September 2021

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
27 September 2021 Betheena C. Dizon

Taxing the famous and followed: The broader impact of the BIR’s new regulations

Social media spawned the rise of popular and highly followed content creators — ordinary individuals outside of show business who become celebrities overnight by creating viral content through their digital platforms. Realizing the advertising potential of these content providers, also known as “social media influencers,” more and more companies partner with them to spread and maintain awareness of their brands and products among the influencers’ millions of followers.This became even more apparent during the lockdowns resulting from the pandemic, when an increasing number of people plugged into the online world to stay connected.The growing business of social media influencing caught the attention of the Bureau of Internal Revenue (BIR), which recently released Revenue Memorandum Circular (RMC) No. 97-2021 to clarify the taxation of any income received by social media influencers.INFLUENCERS LIABLE FOR INCOME TAX AND VALUE-ADDED TAX OR PERCENTAGE TAXThe BIR emphasized that social media influencers are liable for Income Tax and Value-Added tax or Percentage Tax unless the law clearly provides for an exemption. Moreover, social media influencers are required to register as taxpayers with the BIR, maintain books of account, and file the appropriate tax returns.BROADENING ENFORCEMENT OF TAXPAYER COMPLIANCEThis move by the BIR appears to be consistent with its renewed drive to enforce tax compliance. The recent focus on social media influencers appears to be one of the programs to remind the sector of their tax obligations, starting with the emphasis that earnings from social media platforms, are in fact, taxable income. If in the past, the BIR’s enforcement drive focused mainly on corporate taxpayers, it appears to be sending the message that tax compliance is for all taxpayers, whether individual or corporate.Among the notable points in RMC No. 97-2021 is that the BIR went as far as discussing the tax impact if the social media influencer is taxed by a foreign jurisdiction on income paid by a foreign corporation. Its discussion also includes remedies to avoid double taxation, such as availing of the benefits of the applicable tax treaty.On that point, the BIR is now harnessing increasing coordination among foreign tax authorities by reminding social media influencers that it has the power to obtain information from foreign tax authorities. By utilizing the Exchange of Information provisions included in tax treaties, the BIR emphasized that it has the capability to determine if the social media influencers correctly disclosed their earnings in their tax returns.It then stands to reason that the BIR can likewise wield its power of obtaining information from foreign tax jurisdictions to also ascertain the correct amount of foreign-sourced income earned by other taxpayers. For instance, the BIR may determine the amount of any foreign-sourced dividends received by a domestic corporation using the Exchange of Information tools under the tax treaties, to determine whether these dividends were declared by the corporation for tax purposes.The power to obtain information through Exchange of Information is only one of the weapons in the BIRs arsenal to oversee tax compliance. It may be worth remembering that the National Internal Revenue Code itself gives the BIR the power to assess the proper tax based on the best evidence obtainable. The BIR has been known in the past to use commercial advertisements to approximate the taxpayer’s net worth.While RMC No. 97-2021 focused its discussion on the tax obligations from the perspective of social media influencers, corporations who partner with these individuals may well be reminded that any income payments to such individuals or corporations may also give rise to withholding obligations. As withholding tax agents, corporations are required to withhold a specific amount of income on their income payments. The domestic corporation paying the social media influencer is required to withhold tax on payments at a rate anywhere from 2% to 15%, depending on how the payment is characterized under the expanded withholding tax system. Failure to withhold the correct amount of tax can give rise to potential deficiency withholding tax assessments that can be raised in a tax audit.On this note, a withholding tax issue may arise on the part of corporations with respect to free products that they give to the social media influencer. RMC No. 97-2021 emphasizes that the fair market value of free products received by a social media influencer in exchange for promotion on the digital platform is to be treated as income. If these free products are to be treated as income payments, a question may be raised on how the corporation giving away the free products is to apply withholding tax rules. Since the payment is made in the form of goods, and not cash, what practical approach can be adopted by the corporation providing the free products to meet its withholding tax obligations? Are these payments through free products even subject to expanded withholding tax? These points may be worth considering both by the payors and the tax authorities themselves.Another potential impact of this regulation is the reputational or perception issue of the partnering corporation. If the social media influencer is deemed to be non-compliant with tax filing obligations, it is possible that the corporation partnering with the social media influencer can likewise be questioned by the BIR if it correctly withheld taxes on any payments that may have been made to the non-compliant social media influencer. This can be an additional issue to hurdle in the event of a tax audit on the partnering corporation.TAXES FOR COMPLIANCE AND SOCIETAL CONTRIBUTIONWhile RMC No. 97-2021 trains its attention on social media influencers, the broader implications are that the BIR has tools at its disposal to remind all taxpayers of their tax obligations and to enforce compliance. Moreover, this regulation reminds us that all income, no matter how it is sourced, cannot escape the taxing power of the state. This is especially relevant in these times, in which taxpayers, both individual and corporate, can help by providing the resources to fight the pandemic. This makes these taxes not just an obligation carried out of compliance, but also our contribution to help society heal. 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.Betheena C. Dizon is a Tax Partner of SGV & Co.

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20 September 2021 Martin C. Guantes

How will the auditing profession look in the future?

The pandemic has accelerated new ways of working across various industries, including the auditing profession. However, new ways of operating for audit firms and the companies they audit, including the sudden shift to flexible and remote working, are expected to outlast the immediate effects of the pandemic. According to the EY article, How the auditing profession is transforming to meet future challenges, this adds new dimensions to the existing challenges that audit professionals face in adapting audit to a rapidly evolving corporate world now and especially after the pandemic.With digital transformation driving companies to adopt more complex business models, the audit profession has the opportunity to transform itself by adopting an agile mindset capable of embracing disruption, further exploring the flexible working shift with hybrid working models and operating effectively in diverse, more technologically aware teams.EMBRACING DISRUPTION AND MULTIPLE DISCIPLINESAs the audit process becomes increasingly dependent on digital technology and data analysis, audit firms will require a more diverse skill set from their people. Though firms traditionally recruit auditors with business backgrounds with an emphasis on personal integrity and professional skepticism, all auditors will need to possess an increased level of technological understanding and an agile mindset that embraces disruption.As business models grow in complexity, firms will require professionals with the ability to leverage a wider specialist expertise across multiple areas of business. By directly accessing technical expertise through the multidisciplinary model and the resources of a broader firm, auditors can leverage knowledge such as cybersecurity, fraud, sustainability, and corporate finance expertise to provide high-quality audit services.While the article cites this as a necessary trend moving forward from the pandemic, it is interesting to note that we in SGV have been doing this kind of multidisciplinary talent development for a long time, with our professionals not only gaining strong audit competencies, but also acquiring related skills in business transformation, sustainability reporting, law, forensics, corporate governance, IT security, data analytics, business strategy development, digital transformation, workforce services, and many others.EXPLORING FLEXIBLE WORKING AND HYBRID MODELSThe pandemic has also proved that when the situation demands it, audit firms are capable of making rapid and significant changes to how they operate, particularly given the inherent challenges in mobility, interaction and collaboration due to quarantine and other restrictions. This shift has brought with it the reality that flexible, remote working has become the current norm for audit professionals who have both successfully adapted to using digital technology to perform audit work away from a client’s business premises, and learned to collaborate and support each other virtually.The sudden changes forced by COVID-19 not only helped accelerate cultural change in organizations — they also made them more open to different ways of working. This increased flexibility also brings with it other significant benefits, such as audit firms placing more emphasis on performance in terms of output and productivity.It should be noted, however, that such a rapid shift to flexible working also produced challenges that audit firms will need to address. Practical issues in remote working include audit teams having to hold their discussions over chat rooms or less personal virtual meetings, rapidly developing proficiency in using specialized digital platforms, and others. Moreover, there are also challenges with conducting sensitive conversations remotely, as well as helping new colleagues understand the firm’s organizational culture and receive proper coaching and mentoring. Building remote trust and rapport may be one of the new challenges for audit professionals in addition to needing to manage expectations from audited companies regarding onsite attendance.Firms can address these issues by shifting to a hybrid working model based on the requirements of the audit firm, its teams, and the companies they audit. This setting will involve determining the ideal proportion between flexible, remote and onsite working, and will depend on circumstances such as the need to build professional relationships. For example, teams will need to consider when they need to meet to increase team cohesion, receive training, or travel onsite to meet company management and establish trust and gather evidence. Auditors can also explore further applications of technology, such as the use of blockchain and drones to enhance audits, which professional firms like EY have been developing since even before the pandemic. As a member firm of EY, SGV has been able to leverage a number of technological applications that have enabled our audit teams to conduct remote audit.FOSTERING TEAM DIVERSITYThe move towards remote working further necessitates the need to build strong audit teams. The ideal audit team will have people who possess a wide range of personal and technical skills, diverse experiences, and viewpoints. This will mean recruiting people from wider backgrounds as well as providing opportunities for them to broaden their horizons to accommodate various interests and aspirations. The traditional linear and hierarchal career progression will not necessarily suit everyone, and it will be important to offer alternatives to those who do not want to go down this path. Promotions must also focus on skill instead of tenure, with career progression occurring once the individual is ready versus waiting for them to reach a certain number of years.However, fostering diversity will only be effective if the firm can create an appropriate environment where people can contribute and add value. Supporting a more diverse workforce that needs to operate in a rapidly evolving business environment will require continuous training, but with the new ways of working, such training will likely need to adopt a hybrid model based on the needs discussed previously. Long-term models will combine classroom-based and virtual setups to deliver training even beyond the pandemic.WORKING IN TRANSITIONThe working models brought about by the pandemic accelerated the transition towards a more flexible, diverse and technologically aware auditing profession. Auditors work in a continuously evolving space, with digital tools and data playing an increasingly significant role in the audit of tomorrow. While this process will pose an inevitable challenge for some, others will welcome it. If audit firms can navigate this change effectively, it gives audit professionals the opportunity to flourish.Digital transformation and the resulting new environment can give auditors not just more effective ways to perform their work, but a more purposeful profession that can better serve the public interest. 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.Martin C. Guantes is the Assurance Leader of SGV & Co.

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13 September 2021 Marie Stephanie C. Tan-Hamed

Changing the game with digital ecosystems (Second Part)

(Second of two parts)To create long-term value and secure a competitive advantage, it is imperative for companies to undergo digital transformation and address rapidly-evolving consumer expectations as many economies begin preparing to reopen and start the period of recovery. Consumers today expect responsiveness and a variety of channels to access with a hyper-personalized experience. The need for digital interaction, online consumerism characterized by expectations of high responsiveness and extensive personalization, and new technology platforms were further accelerated by the pandemic. Companies forced to innovate and enhance business models through technology have blurred the boundaries between industries, leading to the emergence of what we call digital ecosystems.Digital ecosystems are defined in a new EY study, Building successful digital ecosystems in Southeast Asia, as competitive game-changers. Formed through a combination of strategic partnerships and platforms, digital ecosystems deliver value to consumers through personalized products and services that cut across numerous channels. By presenting an interconnected set of offerings composed of businesses across various sectors, a digital ecosystem can fulfill consumer needs in one integrated experience.To create an effective digital ecosystem roadmap and strategy, the EY study highlights three things companies must take into account before embarking on their digital ecosystem journey. In the first part of this article last week, we discussed the first two: evaluating the digital ecosystem maturity of the organization and defining the business model. In the second part of this article, we continue by discussing implementing and mobilizing the ecosystem.IMPLEMENTING THE ECOSYSTEMOnce organizations identify a digital ecosystem opportunity, they need to follow certain steps to design an ecosystem. The first step consists of identifying the most suitable role for organizations to undertake: digital ecosystem partner, enabler, or orchestrator. Once their role is identified, organizations need to determine their business model based on digital and platform maturity and partnership ecosystem. Additional significant aspects that will need to be addressed include assessing and determining the nature of the ecosystem, product market fit for integrated solutions, and the monetization model to generate value from the ecosystem.Moreover, to further sustain and scale the reach and capabilities of the ecosystem, organizations need to identify the key enablers of the digital ecosystem. These include organization structure and culture, talent pool, the technology stack and external resources that will need to be progressively developed to create a sustainable digital ecosystem.Lastly, critical to building a successful digital ecosystem is understanding and creating the digital ecosystem evolution roadmap. This involves mapping maturity of the business within the ecosystem, building and growing partnerships, identifying the potential pitfalls of the digital ecosystem and designing a risk mitigation plan. MOBILIZING THE ECOSYSTEMThe ultimate aim for organizations should be to assume the role of an ecosystem orchestrator who defines the reference architecture of the ecosystem. Of the three roles in an ecosystem — orchestrator, partner and enabler — orchestrators are pivotal players in any ecosystem, often outperforming other entities in terms of revenue and profit. With the larger control they hold over ecosystem dynamics, they are also subject to being more exposed to the gains and losses of the ecosystem.Whether the orchestrator is an incumbent or an innovator, a business can mobilize a digital ecosystem in multiple ways: the build, buy and partner approach.The build approach has the orchestrator begin with its own platform before organically involving and adding industry partners to expand. This includes ride-sharing apps that built the platform organically and were later joined by drivers and partners.The buy approach is where the orchestrator strategically invests in platform-based businesses through mergers and acquisitions (M&A) and investments to add upon their existing capabilities and customers. The investment made can be for small, strategic investments to get partners on board, or a majority stake.The partner approach leverages joint ventures, strategic contracts and alliances to develop a customized, platform-based offering that connects stakeholders and customers across different industries. These can also involve data-sharing or licensing arrangements between partners. CREATING LONG-TERM VALUE WITH ECOSYSTEMSThough digital ecosystems were originally believed to be relevant only to selected industries and regions, recent times have seen dominant ecosystem players accelerate their activities worldwide. This is only expected to intensify with the world continuing to prioritize digital interactions in the wake of the pandemic.The complex structure of digital ecosystems requires enterprises to define the right approach to maximize the value they can gain. It will be essential for businesses to assess how they create value to align their digital ecosystem strategy with the overall strategic vision of the company. They will need to assess market trends and identify the specific fit for their organization within the ecosystem.Questions that businesses must ask themselves include what opportunities to capitalize on the enterprise digital spend, how to build integrated, future-ready IT and data architecture, and how to digitally enable their workforce to drive transformation. After determining the maturity of the platform opportunity in their sector, the incumbents and disruptors in the current landscape, and whether their business model is best suited for the role of orchestrator or participant, businesses will need to assess and lock in quality partners through strong value propositions and develop one-stop solutions to commercialize the value chain end-to-end.By identifying the key objectives they need to achieve, be it core business growth, entry into new market segments or optimization within their operations, businesses will be able to more effectively map out their roles within an ecosystem and secure 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 author and do not necessarily represent the views of SGV & Co.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

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06 September 2021 Marie Stephanie C. Tan-Hamed

Changing the game with digital ecosystems (First Part)

(First of two parts)With the continuing uncertainty present in the global economy, digital transformation continues to be a business imperative for companies seeking to create long-term value, secure a competitive advantage, address more rapidly evolving consumer expectations and transform in preparation for the period of recovery. The need to physically distance for safety has deepened the need for digital interaction, online consumerism and new technology platforms. This shift in industry dynamics has blurred the boundaries between industries, leading to the emergence of digital ecosystems.According to the new EY study, Building successful digital ecosystems in Southeast Asia, digital ecosystems are becoming a competitive game-changer. A digital ecosystem is formed through a combination of strategic partnerships and platforms in the form of omnichannel architecture that delivers value to consumers through personalized products and services. By presenting an interconnected set of offerings composed of businesses across different sectors, a digital ecosystem can fulfill consumer needs in one integrated experience.A digital ecosystem is not just about a partnership or merger and acquisition (M&A) — it is about building a truly integrated network of enterprises that encourages and facilitates the sharing of applications, technology infrastructure and data. The shared elements of a digital ecosystem enhance and complement each other, resulting in improved innovation, trust and digital experiences.Organizations need to map their roles in a digital ecosystem as well as monetize the digital ecosystem to drive sustainable growth. To create an effective digital ecosystem roadmap and strategy, companies must take three considerations into account before embarking on their digital ecosystem journey. This article will discuss the first two: evaluating the digital ecosystem maturity of the organization and defining the business model.EVALUATE THE DIGITAL ECOSYSTEM MATURITY OF THE ORGANIZATIONWhile digital ecosystems present myriad opportunities to all value chain participants, there are also various hurdles that need to be overcome before reaping the benefits of a digital ecosystem. Companies often find it a challenge to choose the appropriate role for them and the path to achieve it. This makes a robust digital ecosystem strategy critical for every organization regardless of where it stands in its digital ecosystem journey.As part of devising a digital ecosystem strategy, organizations need to understand the different maturity levels to be traversed in the digital ecosystem journey, and assess where they lie on the maturity curve. These are based on the digital capabilities a business has developed and the level of transformational impact it creates. There are three maturity levels to consider: digital ecosystem adaptor, digital ecosystem accelerator, and digital ecosystem attacker.Most organizations start at the digital ecosystem adaptor level, where the transformation of an organization is at a modular level and is limited to a particular geographical market or business unit. The transformation initiative may be in the form of a pilot program, or the company leveraging partnerships and platforms to create value for its customers.The next stage is the digital ecosystem accelerator, where the organization scales the transformation to a company and industry level, adding more digital capabilities and creating value from the platform economy. This can disrupt the respective industry of the company as it redefines how business is conducted by being a pioneer.An organization at the level of a digital ecosystem attacker drives large-scale transformation across multiple industries, leveraging cross-sector collaboration and technology capabilities across various parts of the value chain. The transformation of the organization at this level utilizes multi-platforms, omnichannel plays and super apps, with strategic partnerships across different industries and geographies.The impact and value brought by an organization into the digital ecosystem broadens from the company level to an ecosystem level as it moves from being an adapter to an attacker. As with any maturity model, organizations at the first stage must transform themselves before transforming their industry and ecosystem in the last stage.DEFINE THE BUSINESS MODELAfter assessing and determining their own digital ecosystem maturity level, organizations need to identify the business model to leverage as a digital ecosystem participant based on parameters such as the nature of the ecosystem, the scale of industry partnerships and the revenue model.Businesses that are just starting out on their digital ecosystem journey usually leverage pilot programs to develop a coherent set of digital solutions through partnerships. At the next level, platform-based businesses must look to connect multiple stakeholders across different industries through a marketplace model. One such example of this is ride-sharing apps that expanded into adjacent segments of food delivery and payments. Businesses at the digital ecosystem attacker level will utilize a multi-platform model, which can be transformed into a single source capable of offering products and services from different industries in one seamless, integrated experience.Businesses can define their business model as a digital ecosystem participant based on three archetypes, each defined by the stages of evolution within a digital ecosystem: the digital ecosystem pilot, platform, and super app or multi-platform.The digital ecosystem pilot archetype creates a coherent solution by digitalizing product capability with new functionalities through digital partnerships. It is orchestrated by the core firm, internal business units or its incumbents, and requires digital ecosystem adapters to launch.The platform archetype offers a single platform that seamlessly connects users and is orchestrated by single platform companies. This archetype requires digital ecosystem accelerators to launch.The super app archetype focuses on integrating several platforms into one service and captures user data from their integrated platform. This archetype is orchestrated by multiplatform companies with large investments or capital and requires digital ecosystem accelerators or attackers to launch.In the second part of this article, we will discuss the considerations in implementing and mobilizing the ecosystem. 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.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

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