February 2021

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.
22 February 2021 Carlo Kristle G. Dimarucut

Why boards of private businesses must prioritize cybersecurity

Imagine getting a frantic call from your head of IT. Your accounting personnel have reported that they have not been able to access your accounting system, and that they have been working on the issue for several days now. You have been the target of a cyberattack, resulting in the loss of many records.This situation is not uncommon. Over the past year, we have seen a significant rise in similar attacks that have been targeting private, and generally smaller organizations. These attacks, while less sophisticated than the well-publicized bank heists and the government-backed intrusions into key infrastructure, make up a large portion of the cybersecurity issues that threaten organizations. They need to be managed.INCREASINGLY MOBILE WORKFORCEThe current pandemic has changed the way people work almost literally overnight. Businesses temporarily closed their doors, and in-office employees instantly became a virtual workforce. This change has boosted online interaction, opening up companies to increased risk. In some cases, employees have taken matters into their own hands because of the perceived inflexibility of in-house IT organizations. Many have turned to cloud-based, usually consumer-grade digital solutions that they have grown accustomed to in their personal lives. In-place cybersecurity controls and protocols are being tested like never before, while threat actors are exploiting this new work environment and intensifying their activities.Dealing with cybersecurity in smaller organizations is oftentimes not easy. There usually isn’t a technical solution that would fix all issues and keep attackers out. More often than not, the solution is a painful process of educating users of what and what not to do, or upgrading an old system so that it can be appropriately supported by current vendors. However, these protocols and reminders are usually things that most board members and employees alike have grown tired of hearing about.A recent EY survey (conducted prior to the pandemic) of over 1,100 private company leaders, revealed that only 17% of those polled had made or planned on making significant investments in technology to reduce risk, including cyber risks. Additionally, 50% feared the reputational or operational disruptions caused by cyberattacks even as they began to invest in digital solutions. This is further exacerbated by the mindset of many smaller private organizations that do not pay particular attention to cybersecurity concerns until it’s too late.Since embedding a culture of cybersecurity in an organization needs to flow from the top, boards need to be more vigilant with their oversight of cybersecurity risks in today’s new work reality. They should consider the following questions:• With increased remote access, how is the company’s overall cybersecurity posture being optimized, and is the company evaluating whether additional technology and operations are secure?• Has management reviewed and tested all security features (e.g., point-to-point encryption, data protection) associated with the company’s videoconferencing tools, including patching, and are vulnerabilities mitigated if patches are not available?• What changes have been made to security monitoring procedures given the increase in remote workers? Are changes to user accounts with administrative or privileged access being more vigorously monitored?• Are security personnel effective while working remotely? What physical (in-person) security requirements are not being performed?• What are the contingency plans if key IT or security personnel require time off?• How is management maintaining an effective incident response and recovery function considering the need for additional remote access technology and operations?• Are there additional needs for software, technology, personnel or other resources to augment existing controls?• Are system updates and patching current?• Are employees reminded of security awareness protocols because of the increased risk of COVID-19 phishing e-mails or similar tactics?• Is management communicating with critical suppliers to determine if they are evaluating additional steps to assess and protect their networks?• Are incremental insider threats being evaluated, including revising print-from-home capabilities?• What security risks might there be that are related to employee layoffs and furloughs? Are the human resources and IT security teams aligned so that user-access privileges are immediately removed?• How is the IT security function affected if furloughs or budget cuts are executed or contemplated?• Should the company’s security personnel review or update board members and C-suite home networks for appropriate security?Cybersecurity in this unprecedented new work environment is an enterprise-wide concern that critically requires board mandate, support and oversight. The board needs to set the tone and the urgency of cybersecurity enhancements and preparation. As widespread remote working and increased online interactions become the new business “normal,” companies will need to reimagine and reinvent their business models.A company’s ability to adjust and strengthen its cyber resiliency in response to the dynamics of this health crisis will position the entire organization for a more secure future as new and varied challenges arise.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.Carlo Kristle G. Dimarucut is a Consulting Partner of SGV & Co.

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15 February 2021 Judy J. Castroverde

Tax relief from net operating losses: Useful or futile?

The prolonged community quarantines during the pandemic have caused a significant reduction in economic activity. Sectors and industries deemed non-essential experienced closures or resorted to reducing their staff, which resulted in low productivity. Various establishments were challenged with low demand for their products and services, ultimately leading to a decrease in net operating income — or worse — to net operating losses.From a tax perspective, can businesses still recover their net operating losses arising from the effects of the pandemic?To address the impact of COVID-19, the Senate and the House of Representatives enacted Republic Act (RA) No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II) effective Sept. 15, 2020 with an original expiry date of Dec. 19, which has since been extended to mid-2021. Bayanihan II provides for COVID-19 response and recovery interventions and mechanisms to accelerate the recovery and to bolster the resiliency of the economy.The extension of Bayanihan II to June 30 was signed on Dec. 29, in the form of RA 11519.CARRY-OVER OF NET OPERATING LOSSESAmong the response and recovery interventions provided under Bayanihan II are the carry-over of net operating losses incurred by the business or enterprise for taxable years 2020 and 2021 as deductions from gross income (for purposes of computing net taxable income subject to regular corporate income tax) over the next five consecutive taxable years immediately following the year of such loss [Section 4 (bbbb) of the Bayanihan II].One of the features of Bayanihan II was a provision that Section 4 (bbbb) would remain in effect even after the expiration of the Act, provided that the deductions are claimed within the next five consecutive taxable years.In the implementing regulations [Revenue Regulations (RR) No. 25-2020 dated Sept. 30] of Bayanihan II, net operating loss is defined as the excess of allowable deductions or expenses (as enumerated in the Tax Code) over the taxable gross income of the business in a taxable year, whether calendar or fiscal year.Recently, the Bureau of Internal Revenue (BIR) clarified, through Revenue Memorandum Circular (RMC) No. 138-2020 dated Dec. 22, that the net operating loss carry-over (NOLCO) may be availed of under RR No. 25-2020 for taxpayers operating on fiscal-year reporting. The RMC enumerated fiscal years ending between July 31 and Nov. 30, 2020 and Jan. 31 to June 30, 2021 as falling within the taxable year 2020. Meanwhile, fiscal years ending between July 31 to Nov. 30, 2021 and Jan. 31 to June 30, 2022 fall within the taxable year 2021. Thus, net losses incurred by businesses or taxpayers during these fiscal years can be carried over as deductions from gross income for the next five consecutive taxable years.It should be noted that generally, under existing rules (Section 34 of the Tax Code and RR No. 14-01), the accumulated net operating loss of a business by individuals engaged in trade or business or practice of profession and domestic and resident foreign corporations can be carried over as a deduction from gross income only for the next three consecutive taxable years.WELCOME RELIEF FOR TAXPAYERSThe benefit granted under the Bayanihan II extending NOLCO for an additional two years is welcome relief for businesses that have been significantly affected by the pandemic and have suffered operating losses in 2020, as well as those still recovering and expecting negative results from operations in 2021.However, while a business may incur a net operating loss and is allowed NOLCO deductions in subsequent years, the corporation is still liable to pay the 2% minimum corporate income tax (MCIT). The MCIT is based on gross income if the same is higher than the 30% regular corporate income tax (RCIT) based on net taxable income. Accordingly, the extended NOLCO deduction may have no impact or relevance if the corporation pays MCIT.MCIT UNDER THE CREATE BILLAnother related development is the reconciled version of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which was ratified by the House of Representatives and the Senate on Feb. 1 and 3, respectively. It covers package 2 of the tax reform program, which proposes amendments to the corporate income tax system, among others, and provides for a reduction in the MCIT rate to 1% effective July 1, 2020 until June 30, 2023.However, this reduction in MCIT rate appears to provide temporary tax relief only during the period when businesses may possibly incur net operating losses due to the pandemic. For the enhanced or extended NOLCO to have significant impact during the period when businesses are supposed to have recovered and claimed NOLCO deductions, the effectivity period of the MCIT relief should ideally be consistent with the extended period of the NOLCO.It is hoped that, as legislators move forward with the CREATE Bill, the possibility of extending the period of MCIT relief is considered to better align the bill with NOLCO provisions of Bayanihan II. Otherwise, between 2023 and 2026, when net operating losses from 2020 and 2021 are allowed to be claimed as deductions, businesses may end up paying the 2% MCIT instead of taking full advantage of the extended NOLCO. Harmonizing these areas is believed to allow taxpayers to enjoy full tax relief and support.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.Judy J. Castroverde is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

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08 February 2021 Clairma T. Mangangey

Decarbonizing for a better working world (Second part)

(Second of two parts)In the first part of this article, we discussed the costs and impact of climate change, the mounting pressures for carbon reduction, and the increasing demand of investors and regulators for greater transparency on nonfinancial performance through sustainability reporting.Climate change and sustainability were among the highlights at the 2021 meeting of the World Economic Forum (WEF), a week-long program at the end of January dedicated to help leaders select innovative solutions to address the pandemic and drive recovery. While climate change was already a dominant theme in the WEF in 2020, this year sees the private sector ready to prioritize a low-carbon future in their evolving business models and strategies.As part of its commitment to sustainability, Ernst & Young Global (EY), of which SGV is the Philippine member firm, recently announced its ambition to be carbon negative by 2021, and net zero in 2025. Becoming carbon negative will result in the reduction of EY’s carbon emissions in line with the 1.5 degrees Celsius Science Based Target (SBT), as well as investing in technologies and nature-based solutions to remove and offset more carbon than EY emits each year. This new ambition builds on the global organization’s achievement of carbon neutrality in December 2020.KEY ELEMENTS OF THE EY CARBON NEGATIVE AMBITIONThere are several key components in the EY ambition to not only become carbon negative, but to also reduce total emissions by 40% and achieve net zero in 2025.— Reducing business travel emissions. Though many EY services require an element of business travel, air travel provides the most significant negative impact on the environment, accounting for approximately 75% of EY’s global carbon emissions in FY19. These emissions will be reduced by 35% in 2025 using 2019 baseline data by continuing to use remote working technologies that helped EY teams provide uninterrupted client service during the pandemic.— Reducing overall office electricity usage. EY will reduce its office carbon emissions from electricity consumption to zero by FY25 and by switching to 100% renewable energy for remaining EY needs. By FY25, EY aims to be a fully accredited member of the RE100, a group of influential organizations committed to 100% renewable power. From 2020, EY’s global Scope 3 emissions measurements include employees working from home, reflecting the changes resulting from the pandemic, trends in remote working and the organization’s flexible working schedule.— Structuring electricity supply contracts. Along with agreed Virtual Power Purchase Agreements (VPPAs) with several solar and wind farms, EY aims to introduce more electricity than it consumes into national grids. These arrangements will add more than twice the amount of electricity consumed into multiple national electricity grids from 100% renewable energy. This allows EY to reduce its total electricity costs, offset its own office electricity emissions, and play its role in decarbonizing the electricity generation sector.— Providing EY teams with tools to calculate and reduce carbon emitted. EY recognizes that executing client-facing projects results in carbon emissions, and many clients want to work towards reducing them. To this end, EY will provide its teams with tools such as the EY Engagement Carbon Calculator to enable them to assess then reduce the amount of carbon emitted when delivering client work.— Offsetting more carbon than EY emits through nature-based solutions and carbon-reduction technologies. EY launched a collaboration with profit-for-purpose organization South Pole in December 2020, where contributions from EY will contribute to renewable energy projects (including solar, wind and hydro) and help preserve natural environments.— Requiring 75% of EY suppliers to set science-based targets. EY will set a goal for suppliers to have a Science Based Targets initiative (SBTi) approved carbon-reduction target by FY25. This involves collaborating with all suppliers to help them achieve SBTi accreditation and decarbonize their products and services, exponentially increasing the impact of EY’s carbon negative position.— Sustainable solutions for a carbon negative working world. In addition to increasing investments in solutions, EY will continue carrying out activities in various multi-stakeholder sustainability alliances. Such alliances include working on metrics and reporting with the World Economic Forum International Business Council, collaborating with C-suite Sustainability leaders in the S30 group, membership in the Alliance of CEO Climate Leaders, and work with the UN Global Compact and the World Business Council for Sustainable Development.As EY undertakes efforts to become more sustainable, it is also developing a new set of global sustainability solutions for clients to assist them in their own sustainability journey while protecting and creating long-term value for all stakeholders. In addition, EY will continue to transform its business amid the COVID-19 pandemic and invest in its people by equipping them with the knowledge and skills necessary to lead climate action at work and at home.As a member firm of EY Global, SGV & Co. will likewise further strengthen its own carbon reduction efforts and sustainability programs to align with the EY carbon negative ambition. More than merely adopting this initiative, the program falls within SGV’s Purpose to nurture transformative leaders capable of reframing the future and helping create long-term value.The COVID-19 crisis has taught us that providing exceptional client service is still possible despite the challenges it brought. The lessons that we have gained from managing the pandemic will help EY further attain its sustainability ambitions. Many of the practices the EY global firm and SGV have adopted due to COVID-19 will remain relevant to reducing carbon emissions and we will capitalize on these as we define our new normal of doing business.As the world moves towards an increasingly decarbonized future, it is our hope that more organizations will take up the challenge and join hands to help address the daunting risks posed by climate change.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.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

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01 February 2021 Clairma T. Mangangey

Decarbonizing for a better working world (First part)

(First of two parts)Climate change is an urgent issue and taking action is critically necessary to limit and reduce global carbon emissions. Businesses in particular will need to consider their own carbon footprint. With collective technological capabilities, financial resources, innovative capacity and global reach to search for solutions towards a low-carbon future, many businesses worldwide are setting carbon reduction targets, progressing towards net zero. In fact, just last week EY Global Ltd. (of which SGV is a member firm) announced its plans to achieve negative carbon emissions in 2021 and net zero by 2025.Combatting climate change is a unique challenge for each organization, but it is clear that a collective effort is crucial to avert disaster. With the ongoing pandemic reinforcing the drive towards a sustainable future, transitioning to decarbonization is more vital than ever to achieve long-term resilience for organizations as well as to aid economic recovery.THE COSTS AND IMPACT OF CLIMATE CHANGEThe Economist estimates that by 2050, the global economy will be 3% smaller due to a lack of climate resilience, potentially raising the cumulative cost of damages to $8 trillion. Research from the EY Megatrends 2020 report also reveals that many Asian countries face high vulnerability to rapidly rising sea levels, flooding, and heat waves. Without clear action to decarbonize economies, hundreds of millions of people may be victims of coastal flooding by 2050.Domestically, the increasingly worse effects of climate change directly impact the vulnerable agriculture and fishing industries in the Philippines. The Philippine Statistics Authority (PSA) said in a report that the production costs for crops and fish have increased between 2017 and 2019 compared to the period between 2016 and 2018. This alarming trend resulted in much lower income for farmers and fishermen.MOUNTING PRESSURES FOR CARBON REDUCTIONBusinesses are more cognizant of the significance of both decarbonization strategies and climate-related investments in achieving long-term sustainable growth. A rise in new industries to support clean technologies can be expected, while emission caps and carbon pricing could transform taxation and invert cost structures.Certain governments in the Asia-Pacific have recognized the need to mitigate the disruptive risks of climate change. For example, Japan committed to achieve carbon neutrality by 2050, and China, the largest carbon emitter in the world, announced its intent to establish peak emissions by 2030 and reach net zero emissions by 2060.The findings from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey indicate that investors need to look into long-term value by critically assessing company performance through environmental, social and governance (ESG) factors, including climate change.In order to meet investor expectations and appear future-proof, companies need to prioritize means of analyzing the opportunities and risks of climate change. They will also need to prioritize how to improve disclosure of their sustainability performance, or else risk the possibility of losing access to capital markets.The decarbonization of businesses is further accelerated by consumers, particularly Generation Z, who are also increasingly aware of how their choices impact climate change. Gen Z is becoming even more influential as stakeholder capitalism continues to rise. They believe in the essential role business plays in addressing climate change and prioritize businesses that protect the environment and utilize sustainable supply chains.SEC REQUIREMENT FOR SUSTAINABILITY REPORTINGIn a 2019 article, Sustainability reports: fad or for good? SGV Partner Benjamin N. Villacorte had articulated that companies are encouraged not to wait for sustainability reporting standards or a regulatory requirement to be mandatory.Recall that in 2019, the Securities and Exchange Commission (SEC) required publicly listed companies (PLCs) to submit their Sustainability Report with their 2019 Annual Report in 2020. The issued memorandum detailed that the guidelines will be adopted on a “comply or explain” approach for the first three years upon implementation. By 2023, PLCs are required to comply with Sustainability Reporting Guidelines specified in the memo, or else be penalized for an Incomplete Annual Report (under SEC Memorandum Circular No. 6, Series of 2005).This pronouncement reiterates the need for structured sustainability reporting and for companies to manage their non-financial performance towards achieving the universal target of improved sustainability. For it to be effective and useful, companies should not only view sustainability as an exercise in compliance, but as their responsibility to earn their social license to operate.BUILDING A DECARBONIZED FUTUREGiven the foreseeable impact of climate change alongside the mounting pressure from investors, employers, leaders, consumers and policymakers to address it, organizations are encouraged to embrace the decarbonization imperative. Adopting a decarbonization strategy will bring about the goodwill of investors, employees and consumers, and also build long-term, sustainable value.In the second part of this article, we will discuss how EY, as part of its commitment to sustainability, will tackle the challenge of becoming carbon negative by 2021.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.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

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