2021

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
29 November 2021 Benjamin N. Villacorte and Yna Altea D. Antipala

Timely and necessary convergence in ESG reporting

In the last decade, standards and frameworks used to report material environmental, social and governance (ESG) topics have become quite crowded, leading to an alphabet soup of sustainability reporting standards. In fact, there are an estimated 600 ESG reporting standards globally, leading to a call for standard-setters to improve the global consistency and comparability of sustainability disclosures that stakeholders — most especially investors — rely on.Given the International Financial Reporting Standards (IFRS) Foundation’s experience in setting global accounting standards, there had been calls for the Foundation to play a role on harmonizing the multiple global sustainability reporting standards and frameworks. The Foundation responded by amending the constitution of the Foundation in April to accommodate the formation and operation of a sustainability standards setting board. On Nov. 3, during the Finance Day of the 2021 United Nations Climate Change Conference (COP26) in Glasgow, Scotland, UK, the IFRS Foundation formally announced the establishment of the International Sustainability Standards Board (ISSB).The ISSB’s main mandate is to develop sustainability reporting standards that will provide a high-quality, comprehensive baseline of ESG information that will meet the needs of investors and capital markets. While remaining independent, the ISSB will work alongside the IFRS Foundation’s International Accounting Standards Board (IASB), which sets accounting standards that are mandatory for most listed entities in over 140 jurisdictions, including the Philippines, to ensure that the standards developed by both boards will complement each other.BUILDING ON EXISTING SUSTAINABILITY REPORTING FRAMEWORKS AND GUIDANCETo give the ISSB a running start, the IFRS Foundation has set up a Technical Readiness Working Group (TRWG) composed of representatives from the Task Force for Climate-related Financial Disclosures (TCFD), the Value Reporting Framework (VRF) which houses the International <IR> Framework and the Sustainability Accounting Standards Board (SASB) Sustainability Accounting Standards, the Climate Disclosure Standards Board (CDSB), the World Economic Forum (WEF), and the International Accounting Standards Board (IASB). They announced at the same Glasgow event that the technical expertise, content, staff and other resources of the VRF and the CDSB will be consolidated under the IFRS Foundation.The TRWG has two objectives: to accelerate convergence in global sustainability reporting standards focused on enterprise value; and, to undertake technical preparation for the ISSB under the governance of the Foundation. The International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators support the work of the TRWG, with the IOSCO stating that it will provide independent oversight of the standard-setting activity in its role as chair of the Foundation’s Monitoring Board and will perform an in-depth technical assessment of the draft sustainability reporting standards.THE IFRS SUSTAINABILITY DISCLOSURE STANDARDSISSB’s sustainability reporting standards will be named the IFRS Sustainability Disclosure Standards. These standards will build upon the prototypes developed by the TRWG, which focus on climate-related disclosures and general disclosures on other material ESG matters that affect enterprise value. The climate prototype is built on the TCFD recommendations, which require entities to provide information on climate-related risks and opportunities, climate-related governance, strategy and risk management, and metrics and targets in relation to climate-related risks and opportunities. Meanwhile, the general disclosures prototype will require entities claiming compliance with ISSB standards to disclose all material sustainability-related information.It is expected that the ISSB will release its first set of draft standards for public consultation in the first quarter of 2022, with the goal to release the standards and have these ready for use by the second half of 2022. Per the IFRS Foundation, the application of the IFRS Sustainability Disclosure Standards is not linked to the application of IFRS accounting standards, so an entity applying IFRS accounting standards for financial reporting purposes is not required to also apply the ISSB standards and vice versa.However, the Foundation has clarified that only local jurisdictions can determine if it will be mandatory for entities to report on sustainability and climate-related matters using the IFRS Sustainability Disclosure Standards. It remains to be seen if the Philippine regulatory authorities will adopt ISSB’s sustainability reporting standards, similar to how we adopted the IASB financial reporting standards.WHAT COMPANIES SHOULD DO NEXTAs the pressure from investors and other stakeholders for consistent and reliable sustainability reporting increases, we anticipate that local jurisdictions will soon require disclosures in line with sustainability reporting standards and the relevant external assurance. This also raises the question of whether an appropriate governance structure needs to be put in place to provide oversight on the implementation of sustainability initiatives and the subsequent sustainability reporting process. Perhaps boards can consider whether a committee, separate from the audit committee, should be formed to take charge of the sustainability report assurance and ensuring the effectiveness of the company’s internal quality control and risk management for non-financial disclosures.While reporting using the IFRS Sustainability Disclosure Standards is not yet mandatory, local entities can start building on their capabilities to report on sustainability and climate-related matters using voluntary sustainability reporting frameworks and guidance, as applicable, and adopt the following measures.They can establish executive management-level oversight and accountability of sustainability and the sustainability reporting process. It will be important to align ESG initiatives and sustainability reporting efforts to support corporate strategies, as well as provide training and educational courses to employees as sustainability reporting cuts across corporate functions. Companies will also need to assess and incorporate ESG and sustainability reporting risks in the enterprise risk management framework. Moreover, they need to articulate the company’s long-term value creation story in the sustainability report.The IFRS Foundation’s formation of the ISSB and the development of the IFRS Sustainability Disclosures Standard have shown that sustainability reporting will be a mainstay of the annual corporate reporting cycle. It is no longer a compliance program, as investors and capital markets increasingly rely on ESG disclosures to enable more informed decision-making.As the global sustainability reporting standards evolve, so too should an organization’s understanding, management, and reporting of the material ESG matters that impact their long-term enterprise value creation. 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.Benjamin N. Villacorte is a partner and Yna Altea D. Antipala is a manager from the Climate Change and Sustainability Services team of SGV & Co.

Read More
22 November 2021 Olivier Gergele, Maria Kathrina S. Macaisa-Peña, Fabrice Imparato, and Shaurya Ahuja

How to win Asia-Pacific consumers in the new era (Second Part)

(Second of two parts)Although consumer behaviors were already shifting before the COVID-19 pandemic impacted economies and societies, some of the changes were accelerated by the disruption. This meant consumer companies needed to understand what drives consumer lifestyles by redefining how to best serve consumers, looking at the business through a non-traditional lens and anticipating disruptors.In the first part of this article, we discussed the five dominant behavioral shifts as identified in the EY Future Consumer Index, which surveyed more than 5,500 respondents across six Asia-Pacific countries (China, India, Indonesia, Japan, Australia and New Zealand) from among 20 countries in total. However, these facts seem consistent from the survey — that consumers are prioritizing pricing in their purchasing criteria as they place high concern over their finances, and that they prioritize their health and safety in considering wellness products and digital experiences that do not require them to leave their homes. These behaviors can be traced to the early stages of the pandemic, where consumers worried for the health of their families, the ability to purchase their basic needs, and the loss of freedoms previously taken for granted.Although individual consumer behaviors are likely to be volatile, companies can anticipate their needs in the areas of value, health, sustainability, experiences and the omnichannel. In our own market, we are likewise already seeing rapidly shifting consumer behaviors driven by the pandemic. We have seen the rise of social media retailers, particularly in the sectors of food and beverages. Large, e-retailing platforms have branched out to encompass basic necessities, groceries, insurance products and have even donation channels, and consumers have shifted bargain-hunting behaviors online with monthly online sales and price-offs having become the norm.Clearly, addressing these shifting consumer expectations will require consumer companies to take a hard look across their organization — from the strategy, business model and operations to talent and capabilities. In order to remain competitive and serve the customers of the future, leaders of consumer companies should consider three key actions that have never been as important in the current landscape. These actions will provide the agility required for companies to adapt rapidly to customer expectations as they continue to evolve.REDEFINE HOW TO BEST SERVE THE CONSUMERThe survey revealed that Asia-Pacific consumers are increasingly open to sharing their personal life data. More than ever, consumer companies have a unique opportunity and strong impetus to enhance their capability to make the right — and trusted — use of such data. Technology like advanced analytics and artificial intelligence can help improve their listening abilities and profile consumers more intelligently to proactively anticipate where, when and what they buy. The ability to adapt products and services with speed and agility can make a critical difference in how well companies can keep consumers connected to the brand. For example, the prolonged lockdown dramatically affected the purchase of personal care products. As the quarantine restriction eases and mobility increases, we are likely to see a resurgence in personal pampering. Businesses in this sector that can find new ways to connect and serve their customers may find rich new opportunities for growth.LOOK AT THE BUSINESS THROUGH A NON-TRADITIONAL LENSTo many consumer companies, serving consumers in a different way, such as embarking on direct-to-consumer strategies or developing a compelling consumer community platform, may not be profitable in the short term or make sense in isolation. Similarly, sustainability-related programs are often seen as a cost and associated with negative ROI. However, many of these programs can create strategic value for the company as a whole, whether in terms of enhancing brand image and awareness, generating data that can be further monetized or driving employees’ commitment, making the business more resilient against disruption. Consumer companies must therefore adopt a strategy that encompasses a broader view of value as well as a focus on profitable growth.ANTICIPATE POTENTIAL DISRUPTORSConsumer companies need to be increasingly forward-looking and investing time and effort to anticipate potential disruptions that could upend their established business models. In recent years, the blurring of sector boundaries has seen powerful digital ecosystems emerging, enabling players — both new and incumbent — to complement one another to offer interconnected products and services in one integrated experience. Take, for example, how food and beverage or financial services companies are disrupted by the technology and mobility sectors, giving rise to super apps that consumers are familiar with today. Locally, we have seen how some companies have evolved, such as ride-sharing apps that now offer food, retail, on-demand purchase assistance, and even bill payment functions. Consumer companies must act now to define and implement a successful digital ecosystems strategy and step up innovation to compete in the short and longer term — or risk being left behind.WINNING THE FUTURE CUSTOMERAs the COVID-19 pandemic continues its unpredictable course, each of the above actions will enable consumer companies to respond nimbly to the future consumer’s continuum of preferences and attributes. There is no single consumer persona and therefore no one-size-fits-all strategy. This makes developing and executing the right one for every company all the more urgent and important to ensure that they win the customers of the 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 authors and do not necessarily represent the views of SGV & Co.Olivier Gergele is the EY ASEAN Consumer Products & Retail leader, Maria Kathrina S. Macaisa-Peña is a business consulting partner and the Consumer Products and Retail Sector leader of SGV & Co., and Fabrice Imparato and Shaurya Ahuja are EY-Parthenon partners.

Read More
15 November 2021 Olivier Gergele, Maria Kathrina S. Macaisa-Peña, Fabrice Imparato, and Shaurya Ahuja

How to win Asia-Pacific consumers in the new era (First Part)

(First of two parts)Before the COVID-19 pandemic unleashed its unprecedented impact on economies and societies, consumer behaviors were already shifting. Digitalization was reimagining how consumers live, work, play and consume, evidenced by the rapid rise of e-commerce in the Asia-Pacific region.In a survey conducted by VISA (VISA Consumer Payments Attitude Study) mid-year, about 93% of Filipinos increased their shopping activity on websites and mobile apps. In fact, up to one in two Filipinos shopped online during stricter lockdown protocols. Businesses and consumers alike anticipate monthly promotions of online retail platforms and explore shopping via social media platforms such as Facebook and Instagram.The pandemic accelerated some of these changes that were underway, leading consumers to reprioritize what they value. Arguably, it is no longer just about what they buy but also how they want to live their lives. That means consumer companies need to understand what is driving consumer lifestyles and ultimately, use these insights to make bolder plans to get ahead of change.To be fair, many consumer companies did pivot to cater to shifting consumer demand during the last 18 months of the pandemic. However, the consumers that companies adapted to serve during the pandemic may not be the same consumers who will make them profitable in the future. That said, certain pandemic-induced traits may persist. For example, companies that offered the supply and price stability needed by consumers early in the pandemic are more likely to be rewarded with consumer stickiness than those that chose to pass on the higher costs to consumers.Many consumers, particularly in the Asia-Pacific region, appear to be turning into COVID-19 anxiety “long haulers,” as indicated by real-time global consumer sentiment tracked by the EY Future Consumer Index which surveyed more than 5,500 respondents across six Asia-Pacific countries — China, India, Indonesia, Japan, Australia and New Zealand — from among 20 countries in total. Of the Asia-Pacific consumers surveyed in the May 2021 edition, 85% express concerns over health. With regard to pandemic-related caution in their spending behavior, 44% say they are purchasing only essentials and about two-thirds say they are thinking more carefully about how they spend money. This is consistent with the results of the study published by Kantar (Kantar Purchase Confidence Study in July 2020) where roughly 79% of consumers expressed worry about their financial situation and the importance of health and immunity benefits of fast-moving consumer goods (FMCG) products.FIVE DOMINANT BEHAVIORAL SHIFTSWhile individual consumer behaviors are likely to be volatile in the foreseeable future, companies can proactively accommodate their needs in five key areas: value, health, sustainability, experiences and omnichannel.VALUEConsumers, being concerned about finances, are invariably increasingly price-sensitive. Of the respondents in the consumer index report, 56% of consumers see price as a more important purchasing criteria than before, while 44% are purchasing only essentials. Less than half at 42% will buy more store-brand household staples moving forward.Consumer companies need to review their overall portfolios and value chains to consider if they can offer consumers quality, low-cost alternatives, as well as compete effectively with store brands and private labels. At the same time, retailers need to reassess their private label strategy. Short-term brand conversion during the pandemic could likely lead to longer-term brand loyalty — but only if private labels continue to drive product range and innovation, marketing outreach and quality. HEALTHThe pandemic has re-emphasized the importance of health, fitness and wellness. Understandably, as much as 85% of consumers are concerned about their family’s health. Meanwhile, 48% are spending more on healthy or “good for me” products, and 36% are willing to pay a premium for products promoting health and wellness.Asia-Pacific consumers are concerned with protecting their health and that of their family. Consumers are actively shopping for health products that will make them safer and healthier at home. Catering to this “in-home” hygiene market, including cleaning, nutrition, fitness and even beauty products may require more ingenuity in exploring healthier formulations, reshaping product portfolios and R&D investments.SUSTAINABILITYIt is not enough to just offer a product at the right price point: the behavior of a company is as important as what it sells. An overwhelming 82% of Asia-Pacific consumers say that companies must be transparent about their environmental impact and 28% are willing to pay a premium for more sustainable goods and services. Almost half at 48% also say that local sourcing has become more important.If consumer companies can proactively demonstrate accountability and transparency over their environmental impact, they will be able to gain consumer trust and encourage higher spending. To do so, companies should look into re-engineering their production, logistics and supply chains as well as recognizing the third-party risks that can erode credibility.EXPERIENCESPent-up demand for unique experiences, especially among younger consumers, will create opportunities for consumer companies to provide new offerings that fit a range of budgets. The EY Future Consumer Index revealed that 64% of Asia-Pacific consumers are willing to share personal data for a tailored online experience. Meanwhile, 45% will be less inclined to take part in experiences outside their homes, and 43% will actually spend more on experiences. The question is whether companies can switch flexibly between on-trade (or on-site) and off-trade (or bring home) as pandemic restrictions vary.Forward-thinking companies are offering consumers a mix of both digital and physical experiences: digital experiences that can be accessed safely at home, paired with unique in-store experiences that are worth exploring. Adapting to this new trend may require an operating model reset for some Asia-Pacific companies, strategically reallocating resources and restructuring the organization for greater agility.OMNICHANNELMany consumers who moved online out of necessity will largely sustain their online behaviors, although the extent of digital engagement may shift. The interaction between online and offline will be more important than before. For instance, 54% of consumers in the Asia-Pacific region are doing their grocery shopping both online and in person, while 47% even say that the availability of delivery is a more important priority when shopping. On the other hand, 41% are visiting stores less frequently.Consumers want digital engagement to be just as reliable as going to the store. An integrated channel strategy, supported by agile supply chains and logistics, is needed to deliver a consistent and enjoyable experience across online and offline channels. With the right data strategy, the data captured from online interaction and consumption will also yield valuable insights for business planning and delivering superior, bespoke experiences.In the second part of this article, we discuss the three key actions that leaders of consumer companies should consider in order to address these aforementioned shifting consumer expectations. 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.Olivier Gergele is the EY ASEAN Consumer Products & Retail leader, Maria Kathrina S. Macaisa-Peña is a business consulting partner and the Consumer Products and Retail Sector leader of SGV & Co., and Fabrice Imparato and Shaurya Ahuja are EY-Parthenon partners.

Read More
08 November 2021 Leonardo J. Matignas

Building a future-fit board (Second Part)

(Second of two parts)Businesses continue to explore new ways of working, further spurred on by the pandemic and supported by technology. However, to maintain momentum, boards will need to reimagine their roles to ensure they remain relevant, adaptive and responsive to the needs of this transformative age. Future-fit boards are diverse by nature, inclusive, transparent, and responsive, with the ability to navigate the unexpected and innovate in their oversight of human capital to drive long-term value.As discussed in an EY article, Setting the pace or keeping up — is your board future-fit?, there are six key areas of action boards must consider for future fitness. In the first part of this two-part article, we discussed how boards will need to revitalize board composition and dynamics, gather insights from fresh perspectives, and increase focus on the long term. In this second part, we discuss how boards must align and communicate purpose with action, align and monitor culture, and enhance risk and compliance oversight.ALIGN AND COMMUNICATE PURPOSE WITH ACTIONBased on an EY survey, 80% of CEOs around the world agree that public opinion will become as important to companies as their investors in the next five to 10 years. At the same time, surveys also indicate that 76% of the general global population feels that companies are capable of increasing profits and improving the social and economic conditions of the communities where they operate at the same time.It is interesting to note what global CEO respondents identified as the most significant factors constraining them from being more involved in solving global challenges: board attitudes, composition, skills and leadership. In fact, these factors topped the list for more than half of the CEOs in the survey, surpassing regulation, investors and compensation. This suggests that if it were not for board direction, these CEOs felt they would be more vocal in addressing social issues. This is where future-fit boards can push the idea of their organizations’ purpose, a reason for being and operating that goes beyond making profit, as an essential part of strategy.By articulating purpose with clarity, companies provide their people an achievable vision that they can contribute to, but this purpose must clearly state who the organization aims to benefit apart from its shareholders, as well as how it will do so. Although purpose alone does not replace strategy, it declares the “why” and intensifies the will behind it. It is also important to impart a clear, mutual understanding of the division of roles for external communications as well as plans for appropriate responses in the event of a crisis. Such crises can range from fraud, cyber-attacks, or environmental destruction. The increased scrutiny from 24-hour news cycles and how easily information can now spread dictates that integrity, clarity and timely responses are imperative for future-fit boards.However, clarity of purpose is not enough. Future-fit boards need to recognize that companies will fail if they do not align their communicated purpose with action, which is especially relevant to maintaining trust with stakeholders. An EY global survey of CEOs found that a key gap standing in the way of transformation is the “say-do” gap, where action does not match intention. This indicates that, in addition to clearly stating its purpose, an organization’s leadership needs to show their customers and people that they “walk the walk” and not just “talk the talk.” By their actions they can demonstrate their will to follow through on their stated purpose, thus inspiring the buy-in and earning the trust of their stakeholders. Therefore, the future-fit board needs to ensure that purpose both informs strategy and permeates all aspects of operations.Boards will need to ask themselves how accurately the public understands what their business does, and how their organization contributes to both the economy and society. They have to assess whether they are constraining management from contributing to solutions for global challenges, and whether they are engaging with stakeholders, such as employees, on the most important and pressing issues. In addition, boards must determine their readiness and ability to respond to a crisis, and the assurance that they can stand by their purpose and values.ALIGN AND MONITOR CULTURECulture is a strategic asset, and in the war for talent, culture is a key intangible asset that needs to be protected. Emerging technologies are changing the workplace and impacting culture as well. Both investors and regulators have an interest in how companies leverage talent culture and strategy to enhance viability and accelerate long-term success. How the culture of a company is aligned with long-term strategy can change over time, especially in this transformative age, where strategies must adapt to face new challenges.Future-fit boards will need to align their long-term strategy with a clear vision of their corporate culture and empower management to embed said culture throughout the company. Monitoring the alignment of culture with strategy and the impact of culture on corporate engagement needs to be conducted using non-traditional metrics, such as employee review sites, turnover rates, exit interview data, training effectiveness, incentive schemes and social media impact. Future-fit boards should encourage management use of big data as well, understanding what behaviors drive performance even when performance is high.It takes resources and time to drive any cultural shifts. Boards therefore need to ask themselves how effectively they can oversee shifts in culture to build a future-focused workforce that has the skills and resolve to face future challenges. They will need to assess how creative they are in their use of data to build culture, and how clearly they communicate this culture to drive strategy.ENHANCE RISK AND COMPLIANCE OVERSIGHTFuture-fit boards need to focus on the evolving world of reporting, monitoring and compliance technologies — and the cultural and investment shifts required to enable them. Boards need to employ a pragmatic approach to horizon scanning, gathering external insights and deploying monitoring mechanisms. They also need a broader perspective about indirect and emerging risks and consider deploying automation to monitor such risks and benchmark them against Key Risk Indicator (KRI) tolerance thresholds.One necessary shift will be to develop new competencies for finance, compliance, and risk professionals, boards and audit committees. As an example, making use of technologies and new sources of data will require strong knowledge of legal frameworks for external data hosting, external and internal data protection risks, and audit procedures across different platforms.Boards must ask themselves if they are combining smart technology with rich data to power their compliance and risk oversight, and determine what new competencies and skills are necessary at the board and management levels to maximize their data analytics tools. Moreover, they need to treat data as a strategic asset, and ensure that data governance risks are encompassed in board-level risk assessments.SETTING THE PACE FOR A FUTURE-PROOF BOARDBoards can seize the future by reshaping their performance and reinventing themselves, aligning values and culture as necessary and re-energizing their risk and compliance mechanisms. By gathering external perspectives, embracing diversity and shedding light on risks and opportunities, they can enhance their decision-making and gain deeper insights to generate long-term value. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Leonardo J. Matignas is a business consulting partner of SGV & Co. and the EY ASEAN risk management leader.

Read More
01 November 2021 Leonardo J. Matignas

Building a future-fit board (First Part)

(First of two parts) Accelerated by the pandemic and enabled by technology, businesses continue to explore new ways of working and business models outside of traditional capabilities. But to maintain momentum, boards will need to reimagine their roles to ensure they remain relevant, adaptive and responsive to the needs of this transformative age. The current pace makes it imperative for boards to continuously evolve and embrace transformation. Environmental, technological and geopolitical changes require them to guide their companies to better seize opportunities arising from disruption, manage risks and optimize for future performance.Boards can become future-fit by employing a forward-thinking mindset, and being proactive in collecting perspectives which can impact the business. They must be outward-looking and lead in balancing long-term interests, as well as expand their view of risk with technology-enabled compliance, mitigation and monitoring. Future-fit boards are diverse by nature, inclusive, transparent, and responsive. They are capable of navigating the provocative and unexpected and are innovative in their oversight of culture and human capital to drive value.As discussed in an EY article, Setting the pace or keeping up — is your board future-fit?, there are six key areas of action boards must consider in order for them to achieve future fitness. In the first part of this two-part article, we will look at how boards will need to revitalize board composition and dynamics, gather insights from fresh perspectives, and increase focus on the long-term.REVITALIZE BOARD COMPOSITION AND DYNAMICSTo gain insight into what the boardroom of the future will look like, boards must consider their current composition in the context of long-term strategy coupled with the need for reinvention, adaptation, and challenge. They will also need to determine who will be necessary in the boardroom to optimize performance, not just for now, but also for years to come. By maintaining a diverse set of backgrounds, experience and cognitive styles, boards can plan for and ensure a balance that will be maintained even as new directors come and go.However, even with a diverse, well-balanced board, it is still possible to disregard otherwise valuable input and underutilize assets. Future-fit boards can counter this by actively valuing diverse inputs, and by recognizing the importance of different opinions and disruptive ideas. They should also recognize the value of an age-diverse group, leveraging experience while valuing new directors, particularly with the rapid disruptions happening in the world today. Future-fit boards must be open to developing new knowledge and competencies — training and re-training its members as a whole rather than just relying on the expertise of a single director with the relevant skills.To determine whether a board is future-fit in its dynamics, it must ask itself if it seeks and encourages unexpected and disruptive ideas, and if it can reach outside of traditional methods to analyze business challenges and issues from every angle. By keeping open to reinvention and transformation, boardrooms can discover new dimensions for long-term growth.GATHER INSIGHTS FROM FRESH PERSPECTIVESSimply gaining a different view on matters, such as understanding employee well-being or the quality of customer experience, is not enough to truly gather varied and quality perspectives with the breadth of insight needed in today’s environment. Future-fit boards must proactively gather new perspectives at a broad and strategic level, seeking input from more stakeholders such as investors, industry peers and others.Future-fit boards need to be able to ask the right questions regarding strategic priorities, direction, and emerging risks. This also means they have to determine the right internal and external stakeholders to ask. They will need to review the kinds of information they receive and assess whether there are new data points they must find. This in turn can help facilitate dialogue that fosters trust and maximizes access to markets, talent, and customers.Boards must also be strategic in their analysis of feedback and various forms of external data. While it is possible to be overwhelmed by large volumes of information and face challenges in sorting through that information to determine what is relevant, future-fit boards must take the initiative and determine what data and information is necessary before developing their knowledge on the right issues.Finally, boards will also need to ensure they maximize the use of external data, stakeholder perspectives, and the relevant expertise to educate themselves on new areas of risks and gain further opportunities to hold the right conversations.INCREASE FOCUS ON THE LONG-TERMWith uncertainty and disruption continuing to prevail in the current landscape, it is easy to understand why some boards narrow their views toward short-term survival. Based on another EY survey, over 40% of global board members believe that investors would prefer to focus on long-term decision-making and investments that will enhance the future prospects of the business even if this reduces short-term financial performance. Since there are no universally applied or disclosed metrics on value generated from customer loyalty, trust, human capital, innovation and culture, it can be challenging to communicate with investors consistently. However, future-fit boards must be focused on articulating long-term strategies clearly, determining what investments they make to sustain and protect the value drivers underpinning the business.Boards also need to be cognizant of what “long-term” may look like. We are now in a time when business models are rapidly evolving, and traditional markets and industries are transforming and converging to create new models. Consider, for example, how fluidly enterprises are diversifying their services and offerings today — ride-hailing apps have added shopping and food-delivery features, telecommunications companies are venturing into banking and remittances, and online shopping platforms have become venues for insurance and financial products. Future-fit boards have to remain focused on transformation and create a culture of agile adaptation that reimagines what their business could become, using information from megatrends and stakeholder intelligence to boldly redefine and reinvent their own future.In the next part of this article, we will discuss how boards must align and communicate purpose with action, align and monitor culture, and enhance risk and compliance oversight. 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.Leonardo J. Matignas is a business consulting partner of SGV & Co. and the EY ASEAN risk management leader.

Read More
25 October 2021 Nixon C. Garais

Why data governance matters

With the rise in regulatory requirements and global industry standards to address the increased business consumption and volume of consumer data caused by the COVID-19 pandemic, companies have placed greater significance on the protection and handling of data. Now perceived as part of the wider challenge of maintaining operational resilience, issues in data quality, security, privacy and the threat of cyber-attacks rank higher on the data agenda of many organizations.However, compliance with data handling policies can no longer be entrusted to Data Protection Officers (DPOs) alone — there needs to be an entire data lifecycle management process that is sustained by more individuals who will be held specifically accountable for both the responsible use and protection of data. This presents organizations with the opportunity to maximize data value through improved data governance, taking advantage of increased data volume to automate and scale data governance processes while ensuring its ethical use.THE NEED FOR DATA GOVERNANCEWhile data governance refers to the exercise of authority, control and shared decision-making over the management of data assets, it should be distinct from the concept of data management. Data management is the practice of ensuring that an organization’s data is accurate, relevant and effective in fulfilling its business objectives. This includes activities to maintain data such as data classification, labeling, and proper handling. Data governance, on the other hand, sets the policies on how an organization manages data, and implements and monitors compliance.Data governance is mandatory for success if an organization wants to maintain a “single source of truth” to its data, enabling it to reduce redundant data, enhance data quality and maximize the value of information. According to the EY article “Three priorities for financial institutions to drive a next-generation governance framework,” organizations must focus on three key areas in governing the use of data.DATA PRIVACYRegulations around data privacy have become increasingly difficult to comply with, given the current data storage and access technologies. In the past, ensuring data privacy only entailed focusing on role-based access controls (RBAC) that restricted sensitive data access. Now, the widespread adoption of the cloud and the introduction of open application programming interfaces introduced new challenges not addressed by traditional controls. This makes it highly difficult for organizations to monitor the legitimate use of personal data, ensure transparency or obtain consent from individuals, and exercise data deletion for a specific individual.Companies must take a structured approach along the entire data lifecycle to achieve compliance. Meeting customer needs and achieving compliance with privacy regulations requires organizations to be transparent in how they store, process, control, and distribute private data. While modern data privacy controls are growing as a trend, these controls are predicated on the exponential growth and diversity in data usage and sourcing. Traditional risk-based approaches that apply retrospective controls will not be sufficient to manage the complexity of data privacy as technologies and use cases become more sophisticated. For companies to ensure proper processing of personal data, they must take a structured approach along the entire data lifecycle similar to the traditional “process and controls” approach, with more forward-looking considerations.CLOUD PLATFORMS AND DATA FABRICSNew technologies using public cloud will offer a competitive advantage if they can automate controls and reduce costs while being able to properly use data. The use of the cloud in particular can be seen as a new challenge for data governance or a simple extension of an existing technology practice. However, organizations must take the opportunity to use modern technologies to actually solve challenges in data governance.A well-formed data governance framework for the cloud will need to consider regulation, visibility, data classification, risk management and change management. Organizations will need to determine the controls required to be compliant across regions, keep abreast of changing global regulations, and provide evidence that the necessary controls are in place. They must also determine how data should be classified, how different classifications should be handled, and how operational risk should be measured and reported. Organizations will need to exercise key controls in moving data while avoiding control gaps and ensuring consistency. These controls must be maintained over time, while the information in the cloud should be automatically tagged to make it useful for enterprise reporting.ARTIFICIAL INTELLIGENCE AND MACHINE LEARNINGInnovation through artificial intelligence (AI) and machine learning (ML) is not just driving business transformation — it also highlights unique risks and challenges regarding the governance of data. Both AI and ML applications are becoming more accessible and powerful as firms increase their access to open-source algorithms, use of big data, and low-cost computing.Organizations need to establish an AI/ML governance framework that addresses the data-related risks of AI/ML ecosystems in aggregate. The framework should use cases where new technologies are applied and include early risk assessments based on an understanding of AI and ML. It should ultimately be automated to balance risk against data value, mapped against clear benefits and business outcomes. As these technologies become more accessible and advanced, in turn becoming integral components of business functions, achieving this level of automation and integration will be imperative for organizations.CLEAR DATA GOVERNANCE POLICIES AS A NEW BUSINESS IMPERATIVEAs companies grow increasingly cognizant of the disruption and risks posed by weak data protection, they need to develop robust data governance frameworks and prioritize improving controls over the ethical use of data. Organizations cannot wait for a cyber-attack or data breach — they must shift to a proactive strategy with enhanced capabilities in areas such as privacy frameworks, data and analytics growth, data traceability and detection, and data security and controls.By strengthening capabilities that approach data in a protective and operationally efficient manner, organizations can enable a data governance framework that supports key business outcomes focused on long-term growth. 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.Nixon C. Garais is a manager of SGV & Co.

Read More
18 October 2021 Julie Christine O. Mateo

Managing workforce wellness

With global instability and the uncertainty pervading our current situation due to the disruption and volatility caused by COVID-19, employees may be struggling with feelings of helplessness, anxiety, and heightened stress. It becomes more important than ever for leaders to provide clarity and guidance, and to be the calm in the storm.As SGV celebrates well-being month this October, the firm acknowledges the additional challenges and responsibilities in managing mental health concerns in our teams. Though current conditions are far from ideal, we can control how we respond as well as how we connect.Something that can also provide clarity and perspective despite the uncertainty is purpose, which we can turn to as a source of focus and motivation. In SGV, our purpose to nurture leaders and enable businesses for a better Philippines gives us the assurance and confidence that our work — developing people and sustaining economic growth — will positively and meaningfully redound to the country and community.Purpose, however, is a collective journey for an organization and one that requires long-term planning and implementation. For organizations who already have a clearly defined purpose, ensuring that it continues to resonate with their people is crucial to sustaining their wellbeing. In terms of concrete, actionable steps in the near-term, the following key considerations can impact how we empathize with colleagues, teams and clients in a purposeful way and help foster a better working environment, remote or otherwise.RECOGNIZING AND ADDRESSING MENTAL HEALTH ISSUESThe pandemic drives to trigger global anxiety and fear, placing our minds in a constant threatened state while we deal with the unknown nature of the future. It becomes imperative to learn about the mental health continuum and normalize conversations about mental health within the team. Leaders have the responsibility of creating a safe space to discuss emotions and create a supportive workplace, but — and this is important — not to offer diagnosis or counselling. These should be given to mental health professionals to address.Moreover, providing support does not mean trying to fix the situation — connect by simply listening to their anxiety and fears and expressing empathy for how team members are feeling. Identify triggers for feelings of anxiety, and discuss how these can be reduced or managed. Help identify the kind of support they would need, and connect them to appropriate resources or suggest talking to a doctor or counsellor to help. Recognizing the importance of this, we in SGV have engaged a professional mental health platform to provide ongoing support to all our people.MANAGING AND SUPPORTING REMOTE TEAMSLeaders have the role of providing clarity and providing the most important task for the team to focus on, especially now that most teams are working remotely. This can be done by connecting regularly to communicate business priorities and keep on track through huddles that discuss incoming activities.Keeping connected through conducting regular check-ins can also determine how teams are handling the stress. Leaders must take note of any changes in behavior from their team members and take action to support them. Taking the time to talk with those who may be struggling and understanding their unique situations can make a difference in helping someone feel less alone. Early intervention can also help address issues before they escalate.In addition, acknowledge and celebrate small and big achievements, and recognize efforts frequently. Committing one activity on the calendar that is non-work related also helps facilitate social connection and balance work and recreation.MAINTAINING WELLBEINGTo provide sustainable support to someone in a team who may be feeling overwhelmed, leaders must first take positive actions to care for their own wellbeing. Aside from connecting regularly and providing a safe space for team members, leaders must familiarize themselves with available wellbeing programs and services aimed at addressing their teams’ physical, emotional and financial wellbeing.Focusing on relationships through short but frequent check-ins can help employees feel appreciated. Personal gestures such as celebrating birthdays, anniversaries and similar milestones creates a reinforced culture of positivity during these turbulent times, helping us focus on the good no matter how big or small.CREATING A HEALTHIER REMOTE WORKPLACEIt is already challenging to balance the demands of multiple engagements, and doing so with the wellbeing needs of a team can be even more daunting. Stress related to work is something everyone experiences — leaders and teams alike — and can even be useful by improving alertness and performance in short bursts. However, prolonged work stress can lead to burnout, which affects all aspects of wellbeing: physical, mental, emotional, social and financial health. Prolonged burnout can lead to real implications to the business such as loss of productivity and turnover, even manifesting into serious health consequences.There are some key principles that leaders can focus on to address the conditions that lead to burnout, and mitigate them to help their team members and themselves. As mentioned previously, it is important for leaders to look after their own wellbeing and promote good practices to their team members. This can be achieved through physical fitness, proper sleep and nutrition as well as finding time to disconnect and valuing contribution over just being busy. Ways to proactively disconnect include spending time on hobbies or creating a shutdown ritual, where employees can adapt their routine of leaving the office in their remote work spaces and even schedule a virtual commute.At the same time, avoid contributing to team member burnout. Set realistic deadlines and try to keep away from requiring work to be performed excessively outside of reasonable work hours as much as possible. Balance the workload of each team member and ensure these are appropriate and shared when necessary. Be clear regarding expectations and provide sufficient task ownership to avoid micromanaging. Be prepared to lend a hand with the completion of work when deadlines loom and team members feel overwhelmed. While this, of course, is easier said than done given the increasing demands on our people, it is still something that leaders will need to proactively manageREFRAMING FOR RESILIENCEManaging the psychological as well as physical safety of work teams is more important than ever, with uncertainty still prevalent. Though the future is outside of our control, leaders can help their teams reframe their responses and build resilience by encouraging a growth mindset and providing a clear vision of the future beyond the pandemic. By taking to heart the power of purpose to address uncertainty and taking steps to manage our own responses and providing the necessary guidance and resources, we can tackle external challenges in a more positive way. 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.Julie Christine O. Mateo is the talent leader and purpose council co-chair of SGV & Co

Read More
11 October 2021 Benjamin N. Villacorte

Paving the path toward decarbonization

The most recent Intergovernmental Panel on Climate Change (IPCC) report delivered facts about widespread, extreme climate change, together with the warning that the rise in temperatures can exceed 1.5°C to 2°C in the next few decades if stakeholders don’t act now. The reminder to place the utmost importance on urgent, large-scale reduction of greenhouse gas emissions came months before the United Nations Climate Change Conference of the Parties (COP26) addresses the issue on a global scale.The IPCC report and the upcoming COP26 emphasize further the need for organizations to prioritize decarbonization. Increased investor and regulatory pressure have pushed organizations to heed prior wake-up calls and respond by broadening their climate disclosures, specifically by adopting the Task Force on Climate-related Financial Disclosures (TCFD) framework. This is reflected in EY’s 2021 Global Climate Risk Disclosure Barometer, which reveals that coverage of the TCFD recommendations has reached an average of 70% for more than 1,100 companies across 42 jurisdictions. However, higher coverage scores continue to be linked to climate-mature markets, highlighting inconsistencies among jurisdictions and a significant gap for low-performing markets to bridge.While TCFD reporting has made progress in the Association of Southeast Asian Nations (ASEAN), the region also logs the lowest score at 19%. In the Philippines, adoption of international reporting frameworks is underway but is still in the nascent stages, mainly driven by the move of the Securities and Exchange Commission (SEC) to require publicly-listed companies (PLCs) to report on their environmental, social, and governance (ESG) impacts through Memorandum Circular (MC) No. 4 Series of 2019. Similarly, the Bangko Sentral ng Pilipinas (BSP) proposed guidelines to encourage banks to integrate sustainability principles and ESG risks into their strategies and operations.Intensifying climate reporting, though, should go beyond compliance and shift to accurately mapping out risks and opportunities so companies can adopt appropriate risk management strategies, metrics, and targets that significantly contribute to the global efforts of mitigating the adverse impact of climate change. Key findings from the EY Barometer discussed below shed light on what areas to focus on.QUALITY TRAILS BEHIND COVERAGE IN TCFD REPORTINGThe EY Barometer evaluated companies based on the number of recommended disclosures made (“coverage”) and the extent or detail of each disclosure (“quality”). Despite the advances in the coverage of TCFD elements, the quality of disclosures of the assessed companies was deemed unimpressive. Overall performance peaked at 42%. Of the almost 50% achieving 100% coverage, only three companies received a score of 100% quality.EY data point to better reporting on governance, targets and metrics, while risks and opportunities may have been relegated to a “tick box” item for now. These results indicate either of two things: that organizations feel more comfortable disclosing more of what they are trying to achieve and less of how they intend to get there, or that there may be a trend for companies looking to set aspirational targets in advance of creating a clear pathway to achieving their goals.Still, it’s worth noting that high performers in disclosure quality with long-standing Climate Disclosure Project (CDP) reporting practices have leveraged the alignment of the CDP questionnaire with some TCFD elements.SCENARIO MODELING CAPABILITY STILL IN ITS EARLY STAGESSectors with the most significant exposure to transition risk scored higher for their disclosures. These include financial services, with banks in the lead. One effective way to assess the risks and seize opportunities related to climate change is through scenario analysis, and it is great to see that many banks have taken the initiative to use it in stress testing their assets, products, and services.Scenario analysis is a critical element of the TCFD framework as it helps institutions evaluate future climate-related events, develop better strategies, and build compelling models, even if at this point, many companies are still struggling to implement it. This challenge prevents them from fully understanding the size and time frame of physical and transition risks. Climate scenarios are also necessary for financial institutions to get a full picture of the impact of their portfolio’s carbon emissions, including value chain activities.TURNING THEORY INTO TANGIBLE, ACTIONABLE STRATEGIESWithout enhancing scenario analysis, it can prove difficult to assess risks and opportunities accurately. In turn, this affects the attainment of goals, development of strategies, and creation of long-term business value.The EY study shows that only 41% of companies have conducted scenario analysis — a number that shows there’s room for improvement. Among the scenarios referenced, Representative Concentration Pathway (RCP) 8.5 was the most common, followed by RCP 2.6. Furthermore, an estimated 60% of these companies have referenced physical or transition risk or both, with 55% mentioning physical risks.As the adverse effects of climate change become more evident, many organizations recognize the importance of preparing for physical risks without waiting for an economy-wide transition. However, not all organizations have the internal capability to create an illustrative path toward net-zero. So what can be done?According to the EY report, companies can start by reporting on risks and opportunities around climate change, and clearly identifying climate-related risks when embedding these in the enterprise risk management system. They need to then assess business transformation levers to respond to climate risks and opportunities. Finally, they must publicly commit to decarbonization and implement strategies to reduce carbon emissions within their business operations and supply chain.ACCELERATING DECARBONIZATION IN THE PHILIPPINESThe EY report shows that while there is some advancement towards TCFD reporting, more comprehensive and concrete action is required to sufficiently address the climate crisis, especially in the case of the ASEAN region and the Philippines in particular, who are playing catch-up to global initiatives.Globally, central banks, exchanges, and other regulators have provided guidance to support more sophisticated sustainability reporting. In the Philippines, stricter requirements can be introduced sooner as the country submitted its Nationally Determined Contribution (NDC) in accordance with the partnership arranged under the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. As such, putting off alignment with decarbonization targets can be counterproductive, leaving businesses with disclosures that display their climate change inaction in full public view.The proper time to act is now. Recognizing climate risks and opportunities as material to business growth should be a top priority for organizations. This decision will facilitate the development of holistic decarbonization strategies to address the call for business transformation amidst the looming climate crisis and pave the path to a net-zero world.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.Benjamin N. Villacorte is a partner from the Climate Change and Sustainability Services team of SGV & Co.

Read More
04 October 2021 Aaron C. Escartin

Closing books in the new normal

As the world continues to adjust to the changes wrought by COVID-19, previously small annoyances in closing the books of a company can turn into significant hurdles. While it was sometimes already challenging to close books pre-pandemic, the difficulty of the task is now compounded by new stressors such as strained technology resources, a distributed workforce, and even personal concerns regarding health and finances.This article will discuss some strategies on how CFOs, controllers and their teams can communicate effectively and drive clear priorities during a virtual close. Based on the EY article How to manage your close process virtually, these considerations aim to help companies close books effectively as well as position them for post-pandemic recovery. This will apply whether company operations are manual or are more advanced.ESTABLISHING A STRONGER TEAM DYNAMICEven in the best of times, effective collaboration can be a hurdle in itself. A large, multinational organization may have to deal with thousands of users across multiple geographies who need to be aligned in terms of processes and deliverables. While there may be one or two people who specialize in certain tasks, teams of people should ideally be equipped with vital knowledge to pick up on each other’s work in the event someone is unavailable.Given today’s circumstances, however, establishing new and dynamic technology-empowered team norms becomes even more critical. Teams are encouraged to conduct more meetings and utilize video software for key agendas to establish a more personal connection. The team also needs to look for new methods and solutions that promote closer remote collaboration since e-mails are often quite a limited tool — in fact, there is a constant risk of e-mails being overlooked or for a user to be overwhelmed by the sheer number of e-mails we now receive on a daily basis. In addition, teams should consider reviewing controls that require two-person coordination before the close. Determine whether remote working demands have changed these controls, and ensure they are properly documented to support eventual audits.It will also be vital to communicate with management early regarding how reporting and reviews will be handled. Management reporting recipients need to be briefed before making any changes. As an example, it should be determined how trial balance and preliminary P&L reviews will be conducted remotely to properly manage expectations. A plan has to be in place for report distribution as well as reviews related to the close.UTILIZING EFFECTIVE TEAM SOFTWAREInstead of relying mostly on meetings to understand statuses and involvement in the process, a team can use dashboards and standard reports with read-only access for stakeholders and auditors for visibility. Teaming software allow simultaneous collaboration on the same task or reconciliation, the flexibility of which is especially useful in the current working environment. Features that enable users to attach documentation and access work that has been accomplished in previous periods will allow new or even temporary workers to gain the necessary information from one place, establishing better continuity even if one or two key team members are unable to work.Effective teaming software solutions can also facilitate communications and establish one source of truth. By having one place where all files are consolidated and can be securely transferred, employees will not need to search in multiple sources and save time. An efficient software solution will allow teams to create business rules that can help operationalize high-risk priority accounts with frequency information and due dates. Another function that should be prioritized is the ability to set review levels and frequencies based on criteria defined by the business. Some accounts may have less volatility than others and will not need to be reviewed monthly, while others may be zero-balance accounts that can be certified automatically.An efficient task management solution can handle the documentation, support and sign off of any activity, while the best task management software can set up recurring tasks for certification or tracking.UNDERSTANDING RISKS AND SETTING PRIORITIESAfter establishing clearer ways to team up in the new normal, the next point of focus is identifying the most high-risk items and addressing them. With strained resources and issues in technology, such as maintenance and cybersecurity, arising given our current circumstances, understanding and prioritizing risks accordingly will help keep the focus of the team from fraying or latching onto low-impact concerns. Teams must learn what they can from external and internal auditors as well as how their controls can identify the high-risk items that need to be prioritized.It is recommended to scrutinize how overall activities relate to broader milestones in the close — for example, they can center on closing sub-ledgers and the general ledger. All the dependencies such as entity-level processes that are dependent on local steps will need to be considered. Risks such as reconciliations, journal entries and tasks like controls must have their risks assessed.Teams can also reduce activities by evaluating and enforcing materiality thresholds, with the addition of appointing a point person to monitor the close checklist to serve as a secondary control in ensuring the team does not miss any steps. After reviewing the virtual close plan with auditors and soliciting their input, any extra steps can be determined to further support the audit process.OPTIMIZING TODAY WORK BETTER TOMORROWThough the immediate goal is to close the books, these considerations can pave the way for companies and teams to become more optimized. By learning how to address and manage risks and pain points under the unprecedented challenges to be found in our current environment, teams can develop the necessary agility, resiliency and flexibility to meet future disruptions and better position themselves to grow and thrive in a business world beyond the pandemic. 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.Aaron C. Escartin is a Tax Partner of SGV & Co.

Read More
27 September 2021 Betheena C. Dizon

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

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

Read More
Leading the way in business

Other SGV News and Publications