September 2022

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.
26 September 2022 Victor C. De Dios and Josephine Grace R. Sandoval

Risk vs reward: Are VAT refunds worth it?

Most taxpayers generally have a negative impression of the process for seeking VAT refunds, whether from personal experience or from word of mouth. Some dread the many requirements that need to be prepared, as well as the challenges of having to file the claim, monitor its slow movement, and hurdle the strict scrutiny of BIR examiners. Others believe that the chances of winning approval are slim, and may just attract further scrutiny from the Bureau of Internal Revenue (BIR). For many taxpayers, the burdensome experience has discouraged them from pursuing repeat claims.Our lawmakers enacted the TRAIN law to address various tax issues, including institutionalizing an efficient VAT refund mechanism. The BIR then followed suit by issuing rules and regulations that streamlined the review process for refunds, which in part trimmed down the documentary requirements to support a claim. With these changes, many taxpayers were hopeful that the refund process would be eased.However, with denial of claims still a recurring topic of conversation, taxpayers ask themselves: is it really worth pursuing?THE COMPLEXITY OF VAT REFUNDS: WHAT HAPPENS IN THE BACKGROUNDTax refunds are complicated. Specifically for VAT refunds, claimants are faced with the pressure of being able to prepare the application package before a prescribed deadline. The package should be complete and accurate as they will undergo rigorous review by the BIR. True to its billing as a “mandatory audit,” the review is conducted every single time to cover all submissions. If the package is found to be lacking or non-compliant, the claim likely ends up in a denial, or worse, may trigger in the issuance of a letter of authority to formalize an assessment.The preparation alone can be daunting. Companies will usually designate a point person or team, typically within the finance or tax function, to retrieve records, sort them out, and prepare corresponding schedules in a timebound manner. The investment in time and effort will be significant, particularly if the same person or team also needs to handle equally important day-to-day functions while preparing the application.Filing the claim is an experience in itself. For reasons attributable to delayed preparation, companies almost always find themselves filing claims at or near the deadline. Often, the stress of rushing to the BIR for a routine “checklisting” prior to being stamped “received” can be a struggle, especially when the claim is refused acceptance for being incomplete. Time management and planning are crucial, although often, this just adds to the pressure of preparation.The difficult part is not even in the filing, but in the monitoring. After filing, the company, through its point person or team, needs to monitor the BIR’s review process, and this is possible only by way of effective coordination with the assigned BIR examiners and reviewers. From experience, the BIR can pose questions around the claim, which the company needs to quickly address or risk summary denial of the application. Questions can vary from legal basis to additional documentary support. By law, refunds are strictly construed against the taxpayer, and with this, the importance of addressing questions that cast doubt on the claim’s validity cannot be over emphasized.The VAT refund process is time-consuming and requires significant expense and effort — with no guarantee of return. Because of this, decision makers often have to make a tough choice between pursuing or forgoing their claims.In this situation, determining the best option for the company is never easy. Some would attempt to identify and quantify the possible risks, and then proceed to assess whether the possible grant of claim is adequate to compensate. Striking a balance between risk and reward, therefore, becomes vital particularly when the risks are outweighed by the rewards. However, the real issue lies in defining what “reward” really means. Is it simply the refundable amount, or can it be some other potential that can be unlocked in the process?In one of the breakout sessions in the recently concluded 1st SGV Tax Symposium held on Aug. 19, one of our authors delivered a presentation, “Balancing Risks and Rewards in VAT Refund Claims.” The main goal of the session was to get the message across that companies need to consider the balance of risk and reward, where risks are lowered by means of active preparation, and rewards are increased as a necessary consequence of the exercise. The rewards take the form of a grant or a seal of overall tax compliance.LOWERING THE RISKSActive preparation is very critical to the success of any VAT refund claim. In an ideal world, companies should strive to be proactively VAT refund-ready at all times. This can be done by developing and maintaining a well-organized record-retention system where relevant documents can be quickly and easily retrieved for package preparation. They can also conduct internal reviews to examine current levels of compliance and try to improve them by way of process improvement and suggested remediation. This exercise, incidentally, helps companies identify issues, giving them a preview of the actual refund process, and an opportunity to simulate and strategize for better ways to address issues raised in the process.To ease the burdens and demands required by the refund process on the persons tasked with preparation, companies can also explore outsourcing the task to tax experts who specialize in handling claims. The outsourced tasks are usually designed to be end-to-end to cover internal review, preparation of the refund package, filing, and monitoring. Having the guidance of tax experts also helps keep internal teams abreast of relevant laws, rules and regulations, and the current position of the BIR on certain issues. The interaction with tax experts inevitably leads to an overall improvement in internal teams, an investment in resources that lowers the companies’ risks over time.INCREASING THE REWARDSIt must be stressed that choosing to lower the risks by active preparation already tilts the balance in favor of successful refunds. By being VAT refund-ready, companies are likely able to resolve potential issues even before they ripen into real ones during the BIR’s review. Companies also get a better shot at presenting a complete set of documents and attending to inquiries that may be raised during the review. While companies envision the refund as the instant reward, they should also recognize that improved overall tax compliance will redound to more value for the company in the long term.THE FUTURE OF VAT REFUNDSThe BIR is already actively promoting the implementation of its digital transformation program through its new Electronic Invoicing System (EIS). With digitalization, stakeholders can look forward to a simplified VAT refund process, hopefully doing away with the need to submit voluminous hard copies of invoices and official receipts. The potential for a simplified process should make refunds more attractive to taxpayers. Digitalization is a change in process enabled by technology. It can be a complementary solution to easing the usual refund concerns relating to proper substantiation and adequate presentation.The recent granting by the BIR of VAT refund claims is certainly encouraging news and tax experts hope that it is a precursor of more refunds to come. Yet, while encouraging, this does not change the fact that the BIR will continue to adhere to the strict review guidelines required by law. More than ever, companies that intend to file refund claims should ensure that they are VAT-refund ready at all times, both to improve their chances as well as enhance their level of tax compliance. After all, as Benjamin Franklin once said, “failing to prepare is preparing to fail.” 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.Atty. Victor C. De Dios is a tax principal and Josephine Grace R. Sandoval is a tax senior director, respectively, of SGV & Co.

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19 September 2022 Cecille S. Visto

Ready to ride the digital wave

The current buzzword in tax is digital transformation. The business sector is well aware that riding the digital wave is necessary and inevitable. Companies that can leverage and successfully implement digital transformation — if they have not yet done so — have the distinct opportunity to seize new growth opportunities ahead of competitors and smoothly transition as government rolls out digital innovation initiatives.At the 1st SGV Tax Symposium organized by SGV & Co. and held on Aug. 19, digital innovation and business transformation were widely discussed by guest speakers and panelists, in alignment with the main theme, The Future of Tax.One of the highlights of the symposium was the presentation of BIR Commissioner Lilia C. Guillermo, which zeroed in on digital transformation in tax administration.Ms. Guillermo centered on the BIR’s 2030 digitalization vision, which is composed of four pillars: the strengthening of the BIR organization; modernizing the BIR digital backbone; enhancing policies, governance, and standards; and elevating taxpayer experience and innovating BIR services. In her presentation, she said digitalization is not a one-person show, but a long and deliberate process in which all stakeholders must be fully engaged.The BIR’s digital transformation program aims to transform the BIR into a data-driven organization through a digitally empowered and resilient workforce utilizing reliable, scalable, and robust digital technologies and infrastructure to innovate BIR services and elevate taxpayer experiences.During the Conversation with C-Suites session, which was moderated by SGV Tax Head Fabian K. delos Santos, executives from the logistics; information and communications technology (ICT); and property development and retail sectors emphasized that businesses must keep pace with the ever-changing digital landscape and prepare to harness the benefits of a truly digital economy.International Container Terminal Services, Inc. Chief Financial Officer (CFO) Rafael D. Consing, Jr., Converge ICT Solutions, Inc. Chief Executive Officer Dennis Anthony H. Uy, and SM Prime Holdings, Inc. CFO John Nai Peng C. Ong all acknowledged the paramount need for companies to equip themselves with the necessary tools to be ready for the digitalized mode of tax administration and enforcement.As the Department of Finance and Bureau of Internal Revenue are poised to adopt the electronic invoicing system (EIS), taxpayers — particularly those who have been selected to participate in the pilot program — must have readied their infrastructure for the EIS implementation.Mr. Consing said e-invoicing is a breakthrough project that is aligned with ICTSI’s own digital initiatives. The logistics company was among the early preparers, recognizing the benefits of digitalizing a portion of its finance function, mainly since it operates in various jurisdictions.E-invoicing could bring about ease of compliance for the private sector and at the same time, real-time monitoring on the part of the BIR. Compliance with the invoicing requirements for those seeking refund claims will also largely gain from electronic receipting.Mr. Uy, meanwhile, stressed the important role that the ICT sector will play in the government’s digital transformation.The digital infrastructure must be established to pave the way for wider broadband penetration and improved speed quality. Without a mature digital framework, full implementation of any digital endeavor may prove to be challenging.The discussion also delved into recent legislative changes that have had a major impact on business and are expected to foster a more vibrant economy.Mr. Ong said the passage of Republic Act 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, is lauded by the property sector, especially companies like SM Prime, which is engaged in nationwide mall operations and real estate development. Permit filings and securing of licenses were made more convenient, principally in areas where government agencies have set up satellite offices in malls.He cited other developments that will drum up more economic activity in the short- to medium-term, such as the liberalization of the Retail Trade Law and the harmonization of tax incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, including the publication of the Strategic Investments Priority Plan, which includes the establishment of smart cities.The retail sector, he said, will likely take advantage of the trade liberalization rules allowing foreigners to set up shop in the Philippines with lower investment requirements. The more relaxed rules are expected to encourage more direct investments into the malls. Mr. Ong added that smart cities can bring about progressive developments envisioned under the current administration’s socioeconomic agenda.ICTSI’s Mr. Consing said industries heavily immersed in science, technology, engineering, and mathematics should still be encouraged to sustain the country’s growth.Digitalization can also provide previously considered sunset industries with a new lease on life. Online selling, for instance, grew by leaps and bounds during the pandemic. Giving this sector access to digital infrastructure allowed it to electronically market and sell products, which was previously not widely available.All these economic activities will result in more taxable revenues and the corresponding taxes collected can be funneled back into the economy.While the digital shift may face challenges in areas where manual procedures have been the norm, executives are confident that these are only temporary. They, however, cautioned that there is a need for strong regulations to prevent any technological abuse.Even the BIR recognizes that true and lasting transformation will not be achieved overnight. Among the first steps that must be taken is to learn and build the capabilities of BIR examiners and personnel using a specialized BIR learning platform. The BIR wants to train and introduce its personnel to the industry’s best practices, including analytics and systems development, the establishment of a cybersecurity framework, enterprise architecture, advanced data warehouse solutions, and project management methodologies.Indeed, it will still take time before full digital compliance and monitoring will be the rule more than an exception. But both the public and private sectors need to gear up to ride the digital wave, which may be the only way to successfully navigate the business world in the foreseeable future. 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 EY or SGV & Co.Cecille S. Visto is a tax senior director and lead manager for the Entity Compliance and Governance Services of SGV & Co.

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12 September 2022 Fabian K. Delos Santos

The future of tax

In recent years, tax administrators have begun shifting their focus from being regulatory and tax-collecting to becoming transformational. This trend has been further accelerated by the exigencies of the COVID-19 pandemic. Tax authorities have harnessed the latest advances in technology, taking major steps to strengthen their organization and enhance the taxpayer experience. Integrating digital into modernization programs, designing customer-centric services, and fine-tuning age-old policies are at the heart of this global digital transformation — with improving compliance the ultimate objective.But the digital revolution is only one component of a multi-faceted tax ecosystem needed to drive much-needed transformational change.Taxpayers, regulators, and tax practitioners have crucial roles to play to make the Philippine tax ecosystem more transparent, accountable, and vibrant.With these goals in mind, SGV & Co. organized the 1st SGV Tax Symposium to bring in these stakeholders to share ideas, insights, and experiences that could help to further evolve our tax ecosystem. True dialogue, after all, starts from people coming together with a shared goal and common starting point.Aligned with the firm’s purpose of nurturing leaders and enabling businesses for a better Philippines, SGV Tax articulates its vision towards a sustainable Philippine tax ecosystem, where taxpayers are knowledgeable on tax rules and willing to comply. A sustainable tax ecosystem starts from the taxpayers, who can help build a culture of ethics with better tax knowledge and appreciation of their social responsibility and commitment to nation-building by paying the correct taxes.The importance of closely collaborating with regulators, who are business partners in achieving inclusive and resilient economic growth cannot be underestimated. When tax practitioners are armed with the necessary technical skills, while embracing the value of integrity, they foster an environment where taxpayers are compliant, employment soars, the Philippines becomes an investment haven for potential investors, and businesses flourish.We all want to see a more evolved, advanced and effective tax system. We all understand the critical importance of taxation to national socio-economic development. We all want a system that is fair, equitable and progressive, one that is less complex and more value-adding.At the SGV Tax Symposium, we shared the latest developments in taxation and the economy, in the hope of stimulating new conversations on where we want our tax system to go despite the many complex issues facing us today post-pandemic. Increasingly, tax is becoming the business and economic gamechanger in this period of recovery.The role of tax is particularly important given the priorities of the new administration, as discussed by various government leaders during the SGV Tax Symposium.National Economic and Development Authority Undersecretary Rosemarie G. Edillon kicked off the plenary sessions by discussing the recent economic performance and outlook, describing as the key to economic recovery the full reopening of the economy through well-crafted policies and programs. She also noted the risks to accelerated and sustained recovery, such as inflation, the fiscal deficit, and the slowdown in global demand.Trade and Industry Undersecretary Rafaelita M. Aldaba discussed competitiveness, innovation, and the 2022 Strategic Investment Priority Plan, touting the recent liberalization reforms and the push to attract more investment in science, technology, and innovation. She said the Philippines is ready to embrace more investment that will bring in new technology, innovative processes, and disruptive business models.​ She also assured investors of a conducive innovation and business environment awaiting them.​Representative Jose Ma. Clemente S. Salceda discussed the Department of Finance’s priority measures as well as the tax agenda that the House Committee on Ways and Means will focus on. He said Congress will study the feasibility of a 15% minimum tax on book income, address base erosion and profit-shifting through measures such as aggressive transfer pricing policies, and promote legislation that will allow the Philippines to gain a just share of global tax revenue.Bureau of Internal Revenue (BIR) Commissioner Lilia C. Guillermo focused on the digital transformation of tax administration. She outlined the BIR’s path to its 2030 digitalization goals, which comprise four pillars: the strengthening of the BIR organization; the modernization of the BIR digital backbone; the enhancement of policies, governance, and standards; and the elevation of the taxpayer experience via innovative BIR services. There are specific projects for each pillar, but the majority of the positive feedback was on the BIR’s planned implementation of convenient, fast, and reliable online or digital transactions in the areas of registration, filing, payment, audit and enforcement.Over the years, we have seen the progression of tax administration in the Philippines — from manual filing towards e-filing and e-payment and recently, increasing digital transformation. With the policy already laid down by both the BIR and the Department of Finance, supported by the Marcos administration, we expect to witness a rapid evolution of tax administration.From level 1 of the digital tax administration life cycle, the government is moving towards levels 2 and 3 with the impending full roll-out of the e-invoicing or e-receipting system (EIS). Under Levels 2 and 3, the focus will be on the real-time reporting of data to drive compliance and collection where tax authorities will have direct access to company data. In some instances, the BIR may allow taxpayer information to be cross-referenced and shared across agencies to eventually allow for the electronic audit and assessment of taxpayers.EY ASEAN Tax leader Amarjeet Singh and EY Asia-Pacific Tax Leader Eng Ping Yeo, who both spoke virtually at the event, agreed that digital transformation is necessary and choosing the right operating model, partners, and systems is key on the road to transformational success. However, a tax administration cannot transform on its own. It needs to, among others,  build in significant time for consulting and engaging with taxpayers and the private sector.The vital need for organizations to focus on digital transformation was further highlighted by executives from some of the major business groups, such as John C. Ong, Chief Financial Officer (CFO) of SM Prime Holdings; Rafael D. Consing, Jr., CFO of International Container Terminal Services, Inc.; and Dennis Anthony H. Uy, Chief Executive Officer of Converge ICT Solutions, Inc. They shared key insights into how their respective industries are gearing up as government embraces digital transformation.In our relentless effort to see our purpose come to life, SGV Tax has collectively envisioned what this Future of Tax could be. It is our hope that the SGV Tax Symposium has inspired all those who participated to pursue greater work and success, all towards the aim of a better Philippines.There is more work to be done as tax administration continues the shift to being transformational. More robust and involved discussions are expected in future SGV sessions. 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. or EY.Fabian K. Delos Santos is the head of Tax of SGV & Co.

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05 September 2022 Rossana A. Fajardo

How tech companies can stay agile in an uncertain world (Second Part)

Second of two partsTechnology companies are stepping into a new era of uncertainty as they develop their global operational models. Decisions on sourcing, supply chains, product and service manufacturing, and distribution are impacted by the accelerated changes affecting complex economic, political, and regulatory changes in the larger corporate environment.To better understand the additional risks and challenges that technology companies must deal with, EY undertook a global research study with 750 technology executives to help consumers comprehend what technology companies must do to flourish in a changing environment. Moreover, the EY Global Technology Sector team supplemented the findings with additional insights and recommendations.In the first part of this article, we discussed how technology companies need to withstand uncertainty, address critical regulatory issues, optimize their supply chains, and choose the right operating model.In this second part, we continue by discussing rethinking the workplace, focusing on continuous change, ensuring worldwide compliance and reporting, and adopting ESG commitments.RETHINKING THE WORKPLACEInertia and uncertainty are frequent obstacles to change. In a recent EY return-to-work study, roughly 54% of employees worldwide shared that if they were not given sufficient flexibility in where and when they work, they would think about leaving their jobs after COVID-19.Because of this, executives in almost all of the surveyed industry sub-sectors regarded employee satisfaction and well-being as the most crucial factor. Tax and other statutory requirements were ranked as having the highest priority by FinTech executives, followed by the capacity to access or manage labor and skills and employee satisfaction and well-being.When redesigning work, important factors to keep in mind include:• Examine what new opportunities will arise as a result of the new, more collaborative ways of working and how roles may alter as a result.• Check to see if the organization’s new working methods complement its mission, culture, productivity, and performance.• Determine how much space is needed and how it will be used, while making accommodations for at-home workplaces and technological enablement.• Consider the ramifications for payroll, regulations, corporate taxes, international employment taxes, and cybersecurity before making decisions.Technology businesses claimed they are also taking steps to address the evolving nature of work. Talent is an essential resource for the sector, with key performance indicators that include the availability of talent, employee happiness, and attrition rate.As a result of COVID-19, 87% of executives from technology businesses reported that their organizations had reduced the number of physical workspaces they occupy, and 66% intend to expand their employees’ alternatives for working from home during the next three years. In the post-pandemic context, new operating models and modes of working should successfully combine people, place, and technology, changing how people operate across numerous working environments while keeping essential values and cultural characteristics.FOCUSING ON CONTINUOUS CHANGETechnology firms will need a comprehensive and holistic global trade strategy through an agile operating model to thrive and accelerate growth in this continuously changing business environment. It must be able to adapt to changes in international compliance regulations, rethink its staff, and make a commitment to environmental, social and governance (ESG) needs. Every C-suite executive will have to ask themselves if their operating model is prepared to support new initiatives and propel future success in the face of an unpredictable future.Two out of three technology executives emphasized the need to be flexible and agile, as well as the need for plans to change their operating model over the next three years to serve both current and changing business needs. However, the question of whether they have the tools and systems in place to make changes in real time while considering the overall effects each discrete change will have on the financial conditions and operational effectiveness of the business remains to be answered.Overall, the executives surveyed indicated that the most important areas they will invest in as enablers to improve their operating models over the next three years are technologies and tools related to customer transactions, relations, and support (58%); supply chain optimization (53%); and supply chain transparency (45%). Majority at 64% intend to alter the organizational structure to enhance tax planning and financial reporting. Due to the increasingly complicated compliance and reporting requirements everywhere in the world, there is a demand for global visibility and risk management.ENSURING WORLDWIDE COMPLIANCE AND REPORTINGCompanies can use combined tax and financial operating systems to support their complicated requirements, which can be easier said than done and expensive for businesses that must continually adjust their own capabilities. To reduce risk and improve both visibility and efficiency, finance functions can utilize standardized methodologies and advanced analytics to stay ahead of the digital curve.Technology companies will have to keep these key considerations in mind to ensure effective worldwide compliance and reporting:• Adopt a coordinated strategy for adjusting global tariffs.• Reduce trade network costs, risks, and delays.• Create a solid data foundation to increase the effectiveness of reporting and compliance.• Leverage the proper technologies.Over the next three years, technology companies will restructure their operational models, prioritizing the commitment to a sustainable future. Nearly two-thirds of the IT leaders who participated in the EY survey agreed that ESG considerations were important when developing their operating model. Reduced shipping costs and energy consumption will also be crucial considerations in operating model design. Long-term sustainability and ESG value can be created by applying the appropriate strategy and optimizing the supply chain, capital allocation, and portfolio, as well as by developing assessment frameworks to measure both financial and non-financial outcomes.ADOPTING ESG COMMITMENTSThe relevance of ESG, agility, speed, and flexibility are also high on the agenda in specific areas of change and focus over the next three years. ESG emerges as a factor in changes to the supply chain and operations. By implementing the following actions, technology companies can achieve high sustainability performance while giving shareholders profitable returns:• Recognize the development and efficacy of the present ESG strategy.• Examine ESG opportunities, impacts, and risks.• Include ESG in your organization’s overall strategy.• Communicate with stakeholders and provide performance reports on ESG.ADAPTING TO HANDLE CONSTANT CHANGEThe one constant in the world economy and the technology sector is the unrelenting and accelerating rate of change. Even the most adaptable firms are finding it difficult to keep one step ahead in this era of extraordinary change, whether it be a game-changing breakthrough or a once in a thousand-year black swan occurrence.The EY survey discovered that technology company executives are frequently attempting to respond to concerns that impact their functional issues while continuously reviewing their business and operating models. Addressing the immediate problem instead of realizing that there will always be problems requires a comprehensive, holistic strategy to handle ongoing change and expand the company.The study also notes that changing the operating model to increase company resilience and concentrating on issues like ESG are not separate initiatives. Instead, in the search for technology businesses to become truly adaptive, these become guiding principles that influence practically all upcoming organizational change initiatives. These changes progressively extend into the connections between the key stakeholders of a technology enterprise, from suppliers to consumers. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

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