November 2023

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.
27 November 2023 Maria Margarita D Mallari–Acaban and Mira Ramirez-Uy

Philippines bets on BEPS

On Nov. 8, the Philippines officially accepted the Organisation for Economic Co-operation and Development’s invitation to join the Inclusive Framework (IF) on base erosion and profit shifting (BEPS). The announcement is timely, as other countries, including our Asian neighbors, have expressed their intention to join or have started drafting their own BEPS legislation earlier this year.In 2021, 136 member jurisdictions of the IF forged a new global tax deal — the Two-Pillar solution—with the aim of curbing tax avoidance by Multinational Enterprises (MNEs). The Two-Pillar solution was years in the making and represents the most significant tax reform in decades. The Global Anti-Base Erosion (GloBE) Rules, a core component of BEPS 2.0 Pillar Two, seek to limit unhealthy tax competition — the so-called “race to the bottom” for corporate tax rates — among jurisdictions by introducing a 15% global minimum tax rate.This is the fifth article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. This article will discuss how BEPS 2.0 Pillar will impact the Philippine tax landscape.WHAT IS THE BEPS 2.0 PILLAR 2 ARCHITECTURE?Applies only to large MNEs. Under the GloBE rules, the 15% global minimum tax rate applies only to large MNEs — particularly those with annual consolidated revenues of 750 million euros (or equivalent) in two of the last four years. Essentially, purely domestic firms or MNEs falling below the 750 million euro revenue threshold are excluded from the coverage of Pillar 2.GloBE Effective Tax Rate (ETR) is below 15%. Once an MNE is considered in-scope, the group determines the ETR of the entities per jurisdiction and compares this with the 15% global minimum tax rate. If the ETR of an entity is lower than the 15% minimum rate (deemed as a low-taxed entity), an additional tax called the ‘top-up tax’ becomes due.When computing the ETR, the GloBE Rules apply to all low-tax outcomes as a wholesale policy. Therefore, it does not provide any exceptions or preferences for reduced tax rates intended to encourage specific sustainability efforts (e.g., investments in renewable energy), or those granted for specific industries or activities.New charging and collection mechanism. Through an ordered system of top-up taxes, the GloBE Rules recognize a new set of taxing rights, allowing various jurisdictions to collect the top-up tax irrespective of the low-taxed entity’s physical location or tax residency. The Pillar 2 system effectively deviates from the tax system where income is typically collected by the source jurisdiction or the immediate parent’s jurisdiction. By design, the GloBE rules allow not only the domestic jurisdiction (where the low-taxed income is earned) to collect the top-up tax via the Qualified Domestic Top Up Tax (QDMTT), but also the ultimate or intermediate parent jurisdiction via the Income Inclusion Rule (IIR) or another related entity within the Group via the Undertaxed Payments Rule (UTPR).Common approach. Adopting the GloBE rules is not mandatory for all countries. However, to ensure uniform implementation, the rules provide a common approach to be adopted by the implementing jurisdictions. To date, a few countries have enacted their own Pillar 2 legislation, such as Japan, South Korea, and the UK. Additionally, more than 40 countries — including the Philippines — have signified their intention to adopt the GloBE Rules or are in the process of passing local legislation, with anticipated implementation by 2024 to 2025.THE PHILIPPINES IN THE BEPS 2.0 WORLDWith the Philippines joining the IF, our adoption of the Pillar 2 rules will become a critical piece of local legislation. It will determine the top-up tax mechanism to be applied to low-taxed entities of Philippine and Foreign MNEs, and the alternative incentives we need to complement it.For developing countries like the Philippines, incentives have been traditionally used as a stimulus mechanism to boost employment, foster technology transfer, encourage capital inflow and foreign currency, and promote overall growth. As an investment hub, the country is home to many enterprises in the manufacturing, business process outsourcing, and renewable energy space, which benefit from income tax holidays or special income tax rates. As such, entities enjoying these incentives will likely have a jurisdictional ETR of below 15%, for which a top-up tax will be due.Local enterprises that benefit from these incentives will be the most affected in case we adopt the QDMTT since the Philippines will now have the primary taxing right over these low-taxed entities. For Philippine-headquartered conglomerates with operations in other low-tax jurisdictions, the country will likewise have the right to collect the top-up tax through the IIR or UTPR.IS THIS THE END FOR TAX INCENTIVES? NOT NECESSARILY.Certain incentives that are grounded on substance (e.g., payroll, tangible assets), are expenditure-based (e.g., accelerated depreciation), or are not income tax-related, appear to work better in a Pillar 2 environment. Our neighbors in ASEAN are similarly re-assessing the design of their tax incentives. For instance, as part of their Pillar 2 implementation, Malaysia and Vietnam are exploring cash grants and qualified refundable tax credits. Other alternatives being considered include non-income tax incentives, interest-free loans, and relaxation of ownership rules. The Philippines could explore similar approaches that can be localized to align with the government’s investment policy.In the long term, however, as designing incentives becomes more complex and challenging in a Pillar 2 environment, we may eventually need to shift our focus toward non-tax investment drivers, such as general operating conditions, infrastructure, human capital, access to talent, and ease of doing business, to remain competitive in the market. These measures have been viewed to deliver more sustainable, long-term value to investors.STRIKING A BALANCE IN A PILLAR 2 ENVIRONMENTThe BEPS Project is arguably the most ambitious and comprehensive tax initiative we have seen. As more countries enact their own Pillar 2 legislation, we can anticipate significant changes in the tax landscape. For affected MNEs, an impact assessment, incentives review, group-wide BEPS compliance, and Pillar 2 planning should now take precedence in their tax and finance agendas. Engaging with the regulators is also a must to ensure a smooth transition to a Pillar 2 environment.This entire process will likewise involve a delicate balancing act by the government. Surely, this will require more than just adopting a top-up tax legislation. A major policy reform should go along with it to address the long-term impact of top-up taxes to existing and future investors. A comprehensive solution should definitely be on the table, otherwise, the intended benefits of our Pillar 2 adoption may well be short-lived. 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.Maria Margarita D Mallari–Acaban is a tax principal of SGV & Co., and Mira Ramirez-Uy is a tax senior director of SGV & Co. 

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20 November 2023 Cheryl Edeline C. Ong and Anne E. Momongan-Lim

Innovating for green and sustainable growth

With the Philippines undergoing rapid urbanization, industrialization, and environmental degradation, the government is taking the initiative to steer the country towards green growth and sustainable development. To be globally competitive, the government and businesses alike must prioritize innovative approaches, fostering technological advancement, and implement incentive mechanisms that promote environmental protection while driving long-term economic growth.As such, the government has been actively ramping up efforts to encourage new and current investors to support this green and innovative drive through government-led incentive programs such as the Strategic Investment Priority Plan (SIPP) and the incentives under the Renewable Energy Act.For business owners and investors, the SIPP is a crucial policy that serves as a roadmap and guide to identifying priority sectors and industries that play a pivotal role in achieving the country’s development goals, including the creation of employment opportunities and export growth.This is the fourth article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. In one of the discussions by the Board of Investments, the speaker presented the SIPP goals for nation building briefly covered below.THE LABOR-INTENSIVE ECONOMYAccording to the Department of Finance (DoF), the unemployment rate in the first eight months of 2023 improved to 4.6% compared to the 5.3% rate from a year earlier. This is a positive development in a labor-intensive country. It is recognized that the workforce plays a vital role in growth and development. With a population of over 118 million in 2023, the Philippines presents a unique opportunity for labor-intensive industries to flourish. Noteworthy though is that being labor-intensive may also be the reverse of technological advancement; thus, it is a challenge to strike a balance between technological innovation and human involvement.GLOBALLY COMPETITIVE INFRASTRUCTUREThrough the SIPP, the current administration acknowledges the need to hasten the transformation into a modern and efficient economy with highly developed infrastructure, such as efficient transportation systems, roads, bridges, and airports.The National Economic and Development Authority (NEDA) in March announced that the administration approved high-impact infrastructure flagship projects worth P9 trillion, in line with the “Build Better More” infrastructure program.Investors may want to delve into projects that will provide adequate infrastructure to promote and support the movement of goods and services across the country, thus reducing transportation costs and improving overall efficiency. Globally competitive infrastructure is also going to manifest in improved healthcare facilities, the availability of affordable housing, and enhanced education.TECHNOLOGYOne of the focus areas of the SIPP is technology advancement and innovation. By embracing technology advancement, the Philippines seeks to develop a competitive edge, attract digital investment, foster entrepreneurship, and build a strong digital economy. The Department of Trade and Industry (DTI) is likewise pushing for the acceleration and growth of innovation.As technology will depend on favorable factors, the focus areas for improvement ought to include lowering the cost of power and stabilizing the supply of energy, regardless of location in the Philippines.CLIMATE CHANGEWith its goal of fostering green growth, the Philippines aims to position itself as a regional hub for carbon-reducing activities. The growth of the renewable energy sector and the transition to cleaner and more sustainable energy sources can be further promoted by making investors and stakeholders alike more aware of the fiscal and non-fiscal incentives on offer for those who invest in energy efficiency projects. During the 2nd Tax Symposium, the DTI speaker discussed the energy efficiency projects (EEP) under the 2022 SIPP. In relation, BoI Memorandum Circular 2023-006 was issued as an amendment to the Specific Guidelines on Registration of Energy Efficiency Projects covered by Republic Act No. 11285.Under the circular, for the self-financed, the EEP shall only be entitled to the Income Tax Holiday (ITH) incentive and duty exemption on imports of capital equipment, raw materials, spare parts and accessories. The ITH incentive is limited to the prescribed ITH entitlement period under the CREATE Act or until the recovery of 50% of its capital investment, excluding cost of land and working capital of the registered EEP, whichever comes first.STRATEGIC INVESTMENT PRIORITY PLAN INCENTIVESIt can be inferred from the SIPP that these objectives for nation building are aligned with the global shift towards a sustainable and green economy through innovation and technological advancement. Businesses can be partners of government and align their investments and projects with the administration’s goal for the Philippines to be a regional hub for globally competitive, innovation- and sustainability-driven industries. Amplifying one’s knowledge of priority sectors vis-à-vis incentives can lead to opportunity and to expansive industries — these include electric vehicles, smart/high-tech light manufacturing, high-tech agriculture, renewable energy, and data centers.To highlight these attractive incentives, PEZA presented during the symposium that the incentives granted to industries identified by the SIPP include the enjoyment of a four to seven-year ITH. The incentives will depend on the location, the industry, and whether the company is a domestic or export-oriented enterprise as provided under the CREATE law.After the period of enjoyment, export enterprises can avail of a special corporate income tax of 5% or enhanced deductions. On the other hand, domestic enterprises are entitled to the latter after the ITH period. These deductions are in addition to the allowable ordinary and necessary deductions under the Tax Code, as amended. In addition, companies eligible are entitled to duty and VAT exemption for imports of capital equipment, raw materials, spare parts, and accessories directly and exclusively used in the registered activity. Local purchases directly and exclusively used in the registered activity are also entitled to VAT zero rating.OTHER GREEN INCENTIVES AVAILABLEAside from the SIPP, the Philippines has placed a spotlight on the incentives under the Renewable Energy Act. As an overview, industries eligible under this act are entitled to an ITH of seven years from the start of commercial operations. The maximum period that can be availed of is 21 years, inclusive of the initial seven years. Further, after the ITH period, a 10% corporate tax on net taxable income may be availed of, provided that the savings must be passed on to end-users in the form of lower power rates.When evaluating the incentives offered in the Philippines, businesses contemplating investment may need to carefully assess the available options to determine which are the most advantageous for their specific needs. Each company will have to consider the various applicable incentives and determine which can provide them with greater benefits.The Philippines, being rich in natural resources including renewable sources, and having a pool of talented workers, is making strides towards sustainable development by leveraging innovative solutions and incentivizing green practices. By harnessing these incentives and supporting ongoing innovation, the Philippines is poised to become a regional leader in green growth and a model for other countries seeking sustainable development.   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. Cheryl Edeline C. Ong is a tax partner and Anne E. Momongan-Lim is a tax senior manager of SGV & Co.

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06 November 2023 Noel P. Rabaja

Strategizing for sustainable development

Public policies attempt to fulfill one or more of the following objectives: efficiency, equity, and stability. Efficiency and stability are necessary conditions for sustainable growth while equity helps make development inclusive.This is the second article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors.In this article, we will discuss the Philippine strategy for sustainable development.GROWTH THROUGH TRADE AND INVESTMENTThe Philippine Development Plan (PDP) 2023-2028 aims for a deep economic and social transformation to reinvigorate job creation and accelerate poverty reduction by steering the economy back to a high-growth path. In this regard, two main performance indicators are identified and will be monitored by the National Government.The first is for the country to graduate into upper middle-income class status within the term of the current administration. For this, the economy must grow its per capita income above the threshold set by the World Bank, which means a gross national income (GNI) per capita of at least $4,466. In 2022, the Philippines achieved a GNI per capita of $3,950.The second is to lower the poverty level from 18.1% in 2021 to single digits by 2028 — the end of the term of the current administration. Both indicators require high growth rates. For the next year through 2028, the government pencils the growth rate between 6.5% and 8%.Growth is expected to be investment-led with the implementation of structural changes such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which lowered the corporate income tax rate, and the amendments to the Public Service Act (PSA), Foreign Investment Act (FIA), and Retail Trade Liberalization Act (RTLA), which further liberalized the economy. The new legislation is expected to attract more local and foreign investment, especially in the liberalized sectors. For the energy sector in particular, amendments to the PSA are envisioned to help raise the capital needed to speed up the energy transition of the country to renewables.In addition, the Regional Comprehensive Economic Partnership (RCEP), a trading bloc that encompasses the ten members of the Association of Southeast Asian Nations (ASEAN) and the ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand, is already in force for the Philippines, helping ease market access through trade and investment rules and supporting global and regional supply chains. The Philippines can potentially position itself as a regional manufacturing hub if the right incentives and policy measures are put in place to encourage local and foreign investors to participate. Together, trade and investment are expected to play an important role in attaining economic transformation, the second goal of the PDP.HUMAN CAPITAL AND INFRASTRUCTUREThe ability of people to take advantage of market opportunities arising from investment rests on human capital. To this end, the first goal of the PDP is social transformation which includes, among others, sustained expenditure on social services, mainly education, health, and social protection.The first two goals of the PDP help attain the developmental objectives of efficiency and equity, which rest on the pillars of sustainability and resilience. The third fosters societal resilience: an enabling environment encompassing institutions, macroeconomic stability, and the physical and natural environment.Institutions are vital to economic acceleration, which is why the government’s steps to enhance the ease of doing business are most welcome. Infrastructure development also enables an economy to sustain higher levels of growth, which, in turn, catalyzes yet more investment. The Public-Private Partnership (PPP) Act is up for the signature of President Marcos and, if approved, is expected to further enhance the business atmosphere in mobilizing private resources for infrastructure development.The government aims to sustain its infrastructure program at 5-6% of GDP through 2028 amid a six-year medium-term fiscal framework. This plan gradually narrows the deficit to 3% of GDP by 2028, down from 7.3% in 2022, such that the debt-to-GDP ratio is reduced from nearly 61% in 2022 to a more sustainable level of at most 53% by 2028.DEBT MANAGEMENTThe National Government’s debt was less than 40% before the pandemic struck. It expended much of its fiscal space combatting the pandemic, incurring debt and large budget deficits. While the current 61% debt-to-GDP ratio may be manageable for an emerging economy like the Philippines for some time, the country may not have the fiscal space to respond to another potential domestic or external shock. If the debt continues to rise more than the economy, risks will increase, and the government may “crowd out” private investment as it competes with the private sector for funds to service its debt.The planned fiscal consolidation entails harmonizing the revenue needs with the promotion of investment through the structure and administration of the reformed incentive system. The National Government plans to raise more revenue to finance the country’s socio-economic needs, largely through a progressive and simplified tax system, more efficient and effective tax collection measures through digitalization and, to some extent, from policy measures such as value-added tax on digital service providers and excise tax on sweetened beverages and junk food.Achieving fiscal stability presupposes the sustainability of fiscal policy, and fiscal stability helps “crowd in” private investment.PRICE STABILITY AND INFLATIONIn his second State of the Nation Address (SONA), President Ferdinand Marcos, Jr. singled out inflation as the country’s most pressing problem. In the first nine months of 2023, inflation averaged 6.6% — far above the upper end of the target range of 2-4% set by the BSP. If left unchecked, inflation could undermine growth. Not only does this increase costs to organizations, but it also sets in motion second-round effects as workers start demanding higher wages, consequently increasing business costs and discouraging investments.Inflation is partly driven by supply-side issues and the government is allocating more resources to the agriculture sector to boost production. Mr. Marcos also mentioned that the National Government had distributed 28,000 new tools and machinery to farmers. An additional 600 km of farm-to-market roads were laid down to support the 14 million hectares of farmland, enhancing farmer access to markets. In addition, he signed Executive Order No. 28 in May, forming the Inter-Agency Committee on Inflation and Market Outlook, which is tasked to keep inflation within government targets and boost the economy.ENHANCING CLIMATE RESILIENCEWhile price stability and fiscal sustainability are important macroeconomic issues, environmental sustainability is increasingly gaining importance. Climate change uncertainties and challenges need to be managed and both the Philippine government and the private sector are hard-pressed to deliver their commitments to addressing them. Despite climate change risks, the Philippines has the opportunity to position itself as a prime destination of foreign investments against climate change or environmental, social, and governance (ESG) investments.The government calls for embedding resilience, sustainability, and nature-based solutions in infrastructure planning and investment to enhance climate resilience. Likewise, investments in renewable energy are expected not only to enhance energy security but also reduce greenhouse gas (GHG) emissions.From an economic vantage point, GHG emissions are economic “bads” and are a cause of inefficiency as they get over-produced. Their effects, however, go beyond national borders, and while the Philippines contributes minimally to global GHG emissions, the World Risk Index 2022 report identifies the Philippines as the most disaster-prone country in the world.The government envisions that by 2028: (1) Climate and disaster risk resilience of communities and institutions will increase (2) Ecosystem resilience will be enhanced, and (3) A low-carbon economy transition is enabled.To ensure that these are realized, the government is set to safeguard cross-sectoral convergence and implement a comprehensive risk management approach to address the adverse consequences posed by climate change. It will also promote a green and blue economy coupled with improved governance to guarantee long-term climate and disaster resilience.BUILDING RESILIENCE THROUGH SUSTAINABLE DEVELOPMENTComing off from the pandemic and with the current global economic climate, it is opportune for the government to proactively drive for actionable policies and programs that focus on building the resiliency of the economy through sustainable development with greater emphasis given to addressing climate change.Navigating external and domestic economic headwinds will not be an easy feat for the administration, but the private sector will be an important catalyst for sustainable development. With the private sector sharing industry knowledge, resources and potentially even leading certain socio-economic programs and projects of the National Government, it is to be hoped that AmBisyon Natin 2040 of long and healthy lives for Filipinos that are strongly rooted, comfortable, and secure will be achieved.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.Noel P. Rabaja the Strategy and Transactions (SaT) service leader of SGV & Co.

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