeles, where participants in an EY FutureConsumer.Now program looked into the potential of vitamin-fueled, bespoke energy shots tailored to specific individuals based on their nutritional needs, and manufactured at point of sale using recipes that leverage real-time biometric data. Imagine the possibilities where you can walk into a shoe store and have footwear made-to-order on the spot quickly using 3D printing technology or similar platforms. Additionally, we are already seeing how more and more consumers are transitioning to subscription or shared models, such as with ride-sharing, content-sharing, homesharing and similar platforms, rather than direct ownership. Consider the recent announcement by Google of its Stadia gaming service, which allows consumers to access game libraries online without needing to purchase their own gaming consoles or expensive computer setups. As more people buy into the sharing economy in the future, there may be increasing demand for such services as pay-to-wear apparel lines, pay-to-use sports gear or even furniture. This also poses an increasing challenge for companies to make the consumer experience as convenient and pleasurable as possible. THE BUSINESSES OF THE FUTURE While technology is disrupting all industries and sectors, it is likely that the greatest impact will be on consumer products and retail. Many consumer goods companies today are already proactively adapting to change by further individualizing their products and services to scale. However, many companies also still need to invest in their data infrastructure, analytics capabilities and supply chain flexibility. Supply chains of the future will need to be more agile, not just in terms of managing demand and developing product innovation, but also be able to address the real-time needs of customers, as captured and interpreted by their data analytics capabilities. Some companies may need to restructure and decentralize operations to be more neighborhood-based. While this means serving a smaller number of consumers at a time, it also means increasing customer satisfaction. Shifting from macro to micro markets may also have an impact on resource allocation and sustainability. This highlights the possible need for businesses to develop more resource-sustainable products, while at the same time leveraging sophisticated technologies like blockchain to streamline and better manage operations across their entire network. THE FUTURE IS NOW The greatest change for companies to undergo is not in terms of their operations, but in their mindset and cultures. They need to see the future as bringing yet-unforeseen opportunities, rather than unanticipated threats. They need to see that consumers no longer just buy products, but buy experiences. The key is to BE the change leader, rather than a victim of change. By being at the forefront of innovation, companies can take an active and significant role in shaping the world for future consumers, possibly leveraging on technology to develop new solutions or even uncover new and untapped markets that may not even exist yet. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Ramon D. Dizon is the Transaction Advisory Services (TAS) leader of SGV & Co. Smith Lim is a TAS senior director at SGV & Co.

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08 April 2019 Maria L.V. Balmaceda

Entrepreneurs inspire!

Every two years, the Entrepreneur Of The Year (EOY) Philippines program stages a road show to announce the start of the nomination period for entrepreneurship awards. In our recent road shows in Cebu and Davao, the local reporters were curious to know our observations on entrepreneurship in the country since we launched the awards in 2003. This was a good point to reflect on after 16 years of celebrating the best among Filipino entrepreneurs. It would be best to go back to the very start when we introduced the program. The biggest challenge then was to define who or what an entrepreneur is. The prevailing notion at the time was that we were referring to people who run buy-and-sell enterprises or “mom and pop” stores. Of course these are entrepreneurs by all means, but it was a limited view of entrepreneurship. In our view, the entrepreneur has evolved. SO, WHAT IS AN ENTREPRENEUR? Entrepreneurs include both founders of companies and those who organize, manage, and assume the risks of a business or enterprise in the companies’ life or development. They are active in the leadership of the company. This definition applies to a wide range of people. Traditionally, the entrepreneur is the Chief Executive Officer (CEO) and founder of an organization. However, the definition nowadays has been stretched to include CEOs who come on board to join an existing business. In select cases, the CEO/President of a subsidiary of a company may also be considered an entrepreneur. Entrepreneurs can also be multi-generational as with family businesses that are passed from one generation to the next. Whether the entrepreneur goes by the traditional or expanded definition, the key is that he or she finds creative and venturesome ways to acquire capital resources, build their team, and innovate to achieve their goals and to grow their business. For family businesses, the next generation of leaders should exhibit their own form of risk management and make their mark on the business. All in all, entrepreneurs are those who create value for themselves, their employees, their customers and their communities. HOW ABOUT A SOCIAL ENTREPRENEUR? And speaking of communities, we used to get asked a lot about what it means to be a social entrepreneur. Would an entrepreneur who runs a feeding program in his or her community, donates to charities or provides scholarships qualify as a social entrepreneur? In fact, when the program started in 2003, we had an award category called “Socially Responsible Entrepreneur.” The winners were recognized for their strong Corporate Social Responsibility (CSR) programs. However, sometime in 2006, we collaborated with a global social entrepreneurship nonprofit organization that helped us set the qualifications for one to be considered a social entrepreneur. We then included a Social Entrepreneur Award to refer to people who run businesses that are for-profit or non-profit and whose “approach to social and environmental challenges applies innovation, creativity and resourcefulness to create opportunities for social transformation.” These are enterprises that specifically address social issues such as poverty and the environment with sustainable solutions, not simply those with established CSR programs. After a few years, the category ceased to be a stand-alone award because we had seen how many entrepreneurs have embraced social entrepreneurship, embedding it in their organizations. WHAT ELSE? In the past 16 years, we have also seen the increased participation of women entrepreneurs. While we are aware that there are numerous enterprises founded and managed by women, there were times when women entrepreneurs were underrepresented with as few as one qualifying as a finalist. However, there has been a growing network of women entrepreneurs, perhaps spurred on by the more visible advocacy for gender parity. Younger entrepreneurs are also now more participative in the program, which is worth encouraging. With the advent of social media and online businesses, we have seen how many among the younger generation have boldly taken on entrepreneurship as their career. When we launched the Entrepreneur Of The Year Philippines in 2003, very few schools offered programs in entrepreneurship. Today, it has become a popular degree choice among college students. BUT SOME THINGS NEVER CHANGE Entrepreneurs may differ in responsibility, age, approach or gender but we’ve also noticed that there is some consistency in being an entrepreneur. Regardless of the times or circumstances, entrepreneurs remain passionate about their dreams. They are innovators who may have a single idea that can spark a business evolution, create new possibilities or disrupt the status quo. They are inherently visionaries who leverage new ideas to challenge old paradigms and seize opportunities to develop enterprises that have the potential to transform industries and support economic growth. They are dedicated and hardworking. They have stories to tell and these stories inspire others to become like them. Back in 2003, our nominees would submit reams of documents that we needed to hold in balikbayan boxes. But times have changed indeed because we ourselves have gone paperless. Nominations are now in sync with the digital world. By simply visiting https://geoy.ey.com you can help us recognize and celebrate our world-class Filipino entrepreneurs. Entrepreneurs inspire us, and that never changes. *** Nominations to the Entrepreneur Of The Year Philippines 2019 will be accepted until May 31 2019. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Maria L.V. Balmaceda is Senior Director of SGV & Co. and Program Manager of the Entrepreneur Of The Year Philippines.

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01 April 2019 Anna Maria Rubi B. Diaz

New lease accounting standard: the road to adoption

The new lease standard under Philippine Financial Reporting Standard (PFRS) 16 has been effective for annual periods beginning on or after January 1, 2019. One of the significant changes brought about by PFRS 16 is in lessee accounting, as it requires most leases to be recognized on the lessee’s balance sheet by recording a right-of-use asset and a corresponding lease liability. For many entities, the effects are not limited to the accounting implications but also encompass areas such as lease procurement and negotiation, contract administration, financial statement processes and controls. Entities have embarked on activities to assess the impact of PFRS 16 on their businesses and implement the requisite changes. We share below what many of the financial statement preparers have gone through in their PFRS 16 voyage. ESTABLISHING PROJECT STEERING COMMITTEES AND WORKING GROUPS As part of the governance and implementation processes, entities have established project steering committees and working groups. The steering committee generally provides overall direction and guidance, resolves issues, and monitors the status of the project and approves project deliverables. The working group on the other hand performs overall project management and coordinates with working teams, business units, advisors and other project stakeholders. UNDERSTANDING THE LEASE ACCOUNTING CHANGES AND CURRENT STATE As one of the critical initial steps, entities have acquired an understanding of PFRS 16 either through formal training, discussions with advisors, or knowledge transfer sessions. Aided by this knowledge, entities then conduct current state assessments vis-à-vis the changes brought about by PFRS 16 around identification of leasing activities, distinguishing lease arrangements (including relevant contract terms) and understanding lease administration tasks. The current state assessment allows entities to determine the degree of impact on the areas affected by the lease arrangements. REVIEWING LEASE ARRANGEMENTS The project working groups review the agreements based on the requirements of PFRS 16 and considered any required changes. Many entities have depended on spreadsheets, particularly for the following: Lease arrangement database — Entities develop spreadsheets which document, at a minimum, the counterparty, lease term (considering the impact of lease renewal options and termination clauses where present), lease amount (considering variable lease payments that are in substance fixed where applicable) and other relevant data that were needed for the lease computation. Computation of lease income expense — Entities develop macro enabled spreadsheets to compute for the requirement of the new lease standard especially the impact for lessee accounting. While spreadsheets might be helpful to some, there are also electronic or automated solutions that are more responsive to processing voluminous contracts, such as for those with many leased branches like quick service restaurants, banks and those in retail. As this process is manual in nature, administratively burdensome and prone to errors, it exposes the entities’ operational process and financial reporting risks. To address these, some entities have turned to better solutions using web-based tools, computer programs or artificial intelligence (AI). One example of a tool that uses AI to support entities lease accounting approach is the EY Lease Reviewer. The EY Lease Reviewer uses AI or machine learning, which can help improve the assessment of a large number of lease arrangements. It helps entities to identify and extract relevant contract clauses in adopting PFRS 16 such as the lease amounts, and terms including renewal options and termination options. In finding the right tool in reviewing the contracts, entities check whether the tools supported adequate internal controls and processes applicable to their businesses. IDENTIFYING GAPS AND QUANTIFICATION OF IMPACT Entities identify the gaps between PFRS 16 and PAS 17 which was the legacy standard. They then prepare a gap report that show the results of their implementation. This report summarizes their assessments of the impact and the key items that the entities have to change on their processes and policies. The gap report also serve as the basis of the entities’ results of their quantification. UPDATING PROCESSES AND INTERNAL CONTROLS Some entities took the adoption of PFRS 16 as an opportunity for them to modify their current processes and controls. One example is the centralization of the lease arrangements into one repository. Since most of the lease liabilities under PAS 17 were recognized off books by the lessee and thus, might not be centrally monitored, lease arrangements might often be stored in different locations and handled by different persons or departments. The transition to PFRS 16 is not only beneficial to the accounting and finance functions. Other departments such as procurement, general administration or treasury might also benefit from the centralization — since the critical information would have become readily available (e.g., renewal terms, critical payment dates, etc.). Furthermore, entities would have updated the documentation of the related processes and internal controls that were affected by PFRS 16 to aid in its business as usual. LESSONS LEARNED Success in adopting an accounting change depends on the entity’s state of readiness. Entities must proactively consider their current state, the steps needed for compliance and the processes by which they need to transition to any new accounting standard. This demonstrates the importance of not being resistant to change; but instead, embracing and learning from it. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Anna Maria Rubi B. Diaz is a Financial Accounting Advisory Services Senior Director of SGV & Co.

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