June 2019

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.
25 June 2019 Wilson P. Tan

Digital transformation for SMEs

Established in 2015, the ASEAN Economic Community promotes the significant growth and potential of the region’s emerging economies. Key drivers of emerging economies are small and medium enterprises (SMEs). However, with rapid digitalization occurring across almost all business sectors, ASEAN SMEs are increasingly looking to transform their enterprises. SMEs are considering tapping into digital trends to further grow and strengthen their competitive edge as well as making use of emerging technologies to maintain their profitability. This article focuses on selected insights from EY’s latest survey, Redesigning for the digital economy, which covers SMEs from the six largest ASEAN markets of Indonesia, Malaysia, Singapore, Thailand and the Philippines. Respondents are from 370 ASEAN mid-market organizations with annual global revenues of between $20 million to $500 million. These collective insights help us understand their strategic priorities, approaches to digital transformation, and application of transformative technologies. In general, the survey reports that transformative technology is increasingly viable, facilitating SMEs to adopt a digital-first mindset. Investments in technologies such as artificial intelligence, machine learning, and robotic process automation present attractive benefits that can help manage costs, reduce risks, deliver personalized customer service, and create next-generation products and services that are more focused on the digital age. However, digitalization also presents a challenge. It is as much a game changer as it is a massive undertaking, since SMEs will need to take a long-term view of their resource investments, and may find the need to depart from traditional models to reboot themselves. DRIVERS OF TRANSFORMATION Many SMEs are determined to forge ahead with digital transformation strategies to gain an edge over their competition, and the EY survey identifies four of the forces that spur on digital investments to ensure they stay ahead. Service quality. Customers today have higher service expectations, especially with younger, digitally adept accustomed to 24/7 availability. These customers expect service to be rendered faster than ever, pushing companies to elevate their ability to deliver. Applying digital technology would help organizations achieve near real-time fulfillment, provide contextual personalization, and enable increasingly problem-free user experiences. One current method to provide real-time fulfillment is through AI in the form of chatbots. This developing tool automates repetitive individual queries, increasing the chances of conversion. Build connectivity and leverage off ecosystem partners. Regardless of size or industry, SMEs will gain an advantage from collaborating with participants within their broader ecosystem. This provides them with connectivity into the digital network of other businesses, with the added opportunities of co-creating new products, capitalizing on external expertise and collective innovation, and pursuing new markets or customers. Managing operating costs. Meeting high customer expectations requires SMEs to accelerate the digitalization of their business processes. These include labor-intensive back-office processes to reduce paperwork, raise automation, quicken turnaround times and manage front-office expenses critical to reducing the cost to serve or deliver more services and solutions via digital, self-serve channels. For example, as a response to escalating salaries, robotic process automation (RPA) is emerging as a new class of digital labor that can eliminate manual, repetitive processes. Its benefits include cost-saving opportunities from continued enhancements to processes and advancements in robotic tools, higher dependability, and transactions that are more accurate, documentable, and auditable with process automation. Keep pace with competitors. SMEs are facing competitive threats from new companies created in this digital age that can utilize nimbler data instead of slower physical infrastructure. A possible competitor may come in the form of micro enterprises that can negatively impact profitability without needing to be of comparable scale, or new companies that achieve significant scale by leveraging disruptive technologies and posing a challenge within a short amount of time. Another example is small e-retailers with minimal operating overheads that can choose what product segments to sell, severely undercutting the pricing of SME retail companies. To maintain relevance, SMEs need to deliver on new business propositions by stepping up their technological pace. A possible solution is through improved payment applications, with payment technologies enabled by e-commerce and e-wallets that are especially driven in an emerging country like the Philippines with low credit card penetration. Digitalization will impact almost every facet of SMEs. It alters the competitive landscape and performance across industries, creating an urgent imperative for SMEs to transform for growth and competitiveness. High-level steps must be undertaken for SMEs to transform their digital vision into reality, some of which are presented in the survey. STEPS TO DIGITAL SUCCESS The EY Survey further discusses that while digital disruptions in businesses are well-documented, many organizations have achieved limited, genuine successes with digital transformations. Transformation begins with a committed executive-level sponsorship, laying a firm foundation for digital success. Oversight of digital technologies, and the foresight to prioritize these to champion change, paves the way for SMEs to move quickly. The survey notes that 74.2% of respondents felt that, in developing a culture of agile innovation, having supportive senior stakeholders is a prerogative. To begin, a current-state assessment of the organization’s innovation maturity should be made to serve as a benchmark for execution, while a realistic outlook about what the future-state model must be adopted. Nearly 61% of respondents highlight that technical limitations from legacy architectures hinder their digital strategies, requiring a balance between both. Some SMEs might opt for major overhauls, but many could simply decommission applications they find redundant, then recondition remaining systems to reduce complexity and enable them to process quickly when necessary. Cost savings from IT legacy modernizations such as cloud technologies, open APIs, and microservices applications can then be invested to fund a continuous digital strategy. SMEs should not just concentrate efforts within specific areas, and instead focus on end-to-end initiatives. This means extending beyond customer-facing processes and including digital solutions for mid and back-office functions. Further cohesiveness could be improved by horizontally integrating between front, mid and back-offices. It should be noted that while surveyed SMEs intend to focus more on adopting emerging solutions than business-as-usual technologies by FY22, they should also be cautious against pursuing disruptive technology simply for the sake of doing so. Not every component needs to be digitalized, and not every initiative may deliver a satisfactory RoI. To reduce risk, SMEs can incubate digital solutions through prototyping, testing and validating initiatives through experimentation on a smaller scale and keenly monitoring feedback. SMEs are also treading a fine line between balancing digital initiatives and managing data protection and customer privacy safeguards, ensuring that the intent to mitigate new digital risks do not impede innovation. Security risks from cyber threats and vulnerabilities are also challenges that merit attention as breaches can not only result in significant reputational and financial impact, they could also damage consumer confidence in the company. This calls for SMEs to develop integrated risk management, compliance and security protocols as part of an initial digital design phase. ASEAN SMEs are vital contributors to the region’s economy, but their continued economic support depends on their ability to leverage digital solutions to expand efficiently. While transforming into digital powerhouses cannot be expected overnight, the digital environment is rapidly evolving, and SMEs cannot risk being left behind. Digital initiatives that are well-crafted and executed can help SMES today progress in a competitive landscape, further finding potential to become tomorrow’s multinationals. Clearly, while the challenges in transforming digitally are great, the rewards to be reaped are far greater. 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 authors and do not necessarily represent the views of SGV & Co. Wilson P. Tan is the Vice Chairman and Deputy Managing Partner of SGV & Co.

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17 June 2019 Karen Mae Calam-Ibañez

VAT refund claims under the TRAIN Law

Taxpayers are sometimes reluctant to file VAT refund claims because it triggers a mandatory VAT audit, not to mention the need to submit voluminous of documents and the uncertainty of when the processing will be completed. Any delay in the processing of a VAT refund claim may cause cash flow problems to the claimant because the input VAT remains unutilized when it could have been invested or used as working capital. The recently enacted TRAIN Law, which aims to make the Philippines a more competitive investment destination, shortened the period within which the BIR is supposed to process VAT refund claims. To implement the amendments introduced by the TRAIN Law, the BIR issued Revenue Memorandum Circular (RMC) No. 47-2019, providing revised guidelines and requirements for VAT refund claims within a 90-day period. The introduction of the 90-day period for applications lodged after the TRAIN Law took effect on Jan. 1, 2019, effectively removing the “deemed denied” provision under RMC No. 54-2014, which clarified the issues on the application for VAT refund under Section 112 of the Tax Code. The standing rule is that the BIR must decide on the claim within 90 days from the filing of the application. If the 90 days lapse without a decision, the review shall continue and will not invalidate the belatedly issued report and findings of the BIR. However, the BIR examiner may be subject to administrative penalties, if warranted. Nevertheless, however noble the intention of the legislature, one cannot discount the possibility that the imposition of sanctions is a two-edged sword. While it may in fact hasten the processing of VAT claims, BIR examiners may also be constrained to just deny the claim in order to comply with the 90-day deadline. Notably, this is not the first issuance of the BIR that seeks to implement the 90-day processing of VAT refund claims. The BIR previously issued RMC No. 17-2018, effectively amending the provisions of RMC Nos. 89-2017 and 54-2014 on the processing of claims for the issuance of a tax refund/tax credit certificate, except for claims processed under the jurisdiction of the Legal Service. CONSULARIZED DOCUMENTS RMC No. 17-2018 has provided the list of requirements to prove the VAT zero-rating of sales of services to non-resident foreign corporations (NRFCs) covered under Sec. 108 (B) (2). The key is to prove that the NRFC-buyer of the services is not doing business in the Philippines, as certified by an authorized official of the NRFC. These requirements were reiterated in RMC No. 47-2019 and are as follows: – Original copy of the certification from the SEC that the NRFC buyer is not a registered corporation in the Philippines; and, – Consularized copy of the certificate of foreign registration/incorporation/association of the NRFC. The BIR acknowledged the inherent difficulty in securing consularized documents. As such, the taxpayer-claimants are required to submit the original copies of the consularized documents on the first claim. The documents will be kept by the processing office on a separate file, a copy of which shall be attached to the docket of succeeding claims with a duly-signed notation by the head of the processing office that the documents are faithful reproductions of the original documents on file. However, this RMC (issued on April 16, 2019) may have been effectively amended by the Apostille Convention, an international treaty drafted by the Hague Conference on Private International Law. The Apostille Convention abolishes the requirement of double verification of foreign public documents by both the originating and receiving country, and simplifies the procedure of authentication. Starting May 14, 2019, public documents executed in 117 Apostille-contracting countries and territories (except for Austria, Finland, Germany and Greece) no longer have to be authenticated by the Philippine Embassy or Consulate General once Apostilled for them to be used in the Philippines. For countries and territories that are not Apostille-contracting parties, the previous process of authentication applies. Since this is a relatively new development, the BIR has yet to issue a clarification on the possible suspension of the consularization requirement for Apostille-contracting parties. OTHER VAT REFUND CLAIM REQUIREMENTS As to the verification requirement of the BIR, RMC No. 16-2019 clarified that the inter-office Request for Certification on Outstanding Tax Liability of Taxpayer and Certification on the Status of Cases Pending Legal or Judicial Resolution, for the specific purpose of satisfying the requirements of claims for VAT refund, shall now be valid for six months. As it is, all concerned revenue offices are ordered to indicate clearly in the Certification to be issued that the Certification validity is six months from the date of issuance. It is a long-standing rule that tax refunds, like tax exemptions, are construed strictly against taxpayer-claimants. Thus, taxpayers should ensure the completeness and authenticity of the documentary requirements upon filing of the application for VAT refund. Failure to submit the complete documents in support of the claim shall result in non-acceptance of the application. Moreover, due to the very limited time for processing the VAT refunds, the BIR clarified under RMC No. 47-2019 that no additional documents shall be subsequently requested from the taxpayer-claimant. Any unsupported claim shall be disallowed outright, in full or in part as the case may be. While there is certainly still much room for improvement in the processing of VAT refund claims, this is a good first step taken by government to help exporters ease their cash flow issues caused by input VAT accumulation. 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 authors and do not necessarily represent the views of SGV & Co. Karen Mae Calam-Ibañez is a Director of Business Tax Services of SGV & Co.

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10 June 2019 Aldwin Aris C. Gregorio

Transforming the HR function through technology

With the fast-paced development of technology, the fourth industrial revolution is reshaping nearly every aspect of business. We often read about how technology and disruption are transforming critical business functions, and one such function that needs to keep up is human resources or HR. More and more, the HR function needs to explore how new solutions, trends and technologies (such as automation) can have a direct impact on productivity. According to proprietary research by CareerBuilder, a global human capital solutions company, HR manager respondents who do not fully automate say that they lose 14 hours a week from manually completing tasks. HR managers are optimistic about the impact of automation and artificial intelligence (AI) on HR strategies. This is also corroborated in a survey by CareerBuilder, where 72% of respondents said that they “expect that some roles within talent acquisition and human capital management will become completely automated in the next 10 years.” HR automation is, indeed, on the rise with the top three automated functions: employee messaging (57%), employee benefits (53%), and payroll (47%). It is only a matter of time before automation drastically impacts on HR operations and becomes a catalyst of employee engagement. USING TECHNOLOGY TO IMPROVE THE PERFORMANCE OF HR FUNCTIONS Let us consider some examples of how aligning with current technological trends can help successfully initiate and implement HR strategies. Take recruitment and talent management for instance. With the increased interest among today’s workforce to shift towards mobile technology and social media, organizations are transitioning from posting on job search websites into social media. Data shows that 79% of job seekers are likely to use job search portals, while talent acquisition leaders also consider online professional networks as an effective branding tool. HR managers are also increasingly aligning with this trend, where 72% of recruiters use LinkedIn to hire employees and 55% of organizations strategically use Facebook and Twitter for various HR purposes. Aside from the impact of social media, organizations are also leveraging data analytics and cloud-based solutions to deliver improved HR services and gain better insights on trends affecting their employees. Small-scale organizations are beginning to adopt cloud technology for certain functions such as talent management, human resource management systems, workforce management, and payroll. Organizations are also investing resources for social media tools and HR technology integration. In fact, two in five organizations say that their HR technology spending is on the rise. However, investment in HR technology is not always top of mind for some business leaders because of their intangible impact on the organization’s bottom line and employee productivity. Despite the digital disruptions transforming business today, many organizations have yet to adopt technologies for their core business or for support functions that include HR. ROBOTICS AND THE FUTURE OF THE WORKFORCE Other technologies expected to have a huge impact on HR are robotics and AI. With the advent of automated solutions that can handle clerical or repetitive work, there is need to plan ahead, look into possible job displacement, and manage employee transitions to new roles. The onset of the machine economy is set to displace parts of the workforce, with two-thirds of all jobs susceptible to being rendered obsolete by automation. This, however, varies depending on the rate of adoption of technology in specific countries. According to research and advisory firm Forrester, automation could lead to a net job loss of 9.8 million or 7% jobs in the US alone by 2027. As a result, a new wave of jobs will develop and require a completely new skillset (e.g., data analyst, information security specialist). Employees consider this to be one of the biggest risks of automation, but are also optimistic about their perceived benefits in their everyday work. In fact, 9 out 10 workers seek to automate mundane tasks at the workplace. Organizations must also be able to strike a balance for complementary working systems between technology and people. The key to achieving this balance is not to displace human workers by utilizing RPA, but to make them more effective in performing more strategic activities. There is also a need to build analytic capabilities into HR that will in turn support talent strategies in boosting organizational performance and productivity. THE GIG ECONOMY AND REMOTE WORKING ARE RESHAPING THE WORKING WORLD As traditional business processes evolve, we are seeing an increase in the freelance or gig economy and remote working, which have become acceptable practices. According to Upwork’s Future Workforce Report, nearly half of respondent companies utilize flexible workers. Surprisingly, 90% of hiring managers say that they are more satisfied with the skills of freelancers than their recent full-time workers. Companies are more likely to hire freelancers based on quality over cost. The US, the Netherlands and the UK lead the pack in embracing the gig economy, as these countries have a high share of self-employed individuals. A favorable policy environment was one factor perceived to have fueled the growth of the gig economy in these countries. Remote work in the Philippines has recently been institutionalized with the passing of the New Telecommuting Act (Republic Act No. 11165) in early 2019. The law recognizes telecommuting, which allows employees to work in alternative locations via enabling technologies (e.g., internet, cellular phone, computer). Many multinational organizations and business process outsourcing companies have long adopted telecommuting due to the need to communicate regularly and deliver work across time zones. Employers and employees both directly benefit from telecommuting arrangements by gaining more flexibility in office space utilization and lessening time and money spent traveling to and from the workplace. As technology advances further, telecommuting could become the new norm. Already, some organizations are shifting corporate spending from office space and utilities to subsidizing connectivity expenses of employees who work offsite. Ultimately, this will necessitate the review and updating of company people polices and local labor laws to make telecommuting more aligned with the future of work. Situations such as road congestion and a shortage of or high costs for work space, and insufficient facilities (e.g. parking) mean that working from home can reduce costs for companies. Focus then can be given to managing employee discipline and maximizing productivity remotely, to ensure quality output that is comparable to the work produced in a traditional workplace. Given the rapid adoption of technology, automation and new workforce behaviors, HR functions are pressed to catch up and leverage these new trends to adequately meet the needs of tomorrow’s global workforce, and to maintain their competitiveness through effective, strategic and technology-enabled HR processes. 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 authors and do not necessarily represent the views of SGV & Co. Aldwin Aris C. Gregorio is an Associate Principal of SGV & Co.

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03 June 2019 Gabriel Eroy

Automatic exchange of information: What’s in it for the Philippines?

In February, President Rodrigo R. Duterte signed into law Republic Act No. 11213, “An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2017 and Prior Years with Respect to Estate Tax, Other Internal Revenue Taxes, and Tax on Delinquencies.” However, it was signed with certain line item vetoes including the grant of a general tax amnesty which was vetoed in its entirety. The President indicated that a general tax amnesty, at this point would be overly generous and unregulated. He has requested Congress to pass another general tax amnesty bill that includes the lifting of bank secrecy for fraud cases, the automatic exchange of information (AEOI) and safeguards to ensure truthful declarations. Evident in the President’s message is the intention for the country to participate in an exchange of information regime that has been gaining ground in the international community. AEOI WORLDWIDE AEOI was conceptualized to promote tax transparency and curb tax evasion. As economies worldwide increasingly become interconnected, cross-country investments and financial products are more accessible to anyone, regardless of residence or location. Initiated and developed by the Organisation for Economic Co-operation and Development (OECD) with the G20 countries, the Standard for AEOI represents the international consensus on automatic exchange of financial account information for tax purposes, on a reciprocal basis. It provides for the exchange of financial account information with the tax authorities in the account holders’ country of residence. Participating jurisdictions that implement AEOI send and receive pre-agreed information each year, without having to send a specific request. The most prevalent standards that require exchange of information on an annual and automatic basis, effective as of date, are: (1) United States Foreign Account Tax Compliance Act (US FATCA); and (2) the Common Reporting Standards (CRS). FATCA started the push for greater tax transparency by requiring financial institutions outside of the US to report tax information (i.e., income earned and assets owned) of US citizens and/or residents to the US Internal Revenue Service (IRS). As of date, there one hundred thirteen (113) jurisdictions that have signed an intergovernmental agreement (IGA) with the US government to facilitate FATCA compliance of financial institutions operating in non-US jurisdictions and the annual exchange of information which started in 2015. The Philippines signed its IGA with the US in July 2015 but with no significant progress recently. CRS, on the other hand, involves several participating jurisdictions’ exchanging, on a bilateral or multilateral basis, financial account information submitted by reporting financial institutions. CRS went live in January 2016 and the first CRS exchange transpired in September 2017. According to the latest list dated November 2018, there were 108 participating jurisdictions with definite date of first reporting by 2020. On several occasions in the past, the Philippine government has signified, albeit informally, its intent to participate in the CRS regime. Like FATCA, there is no recent progress and there is no date for the Philippines’ first reporting and exchange. Notwithstanding these delays, the Philippine government is still encouraged to participate and enter into bilateral or multilateral agreements on exchange of information with other jurisdictions. However, concurrence by at least two-thirds of the Members of the Senate is required before a treaty or international agreement is effective, as provided under Article VII Section 21 of the 1987 Philippine Constitution. To bolster its participation, the Philippines may need to amend bank secrecy and data privacy laws to legalize the sharing of information with other jurisdictions. BENEFITS TO THE PHILIPPINES Countries with strict bank secrecy and data privacy laws may be perceived as breeding grounds for tax evaders. On one hand, foreigners may prefer to invest their money in these countries since the government and financial institutions operating therein are generally not required to share information with the tax authorities of the jurisdiction/s where these investors are tax residents. On the other hand, tax residents of countries with such laws, especially high net worth ones, may simply invest their money in countries without personal income tax (tax haven jurisdictions) to maximize income while not paying the related tax along with the minimal risk of detection. In a report from the G20 Argentina: The Buenos Aires Summit held in late 2018, it was noted that prior to the start of the AEOI, countries were able to collect 93 billion euros in additional tax revenue due to voluntary disclosure programs and offshore investigations. It is generally expected that AEOI may yield the same, or even greater results, due to its wider coverage and practical approach. AEOI may help Philippine tax authorities detect non-compliance/non-reporting of income and taxes arising from investments of Philippine tax citizens/residents in participating jurisdictions, especially where tax administrations have had no previous indications of non-compliance due to limited disclosure or intentional non-disclosure. Consequently, AEOI may encourage voluntary compliance by compelling taxpayers to report all relevant information or face sanctions as tax evaders. With the foregoing, AEOI may, to a certain extent, deter future tax evasion through offshore investment schemes and financial accounts. It is hoped that the current Administration’s intention to relax bank secrecy and data privacy laws will further its tax transparency agenda for the Philippines that align with ASEAN and global standards and practice. It is likewise hoped that the Philippines’ participation in the global AEOI regime may aid in the implementation of tax laws more effectively due to expected increase in visibility and wider reach to gather relevant tax information. To some extent, there may be expected additional tax revenues from detecting cases of tax evasion and/or voluntary disclosure/compliance. Additional fiscal revenue will then translate to more funds to support the development plans, ultimately spurring economic growth. 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 authors and do not necessarily represent the views of SGV & Co. Gabriel Eroy is a Tax Manager from the Financial Services Organization of SGV & Co.

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