2019 Articles - Suits the C-Suite - Page 4 | SGV & Co. | EY

15 April 2019

Ramon D. Dizon and Smith Lim

Evolving to match future markets

Traditionally, businesses have used the term “markets” to refer to economies. Hence the terms “developed market” or “emerging market” are usually associated with countries at a certain level of development. However, given the changing times and consumer paradigms, businesses may need to shift their focus to smaller “markets.” Cities, for example, are expected to grow further. A United Nations study projects that by 2050, 68% of the world’s populations will live in urban areas, with corresponding effects on infrastructure and the environment, as well as consumption behaviors. Because of new technology and needs, consumers are already changing the way they work, live and play. Smart technology is continually transforming cities and consumers, as discussed in an EY article, “Will the next global market be a country, city or individual?” The article shares some insights from EY ASEAN and Global Emerging Markets Leader for Consumer Products and Retail Chandan Joshi on his predictions for future cities, businesses and consumers. THE CITIES OF THE FUTURE Technology has brought an unprecedented wave of transformation across the world, disrupting almost every aspect of life as we knew it. Even concepts as basic as money and finance, for example, are rapidly evolving with developments such as mobile cash, bitcoin and cryptocurrency, digital banking and online shopping. Tomorrow’s cities may evolve in very different ways, and be markedly different from existing ones. While city planning has always been the purview of the government, we will see increasing public involvement in city development in the future, especially as connectivity and data-sharing increase among consumers, governments, companies and infrastructure providers. Community-based and participatory approaches to designing future cities will become increasingly popular, as ready access to data raises awareness, understanding, and involvement in urban issues among citizens. We are already seeing this with some applications that rely on crowdsourced data such as Waze, which helps manage traffic flow in the city. We are also likely to have more areas shifting from multi-use to every-use. Currently, there are spaces where commercial and residential uses intermingle. It is very likely that future cities will have spaces where the lines will blur between work and leisure, retail and entertainment, personal and communal, which means that real estate providers will have to consider ways to make developments more multifunctional, flexible and modular to meet future needs. The rise of telecommuting and other flexible work arrangements will change the way people work, and the way spaces are utilized. The optimal use of scarce real estate space will become an increasingly important theme in the future. Higher levels of connectivity will also mean more virtual interaction, making it increasingly easier for people to form virtual communities that disregard location. As people come together due to shared values and interests, traditional marketing geo-demographic indicators such as age, gender, location, economic bracket and others will decrease in relative relevance. THE CONSUMERS OF THE FUTURE While physical and virtual boundaries continue to blur, and data and technology become even more integrated into daily living, the focus on individual consumers will likely remain constant. Even if virtual communities become the norm, consumers will still expect to be served as individuals, perhaps to an even more bespoke level. The traditional sources of customer insights that companies currently rely on, such as market surveys and focus groups, may rapidly become obsolete when customers expect customized service based on their meal plans, exercise needs, social activities, medical conditions and other personal data. With the increased use of data infrastructure and analytics, future businesses may be able to identify the precise needs of consumers in real-time. One example of such services was explored in London and Los Angeles, where participants in an EY FutureConsumer.Now program looked into the potential of vitamin-fueled, bespoke energy shots tailored to specific individuals based on their nutritional needs, and manufactured at point of sale using recipes that leverage real-time biometric data. Imagine the possibilities where you can walk into a shoe store and have footwear made-to-order on the spot quickly using 3D printing technology or similar platforms. Additionally, we are already seeing how more and more consumers are transitioning to subscription or shared models, such as with ride-sharing, content-sharing, homesharing and similar platforms, rather than direct ownership. Consider the recent announcement by Google of its Stadia gaming service, which allows consumers to access game libraries online without needing to purchase their own gaming consoles or expensive computer setups. As more people buy into the sharing economy in the future, there may be increasing demand for such services as pay-to-wear apparel lines, pay-to-use sports gear or even furniture. This also poses an increasing challenge for companies to make the consumer experience as convenient and pleasurable as possible. THE BUSINESSES OF THE FUTURE While technology is disrupting all industries and sectors, it is likely that the greatest impact will be on consumer products and retail. Many consumer goods companies today are already proactively adapting to change by further individualizing their products and services to scale. However, many companies also still need to invest in their data infrastructure, analytics capabilities and supply chain flexibility. Supply chains of the future will need to be more agile, not just in terms of managing demand and developing product innovation, but also be able to address the real-time needs of customers, as captured and interpreted by their data analytics capabilities. Some companies may need to restructure and decentralize operations to be more neighborhood-based. While this means serving a smaller number of consumers at a time, it also means increasing customer satisfaction. Shifting from macro to micro markets may also have an impact on resource allocation and sustainability. This highlights the possible need for businesses to develop more resource-sustainable products, while at the same time leveraging sophisticated technologies like blockchain to streamline and better manage operations across their entire network. THE FUTURE IS NOW The greatest change for companies to undergo is not in terms of their operations, but in their mindset and cultures. They need to see the future as bringing yet-unforeseen opportunities, rather than unanticipated threats. They need to see that consumers no longer just buy products, but buy experiences. The key is to BE the change leader, rather than a victim of change. By being at the forefront of innovation, companies can take an active and significant role in shaping the world for future consumers, possibly leveraging on technology to develop new solutions or even uncover new and untapped markets that may not even exist yet. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Ramon D. Dizon is the Transaction Advisory Services (TAS) leader of SGV & Co. Smith Lim is a TAS senior director at SGV & Co.

08 April 2019

Maria L.V. Balmaceda

Entrepreneurs inspire!

Every two years, the Entrepreneur Of The Year (EOY) Philippines program stages a road show to announce the start of the nomination period for entrepreneurship awards. In our recent road shows in Cebu and Davao, the local reporters were curious to know our observations on entrepreneurship in the country since we launched the awards in 2003. This was a good point to reflect on after 16 years of celebrating the best among Filipino entrepreneurs. It would be best to go back to the very start when we introduced the program. The biggest challenge then was to define who or what an entrepreneur is. The prevailing notion at the time was that we were referring to people who run buy-and-sell enterprises or “mom and pop” stores. Of course these are entrepreneurs by all means, but it was a limited view of entrepreneurship. In our view, the entrepreneur has evolved. SO, WHAT IS AN ENTREPRENEUR? Entrepreneurs include both founders of companies and those who organize, manage, and assume the risks of a business or enterprise in the companies’ life or development. They are active in the leadership of the company. This definition applies to a wide range of people. Traditionally, the entrepreneur is the Chief Executive Officer (CEO) and founder of an organization. However, the definition nowadays has been stretched to include CEOs who come on board to join an existing business. In select cases, the CEO/President of a subsidiary of a company may also be considered an entrepreneur. Entrepreneurs can also be multi-generational as with family businesses that are passed from one generation to the next. Whether the entrepreneur goes by the traditional or expanded definition, the key is that he or she finds creative and venturesome ways to acquire capital resources, build their team, and innovate to achieve their goals and to grow their business. For family businesses, the next generation of leaders should exhibit their own form of risk management and make their mark on the business. All in all, entrepreneurs are those who create value for themselves, their employees, their customers and their communities. HOW ABOUT A SOCIAL ENTREPRENEUR? And speaking of communities, we used to get asked a lot about what it means to be a social entrepreneur. Would an entrepreneur who runs a feeding program in his or her community, donates to charities or provides scholarships qualify as a social entrepreneur? In fact, when the program started in 2003, we had an award category called “Socially Responsible Entrepreneur.” The winners were recognized for their strong Corporate Social Responsibility (CSR) programs. However, sometime in 2006, we collaborated with a global social entrepreneurship nonprofit organization that helped us set the qualifications for one to be considered a social entrepreneur. We then included a Social Entrepreneur Award to refer to people who run businesses that are for-profit or non-profit and whose “approach to social and environmental challenges applies innovation, creativity and resourcefulness to create opportunities for social transformation.” These are enterprises that specifically address social issues such as poverty and the environment with sustainable solutions, not simply those with established CSR programs. After a few years, the category ceased to be a stand-alone award because we had seen how many entrepreneurs have embraced social entrepreneurship, embedding it in their organizations. WHAT ELSE? In the past 16 years, we have also seen the increased participation of women entrepreneurs. While we are aware that there are numerous enterprises founded and managed by women, there were times when women entrepreneurs were underrepresented with as few as one qualifying as a finalist. However, there has been a growing network of women entrepreneurs, perhaps spurred on by the more visible advocacy for gender parity. Younger entrepreneurs are also now more participative in the program, which is worth encouraging. With the advent of social media and online businesses, we have seen how many among the younger generation have boldly taken on entrepreneurship as their career. When we launched the Entrepreneur Of The Year Philippines in 2003, very few schools offered programs in entrepreneurship. Today, it has become a popular degree choice among college students. BUT SOME THINGS NEVER CHANGE Entrepreneurs may differ in responsibility, age, approach or gender but we’ve also noticed that there is some consistency in being an entrepreneur. Regardless of the times or circumstances, entrepreneurs remain passionate about their dreams. They are innovators who may have a single idea that can spark a business evolution, create new possibilities or disrupt the status quo. They are inherently visionaries who leverage new ideas to challenge old paradigms and seize opportunities to develop enterprises that have the potential to transform industries and support economic growth. They are dedicated and hardworking. They have stories to tell and these stories inspire others to become like them. Back in 2003, our nominees would submit reams of documents that we needed to hold in balikbayan boxes. But times have changed indeed because we ourselves have gone paperless. Nominations are now in sync with the digital world. By simply visiting https://geoy.ey.com you can help us recognize and celebrate our world-class Filipino entrepreneurs. Entrepreneurs inspire us, and that never changes. *** Nominations to the Entrepreneur Of The Year Philippines 2019 will be accepted until May 31 2019. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Maria L.V. Balmaceda is Senior Director of SGV & Co. and Program Manager of the Entrepreneur Of The Year Philippines.

01 April 2019

Anna Maria Rubi B. Diaz

New lease accounting standard: the road to adoption

The new lease standard under Philippine Financial Reporting Standard (PFRS) 16 has been effective for annual periods beginning on or after January 1, 2019. One of the significant changes brought about by PFRS 16 is in lessee accounting, as it requires most leases to be recognized on the lessee’s balance sheet by recording a right-of-use asset and a corresponding lease liability. For many entities, the effects are not limited to the accounting implications but also encompass areas such as lease procurement and negotiation, contract administration, financial statement processes and controls. Entities have embarked on activities to assess the impact of PFRS 16 on their businesses and implement the requisite changes. We share below what many of the financial statement preparers have gone through in their PFRS 16 voyage. ESTABLISHING PROJECT STEERING COMMITTEES AND WORKING GROUPS As part of the governance and implementation processes, entities have established project steering committees and working groups. The steering committee generally provides overall direction and guidance, resolves issues, and monitors the status of the project and approves project deliverables. The working group on the other hand performs overall project management and coordinates with working teams, business units, advisors and other project stakeholders. UNDERSTANDING THE LEASE ACCOUNTING CHANGES AND CURRENT STATE As one of the critical initial steps, entities have acquired an understanding of PFRS 16 either through formal training, discussions with advisors, or knowledge transfer sessions. Aided by this knowledge, entities then conduct current state assessments vis-à-vis the changes brought about by PFRS 16 around identification of leasing activities, distinguishing lease arrangements (including relevant contract terms) and understanding lease administration tasks. The current state assessment allows entities to determine the degree of impact on the areas affected by the lease arrangements. REVIEWING LEASE ARRANGEMENTS The project working groups review the agreements based on the requirements of PFRS 16 and considered any required changes. Many entities have depended on spreadsheets, particularly for the following: Lease arrangement database — Entities develop spreadsheets which document, at a minimum, the counterparty, lease term (considering the impact of lease renewal options and termination clauses where present), lease amount (considering variable lease payments that are in substance fixed where applicable) and other relevant data that were needed for the lease computation. Computation of lease income expense — Entities develop macro enabled spreadsheets to compute for the requirement of the new lease standard especially the impact for lessee accounting. While spreadsheets might be helpful to some, there are also electronic or automated solutions that are more responsive to processing voluminous contracts, such as for those with many leased branches like quick service restaurants, banks and those in retail. As this process is manual in nature, administratively burdensome and prone to errors, it exposes the entities’ operational process and financial reporting risks. To address these, some entities have turned to better solutions using web-based tools, computer programs or artificial intelligence (AI). One example of a tool that uses AI to support entities lease accounting approach is the EY Lease Reviewer. The EY Lease Reviewer uses AI or machine learning, which can help improve the assessment of a large number of lease arrangements. It helps entities to identify and extract relevant contract clauses in adopting PFRS 16 such as the lease amounts, and terms including renewal options and termination options. In finding the right tool in reviewing the contracts, entities check whether the tools supported adequate internal controls and processes applicable to their businesses. IDENTIFYING GAPS AND QUANTIFICATION OF IMPACT Entities identify the gaps between PFRS 16 and PAS 17 which was the legacy standard. They then prepare a gap report that show the results of their implementation. This report summarizes their assessments of the impact and the key items that the entities have to change on their processes and policies. The gap report also serve as the basis of the entities’ results of their quantification. UPDATING PROCESSES AND INTERNAL CONTROLS Some entities took the adoption of PFRS 16 as an opportunity for them to modify their current processes and controls. One example is the centralization of the lease arrangements into one repository. Since most of the lease liabilities under PAS 17 were recognized off books by the lessee and thus, might not be centrally monitored, lease arrangements might often be stored in different locations and handled by different persons or departments. The transition to PFRS 16 is not only beneficial to the accounting and finance functions. Other departments such as procurement, general administration or treasury might also benefit from the centralization — since the critical information would have become readily available (e.g., renewal terms, critical payment dates, etc.). Furthermore, entities would have updated the documentation of the related processes and internal controls that were affected by PFRS 16 to aid in its business as usual. LESSONS LEARNED Success in adopting an accounting change depends on the entity’s state of readiness. Entities must proactively consider their current state, the steps needed for compliance and the processes by which they need to transition to any new accounting standard. This demonstrates the importance of not being resistant to change; but instead, embracing and learning from it. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Anna Maria Rubi B. Diaz is a Financial Accounting Advisory Services Senior Director of SGV & Co.

25 March 2019

Christian G. Lauron and Abner E. Serania

A New Green Revolution: The Green Bonds Part 2

(Second of two parts) In the first part of this article, we discussed some of the environmental consequences brought on by the rapid increase of infrastructure and economic development in the country. Although the Philippines maintains the lowest ecological footprint in ASEAN, growing overconsumption, unregulated production, and waste mismanagement all contribute to the environmental burden on the land. One method to increase the impact of environmental protection and sustainability involves grassroots efforts not just from private citizens, but from organizations, local communities, and Local Government Units (LGUs). Although there is a lack of funding on this front, the Department of Finance (DoF) has begun urging its Bureau of Local Government Finance to strengthening LGU fiscal autonomy. To be discussed further are the use of green bonds as an alternative funding source, which can encourage self-reliance and project autonomy, how green bonds are structured, and how they can be adopted for local implementation. Like conventional bonds, green bond prices are also driven by interest rates, credit risk, foreign exchange markets, market perceptions of liquidity, and supply and demand. As interest rates increase, bond prices decrease. Moreover, the required return for investors tends to increase as the credit risk assessed to the issuer increases. Also affecting bond pricing are the anticipation of the project’s success and backup plans for future business opportunities. All of these are taken into consideration in calculating bond return. Slightly deviating from a conventional bond, other additional terms and characteristics of a green bond — whether it is a floating rate, cancellable or callable — also affect its price. Further studies from Harvard Business School show that most US municipal green bonds are issued at a premium, where after-tax yields are six basis points lower than a conventional municipal bond. It makes sense to encourage more investors to invest, although most green bonds are generally oversubscribed. Since the first green bond issuance in 2007, investments in green bonds have increased in recent years, with the International Finance Corp. (IFC) a unit of the World Bank Group, reporting an annual additional $1-trillion investment. While the creation of the green bond seems to follow conventional bond creation, evolving guidelines have been published across different markets around the globe to guide the creation and issuance of these bonds. It also provides a clear distinction for green bonds since investors demand identification. Under the Climate Bonds Initiative, a four-stage bond certification process needs to be passed: project identification, bond structuring, transparency on use of proceeds, and screening of credentials. Furthermore, the International Capital Market Association has issued green bond principles aimed at streamlining voluntary guidelines in creating and issuing a ‘credible’ green bond. In the Philippines, the Securities and Exchange Commission (SEC) has adopted guidelines from the ASEAN Green Bond Standards (AGBS) to improve an awareness and appetite in capital funding for green projects in the ASEAN region. It outlines rules and procedures for issuing ASEAN Green Bonds in the country starting with: – The identification of eligible green projects, excluding fossil fuel power generation from the list; – Clear documentation of the utilization of proceeds; and – Proper establishment and disclosure of project selection and evaluation. Management of proceeds must also be disclosed, where net proceeds must be tracked and adjusted periodically to match allocations required. Lastly, there should be an annual report on the projects done with their corresponding resource allocation. APPETITE FOR GREEN BONDS In the Philippines, the first green bond was issued in 2016 by Aboitiz Power Corp. Banco de Oro Unibank followed in December 2017. In 2018, a locally denominated green bond emerged through the $90-million loan issued by the IFC for Energy Development Corp.’s (EDC) geothermal energy generation output. This is just a piece of the $30-billion funding requirement for the energy sector in the Philippines. Both public and private sectors have already begun gently nudging investors and issuers towards the green bonds market, as can be observed with the SEC’s recent adaptation of the AGBS, and the 2018 Philippine Investment Forum’s discourse on the future of green bonds. However, though the returns are fairly comparable to that of a conventional bond, issuers hesitate at the cost of additional requirements of the “green” label. Thus, where investors seek to ensure they invest in truly green projects, issuers look at it as a burden to consider. In the Philippines where the preliminary and strongest of impacts of climate change can be felt through intensifying typhoons and unusual flooding brought by rising sea levels, green bonds can be a way for the national government and the LGUs to raise funding for climate change mitigation and resiliency projects through proper waste management, waste-to-energy, and resilient infrastructure initiatives. This is the case in the US where municipal bonds were expected to increase to $15 billion in 2018, up 43% from 2017 based on S&P Global Ratings report. Given that the country requires much financing for its programs, green bonds can potentially tap into the $36-trillion market. After the SEC adopted AGBS, green bonds are now being seen as potential investment vehicles that can ease the flow of funds between needing LGUs and willing investors. They may be viewed as alternatives to the typical fund-raising avenues of the LGUs such as loan applications to Government Financial Institutions that are backed by their respective Internal Revenue Allotments to augment their income. Given that such bond issuances have additional (and more tedious) requirements, the national government must also be able to extend technical assistance to such LGUs willing to explore this fund-raising track, through the BLGF. Strides can be taken to foster widespread awareness of the key role green bonds can play in securing the sustainable development in support of the country’s economic and social growth. However, as in all worthwhile initiatives, it will require close and intense collaboration among the government, the private sector, and the country’s banking and capital markets. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Christian G. Lauron is a Partner and Abner E. Serania is a Senior Associate of SGV & Co., respectively.

19 March 2019

Hemant M. Nandanpawar and Arielle Nicole R. Papa

A New Green Revolution: Green Bonds Part 1

(First of two parts) The Philippines’ GDP growth has maintained a relatively stable upward trend over the last decade. Regionally, the archipelago continues to outpace most of its neighbors, maintaining an average annual growth rate of six to seven percent in the last seven years. The driving force behind this economic and developmental progress is the reinvigoration of the national government’s investment in public works, health and education infrastructure, and improved public financial management. However, the effort and resources expended towards the modernization and overall development of the Philippines still falls short in one key consideration — climate and environmental resilience and the sustainability of these infrastructural pursuits, and of the overall development and growth path of the country in its entirety. Post-liberation, the Philippines has followed traditional development pathways that — while conducive to basic economic objectives of expansion and growth — are inherently unsustainable to the landscape and the environment. As of 2018, the manufacturing sector has contributed over a quarter of all value generated within the economy. Partnered with the increased activity in infrastructure development, and the resulting rising demand in land, resources, and energy, the economic activity of the country continues to exacerbate the environmental burden of sustaining day-to-day operations. Despite maintaining the lowest ecological footprint among its neighbors in Southeast Asia, the rapidly-growing incidence of overconsumption, unregulated production, and lack of a solid waste management framework have significantly amplified the population’s strain on the country’s natural carrying capacity. Since the 1960s, the country’s resource demand has more than doubled, and the resulting Greenhouse Gas (GHG) emissions have grown by a whopping 67% since 2007. Waste management remains another critical shortcoming. As of 2015, the Philippines has become the third-largest source of plastic pollution, directly affecting the rapid degradation of local marine life. A more direct and dire consequence of waste management malpractice is experienced during typhoon season, where major flooding across cities becomes a common and unfortunate occurrence. Linked to that are several other issues in energy, transportation, resilience, agriculture, and overall social and environmental welfare. Although bleak, it is certainly not too late to turn the tide against this lack of environmental awareness and integration. A hopeful study carried out by the United States Agency for International Development (USAID) shows that despite the rapid growth in GHG emissions, emission levels were just over a third of GDP growth for the same period, indicating the potential for notable improvements in the future. The responsibility of this environmental and climate change rehabilitation will need to fall on the collective shoulders of the public sector, private corporations, and most importantly, the citizens themselves. On that note, the most impactful and sustainable approach to environmental protection, climate change mitigation, and adaptation, often begins at the grassroots level — within organizations, localized communities, and even at the Local Government Unit (LGU) level. The bottom-up approach starts off simple, but it ultimately allows the target beneficiaries to create sustainable solutions that are tailored to their particular needs and context. The lack of financing, however, limits the potential for green growth and development. As an example, financing for LGU-led projects is sourced predominantly from government Internal Revenue Allotments (IRAs), which, depending on the size of its municipalities, make up 50-70% of their respective budgets. In response, the Department of Finance has been urging the Bureau of Local Government Finance to take more steps in strengthening LGU fiscal autonomy. At the moment, the push directing Public-Private Partnership and Overseas Development Assistance financing towards local governments has significantly increased funding pipelines for LGU-initiated projects. There is an opportunity to further accelerate this through the use of green bonds as an alternative funding source, which in turn can foster self-reliance and project autonomy. Through this, the investment can empower the community to learn, do, and offer more, leading to great growth potential. Within the private sector, green bonds may help incentivize the correction of negative environmental externalities within established operations, such as in energy efficiency improvements, pollution controls, and energy mix diversification. As most of these pursuits emphasize impact over profit, traction for their growth has been weak, in spite of the obvious benefits and pressing need for active action in striving for green infrastructure. In the second part of this article, the discussion will delve towards the structuring of green bonds as well as further opportunities for local adoption. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Hemant M. Nandanpawar is a Senior Director and Arielle Nicole R. Papa is an Associate of SGV & Co., respectively.

11 March 2019

Katrina F. Francisco

How non-financial reports can tell your value creation story

Of late, a number of companies in the Philippines have been releasing non-financial reports, either called “Environmental, Social and Governance (ESG) Reports,” or “Integrated Reports,” or “Sustainability Reports.” However, these are not yet mandatory. In fact, it was just recently that the Securities and Exchange Commission (SEC) released Memorandum Circular No. 4, which provides the sustainability reporting guidelines for publicly-listed companies on a “comply or explain” approach for the first three years of implementation, starting with the 2019 reporting period. In the absence of a reporting requirement, a key driver that has influenced companies to disclose non-financial information has been the demand from their investors for such reports. In the past four years, EY Global has been commissioning the Institutional Investor’s Custom Research Lab to conduct surveys with institutional investors around the world, to assess if non-financial information plays a role in their decision-making. According to the 2018 EY Global Climate Change and Sustainability Services study, “Does your non-financial reporting tell your value creation story?,” ESG information is now considered an essential criterion for investor decision-making. Investors have come to understand the significant link between ESG factors and a company’s performance and long-term value. INCREASING RELIANCE ON ESG A high of 97% among the investors surveyed in 2018 said that they evaluate, whether formally or informally, the non-financial disclosures of target companies. Risks related to governance, supply chain, human rights, and climate change are some of the main ESG factors that they look into. In the previous year’s report, only 78% undertook reviews of non-financial disclosures. The dramatic increase is mainly a result of widely-known scandals related to poor corporate governance, more data showing the impact of climate change on business, and an increasing awareness of the social impact of business. DEMAND FOR MORE CONSISTENT DATA The quality and relevance of disclosed non-financial data vary considerably by company, industry, and region, with 56% saying that the disclosures are either lacking or not available for any meaningful comparison to take place. Investors now want to see more comparable data at specific points in time, as well as over a period of time, which allows them to evaluate progress within a company and identify the leaders and laggards within an industry. In addition, investors note that there are extensive disclosures relating to governance policies and practices, yet they often overlook discussions on accountability in relation to non-financial information. Investors want to see not just the current practices, but also management effectiveness on these non-financial metrics over a short, medium and long-term basis. IMPROVING THE RATE OF DISCLOSURE Investors agree that ESG disclosures have improved significantly over the years, especially in the area of governance, which is largely driven by exchange-listing or accounting requirements. Additionally, investors perceived that 82% of the companies they do invest in are actually able to assess materiality of governance factors properly. However, only 64% of the companies they invested in actually assessed social factors properly, and only 11% of these companies properly assessed environmental factors. The surveys indicate positive growth in the area of ESG disclosures, although the numbers also show that the concept of materiality in relation to ESG factors and sustainability still has a long way to go before majority of them comprehend and integrate them into their business practices. CONCERN OVER PHYSICAL CLIMATE RISK Given that the risk from climate change is one of the main factors investors scrutinize, a majority (around 70%) indicated that they will closely evaluate disclosures relating to the physical risks of climate change in their investment decisions and allocations over the next two years. Without disregarding transition risks, 47% of the investors said that they will also consider these risks of adjusting to new regulations, practices, and processes. Investors are apparently keen on how board members and senior management intend to exercise oversight around these risks, especially if they are material to the business. NEED FOR INVESTMENT-GRADE ACCOUNTING STANDARDS AND COLLABORATION Of the survey’s respondents, 59% of investors saw the need for more prescriptive accounting standards for non-financial information. The investors recognize that since they are not experts in every industry, they need to adapt and try to establish the material factors for each industry with focus on those that mitigate risks and create value for business. However, quantifying those risks and translating them into financial terms can be challenging. This is why investors believe it is critical to develop a common standard that has enough flexibility to allow companies to report what is material to them and their respective industries. This way, they will be able to compare, establish benchmarks and spot trends relevant for their decision-making. Investors are confident that this can be realized when there is greater collaboration among regulators, trade groups, NGOs and even among themselves. The collaborative effort will assist investors in defining what are most substantial to a company’s long-term sustainable growth. NEXT STEPS The report recommends four key areas that companies should consider to effectively articulate what investors are looking for. First, establish a structured materiality analysis process that allows companies to: * Set strategic objectives and overall corporate strategy; * Define the issues that will be covered in disclosures and reporting; * Design Key Performance Indicators (KPIs) to enable measurement of performance; and, * Align ESG risks with the risks managed and prioritized by business for a more cohesive sustainability risk management. Second, since the materiality process allows companies to see where the largest impact can be made, appropriate methods to measure and report the social and environmental outcomes should be properly identified. Third, identify the KPIs that would translate risks and outcomes into financial proxies for investors to assess the risks and long-term value creation process of the companies. Last, continue to engage with investors and other stakeholders and report more comprehensively on material non-financial information for a better understanding of how they are creating long-term value. With the increasing global focus on environmental issues and corporate social responsibility, and now additional compliance pressure from SEC MC No. 4, Philippine companies with robust ESG reporting policies may find themselves reaping more significant long-term economic, social and reputational benefits. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Katrina F. Francisco is a Senior Director for Climate Change and Sustainability Services (CCaSS) under Assurance (Service Line) at SGV & Co

04 March 2019

Josef Pilger and Christian Lauron

Revitalizing retirement, pensions and social security Part 2

(Second of two parts) If we evolve our thinking about social security, pension, retirement and voluntary savings, could we deliver better socioeconomic outcomes for the Philippines and improve the financial well-being of millions of Filipinos? In the first part of this article, we discussed the existing social security, pension, retirement, and voluntary savings mechanisms in the Philippines. While these already provide great benefits to many Filipinos, these systems can still evolve to become more modern and efficient. By revisiting our social security and pension frameworks, they hold the potential to grow into powerful savings and economic engines which can proactively support the development of our national economy. We also discussed the nine key, systemic dimensions that were identified in EY’s global framework for social security, pension, retirement and voluntary savings. PUBLIC AND PRIVATE SECTOR COLLABORATION CAN LEAD TO BETTER OUTCOMES Many countries increasingly leverage the experience and capabilities of domestic and global financial services organizations to accelerate the evolution and growth of national savings pools. In the key anchor “faster, better, and cheaper,” outcomes and delivery are often applied to those products and services that the government considers less as core tasks, relegating them to enablement. Employment-based and customer-based voluntary pension, retirement, and savings systems are often delivered by financial services providers in the private sector. But the government’s interest is in the outcomes and conduct of those solutions. They must encourage concurrent development of contextual parameters to ensure that sustainable, predictable values are delivered. Community expectations are high. The government must ensure that the joint delivery of such values is in the best interest of the customers and the overall public. Some possible areas where private financial service providers could add value: financial inclusion; financial literacy and advice; digital customer and employer retirement platforms; data and payment enablement; investment, life insurance and other similar products and services; operating broader financial well-being ecosystems; and providing access to leading practices, solutions and capabilities supported by relevant experiences in both local and global markets. Naturally, there are also certain contextual elements that must be established to deliver sustainable value. Examples of this are robust management and governance systems that can handle possible conflicts of interest; meaningful deterrents for poor behavior and outcomes; clearly defined roles with effective monitoring and scrutiny protocols; appropriate incentives that are aligned with reasonable compensation; and a deep and mutual long-term commitment to service. The collective, direct benefits from evolving and expanding social security, pension, retirement, and voluntary savings solutions will be significant for all stakeholders. The indirect benefits from a deeper and broader capital market can enable the funding of more extensive and long-term infrastructures in the country. However, the transformation process will require effort and three very important steps: 1. A thorough understanding of the current situation; 2. A comprehensive analysis of options and their qualitative and quantitative socioeconomic stakeholder impact to determine the desired next evolution stage; and 3. An implementation road map that systematically converts policy aspirations into member and economic outcomes. To help us better understand what is needed to evolve our current systems, we should consider some relevant questions, such as: 1. What social contract do Filipinos expect from the government? What are the strategic objectives of our social security, pension, retirement, and voluntary savings systems? What are our measures of success to expand public confidence? How do we measure up today against delivering the objectives? 2. What are the roles of the existing providers and solutions against the strategic objectives? And what oversight, governance, regulatory, and accountability frameworks and mechanisms do we need to effectively align and ensure each piece delivers against short and long-term expectations? 3. How do we systematically expand inclusion and participation in the existing solutions? What additional and refined solutions do we need to achieve our strategic objectives? 4. What are the short and long-term costs, benefits, and risks for the government and the ordinary Filipino citizen to evolve the current state of the country’s social security, pension, retirement, and voluntary savings systems? What are the risks of doing nothing? 5. How could we further improve efficiency and effectiveness of existing providers and solutions? How can we explore collaboration and shared services solutions to future-proof delivery, while enhancing member and employer outcomes and experiences? 6. What would a sustainable plan to gradually close the funding gap of the three, existing government-based solutions to ensure fiscal budget predictability, and long-term financial system sustainability look like? 7. Would the existing systems and mechanisms and their members benefit from Shariah-compliant products? How would we design and implement such products? These are just some of the initial questions we need to raise, and ultimately address, for our pension mechanisms to grow even more fruitful for the benefit of hardworking Filipinos. Regardless of status and sector, the primary goal of every citizen is to create a prosperous life. The conversation must continue on this front by asking more questions, and raising potential solutions in other related subjects. There is some interest in areas concerning private pensions, as envisaged by PERA (Personal Equity Retirement Account), the rise of digital and micro pensions, the convergence of advice and wealth and pension, and the role of pensions in infrastructure investments. Encouraging collaboration between the public and private sectors may eventually result in productive solutions that can address these and other questions. It is envisioned that a partnership between government and private industry will spur dialogue for a more detailed and developed framework on our existing saving mechanisms. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Josef Pilger is EY’s Global Pension and Retirement Leader. Christian Lauron is an Advisory Partner from SGV’s Financial Services and Government and Public Sectors.

26 February 2019

Josef Pilger and Christian Lauron

Revitalizing retirement, pensions and social security Part 1

(First of two parts) If we evolve our thinking about social security, pension, retirement and voluntary savings, could we deliver better socio-economic outcomes for the Philippines and better financial well-being for millions of Filipinos? SUSTAINABLE ECONOMIC PROSPERITY REQUIRES A MATURE CAPITAL MARKET FUELED BY SAVINGS The Philippines has been experiencing a long period of unprecedented growth and prosperity. At the same time, its young population offers a temporary demographic dividend. However, the capital needed for infrastructure to further spur the country’s economic growth is lacking and has exposed an area demanding additional evolution: the depth and breadth of the country’s capital market constrained by limited sources of long-term savings to enable sustainable domestic funding. More evolved social security, pension and retirement systems, and long-term savings are the most effective and sustainable answer. We should note that there are many relevant regional and global success stories. Both Singapore and Malaysia used substantial savings generated by mandatory social security, pension and retirement systems to support their creation of deep and broad capital markets, which in turn enabled economic prosperity and infrastructure evolution. Even in the United States, a significant share of the fuel for the country’s capital market originates from public and private pension, retirement and voluntary savings. This article focuses on government-driven solutions. Future articles will cover private retirement and savings. EVOLVING EXISTING SOCIAL SECURITY AND PUBLIC PENSION The Philippines has three well-established mechanisms, two of which already rank among the country’s largest institutional asset owners. But various challenges currently limit maximizing savings, which in turn limit positive capital market and funding effects. 1. Social Security System (SSS): Mandatory contributions from participating Filipinos provide pension, retirement and related benefits to more than 36 million Filipinos globally. Long-term sustainability and funding gaps are exacerbated by significant challenges to nudge more Filipinos, mostly from the informal sector, to participate and contribute. Benefit adequacy and administrative efficiency challenges are also heavily impacted by common manual processing limits, available savings and increased cost to service. Additionally, regulatory investment restrictions result in lower than expected average investment returns. Improvements could both increase savings and returns while reducing cost to service. However, change requires all stakeholders (including members and employers) to collaborate. (Note: Republic Act No. 11199 or the Social Security Act of 2018 was signed by the President on Feb. 7). 2. Government Service Insurance System (GSIS): Mandatory contributions from most public sector and government employees provide benefits to more than 1.5 million members, but benefits adequacy remains insufficient. Long-term funding gaps and administrative efficiency challenges impacted by common manual processing and lack of standardization across various government agencies offer improvement opportunities. Similar to the SSS, regulatory investment restrictions result in less than expected average investment returns. Progressive changes could significantly expand available savings and member outcomes. But that change requires the collaboration of all stakeholders including members and government agencies as sponsoring employers. 3. Military retirement and separation benefits: Annual budget appropriations fund this mechanism. However, the rising longevity of military personnel drives benefits costs, which makes this pay-as-you-go solution a growing burden for Government’s annual budget. Benefits are accumulated over 40 years without any dedicated system assets. Therefore, enabling long-term financial sustainability will require a systemic solution. These three existing saving mechanisms provide a sound starting point to evolve into a necessary comprehensive and modern social security, pension, retirement and voluntary savings solution that aligns with the Philippines’ current and future socio-economic strengths. Such a solution acts as a savings engine that will fuel the capital market, attract more foreign investors and increase employment and prosperity. A GLOBAL FRAMEWORK FOR SOCIAL SECURITY, PENSION, RETIREMENT AND VOLUNTARY SAVINGS While economies vary in terms of population and stages of economic development, EY has developed a global framework for social security, pension, retirement and voluntary savings. There are nine key dimensions supported by various sub-dimensions that serve to guide a holistic assessment, design and evolution of such systems in emerging, evolving and mature countries and systems. The framework focuses on the relevant ecosystem with key direct and indirect drivers across relevant stakeholders. Country and policy context — This entails gaining deeper insights into various areas such as socio-economic context and outlook; the social contract, vision and social culture of the stakeholders; the pension program’s long-term strategy and objectives; existing regulations and incentives to save; measurable outcomes; and the depth and breadth of the capital market. Customer and member context — This sub-dimension looks at the needs of customers and members; a balance between the savings culture of the country and the risk appetite of members; consumer protection and advice programs; customer relevance and choices; empowerment for informed decision-making; and alignment to financial well-being. Benefits, products, and services context — This considers the existence of subsistence welfare programs; basic retirement; sound retirement; death, disability and other protections; healthcare and related essentials; and additional retirement and voluntary savings practices. Delivery context — Effective programs will require a sound operating model and appropriate delivery agility; relevant focus on best interest fiduciary duties, effective governance and oversight on possible conflicts of interest; effective risk management; and programs to strengthen public confidence. Solution context — The system should have adequate benefits, financially sustainable operations and investment rules; and efficient management that addresses customer relevance and empowerment. Reform context — This sub-dimension considers elements such as political, stakeholder and reform governance; flexibility in implementing reforms; and continuous evolution for the system. Solution culture, leadership and accountability — Building the right system necessitates establishing the right culture and expected conduct, with the right incentives, all supported by accountable and outcome-driven leadership, including appropriate supervision and relevant penalties. Stakeholder behavior — Members and stakeholders need to be willing to collaborate to come up with new ideas and innovations, work under a culture of transparency and disclosure, share a long-term perspective, all while taking responsibility and accountability for their behavior. Delivery principles — At the last step, a good system should be customer-centric, providing relevant choices while maintaining simplicity, which can be supported by automation, digital platforms and straight-through-processing protocols that leverage exchange-to-exchange value chains. There is hope that this framework adds value to an informed debate in the Philippines to evolve the existing government-driven long-term savings system. Such evolution is perceived to deliver better retirement and financial well-being outcomes for all Filipinos, and, in turn, deepen the capital market and assist in delivering further economic prosperity. In the second part of this article, we will discuss how greater collaboration between the public and private sectors can deliver improved results. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Josef Pilger is EY’s Global Pension and Retirement Leader. Christian Lauron is an Advisory of Partner from SGV’s Financial Services and Government and Public Sectors.

18 February 2019

Arlyn A. Sarmiento-Sy

Data is power: Using analytics for a Customs audit

Our last four Suits the C-Suite articles have emphasized the need for importers to be audit-ready in the event that the Bureau of Customs (BoC) conducts a Post Clearance Audit (PCA). The BoC has already issued 32 Audit Notification Letters (ANLs) to importers; anyone could be next on the list. Audit readiness can be achieved by conducting a Customs Health Check or a Customs Compliance Review (CCR) to identify areas of risk and potential exposures prior to a PCA, to ensure that importation records are complete, and to enable the importer to determine the issues and amounts for a possible availment of the BoC’s Prior Disclosure Program (PDP), which is an option available to importers to voluntarily disclose errors in good declarations and pay deficiency duties, taxes, and other charges that may arise in lieu of a full audit. Given the limited time for importers to be ready for a customs audit — which can occur at any moment — or to consider to do a prior disclosure, how can this be done? Data analytics offers an alternative and possibly, a more efficient approach to audit readiness. DEFINING ‘DATA ANALYTICS’ Data analytics is the application of tests on information that is electronically available, either from the company’s Enterprise Resource Planning (ERP) systems or through brokers’ database and other digital sources. The aim is to identify key focus areas which uncover risks and opportunities, while also providing basis to make strategic decisions over core processes and compliance activities. In doing so, data analytics can help allocate resources to areas of highest saving potential, or for risk mitigation. Data analytics can be used to perform the following: – Identify errors in order to take appropriate actions to minimize exposure; – Discover potential tax and cash flow savings, and tax recovery opportunities; – Detect process inefficiencies or risks, as well as consider opportunities to remove inherent risks, and; – Provide management insight to help address the company’s key trade and value-added tax (VAT) concerns and priorities. THE ROLE OF DATA ANALYTICS IN A PCA The insights gleaned from an importer’s electronic data could be used to identify customs and trade-related risks, issues with noncompliance, and financial exposures. The use of these data will facilitate an accurate and timely disclosure to the BoC, and even to the Bureau of Internal Revenue (BIR). By using available digital data, importers may also avoid resource constraints such as lack of manpower, or the tedious task of manual vouching importation documents. This will also minimize risks of error and oversight that come with purely manual processes. There is also ample possibility of testing 100% of all import transactions, which is preferable to just a sampling. The process involved with data analytics will provide instantaneous multilevel perspectives, allowing an importer to make informed decisions supported by evidence. Some examples of core tests involving trade analytics include: – Import overview — This allows for a quick, “get a sense” of the business, as it illustrates total customs value, duties, or VAT paid, per year, month, or day. It could diagnose unusual dips or increases from the expected or average amounts, allowing the company to investigate the underlying import transactions which may have caused them. – Duty analysis — This creates a pictorial identification of the duty rates paid by the importer, which could show potential variations in duty rates used for similar products. Duty analysis may be able to show product groups with more than one distinct Tariff Classification, which could indicate if one or more products are being incorrectly classified. – Incoterms — The Incoterms (or the International Commercial Terms) are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. Trade analytics can identify suppliers using multiple Incoterms which may be contrary to those agreed or desired. Additionally, analytics may point out risks on the use of Ex-Works, that could give rise to findings of underpayment of duties and taxes since customs values should be based on Free on Board (FOB) or Free Carrier At (FCA) value. Ex-Works is an international term by which a seller makes the product available at a designated location, and the buyer incurs transport costs. – Free Trade Agreement (FTA) usage and opportunities — This would identify where FTAs have been utilized and thus, would point out a need to provide documentation to support the lower duty rate used on specific imports. It will also help identify where FTAs are available (but not currently utilized) to help save costs. – Related party transactions — Analytics may also identify anomalies in related party transactions against unrelated parties. – Physical supply chain — This will identify unusual or inefficient routes, and the value or weight and method of transportation used. Importers also have the option to perform customized tests to compute total landed cost for importations per month, quarter, and year. This will address the question on whether the landed cost per VAT returns tallies with landed cost per the BoC’s summary of importations. Tests can also be devised to compute for the correct customs duties and taxes per import entry, to determine any possible underpayment that may be considered for a voluntary disclosure. Since a PCA covers three years of importation (potentially involving thousands of importations), but only provides a limited time of 15 days to respond to findings of noncompliance and/or assessment of underpaid duties and taxes, it is vital that importers take every available measure to be audit-ready. If applicable, they should also consider the benefit of the PDP. A PCA may result in heavy consequences for importers, since penalties during a PCA range from 125% to 600% of the revenue loss to the Government, depending on the degree of culpability. Upfront disclosure may bring significant material savings to affected importers. With the recent issuance of Customs Administrative Order (CAO) No. 01-2019, it is expected that the BoC will intensify PCAs and issue numerous ANLs. Thus, unprepared importers may face steep penalties, interests and surcharge on noncompliance. This is why the BoC is encouraging importers to seriously consider the PDP. In this age of Information Technology, it will be most prudent to consider harnessing the power of data analytics to sift through and utilize all information that may just be sitting dormant in the company’s database and systems. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Arlyn A. Sarmiento-Sy is a Senior Director for Indirect Tax Services – Global Trade & Customs at SGV & Co.

11 February 2019

Victor C. De Dios and Josephine Grace R. Sandoval

Dealing with common issues in a BoC Audit

When shipments are “cleared” at the border after payment of duties and taxes, importers often assume that the Bureau of Customs (BoC) will simply move on without double-checking the shipment. This assumption is inaccurate. The BoC can actually conduct an audit of past transactions, similar to the function of the Bureau of Internal Revenue (BIR). This exercise is the Post-Clearance Audit (PCA). It usually covers the last three years of importations and the PCA is undertaken to check the correctness of importers’ goods declarations, and the accuracy of their tax payments. The BoC recently issued Customs Administrative Order (CAO) No. 1-2019, which sets new rules in the conduct of PCAs effective Feb. 15. The CAO and its related topics have been written about in the three previous Suits the C-Suites columns. We will now focus on the following: What exactly will the BoC look for? What are the common issues that importers should anticipate? How should importers deal with the common issues in a PCA? RECORD KEEPING After an Audit Notification Letter is issued, the first order of business is for the importer to submit various importation documents identified in a checklist. The most common documents required are those that pertain to shipping, importation, and transport. These are the Single Administrative Documents (SAD) or the actual goods declarations, commercial invoices from foreign suppliers, supply agreements, import licenses and permits (for regulated imports), bills of lading or airway bills, packing lists, freight and insurance documentation, and Certificates of Origin (if lower duty rates under Free Trade Agreements or FTA were used). The BoC can also require other documents such as Audited Financial Statements, filed tax returns, and schedules of importations for the period covered by the audit. The auditors also have the authority to visit the company for verification purposes. In this documentation exercise, the BoC will assess if the importer complies with the obligation to keep importation records. Lack of or incomplete documentation could lead to penalties, including a surcharge of 20% of the value of the goods for which no records are kept or maintained. To overcome this issue, importers should gather importation documents and ensure that they are complete before the PCA begins. The significance of proper record keeping bears repeating, because the BoC will identify the core common issues in an import transaction on the basis of the documents you present to them. VALUATION When an importer declares the value of imported goods at the border, it does so based on its own assessment. Hence, it becomes necessary during a PCA for the BoC to evaluate if the importer’s assessment is correct and compliant with existing valuation methods. Valuation involves a wide range of sub-issues. Here are some of the most common ones: Proper declaration of value, in general — For transactions between a related foreign supplier and importer, the BOC will inquire if the price of the goods is arms-length; meaning, it was not influenced by the relationship between the parties. Similarly, for transactions between unrelated parties, the BoC can question the value declared by the importer based on existing reference values available in the BoC database, or elsewhere. Accurate declaration of the cost-insurance-freight (CIF) — The BOC counterchecks if the CIF per invoice, insurance, and freight documentations tally with the CIF declared in the SADs, applying the specific rules on the proper declaration of such items. Existence of additional payments to suppliers — Additional payments made after importation can form part of the dutiable value of the imported goods. These include items such as transfer price adjustments, dutiable royalty payments or license fees, and proceeds of subsequent resale of imported goods. Proper declaration of all other components of the dutiable value of imported goods — The BoC can likewise check if the importer properly included all adjustments to the price of imported goods, such as dutiable commissions, packing costs and charges, assists, interests, and transport costs, among others. CLASSIFICATION OF GOODS In all importations, the importer should be able to properly ‘classify’ goods under the applicable 8-digit tariff code, or Harmonized System (HS) code. Each unique code has a corresponding duty rate that applies to goods classified under such code. In a PCA, the BOC will check if the importer captured the correct classification and used the applicable rate when it paid the duties. In case of doubt in the applicable classification, the BoC may ask the importer to establish proof of proper classification, such as details of the imported goods and tariff classification rulings obtained in the past. For importers who make use of lower duty rates available under existing FTAs, the BoC can perform a more detailed assessment. This involves a validation of compliance with the origin rules under the FTAs, as well as the availability of the supporting document called the Certificate of Origin (CO). If they fail to refute questions on origin or present COs, the importers may end up losing the privilege of using the lower duty rates. WHERE THE IMPORTER ENJOYS DUTY AND TAX INCENTIVES There is a common misconception that importers who enjoy exemption from paying duties and taxes (such as economic or freeport zone locators, or even importers through a bonded warehouse) are relieved from customs audits. In fact, the BoC remains strict in its audits of special importers, to verify if there are any duty and tax leakages in their activities. Some of the common issues specific to importers with incentives are: Actual entitlement to incentives — The BoC checks if importers have proof of entitlement to the incentives such as their Certificates of Registration and Registration Agreements. Normally, there is a determination if the importations are within the limits of the registered activity. Domestic sales — Goods imported into an ecozone, freeport zone, or bonded warehouse are normally destined for export. In the case of domestic sales, the BoC would like to see if duties and taxes were paid on such sales. Proper liquidation of raw materials — The BoC asks importers to completely account for the raw materials imported free from duties and taxes. Failure to do so can trigger a deficiency assessment. Availability of records — In relation to the record keeping requirements, the BoC checks if there is proper entry documentation, particularly import permits for ecozone locators. OTHER RELEVANT ISSUES The BoC also typically raises other issues, such as the proper computation of duties (components of dutiable value and forex conversion) and VAT (components of landed cost), payment of excise tax for certain articles, among others. Upon looking at values declared per SAD, AFS, VAT returns, and other relevant schedules, the BoC also identifies discrepancies for possible reconciliation. The importer is then required to reconcile discrepancies which could be a lengthy exercise. For failure to fully reconcile, issues may be raised such as incompleteness of records, underpayment of taxes, and in extreme circumstances, allegation of smuggling. Needless to say, there are many other issues that the BoC may raise, depending on the circumstances of each audit. Now that PCAs are well on their way, the most prudent action for importers is to perform a self-assessment for an early detection of potential issues. When importers are “audit ready,” they will be able to better remedy or mitigate any consequences before a PCA commences. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Victor C. De Dios and Josephine Grace R. Sandoval are Tax Principal for Indirect Tax (Customs and Global Trade) and Tax Manager, respectively, at SGV & Co.

2019