December 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.
28 December 2020 Wilson P. Tan

The geopolitical outlook in 2021

As the world continues to grapple with the pandemic, global political risk hit a multi-year high and is expected to persist in 2021. The performance of markets and companies will be impacted by events and conditions due to a combination of pandemic-related issues, climate change, trade tensions, political transitions and other factors. Without question, the top risk is COVID-19. Pandemics are inherently geopolitical, involving issues such as global leadership, international cooperation and competition, and national security. The COVID-19 pandemic has become a political-risk event on an unprecedented global scale as well as a public health crisis, influencing all the top 10 risks identified by the EY Geostrategic Business group in a recent report, the EY 2021 Geostrategic Outlook. In addition to coronavirus disease 2019 (COVID-19), the report discusses the geopolitical dynamics in the Indo-Pacific, the disentangling of US-China interdependence, European strategic autonomy, and the rise of neo-statism. Also identified are reinvigorated climate policy agendas, the geopolitics of technology and data, US policy realignment, the tipping point for emerging market debt and another wave of social unrest. Furthermore, COVID-19 will continue to generate high levels of uncertainty as governments continue to rapidly develop pandemic response policies and innovate in real time. This uncertainty will challenge strategy development and execution, making it even more crucial for companies to dynamically monitor political risks for challenges as well as opportunities in the coming year. POLITICAL RISKS IN 2021 Export controls, vaccine nationalism, domestic political consequences and restrictions on cross-border people movement will generate political risks in markets worldwide. This underscores the need to re-evaluate talent decisions, supply chains, and approaches towards building enterprise resilience. We should also anticipate that the geopolitics of data and technology will come to the fore, given that each country has different approaches to data privacy, technological standards, digital taxation efforts and antitrust enforcement. Companies with cross-border operations will increasingly need to evaluate how the standards in one of their markets will interact with the standards in the other markets within which they operate. Significant trends in regulatory and policy changes will see the world entering an era of neo-statism. Neo-statism refers to state-controlled competition where the state takes on a more active role and may even intervene in driving certain industries within its economy. As the pandemic intensifies the focus on self-reliance, several countries may start to diversify supply chains or re-shore manufacturing, with governments deploying policy tools to not only support domestic production, but also take measures to make their chosen industries inherently more competitive. With more countries announcing their carbon neutrality targets, ambitious climate policy agendas are also likely to be part of COVID-19 stimulus plans, particularly in light of the upcoming 2021 United Nations Climate Change Conference (COP26) in November. Also coming into play are power politics among the EU, China and the US. The European Union (EU) will utilize its investment, industrial and trade policies as well as its ability to shape global standards to progress towards strategic autonomy. On the other hand, China and the US will continue to try disentangling their strategic interdependence amid their trade relationship, rival industrial policies, technological competition and friction regarding Chinese sovereignty. President-elect Biden has also declared his incoming administration’s focus on environmental and industrial policies, with volatility likely in the areas of anti-trust, immigration and trade. Companies could expect production and supply chains in strategic sectors to shift more towards the US economy, while green industries will see expanded investment and growth opportunities. Meanwhile, the global competition in the Indo-Pacific will likely cause more geopolitical instability. This is evinced by recent tensions between China and India, as well as Australia and China, with middle and major powers becoming more assertive in shaping geopolitics while balancing between US and China. Government interventions will also affect investment and growth strategies, while maritime policies may reconfigure global supply chains. Moreover, emerging market debt may hit a tipping point in 2021, with funding vulnerabilities expected to be highest in large emerging markets such as Brazil, India, Mexico and South Africa. Key markets growth prospects may suffer as tax and financial burdens rise among companies. Despite international efforts at debt relief, debt resolution will likely to be complicated by geopolitical dynamics and COVID-19. Finally, a potential wave of social unrest in the form of protests may bring more disruptions to business operations. Five primary issues likely to motivate protestors in 2021 include social justice, climate change, inequality, pandemic restrictions and governance issues. Heightened stakeholder expectations could also magnify reputational risks for companies. MANAGING RISKS THROUGH GEOSTRATEGIC PRIORITIES While the geostrategic considerations differ for each specific political risk, there are five overarching actions that business leaders may consider to manage such risks in 2021. 1.Actively monitor your company’s political risk environment. Make political risks part of the company’s risk radar and dynamically monitor them throughout the year. The debt situation in some large emerging markets and the US policy realignment will require constant monitoring as the year progresses. 2.Conduct in-depth and real-time assessments of identified risks. Model the impact of potential political risk events across key business functions such as supply chain, revenue, data and intellectual property, as well as regularly monitor the potential effects of evolving US-China relations. Moreover, the geopolitics of technology and data likewise warrant close assessment. 3.Create a culture of political risk management across the company. Too often, the identification, assessment, and management of political risk is siloed within various business functions, as revealed in the EY Geostrategy in Practice 2020 survey of global executives. Companies should establish cross-functional teams that will leverage on the lessons learned from ongoing COVID-19 crisis management. This fosters better communication and management of political risks arising from the pandemic and will build greater agility in company operations. 4.Engage your stakeholders in political risk management. Political intervention and public opinion will continue to target companies on a variety of issues, upon which companies must proactively engage their stakeholders. By leveraging on relationships with policymakers, employees, customers, non-governmental organizations, community groups, and other stakeholders, companies can potentially turn challenges from political risks into opportunities. 5.Make political risk analysis integral to strategic decisions. Scenario analyses about political risks can be used to quantify and capture the uncertainty associated with their trajectories in the coming years. These insights can better inform strategic decisions that include M&A, market entry and exit as well as other transactions. As an example, the state of the EU’s pursuit of strategic autonomy and the geopolitical dynamics in the Indo-Pacific in 2021 will likely affect the global business environment for several years to come. THE NEED FOR A GEOSTRATEGY The New Normal may have started in 2020, but it is poised to become even more disruptive in 2021, with the medium and long-term effects of the pandemic becoming more visible. It would therefore be advisable for companies to develop their own geostrategy — one that can help the business integrate political risk management into its operations, as well as into its broader risk management, governance and strategic analyses. Let us look to 2021 with renewed strength, depth of purpose, and clarity of insight as we work to unmask the difficulties brought about by the disruptions happening now, focus on the work to be done Next in order to recover, and keep our eyes on the vision of building and restoring long-term value to our businesses in the world beyond the pandemic. Allow me to take this opportunity to thank the readers of Suits the C-Suite, a thought leadership column regularly published by SGV & Co. since 2009. On behalf of our partners, principals and staff who have contributed to this column, I wish you all a New Year filled with hope and peace. 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. Wilson P. Tan is the Country Managing Partner of SGV & Co.

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22 December 2020 Rosalie T. Lapuz and Leomar G. Velez

Fiscal relief and accounting considerations on the road to recovery Part 2

(Second of two parts) In the first part of this article, we discussed the regulatory relief that the government provided to ease the impact of the pandemic on businesses. These include the 60-day grace period for all existing, current, and outstanding loans with principal and/or interest. We also discussed concessions for banks and non-bank institutions, and the impact of these relief efforts on financial reporting. In this second part, we will cover how to apply the COVID-19-related Rent Concessions Amendment to IFRS 16 on accounting for lease modifications. For lease arrangements, IFRS 16 Leases provides guidance on accounting for changes in lease payments for both lessees and lessors. However, IFRS 16 may be difficult to apply in accounting for changes to lease payments. In particular, assessing whether rent concessions are lease modifications and applying the relevant accounting guidance could prove difficult if there are many lease contracts affected by the pandemic. Multiple changes to each or some of the lease arrangements can also compound the issue. EFFECT OF COVID-19-RELATED RENT CONCESSIONS In May, the International Accounting Standards Board (IASB) issued the COVID-19-related Rent Concessions Amendment to IFRS 16. It provides optional relief to lessees from applying IFRS 16’s guidance in accounting for lease modifications arising from rent concessions given as a direct consequence of the pandemic. The Financial Reporting Standards Council (FRSC) adopted the international amendment and issued the COVID-19-related Rent Concessions Amendment to PFRS 16. This aims to provide lessees that have been granted COVID-19-related rent concessions by lessors with practical relief while still providing useful information about leases to users of the financial statements. Prior to the amendment, when a rent concession is granted by a lessor, a lessee assessed whether such a rent concession qualifies as a lease modification. A lease modification is defined in PFRS 16 as a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease. Such guidance under PFRS 16 in accounting for pandemic-related lease concessions can be difficult, especially if there are many contracts to deal with and the rent concessions qualify as lease modifications. Our previous article Consensus in lease concessions due to COVID-19 by Jerome B. Ching, published on June 8 and 15, covers further details regarding assessing and accounting for lease modifications. ACCOUNTING FOR LEASE MODIFICATION PRIOR TO THE AMENDMENT A lease modification that increases the scope of the lease and increases the consideration by an amount commensurate with the stand-alone price is accounted for as a separate lease. For a lease modification not accounted for as a separate lease, a lessee applies modification accounting at the effective date of the lease modification (i.e., the date when both parties agreed to the lease modification). In such a case, a lessee allocates the consideration in the modified contract to the lease and non-lease components (where applicable), determines the lease term of the modified lease, and remeasures the lease liability by discounting the revised lease payments using a revised discount rate determined on that date. If the modification decreases the scope of the lease (e.g., reduces total leased space or the lease term), the lessee remeasures the lease liability and reduces the right-of-use asset to reflect the partial or full termination of the lease. Any difference between those two adjustments is recognized in profit or loss at the effective date of the modification. For all other modifications, the lessee recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset, without affecting profit or loss. Questions have been asked as to whether the lease concessions mandated by Bayanihan I and II constitute a lease modification. Some stakeholders believe that in these cases, changes to the lease were not part of the original terms and conditions and thus require modification accounting. However, other stakeholders take the view that when the lessee and lessor agreed to a lease contract, subject to the law of a jurisdiction, the parties also agreed to be bound by any future changes in applicable laws. Any changes therefore made to comply with a change in law are contemplated in the contract and should not be considered as a lease modification. Given that PFRS 16 does not specifically address this circumstance, there are likely differences in practice. Both approaches are acceptable. It is important to note, however, that irrespective of the view taken, a lease concession will not qualify as a lease modification only to the extent of what the law provides. For example, if the law requires a waiver only during the period of the pandemic, any concession provided beyond such period is a form of lease modification. Similarly, if the law requires a full waiver during a specified period, but if the lessor granted only 50% waiver which was also accepted by the lessee, the other 50% of the lease payments that would have been waived but were not constitute a lease modification. Moreover, some agreements include provisions that allow changes if unexpected events occur, such as a force majeure clause. However, these clauses do not automatically make the changes part of the original terms and conditions of contracts, as these are usually written in general terms and do not provide specific contractual rights and obligations that arise from the occurrence of a force majeure event. Therefore, the lessor and lessee may need to revisit the lease contract and agree on the coverage of a force majeure clause, including the involvement of legal experts. PRACTICAL EXPEDIENT TO ACCOUNTING FOR LEASE PAYMENT CHANGES With the amendment, a lessee may elect not to assess if a COVID-19-related lease concession from a lessor is a lease modification and simply account for such as it normally would under PFRS 16, assuming the change was not a lease modification. The amendment does not provide any practical expedient to lessors. It should be noted that the practical expedient under the amendment applies only to rent concessions occurring as a direct consequence of the pandemic, and only if all the necessary conditions are met. First, the change in lease payments must result in a revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change. Second, any reduction in lease payments must also affect only payments originally due on or before 30 June 2021. For example, a rent concession meets this condition if it results in reduced lease payments before June 30, 2021, but reductions are recovered through equivalent increase in lease payments after June 30, 2021. This satisfies the condition because the intent is only to defer the payments without increasing the total lease consideration. Third, there must be no substantive change to other terms and conditions of the lease. ACCOUNTING FOR RENT CONCESSIONS BASED ON THE AMENDMENT The amendment does not provide explicit guidance on how a lessee accounts for a rent concession when applying the practical expedient. There are a number of potential approaches in accounting for a rent concession that is not accounted for as a lease modification. One approach is to account for a concession in the form of forgiveness or deferral of lease payments as a negative variable lease payment. In this case, the lessee remeasures the lease liability based on revised remaining lease payments without updating the discount rate (if the contract contains multiple components, reallocating the remaining payments proportionately between the lease and non-lease component using the same allocation from the original contract). This approach is similar to that used by the lessor to recognize variable lease income, is also easier to apply and immediately effects the concession to profit or loss. Another approach is to account for the abovementioned concession as a resolution of a contingency that fixes previously variable lease payments. The lessee remeasures the lease liability similar to the first approach, with a corresponding adjustment to the right-of-use asset. This approach is also easy to apply, but will not immediately affect profit or loss. The third approach is to account for the lease liability and right-of-use asset using the rights and obligations of the existing lease and recognizing a separate lease payable (that generally does not accrue interest) in the period that the allocated lease cash payment is due. In this case, the lessee continues to recognize the unpaid lease payment (i.e., as a lease payable) without accruing interest until it makes the lease payment at the revised payment date. In this approach, the lessee need not revisit the accretion of its lease liability based on the revised timing of payments. In many cases, this allows a lessee to use its existing systems to account for the lease liability using the existing payment schedule and discount rate. ECONOMIC RECOVERY AND COMPLIANCE With the pandemic’s continuing impact on the economy, government support will play a large part in preserving business confidence as we move towards a post-pandemic world. On the part of companies, a clear understanding of how COVID-related reliefs and amendments to accounting standards are crucial to ensuring not only compliance, but also a better state of preparedness as we all embark on the road to economic recovery. 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 authors and do not necessarily represent the views of SGV & Co. Rosalie T. Lapuz is a Tax Senior Manager and Leomar G. Velez is an Assurance Senior Manager from SGV & Co.

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14 December 2020 Rosalie T. Lapuz and Leomar G. Velez

Fiscal relief and accounting considerations on the road to recovery Part 1

(First of two parts) According to the Organisation for Economic Co-operation and Development (OECD) Economic Outlook Interim Report issued in September, global economic output collapsed in the first half of 2020, but recovered swiftly following the easing of measures to contain the COVID-19 pandemic and the initial re-opening of businesses. The report also noted that what prevented greater economic decline were economies that introduced prompt and effective policy support to cushion the blow to incomes and jobs. Moving forward, continued fiscal, monetary and structural policy support will be crucial to preserving business confidence and limiting uncertainty. In the Philippines, the government likewise acted swiftly and provided regulatory relief in aid of national healing and recovery. In the first part of this article, we will discuss the regulatory relief efforts the government provided to ease the impact of the pandemic on businesses, as well as concessions for banks and non-bank institutions and the resulting impact these have on financial reporting. REGULATORY RELIEF EFFORTS The Bayanihan to Heal as One Act (Bayanihan I) made effective on March 25 provided a minimum 30-day grace period on loan payments, without interest, penalties, or other fees charged on these payments. Six months later, the Bayanihan to Recover as One Act (Bayanihan II), which took effect on Sept. 15, doubled the grace period and increased its coverage. Separately, the Bangko Sentral ng Pilipinas (BSP) issued Memorandum No. M-2020-074 on Sept. 28, which required all BSP-supervised financial institutions to provide a one-time 60-day grace period for all existing, current and outstanding loans with principal and/or interest, with amortization falling due between Sept. 15 and Dec. 31 without incurring additional interest, penalties, fees, or other charges. The principal and accrued interest for the 60-day grace period may be paid in installments until Dec. 31 or as may be agreed upon by the involved parties. Other government support included the lowering of effective lending interest rates and reserve requirements, a three-year repayment term, and no collateral for loans below P3 million; conditional loan interest rate subsidies for affected learning institutions; and an increase in maximum loan amounts per borrower, reduced interest rates, and extended loan terms for micro, small and medium enterprises (MSMEs), cooperatives, hospitals, tourism companies and overseas workers affected by the pandemic. The government also initiated a low interest and/or “flexible term” loan program for operating expenses for businesses affected by the pandemic and provided guarantees for non-essential businesses. Moreover, it liberalized the grant of incentives for the manufacture or import of critical or needed equipment or supplies or essential goods, and provided a loan interest rate subsidy to critically-impacted businesses. CONCESSIONS FOR BANKS AND NON-BANK FINANCIAL INSTITUTIONS The general loan loss provision, which is part of a bank’s Tier 2 capital, is limited to 1% of a banks’ credit risk-weighted assets such that any excess amount will be considered in computing risk-based capital ratios. Non-bank financial institutions (NBFI) are also required to set up an allowance for credit losses and to report non-performing loans. Bayanihan II and BSP Memorandum No. M-2020-074 provides certain reliefs to banks and NBFIs in regard to the mandatory grace period to borrowers. These include the staggered booking of allowances for credit losses, with banks and NBFIs given the option to insulate net earnings and capital from the effects of higher credit risk, cushioning the banks and NBFI’s net earnings and capital; exemption of borrowers availing of the mandatory grace period from the limits on real estate loans when applicable, and from related party transaction restrictions, which gives the banks and NBFIs more opportunity to extend financial assistance to those affected by the pandemic; and non-inclusion in the bank’s or NBFI’s reporting on non-performing loans, reducing the regulatory burden on lenders as they extend more loans and restructure facilities of financially-burdened borrowers. These concessions are necessary to avoid putting pressure on any one sector of society, especially on sources of finance. They also ensure that policies to achieve recovery are sustainable in the long run. GRACE PERIOD IMPACT ON FINANCIAL REPORTING As financial institutions and corporations implemented the provisions of Bayanihan I and II, scheduled repayments under the loan and lease agreements were changed to reflect the grace period. Furthermore, borrowers and lessees may potentially negotiate further with lenders and lessors on concessions and forbearance that may significantly change the original terms of their arrangements. In such cases, companies will need to refer to the guidance provided under Philippine Financial Reporting Standard (PFRS) 9, Financial Instruments and PFRS 16, Leases to consider the potential accounting implication of such changes in contractual provisions. For loan agreements, the key consideration is to assess whether the changes represent a substantial modification or a potential contract extinguishment. For borrowers, PFRS 9 provides guidance on determining if a modification of a financial liability is substantial. This includes a comparison of the cash flows before and after the modification, discounted at the original effective interest rate (EIR) commonly referred to as the “10% test.” If the difference between these discounted cash flows is more than 10%, it is considered a substantial modification, and the existing financial liability is derecognized. However, other qualitative factors could lead to derecognition irrespective of the 10% test (e.g., if a debt is restructured to include an embedded equity instrument). If the change results in extinguishment of cash flows, the financial liability should also be derecognized. This is the case when the obligation specified in the contract is discharged, canceled or expires. The effect of derecognition of existing financial liability will result in extinguishment gain or loss recognized in profit or loss. For substantial modifications, a new financial liability is to be recognized based on the revised cash flows using the current EIR. Thus, interest expense will be based on the new EIR moving forward. While most of the renegotiations may result in an extinguishment gain to borrowers, future net earnings will be affected by the change in the interest expense based on the new EIR. From the perspective of lenders, there is no explicit guidance in PFRS 9 for when a modification should result in derecognition. Hence, entities apply their own accounting policies, which are often based on qualitative considerations and, in some cases, include the 10% test. It should be noted though that the International Financial Reporting Standard (IFRS) Interpretations Committee has indicated that applying the 10% test in isolation would not always be appropriate because of potential inconsistencies with the impairment requirements in IFRS 9 (the international standard equivalent of PFRS 9). ASSESSMENT OF RECEIVABLE MODIFICATIONS Some preparers of financial statements may apply different accounting policies depending on whether a modification is granted due to the financial difficulty of the borrower, with some concluding that such a circumstance would rarely result in the derecognition of the financial asset. If a measure provides temporary relief to debtors and the net economic value of the receivable is not significantly affected, the modification is not likely to be considered substantial. For example, if the payment terms of a receivable are extended from 90 days to 180 days, this change on its own would likely not be considered a substantial modification of the receivable. If, following the guidance above, a modified financial asset or liability is not considered a substantial modification, such does not result in derecognition. The original EIR is retained and there is a catch-up adjustment to profit or loss for the changes in expected cash flows discounted at the original EIR. The impact of such is much less compared to when the modification of financial asset or liability is considered substantial. For floating rate instruments, a change in the market rate of interest is prospectively accounted for. However, any other contractual change (e.g., the spread applied above the interest rate) would also result in a catch-up adjustment at the date of modification. It is expected that the changes in contractual cash flows that are solely based on the provisions of Bayanihan I and II will result in a non-substantial modification. However, companies should assess if there are further renegotiations and forbearances that should be considered. In the second part of this article, we will discuss how to assess lease modifications in relation to the COVID-19-related Rent Concessions Amendment to PFRS 16, and our insights on accounting for rent concessions. 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 authors and do not necessarily represent the views of SGV & Co. Rosalie T. Lapuz is a Tax Senior Manager and Leomar G. Velez is an Assurance Senior Manager from SGV & Co.

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07 December 2020 Czarina R. Miranda

Business mobility in the new normal

The new normal has created multi-layered and complex conditions for businesses. At the onset of the pandemic, organizations were forced to implement remote working procedures; and now, businesses are considering appropriate strategies to enable their people to safely return to work. There have also been challenges around business travel and mobility, with domestic and international travel limitations severely affecting many companies. Based on the EY article, Transforming the Mobility Function in the Wake of COVID-19, 98% of companies have suspended or outright cancelled international business travel, and travel industry forecasts indicate a two- to three-year timeline before recovery and a return to pre-COVID-19 level operations. However, the bigger picture is far more complicated. The swiftly evolving situation has exposed weaknesses in the mobility programs of many businesses, especially when it came to real-time data and information-sharing. Simply put, many organizations were caught unprepared. According to a report conducted by EY and the RES Forum, Now, Next and Beyond: Global Mobility’s Response to COVID-19, only 49% of the respondents had a major incident response policy in place when the pandemic hit. Being able to reach and manage a mobile or remote workforce posed a major hurdle. People also found themselves unable to cross borders, becoming stranded in countries beyond their permitted time, or working outside their country of tax residence. These situations created a slew of immigration and compliance issues. Fortunately, the situation surrounding stranded and overstaying workers was alleviated in part because governments implemented protective measures on work permits and immigration status. Nonetheless, any leniency is bound to be removed eventually. In the Philippines, the Bureau of Immigration acted to suspend entry into and departure from the Philippines of both Filipino and foreign nationals at the onset of the pandemic. Lately, however, these rules have been relaxed with policies instituted to safeguard the interests of the public. Outbound and inbound travel now require the usual exercise of precautionary measures, COVID testing, and immediate quarantine in an accredited facility after arrival, among others. The Bureau of Internal Revenue has also issued some guidelines to address concerns and provide some tax relief to non-resident workers who become saddled with unexpected tax burdens from being stranded or quarantined in the Philippines. From a wider perspective and for businesses to move forward in the near term, there are four key areas that must be considered for a more optimal and comprehensive transformation of the mobility function. BORDER CONTROL As restrictions begin to ease, the risks to the workforce increases commensurately. This makes the border situation central to any mobility program. Companies need to monitor these carefully, particularly the quarantine periods enforced in countries where borders are already open. In some cases, quarantine only applies to arrivals from “blacklisted” countries, which can be implemented at very short notice. An example was when the UK suddenly added Spain to its quarantine list in July. Being granted entry to another country presents new challenges that organizations have to consider. One place to start is to establish a business’s risk tolerance and a comprehensive understanding of actual risks. Under what circumstances are they willing to allow travel for their employees? What policies will have to be implemented should employees refuse to travel for health and safety reasons? Policies will need to be communicated to the right corporate decision-makers who may not be aware of the risks that are familiar to the head of mobility or immigration. Ensuring that proper processes and policies are established will be absolutely critical as global businesses execute strategies and objectives while navigating this period of economic disruption. VISAS AND PERMITS For the most part, countries have been understanding of situations regarding permits and visas, particularly for applications and renewals. In fact, 57 countries acted swiftly by granting automatic extensions for migrant workers and stranded business travelers to protect them from overstaying. However, organizations have to note that any leniency will be, by necessity, limited in duration as the pandemic runs its course. New procedures may be implemented, and it could be easy to overlook changes. This makes the continuous monitoring of visa and permit policies critical to ensure that any necessary paperwork is kept up-to-date and compliant in order to avoid any penalties or travel restrictions. TAX OBLIGATIONS Whether due to business or personal travel, many employees were stranded in foreign countries during the pandemic, some beyond the expiry of their visa or contracts. Naturally, many of these people continued to work for their respective companies, which in turn, triggered potential tax penalties. Providentially, many countries were understanding of the situation. With insights from the Organisation for Economic Co-operation and Development (OECD), several countries issued guidance to address concerns like social security, income tax, and permanent establishment. However, this was merely guidance and not clear recommendations, which led governments to rely on bilateral agreements and updates from local tax administrations. One key tax risk is the question of permanent establishment. A stranded executive may trigger permanent establishment by simply continuing to work remotely from a temporary location. It then becomes a challenge for any company to determine whether there actually is a permanent establishment; and consequently, to determine if such a situation triggers a corporate tax filing obligation. There could be significant penalties for failure to file or for mistakes in filing, and a sizable taxable presence may very quickly be created. The environment will become more challenging as borders open and regulations are reinstated, but companies may still want their workforce to stay home and may not push seconded national experts (SNEs) to return to their “home” locations. This may need policy changes on behalf of the businesses, the implementation of virtual assignment policies, and a real-time view of any tax agreements between countries. LOCAL SAFETY CONSIDERATIONS When borders reopen to allow business travel and mobility, companies will have to prioritize issues of employee health and safety. They will need to know and require employees to follow local rules on social distancing, sanitation, occupation limits for locations and public transport, among others. These rules may change regularly and will require constant tracking and communication for people to be adequately informed and safeguarded. Companies should consider leveraging technology to address this risk. For example, EY LLP entered an alliance with WorldAware, to enable the delivery of alerts and regulations for the safety of business travelers, crucial trip data, and a better understanding of travel-related compliance during and after the pandemic. TRANSFORMING THE GLOBAL MOBILITY PROGRAM Business travel and mobility will never be the same post-pandemic, according to the findings of the Now, Next and Beyond: Global Mobility’s Response to COVID-19 report which projects how significantly the landscape is expected to shift. Around 72% of surveyed organizations believe business travel will be reduced, 52% believe that short-term assignments will decrease, and 58% surmise that long-term assignments will become less frequent. More than 82% of respondents see increased use of virtual work, where assignees can complete the objectives of a foreign assignment without physical relocation. The mobility function and the HR team will need to be more closely aligned with the business, and any cross-border activity will have to be intrinsically linked to the business objectives of the organization. “Business critical” will need to be revisited in the context of defining the specific purpose of a business trip and its Return on Investment. The opportunity to transform does not signal the end of mobility — it will spur the creation of a leaner, more considerate mobility program that focuses on increased value creation for the organization while keeping the wellbeing of its people in check at all 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. Czarina R. Miranda is a Tax Partner and the People Advisory Services Leader of SGV & Co.

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