May 2021 Articles - Suits the C-Suite | SGV & Co. | EY

31 May 2021

Christian G. Lauron

Corporate Banking Circa 2030: 7 hypotheses (Second part)

Second of two partsPreviously, we discussed how banks can leverage ecosystems to organize integrated networks and how they can expand services beyond banking to help clients focus on their core activities. These are among the seven hypotheses on how banks will transform to build the next generation of businesses. The second part of our two-part article continues by discussing how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.PROVIDING LEADERSHIP ON SUSTAINABILITY AND COVID-19 RECOVERYReduced trust in financial services poses a serious threat, pushing some banks to prioritize making a credible and high-profile commitment to helping businesses address their challenges and risks. This may be achieved through establishing and executing a clear social purpose and creating measurable non-financial value. These efforts extend beyond expanding environmental, social and governance (ESG) investments and enable the growth and development of profitable operations, benefiting stakeholders beyond a bank’s bottom line. This way, sustainability becomes more than a public relations or branding exercise — it becomes a cultural mindset.The mindset shift will require substance and depth in the banks’ sustainability agenda, which may currently revolve around the prioritization of ESG-minded business practices to ensure operational resilience, the development of forward-looking multi-year roadmaps with interim targets and intergenerational narratives, and the implementation of responsible banking targets, categorized mainly into climate action and provision of social equity. These roadmaps should include solutions for societal challenges, particularly to help restore socio-economic growth in the aftermath of the COVID-19 pandemic. On the climate action agenda, banks can prioritize investments in, and extend credit to, sustainable companies so that those ventures can scale. Banks can help provide direct incentives for clients that commit to and meet sustainability targets, and in the process offer robust and intuitive solutions for businesses to track and report on carbon consumption and other metrics while developing exchanges and marketplaces for the trading of carbon credits. Mark Carney, former head of Bank of England and now a UN Special Envoy, has suggested that “the transition to net zero is creating the greatest commercial opportunity of our age.”It is estimated by the International Energy Agency that $3.5 trillion of annual global investments would be needed to build the infrastructure of a green economy, requiring the coordinated management of finance and investments during the transition phase of climate change mitigation and sustainable development. During this phase where forests are replenished, oceans and supply chains cleaned up, clean technologies replacing dirty power plants, banks will have to face the financial risk and capital implications of stranded assets in their portfolios, particularly to clients exposed to fossil fuel reserves becoming stranded resources. The regulatory stress testing exercises and the launch this year of a sustainability standards board by the International Financial Reporting Standards Foundation are twin developments that are expected to accelerate the surfacing of these issues.Depth is a characteristic that banks will need to embrace on the other agenda of sustainability, which is the provision of social equity. While this can be a highly ideological issue, stakeholders often find common ground on jobs generation, a concrete manifestation of participation by individuals and communities in socio-economic growth and recovery post-COVID. Banks need not go far — they can look at the supply chain for instance, where banks can play a role in deepening the supply chains notably for the following sectors that face varying levels of distress or flourish — construction and real estate, industrials and manufacturing, semiconductor, energy and utilities, agriculture and technology. In these supply chains, there is often a high proportion of underserved suppliers with poor or opaque creditworthiness. At the current state, and as reconfigurations take place, supply chain participants have greater financing needs to enhance resilience, fund reshoring and diversification, and in the process, generate jobs. Banks have for some time been strategizing along supply chains, with capital allocation being driven into SMEs through direct credit enhancements of anchor buyers while employing advanced analytics to identify early warning (and conversely, recovery) indicators. Some of these involve spatial, sentiment and mobility indicators to supplant lagging financial indicators. The increasing visibility on movement of cash between and across tiers of companies in the supply chain correlate with an increase in penetration of underserved SME segments, with FinTechs upping the ante on competition with their adoption of emerging technologies across the value chain. The blurring of the line between the physical supply chain (e.g., sourcing, production, shipping and tracking) and financial supply chain (e.g., ordering, contracting, payment and settlement) is being accelerated especially with the rise of networks and platform solutions like the electronic invoicing utility. One can easily be swamped by these developments, and this is where the banks should discern their purpose, assessing which sectors and value chains to focus on and correspondingly, finance based on size, fit and feasibility, while distilling the value proposition and business case and contributing to whole-system transformation — whether in manufacturing, services or even housing. Banks are critical in the development of inclusive capitalism, and they can create clear market differentiation by expressing and maintaining a clear social purpose. The rising generation of small business owners and entrepreneurs, as well as consumers, prefer to do business with companies that share their values on sustainability, and banks can exert clear leadership by revisiting their social contract and acting upon societal issues, particularly climate action and reduced inequalities, to foster client loyalty.FUTUREPROOFING FOR WHAT’S NEXTThe way forward in a transformation journey, though unique for every bank, starts with a clear and client-focused strategy, strong vision and purpose, sophisticated technology, and a strong and flexible operating model. In many cases, this will require uprooting structures and processes built around a model largely unchanged for a century. While business case development and strategic planning are necessary, banks should not delay action. Securing future market leadership will require addressing the difficult questions in managing transformation; defining clear, long-term business strategies and innovative, client-centered solutions; and sustained execution. By recognizing the opportunities in the present and taking bold action, banks can better capitalize upon what the future holds for the banking industry and thrive in it.Much has been said about banking functions remaining necessary, but as to whether they will continue to be performed by banks is another story. Banking — notably corporate banking — will inevitably have to undergo transformation that goes beyond the technology dimensions. These functions will become not only commoditized — they are becoming complex, networked and distributed, to mirror the continuing need for relevance and utility to bank clientele. Banks may want to take a leaf from the etymology of corporation — corpuratus, to form into a body — why were these groups or bodies formed? They are bound by common aims and aspirations that resulted in a sense of being and action. Corporate banks who find a way to rediscover their purpose will find a wellspring of transformation from within and provide the energy to sustain their transformation journey.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Christian G. Lauron is a Financial Services Partner of SGV & Co. He also leads the Firm’s Government & Public Sector.

24 May 2021

Christian G. Lauron

Corporate Banking Circa 2030: 7 hypotheses (First part)

First of two partsDespite the disruption and challenges caused by the pandemic, the banking industry is more poised than ever for a fundamental transformation. The speed of technological advancements and the means by which banks harness emerging technologies such as artificial intelligence (AI), blockchain, intelligent automation and machine learning only accelerated over the past half-decade. However, though innovation has become more a common capability than an aspirational buzzword, there’s still much transformational work to be done. Banks in the past five years have only seen incremental investments in this direction, adopted emerging technology in a siloed fashion, and focused mostly on cost optimization.Organizations continue to become more global, with electronic marketplaces facilitating more international activity among SMEs and with multiple micro-sized supply chains spanning across different countries. Due to a combination of disruptive technologies, dynamic markets, and easily accessible capital, small and medium-sized firms find the path to becoming substantial commercial accounts — and in turn, huge corporate banking clients — significantly easier.An EY study released in November 2020, How will banks transform to build the next generation of businesses, shares seven hypotheses that reflect how the trends of today reshape the current market, and how they play out in the next 10 years. These hypotheses describe how corporate, commercial and small and medium-sized enterprise (CCSB) banks can rise above the challenges of 2020 and leverage opportunities for growth in 2030.These seven hypotheses discuss 1) how the expansion of banking services from large platforms and tech giants will shrink market share across CCSB segments, 2) how banks can redefine client-centricity in a segment-less world, 3) how they can evolve to become trusted advisors by leveraging data to shape client business strategies, 4) how the subscription model can revolutionize commercial banking, 5) how banks can leverage ecosystems to organize integrated networks, 6) how banks can expand services beyond banking to help clients focus on their core activities, and 7) how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.This two-part article will focus on the last three hypotheses, highlighting the importance of transforming banks to better capitalize upon the future of the banking industry. In this first part, we discuss how banks can leverage ecosystems to organize integrated networks and how they can expand services beyond banking to help clients focus on their core activities.ORGANIZING INTEGRATED NETWORKS IN THE AGE OF ECOSYSTEMSToday’s businesses maintain relationships with different banking providers, because there are no single banks that offer a truly comprehensive range of services nor an integrated platform. The convenience of a single interface offering a unified experience for all banking needs will become a baseline in the future, with regulations such as open banking now nudging the development of ecosystems to serve clients better. Because multiple providers will drive this ecosystem for clients to access an expanded menu of products and ancillary services, tomorrow’s leading banks will be simultaneously integrated, open and secure.Top-performing banks will still own client relationships but will also create their own ecosystems curated with products and services from third party partners through integrated platforms. This gives them an edge by focusing and excelling at their core competencies, innovating through open banking technologies, application programming interfaces (API), and attracting preferred third-party partners through niche offerings. Banks can utilize this advantage by developing macro and micro ecosystems to cater to client demand and major geographical markets.Banks can take another path to market leadership in three ways: by capitalizing on their scale; providing profitable niche services to multiple ecosystems; or specializing in products and services for specific industries. Other banks may even capitalize on their technological capability, experience with complex payments services, risk management experience and scale to provide ecosystem connectivity. The services these ecosystems can provide could also include for instance real-time payments and instant lending to SMEs.Banks need to thoroughly assess their strengths and weaknesses and embrace design thinking and agile working strategies. Plans must be made to heavily invest in cybersecurity, vendor management and strategies to build trust across their own ecosystems. Ecosystems are just one of the many new models that open banking regulation has paved the way for. Integrated partnerships provide the means to move forward, as proven by collaborations between banks and third parties such as FinTechs — and even with other banks and organizations that cater to niche markets, such as microfinance. This would mean determining which partnerships will be necessary to develop and scale integrated ecosystems and operationalizing said relationships.ENABLING BUSINESSES BEYOND BANKINGWith company success driven by focusing on core activities, more companies will need help with non-core activities, particularly those relative to key growth milestones. Banking providers can further deliver value by allowing their clients — especially SMEs — to focus on their businesses, strengthening client relationships by bringing in advisory, risk management, legal and other financial management capabilities in an accessible manner.Harnessing the power of ecosystems allows banks to launch integrated services, such as Chief Financial Officer in a box, corporate treasurer, financial risk and asset-liability manager, on-demand tax and legal advisor, payment and electronic invoicing utility, and model platforms. These would be particularly useful for firms planning mergers or acquisitions, geographic and cross-border trade expansion, supply chain restructuring, IPOs or funding rounds, or even insolvency and liquidation. Ecosystems will also allow banks to carve out niches in specific areas such as healthcare, connectivity, and infrastructure project finance. Offerings will no longer be limited to banking services but can even include the entire financial operating system to manage the business. For example, healthcare providers can engage banks to manage insurance, liquidity, billing and payments, in addition to traditional financing services and investment advisory. A more complex example for banks would be on the emerging case of cities, companies and communities embarking on sustainable and smart city strategies that would require innovative financing and investment structures as well as development strategies aided by integrated and logical frameworks, citizen and community engagement and geo-spatial location intelligence.Banks must be capable of deep integration into client corporations, institutional clients, supply chains and value networks to survive and flourish, as large corporations and institutions with established service providers will expect an integrated experience and seamless collaboration among banks, suppliers and vendors.In the second part of this article, we discuss how banks can provide leadership on critical societal issues to strengthen trust with the next generation of clients.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Christian G. Lauron is a Financial Services Partner of SGV & Co. He also leads the Firm’s Government & Public Sector.

17 May 2021

Roderick M. Vega

Prioritizing the integrity agenda in times of uncertainty (Second part)

Second of two partsThe difficulties of dealing with the pandemic have aggravated current integrity issues while presenting new ones for emerging markets all over the world. The emerging markets perspective of the EY Global Integrity Report, which surveyed more than 1,700 employees across all levels of large organizations in 21 emerging market countries, reveals that corruption and fraud remain major threats to long-term success for businesses in the wake of remote working conditions and regulatory scrutiny following the New Normal.The Global Integrity Report, conducted by global market research agency Ipsos MORI, presented relevant insights into the ethical challenges the organizations faced. By considering how the respondents dealt with areas of risk, businesses may gain insights about how to overcome some of the challenges to post-pandemic recovery.In the first part of this two-part article, we discussed the first of four key areas identified by the Integrity Report: prioritizing corporate integrity and encouraging the use of whistleblower channels. In this second part of the article, we discuss the need for an increased focus on data protection and cybersecurity, and the need to address integrity issues in third party service providers.INCREASING FOCUS ON DATA PROTECTION AND CYBERSECURITYRemote working during the pandemic has heightened the risk of cyber breaches, with more cyber criminals exploiting weak networks and targeting unsuspecting employees. The year 2020 saw a spike in ransomware and cyberattacks, infecting networks with malware and even selling fake COVID-19 treatments through phishing e-mails.Data breaches can result in devastating financial and reputational consequences for an organization, making it imperative to prioritize data protection. The EY report encouragingly shares that 55% of emerging market companies address this by offering employee training on how to prevent security breaches, a higher value than the 45% of companies doing so in developed markets. Should a security breach occur, 42% have an incident response plan in place. Moreover, as much as 86% even share confidence that they are doing everything they can to protect the data of their customers.With such high stakes, organizations should consider building a data privacy and protection framework guided and supported by the board. The increasingly sophisticated nature of cyberthreats and strict regulations result in the need to implement industry-leading practices and raise the bar to protect sensitive data. Companies can improve vigilance and identify issues by utilizing the latest technology, strengthening their virtual infrastructure, and raising cybersecurity and digital risk awareness among stakeholders. In addition, companies must consider developing thorough diagnostics scans, strong monitoring frameworks and incident response strategies.ADDRESSING INTEGRITY ISSUES IN THIRD-PARTY SERVICE PROVIDERSThough it is no mean feat to uphold integrity within an organization, external factors such as third-party partners can undermine existing efforts. The reputation of a retailer, for instance, will suffer greatly if one of its suppliers engages in malpractice, exploits loopholes, pays bribes, or engages in other similarly unethical behavior. These acts tarnish the reputation of the partnered retailer and subjects them to the high likelihood of financial loss, heavy penalties, or legal ramifications.The integrity report reveals that emerging market companies are aware of this particular threat, but with only 35% showing confidence that their third-party partners operate with integrity. Businesses cannot afford to place just their supply chain partners under scrutiny — sources of third-party risk can be found in distributors, joint-venture partners, contractors and consultants. However, despite the added challenge of restricted operations, remote working and limited mobility, 31% of emerging market companies address this risk through training and processes that highlight third-party due diligence.These challenging times pose an increased possibility of lapses in conducting due diligence, impeding internal reference checks, physical site visits and informal discussions that help identify potential gaps in conduct. However, this also gives companies the opportunity to reframe how they assess third-party risk. Digital solutions can be leveraged to streamline the assessment process, such as using data analytics to automate risk scoring and using automated dashboards for more efficient monitoring.CHAMPIONING A CULTURE OF INTEGRITYRisks to integrity have existed before and will persist beyond the pandemic. Employees may be tempted to risk the easy path regardless of accountability, cyberthreats increase in complexity and potential to expose vital data, and third-party risk creates more points of vulnerability in growing ecosystems.The report proves that emerging market companies recognize these threats and are making progress in addressing them, but there is still much to do. Businesses must expand their scope of focus past traditional aspects of integrity such as fraud, corruption and bribery, and must include measures in environmental, social and governance (ESG) criteria. With more customers prioritizing businesses with ethically sound practices, it is more important than ever to champion a culture of integrity not just because it is the right thing to do, but to also create long-term value.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.Roderick M. Vega is a Partner and the Forensic and Integrity Services (FIS) Leader of SGV & Co., and Dennis F. Antonio is an FIS Senior Manager of SGV & Co.

10 May 2021

Roderick M. Vega

Prioritizing the integrity agenda in times of uncertainty (First part)

First of two partsPressure from the COVID-19 pandemic on emerging market economies continues to impede business growth. Economies and companies all over the world are seeing unprecedented challenges and difficulties, which have further exacerbated potential integrity issues. According to the emerging markets perspective of the EY Global Integrity Report, corruption and fraud still pose a major threat to long-term success for businesses. While regulatory regimes and activities designed to strengthen company integrity have increased during the recent months, the remote working conditions and regulatory scrutiny following the New Normal have only aggravated existing issues while presenting new ones.The Global Integrity Report, conducted by global market research agency, Ipsos MORI, surveyed more than 1,700 employees from across all levels of large organizations in 21 emerging market countries. It presents relevant insights into the ethical challenges the organizations faced. From board executives to staff members, nearly 63% of the respondents believe it is difficult to maintain standards of integrity during periods of uncertain market conditions or periods of accelerated change. However, the report also reveals that emerging market businesses push efforts to mitigate misconduct, with 44% sharing how much easier it has been to report misconduct in the past three years, and 55% saying their management regularly communicates the significance of operating with integrity.The report discusses four key areas — ranging from cybersecurity to raising corporate integrity higher in the management agenda — that organizations must focus on in their integrity agendas. By considering how the respondents dealt with these areas of risk, businesses may gain insights into how to overcome some of the challenges to post-pandemic recovery. The first part of this article will discuss prioritizing corporate integrity and encouraging the use of whistleblower channels.PRIORITIZING CORPORATE INTEGRITYThe reputational damage from corporate integrity scandals can heavily scar the reputations of both the companies in question and their stakeholders, damaging even executives who are clearly not involved in such scandals. Stakeholder relationships are also impacted, compromising the long-term value of the involved business.It is critical for organizations to build an integrity agenda from the top and clearly communicate the relevance of acting with integrity. Corporate integrity is not a mere act of compliance — to act with integrity is both the right thing to do and a means to differentiate the business.Though frequently highlighting the importance of integrity in company-wide communications is an important step, actual action plans are much more significant. Senior management must reinforce their integrity message with clear examples, institute key performance indicators (KPIs) and have clear and quantifiable metrics to gauge the impact of their integrity initiatives.Formal policies and programs will provide an avenue for top management to set an example, emphasizing that everyone will be held responsible for their actions regardless of rank or individual performance.ENCOURAGING THE USE OF WHISTLEBLOWER CHANNELSAll employees should be heard. To truly embed integrity into an organization, it is critical to foster a culture of speaking up and active listening. Developing the right reporting channels not only provides a clear indicator of how the organization truly embraces integrity — it also discourages individuals from reporting issues directly to regulators or the media. Whistleblowing about unethical behavior can result in high-risk situations that may affect the reporting individual’s safety or lead them to fear reprisal both personally and professionally. The report states that 37% of the respondents in emerging markets do not report concerns about integrity due to apprehensions about their careers, while a worrying 29% choose to keep their concerns private due to fear of their own personal safety.However, progress is still being made, particularly in emerging markets, with 44% of companies saying it is easier to report concerns in the past three years, and 31% sharing that their companies offer more protection to whistleblowers compared to before. This is driven in part by tighter regulations in emerging markets, but it is also in the best interest of the company to make the whistleblowing process as easy as possible. Employees who are unable to bring their issues to management may instead go directly to a regulator or to social media, leading to a much higher risk of reputational damage. On the other hand, fostering “psychological safety” among employees can help drive productivity, employee satisfaction, and even workplace innovation.As a key pillar of any organization’s corporate governance framework, whistleblower programs require board oversight to be successful. Employees need to feel safe to report misconduct and believe that it is both a practical solution and in the best interest of the organization. Companies should provide multiple channels to report concerns so employees can choose an option that is comfortable and advantageous to them.A minimum requirement to consider for a whistleblowing mechanism includes a formal system that efficiently normalizes the process, such as case management, resource allocation, and clarity regarding how to speak up. Protection is also imperative, and anonymous complaints must be addressed by stakeholders.In the second part of this article, we will discuss the need for an increased focus on data protection and cybersecurity, and the need to address integrity issues in third party providers.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.Roderick M. Vega is a Partner and the Forensic and Integrity Services (FIS) Leader of SGV & Co., and Dennis F. Antonio is an FIS Senior Manager of SGV & Co.

03 May 2021

Karen Mae L. Calam-Ibañez and Aiza P. Giltendez

Redefining Philippine Taxation: CREATE (Fourth part)

Fourth of four partsThe first-ever revenue-eroding tax reform package and the largest economic stimulus program in the country’s history, Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), provides for major amendments to our tax and incentives laws. These changes are enacted with the goal of helping businesses move into post-pandemic recovery while encouraging more foreign investment. The law took effect on April 11.The first and second parts of this four-part article discussed the passage and goals of the CREATE Act, as well as the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax, tax-free exchange, additional provisions to consider and provisions that were vetoed.In the third part last week, we covered the nature of incentives before CREATE, their centralization and administration, and how they become performance-based and targeted. In this fourth and final part, we cover the periods of availment and the kind of incentives registered enterprises may enjoy.PERIOD OF INCENTIVESWith the intention to make incentives time-bound to encourage growth, CREATE no longer accords registered business enterprises (RBEs) incentives in perpetuity.Qualified export enterprises may be eligible for a four to seven-year income tax holiday (ITH), followed by either 10 years of 5% special corporate income tax (SCIT) on gross income earned (GIE) or 10 years of enhanced deductions (ED).On the other hand, qualified domestic market enterprises (DMEs) may be eligible for a four to seven-year ITH followed by five years of ED.As for DMEs, the grant of 5% SCIT incentives was vetoed since the same, according to the President, is redundant, unnecessary, and weakens the fiscal incentives system. If the government is to grant 5% SCIT to registered DMEs, then homegrown firms that are not registered, and make up most of the country’s micro, small and medium enterprises (MSMEs), will have to pay more taxes than registered DMEs. In the process, registered DMEs will have more legroom to reduce prices and secure more contracts, ultimately taking over the market and potentially threatening to put MSMEs out of business.An additional two years of ITH will be given to projects or activities of RBEs located in areas recovering from armed conflict or a major disaster.An additional three years of ITH will also be given to projects or activities registered prior to the effectivity of the CREATE Act that will, in the duration of their incentives, completely relocate from the NCR.In the interest of national economic development and upon positive recommendation of the FIRB, the President can approve extraordinary incentives for up to 40 years, where the ITH does not exceed eight years, followed by a 5% SCIT.The modified set of incentives or financial support package favors projects with comprehensive sustainable development plans, complying with set minimum investment capital or minimum local employment generation, among other conditions.The flexibility and range of authority conferred to the President in granting incentives is not new. ASEAN neighbors like Malaysia, Indonesia, Thailand and Vietnam have been exercising a similar level of discretion in granting incentives to boost their attractiveness and achieve their economic objectives.KINDS OF INCENTIVESIn computing the taxes due, the 5% SCIT is based on GIE, in lieu of all national and local taxes, just like the old 5% GIT. Nevertheless, the allowable deductions for purposes of computing the GIE must be clarified in the IRR to be promulgated by the DoF after consultations with the IPAs and other government agencies.Pre-CREATE, the issue on whether the enumeration of direct costs for purposes of GIE computation is exclusive or not has been the subject of various cases brought before the BIR and the courts. For PEZA-registered entities, the issue has finally been settled by the Supreme Court (SC) in the case of Commissioner of Internal Revenue vs. East Asia Utilities Corp. (G.R. 225266, Nov. 16, 2020) wherein the SC confirmed the non-exclusivity of the list of allowable deductions for purposes of computing PEZA-registered enterprises’ 5% GIT. This pronouncement by the SC on the proper interpretation of the allowable deductions for GIE computation, when articulated in the IRR, will, it is hoped, provide clear direction for the guidance of the implementing agencies and taxpayers alike.Meanwhile, at the regular CIT rate, registered enterprises may claim enhanced deductions that are expected to cushion the income tax effect. These enhanced deductions are: additional depreciation allowance of 10% for buildings and 20% for machinery and equipment; additional 50% direct labor expense; additional 100% research and development cost; additional 100% training expense; additional 50% domestic inputs expense; additional 50% power expense; a deduction of a maximum of 50% of the reinvested undistributed profits or surplus (for those in the manufacturing industry); and an enhanced Net Operating Loss Carry Over (NOLCO) of five years following the year of loss (incurred during the first three years from the start of commercial operations). In addition to the above incentives, all registered enterprises may enjoy duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity. Registered enterprises may also enjoy VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activities.INCENTIVES SUNSET PROVISIONTo give IPA-registered enterprises ample time to adjust to the new incentives, RBEs with incentives granted prior to the effectivity of the Act are given a transitory period.Existing registered activities granted only an ITH will be permitted to continue the remaining ITH period.On the other hand, existing registered activities granted either an ITH and 5% gross income tax (GIT), or are currently receiving the 5% GIT, will be able to enjoy a 10-year 5% GIT. After the expiration of such 10-year 5% GIT transition period, existing registered export enterprises may reapply and enjoy the SCIT for 10 years, subject to certain conditions and performance reviews, and without further extension.The provision allowing export enterprises to further extend the 10-year SCIT has been vetoed by the President.Notably, unlike in the CITIRA Bill where existing RBEs were given the option to shift to the new tax incentives regime by surrendering their Certificate of Registration instead of availing of the sunset period, such a provision is wanting in the CREATE Act.With the passage of CREATE, provisions of the prior laws to the extent inconsistent with CREATE are repealed or amended.While fiscal incentives are not the only determinant for the country to attract investment, adjusting corporate taxes and modernizing fiscal incentives serve as a means for the country to remain competitive with its ASEAN neighbors. Redefining our taxation puts it in a better position to compete for investments and CREATE a better economic future for the Philippines.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. Karen Mae L. Calam-Ibañez and Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.

May 2021

Corporate Banking Circa 2030: 7 hypotheses (Second part)

Corporate Banking Circa 2030: 7 hypotheses (First part)

Prioritizing the integrity agenda in times of uncertainty (Second part)

Prioritizing the integrity agenda in times of uncertainty (First part)

Redefining Philippine Taxation: CREATE (Fourth part)

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