January 2020 Articles - Suits the C-Suite | SGV & Co. | EY

27 January 2020

Pamela Lantes-Arellano

Rising from the ashes: How to claim tax relief from Taal’s unrest

The Philippines is vulnerable to natural calamities due to its geographical location. The archipelago is frequently exposed to the devastating effects of natural disasters like typhoons, earthquakes, and — from time to time – volcanic eruptions. On Jan. 12, the picturesque Taal Volcano expelled smoke, ash and lava, prompting the government to evacuate residents from nearby towns as a precaution in the event of a more powerful eruption. Just less than a month prior, hundreds of thousands of Filipinos lost their homes and livelihoods when Typhoons Tisoy and Ursula swept the Visayas region. In the aftermath of natural or environmental catastrophes, many businesses struggle to recover from the resulting damage, loss and devastation, especially when they are unable to claim losses incurred as deductions for income tax purposes. However, it may be of some comfort to affected taxpayers that this can be avoided. CLAIMING CASUALTY LOSSES Affected individuals and corporations engaged in trade, business or a profession may avail of tax relief by claiming (as business deductions) casualty losses incurred from destroyed properties that were actually used in the business. Keep in mind, however, that casualty losses on assets not used in the course of business or are personal in nature will not be allowed as deductions. To guide taxpayers on how to declare casualty losses incurred during the year for tax purposes, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 31-2009. Although it is a dated RMO, these rules are still in force and highlight critical considerations for taxpayers in claiming casualty losses. ACT FAST, BUT BE DETAILED Businesses that wish to deduct casualty losses need to file their claim of casualty loss within 45 days after the date of the event. A Sworn Declaration of Loss is submitted to the Revenue District Office (RDO) holding jurisdiction over the taxpayer’s place of business. The sworn declaration of loss should include specific details, such as the nature of the event that gave rise to the loss; when it occurred; a detailed description of the damaged properties and where they are located; and very importantly, the amount of insurance or other compensation that the taxpayer anticipates receiving. In addition, the taxpayer needs to provide a detailed computation of the losses covering the cost of the property, any depreciation deducted, the value of the properties before and after the event, and the cost of any necessary repairs for assets that can be recovered. As with other similar claims for deduction, the taxpayer should submit proof of the loss incurred, including but not only limited to before and after photographs of the damaged or destroyed properties. KNOW HOW MUCH LOSS TO REPORT When a taxpayer submits the declaration for casualty losses, it is important to accurately calculate the deductible casualty losses. This amount is basically the difference between the value of the property before and immediately after the calamity. This means that the casualty loss should never exceed the cost (or other adjusted basis, including depreciated cost) of the property the taxpayer is using in business. At the same time, taxpayers should remember to deduct any insurance or compensation they receive for the loss. Understandably, insurance claims take time to process. If the taxpayer or company anticipates any insurance payments to occur after the reporting period in which the losses occurred, then for financial reporting purposes, the loss should be recognized when incurred. For example, when a piece of equipment is destroyed, the asset should be written off, regardless of whether the losses can be recovered from an insurance policy or if there are plans to replace the equipment. Companies should also note that timing will be different for financial reporting and for tax purposes. In cases where a company has no insurance on the assets used in its business, the loss will be recognized on the date it is incurred. However, if a claim for reimbursement exists and there is a reasonable prospect of recovery, then no portion of the loss is sustained until it can be reasonably ascertained whether or not such reimbursement will be received. Determining whether a reimbursement will be received or not can be reasonably ascertained such as by a settlement, adjudication, or abandonment of the claim. Why is this significant? Because taxpayers either need to actually collect insurance proceeds or decide to abandon their claim (which, naturally, requires documentary proof), before they can claim casualty losses as tax deductions. Since volcanic eruptions and the damage they may cause are not usual vents, insurance companies will need time to accurately evaluate the reasonableness of the incurred losses compared to other more frequently occurring disasters, such as floods and typhoons. HOPING FOR MORE TIME Arguably, the 45-day period for taxpayers to submit the sworn statement (together with the supporting documents) may not be enough. This is considering that the losses should first be ascertained before a taxpayer can start preparing the documentary requirements. Our tax authorities in their wisdom may wish to consider granting a longer period to allow taxpayers to collate all of the documentary requirements to report these casualty losses. As an example, the BIR extended by three months the filing of the sworn declaration in the wake of typhoon Yolanda in November 2013. In the meantime, as we hope and wait for any advice for a reporting deadline extension from the BIR, we expect that affected businesses and taxpayers will continue to prioritize the safety and recovery of their employees and their families, while anticipating the resumption of normal operations in the soonest possible time. Amidst all challenges, we hope and pray for the safety and well-being of our affected kababayans. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Pamela Lantes-Arellano is a Tax Senior Director under the Financial Services Organization Group of SGV & Co.

20 January 2020

Betheena Dizon

Estate tax amnesty for non-resident Pinoys: Yay or nay?

Among all the internal revenue taxes imposed in the Philippines, estate tax is arguably one of the most neglected. It is not uncommon to see estate taxes remain unpaid for several years after the death of the decedent until the heirs see the need to transfer the inherited property. These properties then remain idle with their economic benefit unutilized. Thus, the much-anticipated Estate Tax Amnesty program was welcomed when the President signed it on Feb. 14, 2019. This program provides a one-time opportunity to settle estate tax obligations at a reduced tax rate and with no penalties. In a nutshell, the estate tax amnesty allows unpaid estate tax obligations to be settled at the rate of 6%, without any penalties imposed. This covers the estates of decedents who passed away on or before Dec. 31, 2017, with or without tax assessments issued by the Bureau of Internal Revenue (BIR) and that have remained unpaid as of the same date. The amnesty also covers “undeclared estates” or properties that were not included in a previously filed estate tax return and not subjected to estate tax. The 6% amnesty tax rate is imposed on the net estate of the decedent at the time of death. This means that the estate can take advantage of the deductions that are available under the Tax Code as of the time of the decedent’s death. AVAILING OF THE ESTATE TAX AMNESTY The estate tax amnesty return (ETAR) shall be filed with the BIR Revenue District Office (RDO) that has jurisdiction over the place of residence of the decedent, who must be a resident of the Philippines, or of the executor/administrator in the Philippines if the decedent was a non-resident. If the estate has no executor or administrator in the Philippines, the ETAR will be filed with BIR RDO No. 39 in Quezon City. Following Revenue Memorandum Order No. 33-2019, the Certificate of Availment and the Electronic Certificate Authorizing Registration (eCAR), which authorizes the transfer of the estate properties to the heirs, shall be issued within 15 calendar days from the receipt of the validated Acceptance Payment Form and proof of payment of the Estate Amnesty Tax. The estate tax amnesty is available for two years, starting June 15, 2019 and ending June 14, 2021. Any estate that fails to take advantage of the tax amnesty within the period given will be subject to the graduated estate tax rate that was in effect as of Dec. 31, 2017, with interests and penalties also due upon payment. The law was good news to Filipinos in the Philippines as well as those residing overseas who are heirs to unsettled Philippine-based estates with unpaid taxes. Many Filipinos who have settled abroad with their families have expressed their preference to settle the estates and sell off Philippine-based properties. CHALLENGES FOR NON-RESIDENT FILIPINOS However, there are challenges for non-resident Filipinos who wish to take advantage of the tax amnesty. One challenge is the availability of documents required by the ETAR. Under Revenue Regulations (RR) No. 6-2019, documents pertaining to the value of the properties within the estate must be attached to the ETAR to provide a basis for the tax base and the resulting estate amnesty tax payable. If, for example, the decedent passed away decades ago, there is a good chance that the heirs no longer have documents that indicate the value of the properties as of the time of the decedent’s death. This can cause difficulty in proving the actual value of the properties, since it is certain that these properties were worth far less at the time when the decedent died than their current fair market value. Without the relevant documents, it will be difficult to determine the actual value of the decedent’s estate, and the resulting basis to compute the estate amnesty tax. Another challenge for non-resident heirs is how to determine the actual properties that comprise their parents’ or grandparents’ estates. In some cases, the heirs had already migrated to other countries, leaving their parents behind in the Philippines. When the parents are gone, there is a chance that the survivors have no clear idea about the nature or number of properties that were left behind. As they have no resources in the Philippines to obtain information on their parents’ properties, the likely result is an ETAR that may not include all the properties that actually belonged to the decedent. A third challenge for non-resident Filipinos is the actual filing of the ETAR and payment with the bank. Non-residents usually prefer to remit payments online or through wire transfer. However, the amnesty regulations require the physical filing of the ETAR and payment through BIR authorized-agent banks. To avail of the amnesty would require that the non-resident return to the Philippines or to authorize a representative for this purpose. POTENTIAL COURSES OF ACTION With the way that the regulations for estate tax amnesty are currently worded, non-resident Filipinos have the option to authorize representatives in the Philippines to file and process the applications on their behalf, without having to come to the Philippines themselves. Where a proper authorization is in order, these representatives can assist in determining the properties covered by the estate, preparing and submitting the ETAR to the BIR, making the actual payment, and claiming the eCAR to be issued to the estate. In determining the properties that may be covered by the estate, the heirs or their representatives can try to confirm with the relevant government agencies any registered properties that the decedent may have. However, there may also be hurdles on this point as more and more government agencies begin to implement rules that limit information disclosure. Given these challenges for non-resident Filipinos, there may be a need to first evaluate how the authorities can help them maximize the benefits of the amnesty. For example, it may be useful to determine whether it is feasible to authorize Philippine embassies or consulates to accept ETAR filings and amnesty tax payments. Another potential option would be to develop online platforms to enable these individuals to file the ETAR online and settle through bank-to-bank payments. These potential options will certainly help ease the compliance of non-resident Filipinos who may be keen on settling outstanding estate tax obligations. The intent of the estate tax amnesty is certainly laudable as it seeks to increase the revenue of the government, while helping unlock idle properties and opening these up for transfers upon the payment of the estate tax obligation. These objectives can better be realized if additional measures can be developed to help Filipinos, wherever they may be in the world, conveniently and efficiently take part in the estate amnesty program within the given period of time. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Betheena Dizon is a Tax Senior Manager of SGV & Co.

14 January 2020

Nathaniel F. Dizon

Smart, savvy and strategic cyber risk management

We regularly hear and read about hacks, security breaches and similar cybersecurity incidents that expose vulnerabilities in corporate and government digital security systems. The reality is that most companies and organizations lack the internal cybersecurity expertise and capability to combat external threats, which lead them to seek external solutions. While this may be necessary, effective cybersecurity efforts should be anchored on a clear digital risk management strategy, as discussed in a recent EY article, “Making digital risk management strategic.” Digital risk management is the next stage in enterprise risk and security for companies and entities that are incorporating digital processes and technologies into their business. It includes new and unexpected challenges that may arise as a result of digital transformation. Digital risk is a business and not a technology issue, making it a C-suite level concern instead of just an IT matter. Organizations need to take on a holistic approach when creating a digital risk management strategy, one that supports risk-based decisions and improved cybersecurity that reduces costs related to managing security risk. This approach considers the entire organization’s digital assets and relationships since some vulnerabilities can come from the most unlikely of sources. An example would be an incident where the customer information of a local remittance company was leaked through a data breach on a separate system used for marketing purposes. The latest EY Global Information Security Survey showed that 37% of organizations stated they would not be able to detect a sophisticated system breach, despite 53% of respondents claiming that they increased their cybersecurity budgets in prior years. This paints a bleak picture, although the situation may be due to the blurring of organizational boundaries resulting from the emergence of more interconnected devices. With the “Internet of Things” (IoT), or the increased connectivity between systems and the growing online presence of many organizations, any company may become a potential victim. Addressing these risks requires a combination of strategic elements such as identifying risks; monitoring and predicting potential cyber threats; having a ready response protocol to any incidents; and a plan to restore operations. These are considerations that all organizations, regardless of size, need to consider within the limits of their financial and human capital resources. Whether it is a large organization or a smaller one with fewer resources, the key to building an effective digital risk management strategy lies in a few significant steps. FIND YOUR WEAK SPOTS Organizations need to actively and thoroughly review their existing processes, digital platform and operations to identify areas where risks can be minimized or addressed early on. One example of taking bold steps to implement a digital risk management strategy was undertaken by the Singapore Ministry of Defence (MINDEF) in 2018. The government agency decided to invite about 300 ethical (or white hat) hackers from around the world to a first-ever bug bounty event. The challenge was to attempt to hack into the agency’s internet connected system to find vulnerabilities and be rewarded for finding vulnerabilities. This innovative action helped generate nearly 100 vulnerability reports, 35% of which were considered valid security vulnerabilities that the government agency addressed immediately. While this may have been a first for a government agency, it has actually become a common practice for some multinational entities. They now hire white hat hackers to test their security systems for flaws and vulnerabilities by replicating the tactics, techniques, tools and procedures that a malicious hacker would utilize in an actual cyberattack. PROTECT THE CROWN JEWELS Companies need to quantify their risk appetite and identify the digital operations that require greater resources, competencies and capabilities to protect. These are usually the most vital operations such as infrastructure, cloud applications, managed operations or security services. Organizations also need to consider investing in intelligent technology solutions that can automate the process of monitoring and managing digital assets that are most at risk or have the greatest impact on operations. There has been a trend for larger organizations to move their digital risk management and cybersecurity functions outside of traditional IT or technology departments and put them directly under the oversight of top management. This highlights the reality that cybersecurity and digital risk management are larger business issues and not simply IT problems. PREPARE FOR THE WORST Organizations should prepare an incident response plan ahead of time and undertake drills and practices to ensure that all stakeholders know what to do in the event of a breach. This plan, naturally, needs to be one that is continually studied and enhanced as threats evolve. Following the initial response to any breach and the measures taken to minimize the damage, companies should have contingency plans in place to restore business-as-usual operations in the shortest time possible while also managing any operational and reputational damage that may occur. GET YOUR PEOPLE UP TO SPEED As with most programs, people are both the first line of defense and often the greatest point of vulnerability. The EY survey found that 34% of organizations consider careless and untrained employees as their greatest vulnerability. Based on our experience, about one out of five employees fall victim to social engineering techniques in the campaigns we conducted for our clients. This is the reason why organizations need to ensure that all their people are adequately trained in a cyber resilient risk culture. People, in this context, refer to more than just employees. They also include the people engaged by an organization’s vendors, third-party stakeholders and internal/external systems providers. Cyber-savvy organizations need to ascertain that proper access controls, policies and technologies are in place to reduce possible unauthorized access to vital systems or confidential data. A thorough evaluation of the cybersecurity knowledge, exposure and competencies of an organization’s people can also help identify possible human single-point-of-failures, which can significantly hamper an organization’s response time and effectivity in case of a breach. For example, say a breach happens and the cyber-security team swings into action. Part of their containment solution is to block all access to vital databases, but before they can do so, permission from the CIO is required. If for some reason the CIO cannot be readily contacted, it would cause a delay in implementing the security protocols. AN AGILE, HOLISTIC APPROACH TO CYBERSECURITY In the digital environment and ecosystem we operate in today, cyber threats will continue to exist and will constantly evolve to present new risks. Some analysts believe that a breach is inevitable for any organization. However, what matters is how the organization will respond to such an incident. Hopefully, it will be carried out with an agile, scalable, well-designed digital risk management strategy that integrates processes, systems, people and technical competence into a holistic cyber defense system. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Nathaniel F. Dizon is an Advisory Manager of SGV & Co.

06 January 2020

Wilson P. Tan

Making a difference, one ripple at a time

As a new decade begins, we reflect upon the year that just passed and look forward to what may be in store for us in 2020 and beyond. In his article before Christmas — and his last as SGV’s Country Managing Partner — J. Carlitos G. Cruz described how an organization can sustain its purpose for the long term to ensure that its people and culture remain steadfast. In line with SGV’s efforts to sustain our collective purpose to nurture leaders and enable businesses for a better Philippines, we have successfully launched the new EY Ripples program. EY Ripples was introduced by EY Global in late 2019 as a global corporate social responsibility program aimed to drive long-term value for EY clients, people, and the community at large. This multi-year journey is committed to create a greater social impact on the lives of others with the use of the skills, knowledge and experience of EY employees. As one of the early adopters along with the EY member firms in Indonesia, Malaysia, and Singapore, SGV focused on making a difference in two ways: supporting the next generation workforce and engaging impact entrepreneurs. NURTURING FUTURE LEADERS EY Ripples encourages programs on mentoring and coaching the next generation, the young future leaders between the ages of 10 and 18 who will become tomorrow’s aspiring workforce. SGV volunteers interacted with students as young as 5th graders from public and private schools in Malabon, Manila, Muntinlupa, Makati and Quezon City. The students learned about the basics of entrepreneurship and finance through workshop sessions. This was done in collaboration with Junior Achievement Philippines (JAPI), a non-profit organization created to help young people succeed professionally and personally. SGV volunteers all underwent teaching workshops to provide them with basic classroom skills. Their mandate was to help inspire the students with knowledge about the basics of entrepreneurship and financial literacy. The SGV mentors shared the importance of earning, spending, and saving money. They encouraged young students to explore and enhance their career aspirations. Through the use of critical thinking, students were coached to develop a positive attitude in exploring businesses or careers. One SGV volunteer recounted how it was a great experience for her to witness the children’s eyes spark with interest during the talk on the value of money. It made her realize how something so simple might just be one of the ways for us to help Filipino families improve their lives. Besides the schools identified by JAPI, there were other occasions that allowed SGV volunteers to work with young students. These were mainly students sponsored by non-profit organizations. They were introduced to the basics of financial literacy through Supporting the Next Generation workshop modules developed by EY and localized to suit Filipino elementary school children. SGV Christmas outreach programs doubled as learning opportunities with volunteers who taught them the value of money, distinguishing between needs and wants while reiterating the importance of earning and saving. The modules included talks, games and fun activities. BUILDING A BETTER WORKING WORLD EY Ripples also focuses on helping impact entrepreneurs through business clinics to help scale small, growing businesses through seminars and group mentorship. These entrepreneurs differ from other business owners through the positive social change that they generate, as well as the potential to expand that change as they scale. They may occasionally be referred to as social entrepreneurs. SGV held the first EY Ripples business clinic in the Asia-Pacific region, co-organized with Endeavor Philippines, a non-profit organization that aims to build a strong entrepreneurial ecosystem within the country. SGV has had a sound relationship with Endeavor Philippines ever since it was established in the country. Working together on the EY Ripples program was a natural next step for both organizations. Endeavor Philippines helped us identify start-up or small business entrepreneurs from the FinTech, production and services, and business process outsourcing industries. These entrepreneurs were looking for practical training and guidance on how to navigate Philippine business requirements and regulations. SGV partners and senior managers became mentors, sharing practical knowledge and skills in tax and financial planning. Sessions on financing, investment options and methods, as well as Philippine taxation, were conducted with the goal of helping the entrepreneurs accelerate their growth and become more responsible players in the economy. A DECADE OF RENEWED PURPOSE The new decade presents limitless opportunities not only for business but more importantly, for ways to make a difference in the lives of others. We are looking ahead at how we can create more ripples in the next 10 years. More than 1 million people from across EY member firms and their communities will be globally mobilized through EY Ripples. In other parts of the world, EY is laying the foundation to achieve its bold ambition through relationships with impact investors and non-government organizations such as Junior Achievement Worldwide and Acumen. In 2020, some 6,000 EY professionals in the Middle East and North Africa are committed to dedicate at least one work day a year to collectively help advance sustainable inclusive growth in their respective regions. Collaborative initiatives have also been forged with the World Bank, which joined EY in committing to positively affect the lives of 10 million people by 2022. There is also a linkage with TRANSFORM, an initiative founded by Unilever and the UK Department for International Development (DFID) that offers to scale EY support for impact entrepreneurs and help 100 million low-income people in Asia and Africa gain access to vital goods and services by 2025. It is an ambitious program with a collective goal of making a positive impact on the lives of 1 billion people by 2030. We believe it is possible even if it takes us one ripple at a time. In this transformative age of digital — with new knowledge, skills and tools available at our disposal and with people dedicated to our purpose — we are committed to assume a leadership role in communities using the best of our abilities to nurture future leaders and enable impact entrepreneurs to build a better Philippines that, in turn, would create ripples to help build a better working world. I wish to take this opportunity to wish our readers a New Year and a new decade full of promise and possibilities. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Wilson P. Tan is the Country Managing Partner of SGV & Co.

January 2020

Rising from the ashes: How to claim tax relief from Taal’s unrest

Estate tax amnesty for non-resident Pinoys: Yay or nay?

Smart, savvy and strategic cyber risk management

Making a difference, one ripple at a time

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