April 2020

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.
27 April 2020 Editha Viray-Estacio

Is your business COVID-19 resilient?

The World Health Organization (WHO) has declared COVID-19 a public health emergency of international scale, impacting governments and businesses alike with unprecedented disruption and risks. Companies continue to feel the business and financial shocks caused by the pandemic. COVID-19 has become a black swan event, unpredictable and with potentially severe consequences. As companies navigate the COVID-19 crisis, there are a number of key issues corporate leaders should be thinking about, as well as steps they can take to reshape their business and plan for recovery. Global companies have to be predictive and proactive in their decision-making to preserve continuity and build resilience. As global companies grapple with an ongoing and evolving situation, we have identified five priorities for them to consider. PRIORITIZE PEOPLE SAFETY AND CONTINUOUS ENGAGEMENT Ensuring the safety and well-being of employees in the workplace is essential. People look to their employer, community and government leaders for guidance. Addressing their concerns in an open and transparent manner will go a long way towards engaging them and reassuring them of business continuity. One of the adjustments companies have to make is to initiate or expand flexible work arrangements and other policies that allow people to work remotely and safely. Depending on the sector, companies will want to reorganize teams and reallocate resources. Additionally, companies will want to produce regular communications that align with current government and health authorities’ policies to help employees remain engaged as they and the organization navigate through the crisis. Finding ways to reimagine a business-as-usual environment that minimizes disruptions for the organization requires a fine balance. Where telecommuting or flexible work arrangements aren’t possible and companies must have workers on site or in direct contact with customers, it is important to provide measures to protect against infection. RESHAPE STRATEGY FOR BUSINESS CONTINUITY As mentioned, almost all businesses are likely to experience significant disruption to their business-as-usual operations and will experience underperformance throughout the duration of the COVID-19 crisis. This is especially true for companies that either operate in or are exposed to countries with significant outbreaks of the coronavirus. These companies will experience disruption to their supply chain and production commitments. To help address these challenges, companies must: Evaluate short-term liquidity. Companies have to instill short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner. They will need to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. Additionally, it will be important to be creative and proactively intervene to lighten the working capital cycle. Assess financial and operational risks and respond quickly. Companies will need to monitor direct cost escalations and their impact on overall product margins, intervening and renegotiating new terms where necessary. Just as companies need to monitor their in-house vulnerabilities, they also will need to monitor the pressures that may be impacting some of their customers, suppliers, contractors or alliance partners. Finally, they need to be aware of covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values, which may impact the health of the overall balance sheet. Consider alternative supply chain options. Companies that source parts or materials from suppliers in areas significantly impacted by COVID-19 must look for alternatives. Such quick moves will create the temporary capacity to meet customer obligations. Companies that have arrangements with agile manufacturing facilities to make spot buying decisions — or have loose contractual arrangements with various service providers and logistics providers — should consider the initial disruption as well as post-crisis scenarios given the potential for demand spikes. Determine how the COVID-19 crisis affects budgets and business plans. Companies will want to stress-test financial plans for multiple scenarios to understand the potential impact on financial performance and assess how long the impact may continue. Based on the outcome of the assessment, companies may need to look at near-term capital raising, debt refinancing or additional credit support from banks or investors, or policy supports from the government. At the same time, companies will need to review overall operating costs and consider either slowing down or curtailing all non-essential expenses. COMMUNICATE WITH RELEVANT STAKEHOLDERS Clear, transparent and timely communications are necessary when creating a platform to reshape the business and secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities. • Customers. Keep customers apprised of the impact on product or service delivery. If contractual obligations cannot be met as a result of supplier or production disruption, it is important to maintain open lines of communication to revisit timelines or invoke “force majeure” or “act of God” clauses. Such proactive action will help to mitigate punitive damages or liabilities associated with disrupted customer obligations. • Employees. Find the balance between cautioning your people and maintaining a business-as-usual mindset when communicating with employees. • Suppliers. Maintain regular contact with suppliers regarding their ability to deliver goods and services and their own recovery plans. This helps enable the company to consider alternative supply chain options in a timely manner. • Creditors and investors. Review terms and conditions on loan contracts to identify and avoid vital technical debt breaches. These reviews will have the added benefit of giving companies a chance to proactively manage the dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing arrangements. • Government and regulators. Consult with legal and risk management teams for advice on potential exposures. MAXIMIZE THE USE OF GOVERNMENT SUPPORT POLICIES Companies should monitor government and organizational opportunities for support and how they may best serve the individual circumstances of their organization. For instance, the Department of Labor and Employment (DoLE) has said that a P1.3-billion financial assistance program will be given for workers affected by the enhanced community quarantine in Luzon. Under the COVID-19 Adjustment Measures Program, each worker will receive P5,000 in cash to be processed through the companies’ payroll system. Companies should monitor the availability of these kinds of programs and use them to mitigate the risks they face. BUILD RESILIENCE IN PREPARATION FOR THE NEW NORMAL Once companies have solidified strategies based on stress tests and communicated any new directions with relevant stakeholders, they will need to execute revised plans while monitoring what continues to be a fluid situation. Senior management should report any material deviation from the plan in a timely manner so that their companies can take additional action to avoid further negative impact. Once the COVID-19 pandemic is controlled, companies will want to review and assess business continuity plans. If there are deficiencies, identify root causes, whether it’s timeliness of action, a lack of infrastructure, labor shortages, or external environment issues. Companies will then want to consider putting new internal guidelines in place based on lessons learned, as well as solid contingency plans to build resilience and better respond to future crises. WHAT COMES NEXT? As a black swan event, the COVID-19 crisis is impossible to predict. However, there are many lessons companies can learn and carry forward once the crisis has passed and a chance is provided to analyze their response. In the meantime, companies should be making decisions and taking action during this crisis with recovery in mind. When the crisis is over, it will be clear which companies have the resilience and agility to reshape their business strategy to thrive in the future. 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. Editha Viray-Estacio is a Partner from the Transaction Advisory Services of SGV & Co.

Read More
20 April 2020 Marie Stephanie C. Tan-Hamed

Testing your capital agenda amid COVID-19

We are currently in an unprecedented global crisis, and every country is struggling to deal with outbreaks of COVID-19 in their respective jurisdictions. Luzon is still in the midst of an enhanced community quarantine with other parts of the country rapidly following suit. We are faced with rising COVID-19-positive cases with our frontliners and health care system being pushed to the limits. The pandemic has brought massive disruption to our daily lives and livelihoods; businesses are being shaken all around the world. The pandemic-related disruption presents different and more complex challenges compared to typical business disruptions in the dimensions of scale, velocity, duration, workforce shortage, external coordination and infrastructure availability. As private companies continue to grapple with the evolving situation, they have to be proactive and predictive in their decision-making to preserve continuity and build resilience. It is more imperative now to test the companies’ commitment to their Capital Agenda. Our EY Capital Agenda framework presents COVID-19 considerations for companies to consider in today’s current business predicament. INVESTING — BUY AND INTEGRATE If you are in the middle of an acquisition: a. Consider the impact on the closure process — should you close early or postpone the acquisition? b. Ask for further scenarios that stress test the original assumptions underlying the maintainable earnings, cash flows and cost implications. c. Revisit the robustness of your supply chain set up, working capital and short-term liquidity risks. d. Reconsider the overall synergies and your other exposures. If you are in the middle of a major capital program: a. Revisit the feasibility of the entire project; b. Revisit the revenue, cost estimates, and project timelines; c. Review any delay exposures, liquidity damages and mitigation options. Look for new business models and emerging investment opportunities. DIVESTING — SELL AND SEPARATE If you are in the middle of a divestment: a. Assess the impact on the forecast cash flows, working capital, profitability and balance sheet of the business to be sold. b. Assess the robustness of the supply chain set-up. c. Assess the timing of the sale, the impact on the potential buyers, and pricing expectations. d. Increase the frequency of reporting the overall results, risks and mitigating factors through data and smart analytics to the potential buyers. If you are in the middle of a fund-raising exercise: a. Reconsider the pricing and timing of the transaction, especially if it is through public markets. b. Reconsider the purpose, timing and deal terms. c. Explore alternative options. If the business is significantly impacted, then management will need to assess the company’s short-term liquidity needs and funding options. OPTIMIZING — CORPORATE FINANCE Review the supply chain resilience: a. Consider inventory levels for critical components. b. Anticipate possible supplier disruptions and consider alternatives. c. If multi-sourced, optimize production and logistics locations from impacted cities to alternative locations. Scenario plan for short-term and medium-term recovery cycles. Explore synergies across your business portfolio by leveraging common customers, suppliers and financing sources. Explore restructuring options for the capital base — e.g. share buybacks, debt restructuring. Explore cost/financing mitigation options embedded in existing contracts, insurance arrangements and government incentive programs. PRESERVING — RESHAPING AND RESTRUCTURING Consider employee well-being, communication and continuous engagement. Prepare for multiple scenarios with staged action plans for prolonged employee and customer commitment, and supply chain disruptions. Set up short-term cash flow monitoring; scenario plan for short and medium-term disruptions to the business and assess your cash flow needs. Assess working capital management measures; proactively plan and intervene to prevent inventory build-up and collection challenges for receivables. Immediate implementation of cost savings and profit improvement plans. Review the impairment risk of assets; anticipate any potential breach of financial covenants. Undertake deep supply chain risk assessments. Anticipating, planning and forecasting for business disruptions are already complex and difficult exercises, but companies traditionally have past experience, conventional wisdom and corporate finance tools to guide them. However, in this unprecedented crisis, it may prove impossible to some. Despite the challenges, however, companies need to take stock of their current business models, plan for recovery, and prepare for a new normal once the pandemic has been contained and, eventually beaten. After this crisis is over, those who will emerge are those companies that are resilient and agile enough to reshape their business models as they prepare for a post-COVID 19 world. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms. Marie Stephanie C. Tan-Hamed is a Transaction Advisory Partner of SGV & Co.

Read More
13 April 2020 Noel Andro D. Bico

Tax breaks in these trying times

As we discussed in the first part of this article, the tax system in the Philippines has been significantly affected by the strict implementation of the enhanced community quarantine (ECQ) and social distancing measures imposed by the Government to address the COVID-19 crisis. With the extension of deadlines for 2019 annual income tax returns (ITRs) and other tax filings, the Bureau of Internal Revenue (BIR) also relaxed the deadlines for other tax reportorial requirements. The BIR also introduced and implemented new policies to ensure continuous operations and for duties to be fulfilled despite the ECQ and in the spirit of service to the community. More recently, Finance Secretary Carlos G. Dominguez III, with the recommendation of BIR Commissioner Caesar R. Dulay, promulgated Revenue Regulations (RR) No. 7-2020, implementing Section 4 (z) of Republic Act (RA) No. 11469, otherwise known as the Bayanihan to Heal as One Act, particularly on the extension of statutory deadlines and timelines for the filing and submission of any document and the payment of taxes. Note that the deadline extensions mentioned in the first part of this article are consistent with the recently issued RR except for the following: • The required submission of attachments to e-filed annual ITR was moved to June 1 • The provision qualifying the application of the tax filing extensions to certain jurisdiction was not mentioned In the second part of this article, we discuss these additional BIR initiatives during the ECQ. FILING AND SUBMISSION OF TAX ASSESSMENT CORRESPONDENCE: In view of the suspension of offices under the Executive Branch, the BIR issued Revenue Memorandum Circular (RMC) No. 31-2020 on March 23 that gives taxpayers 30 days from the date of the lifting of the ECQ to submit the following documents: • Letter Answer to Notice of Informal Conference (NIC) • Response to the Preliminary Assessment Notice (PAN), Protest Letter to Final Assessment Notice (FAN)/Formal Letter of Demand (FLD) • Submission of relevant supporting documents to support the requirements for re-investigation of audit cases with FAN/FLD • Appeal/Request for Reconsideration to the Commissioner on the Final Decision on Disputed Assessment (FDDA) and other similar letters and correspondences with due dates The extension applies to taxpayers whose response to the revised NIC, PAN, FAN, FLD, FDDA, and other similar notices fall due within the ECQ period. The extension also applies to other jurisdictions where concerned Local Government Units (LGUs) have adopted and implemented the ECQ measures. We should note that the deadline extension is consistent with RR No. 7-2020. However, it does not provide for any qualification on the jurisdictions to which such extension shall apply. Consequently, target collection from covered tax assessments by the concerned jurisdictions may be delayed, potentially adding to the expected shortfall in tax collections from 2019 annual income tax filings. FILING OF CERTIFICATE OF RESIDENCE FOR TAX TREATY RELIEF (CORTT) FORMS: A deadline extension was also given to parties concerned with the filing of the CORTT Form through the issuance of RMC No. 32-2020, dated March 20, and RR No. 7-2020. As a brief background, on March 28, the BIR issued Revenue Memorandum Order (RMO) No. 8-2017 to modify the procedure for availing of tax treaty benefits on the payments of dividends, interest, and royalties to non-residents. It provides that, in lieu of the tax treaty relief application (TTRA) required by RMO No.72-2010, preferential treaty rates for dividends, interests and royalties shall be applied and used outright. Under the procedure, non-residents claiming tax treaty relief shall submit a duly accomplished CORTT Form to the International Tax Division (ITAD) and Revenue District Office (RDO) within 30 days after payment of withholding taxes due on the dividend, interest and royalty income of non-residents based on the applicable tax treaty. Previously, the filing of COURT Forms for final withholding taxes on said income types paid on or before March 10 were to be made on or before April 13. This has been extended to April 30 without penalty. AVAILING TAX AMNESTY ON DELINQUENCY: Also extended is the period to avail of the tax amnesty on delinquency covering the taxable year 2017 and prior years. President Duterte signed Republic Act (RA) No. 11213, which includes the Tax Amnesty on Delinquency. The BIR then issued Revenue Regulations (RR) No. 4-2019 to implement the rules on tax amnesty on delinquency effective April 24, 2019.ÊThe provisions of RR No. 4-2019 were further amended by RR No. 5-2020, particularly on the duration that it may be availed of given current conditions. Most recently, the BIR issued RMC No. 33-2020 dated March 24, extending the deadline on availing of tax amnesty on delinquencies under RR 4-2019, as amended by RR No. 5-2020, to May 23.ÊSuch extension was also consistent with RR No. 7-2020. ACCEPTING TAX RETURNS: The BIR implemented policies in relation to accepting 2019 annual ITR and other tax returns with due dates that fall within the ECQ. On March 23, the BIR issued Bank Bulletin No. 2020-03 to reiterate the relevant responsibilities of authorized agent banks (AABs) in connection with the “file and pay anywhere” rule provided by the BIR under RMC No. 28-2020 to ease the process of filing and paying the 2019 annual ITR. It authorizes all AABs to accept payments of 2019 annual income tax until May 15 without imposing penalties. The same 30-day extension applies to payments of tax returns with due dates that fall within the ECQ, including out-of-district returns. LGU INITIATIVES: Certain LGU offices in the National Capital Region announced the deadline extension for real property taxes and other local business taxes. Hopefully, other LGUs nationwide will follow suit. WHAT TO EXPECT: With the rising number of positive COVID-19 cases in the country, government may become more stringent in implementing ECQ measures. Despite this, the tax authorities are doing their share to help ease the burden on taxpayers. We cannot tell where this pandemic will take us or when it will inevitably end. What we do know is that in the middle of this uncertainty, we are all reminded of one enduring Filipino value — solidarity. Given the very limited options that taxpayers have during the ECQ, one of our best expressions of solidarity would be to comply with our tax obligations that will provide the government with the much-needed resources to overcome this adversity and for the good of the nation. The deadlines and timelines mentioned in this article are pursuant to the Author’s understanding of the existing administrative issuances of the BIR as of the date of writing. These may be subject to change in light of the recently passed RA No. 11469 or the Bayanihan to Heal as One Act, which authorizes the President to move statutory deadlines and timelines for the submission of documents and payment of taxes, fees, and other charges required by law, among others. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms. EYG no. 001665-20Gbl Noel Andro D. Bico is a Senior Associate from the Global Compliance & Reporting Sub-Service Line of SGV & Co.

Read More
Leading the way in business

Other SGV News and Publications