August 2023 Articles - Suits the C-Suite | SGV & Co. | EY

28 August 2023

Alden C. Labaguis

Megatrends impacting indirect tax

Indirect taxes, such as value-added tax (VAT) and customs duties, are the types of tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties, or services. Indirect taxes are levied on goods and services (or consumption), whereas direct taxes are imposed on income and profits. Governments are now turning to indirect taxes to fill their revenue gaps as a result of the pandemic’s severe budgetary pressures.In a challenging year for the global economy, trade, transformation, and sustainability are three megatrends influencing indirect tax policy. While these megatrends are pressuring indirect tax teams to be flexible, use technology to adapt, and do more with less, these trends also provide opportunities for indirect tax and customs functions to help their organizations succeed.Indirect tax is receiving more attention as a result of global economic and geopolitical challenges. VAT/sales tax, excise and customs duty, and environmental taxes are becoming more demanding on a global scale. Governments are also leveraging tax and customs policies to advance political objectives and promote change in fields like sustainability.This has resulted in significant legislative change, additional obligations, and an increased emphasis on technology to support tax and customs compliance processes. Effective indirect tax management is more important than ever to control cash flow, costs, and the risk of audits and legal action from tax and customs authorities.TRADE DISRUPTIONGlobal trade and supply chain activities are inextricably linked to indirect taxes, which are significantly impacted by changes in the way businesses conduct their operations. Changes in these taxes could also significantly impact the supply chains of businesses.The disruption of trade has been a recurring trend in the last year; contributing factors include the war in Ukraine, the ongoing consequences of the pandemic, trade conflicts, new trade agreements and alliances, and a quickly changing regulatory environment. However, the trade function has never had such a strong opportunity to improve the performance of the company or been in such a strong focus than now.Indirect tax and customs functions can take action in the face of geopolitical uncertainty to remain agile while navigating disruptions, including driving out unnecessary duty costs, concentrating on cash flow, delivering cost-efficient tax processes, and using data analytics to compare indirect tax costs and opportunities from new supply chains.In the Philippines, in addition to the tax authorities’ resumption of audit investigations, there is an additional challenge of simultaneously managing the customs authorities’ intensification of post-clearance audits — which are geared towards sustaining increased revenue collection even after clearance of imported goods at the border. TRANSFORMATIONRising complexity, regulation, as well as the competition for talent are contributing to transformation, but technology is the main motivator. Tax and customs authorities all over the world are quickly embracing technology and automating manual procedures. They are demanding real-time transaction data, and several jurisdictions are starting to employ e-invoicing and real-time reporting. In the Philippines, this is consistent with the tax authorities’ adoption of the electronic invoicing and receipting system, which requires certain taxpayers to electronically report their sales data. Upon establishment of a system capable of storing and processing the required data used by electronic point-of-sale systems, certain categories of Philippine taxpayer will be required to use such electronic systems.In a mid-year report, Philippine customs authorities showed they are not far behind, highlighting programs focusing on digitizing customs processes, revolutionizing operations, and enhancing trade facilitation. Advanced information communication technology projects are lined up for implementation, such as automated export declaration and overstaying container tracking systems, among others.As a result, tax and customs authorities will have increased visibility on how businesses operate on a day-to-day basis, placing additional responsibility on corporations to enhance their data collecting and management. This frequently necessitates identifying data across the company and even throughout the supply chain as new taxes and reporting requirements are implemented.These demands are being made at a time when tax departments are under greater pressure to increase efficiency and provide genuine value. Along with effectively utilizing current technology, indirect tax teams must assess the need for extra resources and determine the right balance of in-house and outsourced work for their organizations to satisfy these demands.In order to help drive transformation within their own organizations, indirect tax and customs functions must become future-proof by implementing a data strategy, harnessing the right technology to support their operating model, creating a tax governance structure that defines responsibilities, considering a centralized approach to VAT management, and using the implementation of tax policies to address long-standing data issues.SUSTAINABILITYGovernments, businesses, and individuals around the world are prioritizing climate catastrophes and the need to safeguard the environment and human health. Governments are relying more on indirect taxes to support their environmental, social, and governance (ESG) initiatives, and indirect taxes are raising revenue to help fund green policies. New green taxes are also motivating people and companies to make the necessary changes in order to achieve sustainability goals.The functions of tax and customs are put under pressure by ever-evolving tax and customs regulations. They need to be aware of the taxes that are applicable to their companies, how to comply with their commitments, and how to account for them in costing and supply chain choices. As an example, they can assist in lowering expenses, reducing compliance risks, and finding opportunities for grants and incentives to finance green investments.Indirect tax and customs functions should consider understanding their organization’s plans to achieve its climate ambitions and get involved, as well as measure the impact of sustainability taxes and related policy measures on operations. Other key sustainability actions include identifying tax credits, grants, and incentives that will support the organization’s green agenda, assigning clear responsibilities, assessing exposure and liaising with relevant stakeholders within the value chain, and planning and implementing responses to the new measures impacting the business.THRIVING IN TRYING TIMESLeaders in indirect tax have never had a better chance to add more value to their organizations. By utilizing their abilities, creating connections within the organization, and utilizing innovative technology, they can bring about positive change and produce significant results.It is imperative that they take into account the bigger picture and how the megatrends of global trade, transformation, and sustainability affect the indirect tax function. This will allow them to better frame the indirect tax issue inside their organizations, navigate hurdles, and seize opportunities that will benefit the whole organization and allow it to thrive instead of merely surviving in trying times. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Alden C. Labaguis is a tax principal of SGV & Co.

21 August 2023

Christian G. Lauron

How generative AI creates value for financial services

The artificial intelligence (AI) landscape is constantly evolving, and large language models (LLMs) have gained global traction for their bespoke capabilities. Notably, ChatGPT reached 100 million users merely two months after its launch, making it the fastest-growing application in history. These developments showcase generative AI’s abilities, pushing the boundaries of what technology can do with text and language.However, the utilization of LLMs is controversial and has been the subject of debate among academia, regulatory bodies, and the general public. Skeptics point to hallucination as a significant drawback of AI models, which would be pronounced in cases where the model provides responses based on pattern recognition rather than reasoning. Various entities have urged the government to hasten AI-related regulation in response to the extensive adoption of generative AI models. Moreover, there are significant concerns with privacy, security, trust, and reliability. There is a serious threat of ‘model collapse’ when the knowledge base underpinning generative AI systems is inundated with imperfect information, deliberate misinformation, and uncontrolled synthetic data. The proverbial GIGO is at play — garbage in, garbage out.Despite these apprehensions, generative AI is a comprehensive technology that can transform work for different sectors. Corporations have been rapidly spending on AI, with several industries investing considerable time, money, and resources. While some organizations are moving at a steady pace, others have shared a multiyear commitment to integrating this technology across their functions. While there are sectors that find the current imperfections of generative AI unacceptable, there are those, such as financial institutions, that have actively experimented and deployed use cases in lower-risk areas.THE VALUE PROPOSITION FOR FINANCIAL SERVICESWhile banks and financial institutions have already been utilizing AI applications for different areas like credit risk and fraud, generative AI could further enhance other services, streamlining a broad array of business functions and uses that can elevate core offerings. Several applications and functions are suitable for AI adoption, including customer marketing, insurance claims processing, and financial planning. Internal services like application development, compliance monitoring, and maintenance also have potential.Technological advancements help expand business-use cases, particularly when dealing with unstructured data like text. Thus, organizations can create or refine business content using generative AI’s ability to query data in a natural, humanlike manner. However, the technology is still in its nascent stage, meaning AI should be synergized with human expertise to generate accurate insights and create long-term value.OPERATIONAL EFFICIENCY AND AUGMENTED INTELLIGENCE Financial services firms could slowly integrate AI in lower-risk areas like augmented intelligence and operational efficiency to minimize risk. Differing views have tempered AI adoption, but organizations have been experimenting with various use cases due to the technology’s reported benefits and strengths. To retain their competitive positioning, firms should assess and leverage AI in controlled environments.Operational efficiency involves enhancing productivity and reducing costs by automating tasks like information categorization, review, and synthesis. On the other hand, augmented intelligence entails assisting experts by providing content, insights, and recommendations for clients.CROSS-FUNCTIONAL CAPABILITIESIn the following areas, AI can support operational efficiency, reallocating human effort to other critical tasks:Tax and legal. Augment tax file generation, streamline contract organization and refine diligence processes for legal teams.Product, technology and IT. Create new product or service functionalities, generate natural-language-based code blocks and make test cases for evaluating code vulnerabilities.Risk and compliance. Map risk controls with corresponding regulations and flag missing disclosures or regulatory risks like fair customer treatment and sales practice concerns.FUNCTIONAL SOLUTIONSGenerative AI can also be leveraged in the following functions to streamline operations and innovate new ways of doing business:Chatbots and virtual assistants. Provide tailored, end-to-end support using natural language. Specialists can configure this functionality based on internal or external knowledge or information, subject to the organization’s discretion.Knowledge management and generation. Appropriately sift through and retrieve institutional knowledge and intellectual property. Organizations can utilize generative AI to augment and create content based on internal or external knowledge databases.Document intelligence. Execute advanced information extractions from unstructured or semi-structured data formats. The process can also focus on specific attributes and elements or generate insights from available information.THE FUTURE OF AI IN FINANCIAL SERVICESGenerative AI has the power to transform businesses. For financial services firms, transformation entails capitalizing on the technology’s strengths while managing the corresponding risks. Successfully creating value from AI involves a synergy between the latest technology and an organizational culture that invests in various capabilities and develops a framework for risk management.The financial services sector has a head start with deploying generative AI, given its experience with navigating AI-related regulation. Hence, many financial institutions have become market leaders in devising an AI governance framework, which includes setting policies, standards, and procedures. In the same vein, other industries and organizations should address critical areas like AI governance and oversight frameworks when integrating this technology into their operations.Lastly, effective board governance is crucial for the management of generative AI.While these practices will need to be polished and redefined, financial services institutions should use this time to identify and invest in potential applications for the technology. Organizations that successfully integrate generative AI into their organizational makeup can differentiate themselves and remain competitive. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Christian G. Lauron is the Financial Services Organization (FSO) leader of SGV & Co.

14 August 2023

Lee Carlo B. Abadia

Transforming with AI

The science for artificial intelligence (AI) has been around for almost a century. Although the concept of AI can be traced back to ancient stories from Greece and China, AI practitioners have only actively achieved significant progress within this century. The approach to applying AI has been continuously refined, from using symbolic or classical AI that is based on embedding knowledge and creating rules, to progressing statistical AI which involves pattern recognition, probabilities, and learning. Nonetheless, the challenges encountered in applying AI have forced renewed thinking among practitioners.With computing power increasing exponentially over the years, the discipline of AI now has an explosive opportunity to grow whatever the approach may be, but largely towards practical use cases. In addition, the growth of AI would not be centered solely around creating robots that think and behave like human beings, as is often portrayed in movies and books. Instead, it will revolve more around how it can fulfill specific objectives as agents in various forms to help humans achieve their work. This is where the current boom is coming from, but this unfortunately also raises concerns related to how AI may replace some jobs. On the other hand, there also are many who are actively pushing and exploring the possibilities for AI to make work more efficient for people.In the recent EY Tech Horizon report, where about 1,600 companies across the globe of varying sizes were surveyed quantitatively and qualitatively, respondents reported that AI and machine learning will be a significant part of their top technology investments within the next two years. AI can be considered a foundational technology, along with data and analytics, the cloud, and the Internet of Things. By combining these four as part of their technology strategy, organizations gain a good foundation to execute a tech-enabled transformation. As AI continues to gain more traction in development and adoption, however, its prominence as an expected technology stack will likely increase.CHALLENGES IN AI ADOPTIONThe recent Forrester’s Global AI Software Forecast predicted that off-the-shelf and custom AI software spend will double from $33 billion in 2021 to $64 billion in 2025. Moreover, AI software is projected to have an annual growth rate of 18%, which is 50% faster than the overall software market. However, based on one IDC survey, only 22% of organizations in 2022 reported that AI was implemented on a large scale in their enterprises.For all the reports around how AI will be a priority for investment and implementation in organizations, we have yet to see it leveraged at scale to transform businesses. This poses the question — why is AI, which is clearly a top-of-mind technology around the world, seemingly unable to make a strong breakthrough?A key challenge for widely adopting AI across an enterprise is the typical bottom-up approach taken by organizations. It often starts with technical teams building portfolios of projects on piloting AI on specific processes only, which is disconnected from the wider business. This creates siloed solutioning and tends to put the burden on technical teams to foster the business cases for AI to incrementally secure more funding. This also means that solutions may not look holistically at how the business works and can lead to an incoherent approach to delivering value across functions. This incoherence can lead to leadership and teams being disillusioned with what AI promises to deliver.Maximizing the potential of AI requires a refreshed approach. Businesses should include this as a strategy from the top to help differentiate themselves from competitors while simultaneously becoming more resilient to disruptors in their industry. Chief Executive Officers (CEOs) should drive the change in culture towards AI and align with their Chief Information Officers (CIOs) towards championing the importance of technology in meeting organizational goals.This means that there should not be a separate technology strategy, but one embedded into the business strategy itself. This approach can help answer questions such as whether AI allows the organization to enter a new market or re-imagine its business model. This will ensure that investments in technology will align and help meet the vision of the organization.LEVERAGING AIAs early as the 1970s, one of the first recognized knowledge systems (classical AI approach) was MYCIN. This system was intended as a doctor’s assistant refined over a period of five years and was designed to give input and explanations about blood diseases based on blood tests.The use of AI has since been developing across various industries and businesses should be more aware of how it can be deliberately leveraged while being driven by an organization’s leadership. The most common use is enabling it as a recommendation engine for online retail or search, which by now should start being a standard for most online stores.Fast forward to now: machine learning (statistical AI) can help identify diseases in medical surgery, from CT scans used to detect lung cancer to eye photographs to check for diabetes. Another example is in smart farming, where crop scanners and drones collect images and analyze them to determine if more water, pesticide, or fertilizer is needed. In short, regardless of the industry, AI can drive innovation to help humans.AI can clearly help enable CEOs innovate, but with it comes the responsibility of proper implementation. There are issues such as data privacy, embedded biases, and accountability in deploying this technology. While the strategy is defined from the top, along with it comes the necessary governance to help safeguard the organization from its risks. In 2023, seven leading AI companies in the US have agreed to voluntarily implement safeguards on AI development. They have committed to establishing new standards for safety, security, and trust for the technology.Being familiar with these movements can help business leadership navigate where to plan for AI adoption, and check for readiness on how to address potential regulations in their industries.EMBRACING THE IMMINENCE OF AIWe have come to a point in history where AI can be deployed as a day-to-day technology. This was made possible because the science now focuses more on specific use cases rather than creating general AI that strives for human-like intelligence. AI is going to be an imminent part of how businesses will be run today in the same way that machines in the industrial revolution moved workers from cottage industries to industrial factories and introduced new skills for people.CEOs must embrace this imminence and can do so by intentionally including this in their high-level strategy, understanding how the technology can be applied today, upskilling employees to work with AI, and more importantly being proactive on internal governance and external regulation. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Lee Carlo B. Abadia is a technology consulting principal of SGV & Co.

07 August 2023

Aris C. Malantic

Reframing the CFO role

In today’s fast-evolving business environment, chief financial officers (CFOs) face myriad challenges such as driving long-term value, finding short-term cost efficiencies, and reinventing the finance function while grappling with complex and conflicting expectations from stakeholders.According to the 2023 Global EY DNA of the CFO report, CFOs and finance leaders have the potential to unlock more value if they can adeptly address three fundamental paradoxes within the CFO role: balancing near- and long-term investment priorities, balancing risk with innovation and transformation, and balancing the evolving CFO role with traditional skill sets. This article examines these issues using insights from 110 respondents in Southeast Asia, including finance leaders from the Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam.NEAR- AND LONG-TERM INVESTMENT PRIORITIESSome 84% of the Asean finance leaders surveyed say that the current market environment is putting increasing pressure on finance leaders to drive cost efficiencies and hit short-term earnings targets. This results in finance leaders having to pause or cut spending so that they can meet short-term earnings targets in areas that are also priorities for long-term value.The Asean respondents in the study rate the top three investment priorities driving long-term value as: technology and digital innovation (57%), ESG programs (50%), and customer experience and product and service offerings (47%). At the same time, more than 30% say they are pausing or cutting spend in these areas to meet short-term earnings targets.While balancing long-term with short-term priorities is a collective effort, 65% say that there are disagreements and tensions within their leadership team on how to balance these priorities. A CFO with the influence and credibility to challenge the CEO and executive team will likely be needed to build consensus, but finance leaders are not always prepared to do so. Only 38% of the respondents say they always speak up when they have a differing opinion from the consensus when the executive team is deciding how to balance short- and long-term priorities. For CFOs to effectively influence the executive team’s decision-making, the top two attributes identified are: using data-driven insights to inform decisions and trusted relationships with the board or key investors.BALANCING RISK WITH INNOVATION AND TRANSFORMATIONAsean CFOs are building digitized finance functions to drive long-term and sustainable growth. They identified the following top three priorities to transform their finance function over the next three years: technology transformation (such as transforming IT architecture, building cybersecurity resilience, and modernizing core finance technology), sustainability (such as building skills and capability in ESG data controls and assurance), and advanced data analytics (such as unlocking the value of financial and non-financial data to transform decision-making). However, only 17% of respondents say they deliver “best-in-class” performance when it comes to assessing how their finance function today performs against these priorities.Even though there is significant room for improvement, only 14% of respondents are making holistic and bold changes to transform their finance function. This could indicate potential tension in the CFO’s mindset: a conflict between a risk-averse nature versus the need to embrace greater risks associated with an ambitious vision for a leading finance function.BALANCING THE CFO ROLE WITH TRADITIONAL SKILLSThe survey also reveals a difference in the long-term career goals of respondents: 42% say the CFO role is their long-term goal, while 48% aspire to an even greater CEO role, whether in their current organization or in another. This aspiration to be CEO raises two key considerations: the need for finance leaders to elevate their skills, and the importance of developing the next generation to fill the CFO role when incumbents move to a CEO position.The respondents identified two key challenges in achieving their priorities: finding time to build knowledge and expertise through exposure to external expertise and thought leadership access, and managing a wide range of operational responsibilities, including IT and HR. These challenges can be interconnected — as CFOs expand their operational responsibilities, they need to expand their knowledge beyond finance by acquiring skills in fields such as HR and marketing. However, their busy schedules may hinder their ability to invest in building this knowledge.The evolving expectations for CFOs to expand their knowledge in other domains highlight a shift from domain expertise toward inspirational and strategic leadership skills, going beyond traditional finance skill sets. The study also highlights the importance of highly developed emotional intelligence and experience in people issues like diversity and well-being, which was chosen as the most critical attribute for the successful CFOs of tomorrow.At the same time, incumbent CFOs must prioritize developing the next generation of leaders. Asean finance leaders feel that they perform well here, especially when it comes to mentoring — as much as 64% say they are investing enough time in mentoring aspiring senior finance leaders.REFRAMING THE CFO ROLE FOR THE FUTUREAs CFOs confront the abovementioned issues, they should consider the following:Create value for the whole organization. CFOs must articulate a comprehensive strategy that maximizes long-term value while being supported by short- and medium-term objectives. They must also provide data-driven insights to support the organization’s strategic objectives and build relationships with C-suite colleagues and senior leaders.Drive the performance of the finance function. CFOs need to drive cultural change across the finance team to elevate the performance of the finance function. This can mean embracing new mindsets and incorporating cultural goals into leadership and incentives. Also, they can consider revising hiring, development, and upskilling approaches to future-proof finance skills. This may require assessing the current workforce to identify gaps and surpluses and implementing an appropriate workforce strategy.Achieve career ambitions while developing future CFOs. CFOs should focus on achieving their career aspirations while also nurturing the CFOs of tomorrow. External stakeholder engagement is imperative for gaining invaluable insights into market challenges, as is collaboration with the Chief Human Resources Officer for robust succession planning and training of potential candidates.By taking these areas into consideration, CFOs can help lead their organizations and deliver better performance, positioning themselves for success 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 opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Aris C. Malantic is the Financial Accounting Advisory Services (FAAS) leader of SGV & Co.

August 2023

Megatrends impacting indirect tax

How generative AI creates value for financial services

Transforming with AI

Reframing the CFO role

Other SGV News and Publications

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links