Suits the C-Suite

23 May 2022

Marie Stephanie C. Tan-Hamed

Redefining growth with humans at the core

Companies measure growth by the numbers such as profits, margins, returns, and share prices. They compete and try to win against all odds to meet shareholder expectations with impressive quarterly figures. It is the growth pressure that drives companies and brands to exert tremendous effort to gather data from consumers as they navigate the challenging highways of the digital economy, perhaps oblivious of having regarded the consumers as mere commodities rather than people. All this will have to change if brands are to take the pulse of future consumers who demand more from companies that use digital technology and processes to drive short-term revenue growth.Consumers now expect more and better from the companies they do business with. They are empowered consumers who are not satisfied with brands that only pay lip service to sustainability and purpose-led growth while conveniently sliding back to quarterly earnings as their barometer for success.In the latest EY Future Consumer Index survey, 68% of surveyed consumers think a brand’s behavior is as important as what it sells, while 69% say brands must behave ethically and according to community expectations. Yet only 38% think the positive actions brands are taking are good enough.Companies that have taken heed of the call for sustainability and the new growth strategy talk about long-term value that seeks to assess performance beyond financials to include governance, people, planet and prosperity. This redefinition of growth will need to: drive the innovation of environmentally friendly products and services; redesign customer experience; and build an operating model with humans at its core.GREEN INNOVATIONIn the EY Future Consumer Index survey, 68% of respondents think brands have a responsibility to invest in the sustainable production of goods and services. In addition, 70% say that brands must be transparent about the social and environmental impact of producing their goods and services.This clearly establishes a sense of urgency on fusing planet with profit and rejects the notion that sustainability in product and service innovation can be merely aspirational. Organizations will be better off with commercial, environmental and social sustainability embedded into their purpose, design thinking, prototyping and scaling of products and services.It begins with a little more effort to thoroughly understand a problem before coming up with a solution. Rapid problem-solving often impedes the company’s ability to solve the underlying issue. Staying in the problem longer than one feels comfortable with is a wise step towards driving sustainable innovation that is both planet and profit friendly.FUTURE OF CUSTOMER EXPERIENCEIn shaping the future of the customer experience, it helps to look at the rapid changes in technology. In the last decade alone, technological advancements have challenged companies to rethink the customer experience, and this will be the case over and over again. There is one thing that will be constant though — the human factor that rises above any technology.The EY Global Consumer Privacy Survey shows how customers want to believe in and trust the organizations they do business with. Marketing campaigns alone will not do the job though. For brands to win customer trust, they will need to align to customer values and beliefs and demonstrate that in their actions. This trust is built by knowing and engaging with customers, not as statistics but as individual living, breathing human beings.Engaging with the full spectrum of human needs increases the likelihood of collecting data ethically, and this should result in more trust from customers. This, in turn, enables brands to better anticipate and improve the products and services they deliver to customers, which leads to purposeful growth and the creation of long-term value.With customer centricity embedded throughout the enterprise, customer interactions are much more likely to be consistent. Familiarity and understanding of customer wants and desires will be spread across the different functions in the organization.There are a few ways to fast-track an organization’s way into this future customer experience while delivering on purpose and driving profit at the same time. One is talking to customers regularly and listening to what they say. Marketing chiefs can sometimes assume they already understand customers based on past interactions, and this deprives them of perspective that can be gained from an ongoing dialogue.Interactions with customers that trust the organization can uncover more data, allowing for the organization to combine quantitative information with qualitative perspectives.Marketing chiefs need to shift the mindset of the organization to focus on the desired and organizationally aligned outcome, such as how team members contribute to giving the customer a positive experience, rather than how many gadgets they developed, manufactured and sold.REINVENTING THE OPERATING MODELOrganizations should rethink their business and operating models to truly sustain healthy customer relationships. This is called for mainly because most large organizations were designed according to 20th century principles and founded on rigid structures to organize people only — without considering the impact of technology. This created functional silos that result in disconnects that do not help create a positive customer experience.Based on our EY global organization’s track record in helping clients transform their operating models for customer-centricity, a few key actions have been identified that marketing chiefs can take in partnership with leadership. One of these is creating pod teams that align to the customer lifecycle. A pod is a cross-functional team or a group of individuals with complementary skills working toward a common purpose or to accomplish tasks that form part of a larger project. It transcends existing divisions within an organization. A pod, for instance, may be dedicated to delivering a great welcome experience to all new customers in the first six months, regardless of the product or service purchased. Performance measures will then have to be tweaked to focus on the best possible customer outcome.This cross-functional team needs to be empowered to make decisions for them to be truly effective in delivering the best customer outcome. They are front-facing and therefore capable of seeing how a product or service is performing. Ideally, they should also have the leeway to make data-driven decisions to pivot or shift the direction of a product or service.Redefining growth requires a shift in mindset — a change in the way the organization looks at things to deliver new results. It requires specific steps that go beyond little tweaks here and there. Purpose-washing, or representing the brand as if it is committed to a larger purpose, does not work. Instead, companies need to reexamine their current definition of growth and redefine it in the context of authenticity of purpose and long-term value. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Marie Stephanie C. Tan-Hamed is a Strategy and Transactions Partner of SGV & Co.

16 May 2022

Maria Kathrina S. Macaisa-Peña

Winning consumers with a future-fit operating model (Second Part)

Second of two partsConsumer product companies face the challenge of transforming to stay relevant to rapidly changing consumer needs, but global research commissioned by EY reveals concerns in whether leaders are taking the right actions to steer their organizations.In a recent global C-Suite survey, “Becoming Future Fit: Challenges and Opportunities for Today’s Consumer Products Companies,” which was commissioned by EY from MIT SMR Connections, 86% of the surveyed C-Suites said transformation was essential to become future-ready, but they face uneven progress due to conflicting priorities and a shortage of talent necessary to facilitate change. Unless companies find ways to overcome these hurdles, they will fail to achieve their transformation goals and grow increasingly out of step with the demands of tomorrow’s consumers.In the first part of this two-part article, we discussed the first two key design principles necessary to drive agility, responsiveness and resilience: becoming part of dynamic business ecosystems and building upon data and analytics with data fabric. In this second part, we discuss the remaining three key design principles: encouraging talent flexibility, innovating at scale and embedding Purpose into every facet of the organization.For these principles to be at their most effective, it is best that organizations excel in all rather than merely do well in one or two, and they must be accomplished in a manner that builds and sustains trust not just with consumers but with their people and all their ecosystem partners.ENCOURAGE TALENT FLEXIBILITYTransformation will require developing people with deep skills in key areas such as data transformation, but organizations will also need generalists across functions capable of working together in new ways. An adaptive workforce and culture will be able thrive when supported by emerging technologies and new methods of collaboration in a reimagined workplace. In the EY 2021 Work Reimagined Employee Survey, emphasis is placed in putting humans at the center with the future of work enabled by transformative digital tools.INNOVATE AT SCALEEveryone must be involved in the effort to innovate. People on the frontlines are often the best sources of ideas, as they deal with consumer and ecosystem partners directly and on a daily basis, but these ideas are often either not captured or are weighed down by rigid processes.By taking a future-back approach to strategic planning, investing in data and moving toward resilient supply networks driven by data, companies will be able to innovate at scale and enable hyper personalization. The most successfully innovative ideas support technologies and cultures that capture, rapidly develop and scale ideas that work, and move to the forefront of reshaping both customer and industry expectations. EMBED A PURPOSE-LED STRATEGYThe purpose of an organization defines its value propositions, its role in ecosystems, how it attracts and retains talent, its partners and which consumers it serves. Although purpose and sustainability are key drivers of value, they are not always made an integral part of operations. Although sector-specific issues vary, a purpose-led growth strategy can address critical issues of trust, technology, trade and sustainability while keeping humans at the center of every decision.As leaders look to reframe for the future of their organizations, investors, consumers, employees and the wider society mandate them to become more purpose-led in creating long-term value. The objectives are growth that is accelerated yet sustainable, a stronger market position, and a better working world for all stakeholders.KEY ACTIONS FOR A FUTURE-FIT OPERATING MODELWhile there is no clear finish line in the race to become future fit, organizations that transform around the five principles will be in a much better position to stay ahead of changing market forces. Fostering better relationships with their consumers will lead to long-term relationships on foundations of trust while being in a stronger position to collaborate with partners with increased agility, enabling them to bring products to market quicker.CEOs can take three key actions that are crucial in delivering a future-fit operating model, the first of which is to set a leadership vision that disrupts organizational barriers. Although the organization is on a transformation journey, it is essential to ensure the entire organization is on the journey as well. CEOs are meant to challenge the orthodox and inspire action, but the Becoming Future Fit global survey reveals that 63% of leaders expected corporate culture to be a source of resistance, while 55% cited the failure to orchestrate a transformation roadmap to be another potential barrier.Second, CEOs must be realistic in setting timelines to build capabilities. In the global survey, 61% of leaders said it was critical to create a flexible talent pool within two years, but an adjunct professor quoted in the survey reports that it takes three to seven years just to onboard everyone, align incentives, and get buy-in.Lastly, leaders must start from what is necessary in the future, and not based on what they are capable of today. The global survey found that although 77% of leaders said they had the emerging technologies necessary to transform their operating model, 70% identified the need to upgrade their technology infrastructure as a significant barrier to transformation. This contradiction highlights the gap between having the needed capabilities for today instead of tomorrow, creating consequences in delivering the transformation agenda.THE NEED FOR CONTINUOUS ADAPTATIONIt should be established that there is no single business model that can win in the future at scale, as CEOs will need to deliver many different models, strategies and propositions from a core operating model. Leaders will need to keep adapting business strategies and priorities to anticipate potential disruptors and reflect volatile market conditions.This requires a perspective that does not make the present and future mutually exclusive. Leaders must employ the mindset that the value they create today will fund their transformation in the future, while investments made in future transformation will aid in creating value today — presenting the opportunity to create a virtuous cycle. 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 Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

09 May 2022

Maria Kathrina S. Macaisa-Peña

Winning consumers with a future-fit operating model (First Part)

First of two partsChief executive officers of global consumer product companies face the challenge of transforming their organizations at a rapid pace to ensure they stay relevant to evolving consumers. Part of this challenge entails strategizing and delivering multiple business models and propositions swiftly, but due to time and cost constraints, CEOs cannot build a new operating model from scratch every time something new has to be done.This calls for more agile, responsive and resilient ways of working that will allow consumer companies to pivot overnight when necessary. In fact, according to a recent global C-Suite survey commissioned by EY from MIT SMR Connections, Becoming Future Fit: Challenges and Opportunities for Today’s Consumer Products Companies, 86% of the surveyed C-Suites said transformation was essential to become future ready. However, the study also revealed that there was great uncertainty in whether leaders are keeping the process of continual change in their organizations on the right track.How products, services and experiences are valued is dictated by evolving consumer perspectives, while technology is key to enabling new ways of purchasing and engaging with products. Technology is also what redefines the kind of value propositions that companies can offer consumers, as well as how these propositions are delivered. There are increasingly more options in how companies can design, create, market, combine, package, and deliver their products and experiences to get them closer to the consumer than ever, enabled by technological capabilities in data and analytics.CEOs will need to apply a transformation mindset and create a C-Suite agenda reflecting the new reality of things. With the pandemic bringing to light uncertainty and the urgent need for technological change, these and more factors have already changed every aspect of a consumer’s life and will continue to do so. Their needs, expectations and behaviors have shifted in ways that put the old ways of working and the companies that propagate them at risk.The current times require companies to be agile, responsive, and resilient. These characteristics can be built into a business by applying five interconnected design principles that CEOs must follow to lead systemic transformation and become future-ready.The first of this two-part article will discuss the first two principles: becoming part of dynamic business ecosystems and building upon data and analytics with data fabric.BECOME PART OF DYNAMIC BUSINESS ECOSYSTEMSCompanies that harness dynamic business ecosystems are better positioned to drive capital efficiency and innovation that creates long-term customer value. It becomes imperative to have a good understanding of ecosystems to stay ahead of the pace of change, especially in anticipation of potential disruptors.Those who participate in business ecosystems are more likely to create increased value in a group than they would individually, putting companies who are unable to adapt at the risk of falling behind. By building ecosystem models into the structure of their value creation strategy, consumer companies can more effectively navigate the digital space and more quickly generate customer value.A previous Suits the C-Suites article, How to win Asia-Pacific consumers in the new era, found that digital business ecosystems have emerged in recent years to allow companies to complement each other and offer interconnected products and services in a singular integrated experience. This is already seen in the super apps that consumers are familiar with today, with local examples such as ride-sharing apps with expanded services that include on-demand purchase assistance, food delivery, and even bill payment functions.BUILD UPON DATA AND ANALYTICS WITH DATA FABRICCompanies are facing more pressure than ever to become data-driven as leaders understand the value of data and use it to generate valuable insights. While a listening organization that is built on data and analytics allows CEOs to make timely, informed decisions, simply prioritizing analytics is not enough. Data fabric, a set of independent services put together to provide a single, focused view of data relevant to business across all sources, will be necessary for many large enterprises to operationalize data in order to address specific challenges as well as innovate.Digital networks and their data flows serve as the connective tissue and nervous system that lets the body of the ecosystem function by integrating disparate data sources. Data fabric connects the threads of information across an enterprise, delivering value in the short term with a long-term transformation strategy. It is not designed to collect and store information, as opposed to data warehouses, and there is no need to replicate data or start from scratch when searching and aggregating it.By utilizing the data fabric approach, data is integrated into useful formats that allow for maximum reuse. It enables sharing, portability and governance by intertwining threads of structured and unstructured data to form a consolidated view made available to users in formats they can use and in terms they can understand.In the second part of this article, we discuss the remaining three key design principles necessary to drive agility, responsiveness and resilience: encouraging talent flexibility, innovating at scale, and embedding a purpose-led strategy into every facet of the organization. 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 Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

02 May 2022

Czarina R. Miranda

Managing the hybrid workforce (Second Part)

Second of two partsA look into worker sentiment points to a general preference for an arrangement that involves flexibility in when and where employees perform their duties.For one, the recent EY Future Consumer Index shows employees “losing interest in pre-pandemic work patterns,” a finding that reinforces those made in the EY 2021 Work Reimagined Employee Survey that showed the majority of surveyed employees in Southeast Asia preferred not to return to pre-COVID ways of working.In the first part of this article, we looked at the rise of the hybrid workforce and tackled the challenges in managing the workplace. Now we will look at the challenges of keeping employee well-being at the forefront in the hybrid work environment.Two years of remote work have given employees more choice over how they spend their time and how to be productive outside of the office. It has given them a better appreciation of how important the quality of their time is in comparison to how much they earn. They have found renewed enthusiasm for staying in and buying experiences rather than new material goods.It’s a cultural shift that can have profound implications for corporate leaders. One area that will demand greater attention is managing the workforce and the company culture as organizations institutionalize hybrid work strategies. We look at a few key items critical to success in embracing the flexibility that most employees crave for after years of remote work.THE RIGHT WORKFORCE STRATEGYThe level of uncertainty on how an organization’s “return-to-office” position unfolds post-pandemic can be as high as that felt in the first couple of weeks when the pandemic catapulted much of the country into lockdown in 2020. How organizations have remained productive throughout the last two years can fuel speculation among employees who favor continuing with telecommuting.They certainly will look to the leadership team for a clear message on the workforce strategy that will be in force in our post-pandemic world. It may not suffice to simply confirm that an organization will embrace a hybrid workforce strategy. Corporate leaders will have to answer such questions as whether the organization is leaning towards a remote-first strategy or is it gravitating back to the traditional set-up with a little flexibility.But how does the organization arrive at such a decision? Do we bring the employee along for the journey and listen to what they have to say? All this will depend on company culture. Once a strategy is chosen, the workforce approach can be documented properly so that the entire organization is prepared to support this decision.Communicating this to the entire organization can help various teams decide on how they can best support and enforce the strategy. Will a playbook be necessary to manage the change over the next six to 12 months?A clear workforce strategy and a communication plan can work favorably for employees. It tells them what the company wants and gives teams the chance to contribute to achieving goals with the end-view of maintaining the hybrid workplace.SETTING MILESTONESThe last thing corporate leaders would want to be in is a situation that requires closer monitoring of employee activity. Will putting in place measures that allow management to do real-time tracking of employee activity run counter to the workforce strategy? Workers may look at closer monitoring as a sign of a lack of trust, and this may eventually adversely affect company culture and employee engagement and retention.To choose a hybrid team as a workforce strategy moving forward may be taken to mean as accepting that productivity has not been compromised over the past two years, when the pandemic forced us into remote work. This is the message that workers will read from a workforce decision to go hybrid. It can reinforce their own argument that it is possible to keep productivity up even in the confines of their homes or other alternative work sites.It pays to set milestones on productivity to help teams work in unison to continue to deserve the flexibility that they desire from hybrid work arrangements. Clear milestones make it easier for teams to figure out on their own how to achieve team goals even as they remain in the comfort of their homes for most of the work week.It is advisable though for teams to have a set day of the week when they are compelled to be in the office for various reasons. It can create what many have referred to as moments of spontaneous exchange of ideas that lead to innovation, heightened productivity, or better ways of doing things in the organization. It can also provide an “anchor” for your people to feel connected to the organization and to each other. This is especially meaningful to possible new hires who were onboarded during the pandemic and who may not have yet had in-person interactions with other team members.PROMOTING INCLUSIVE LEADERSHIPChoosing which set of workers can be allowed to work from home and who remains on-site may not be as simple as identifying who faces clients and who works at a plant. Hybrid work models can be vulnerable to instances of resentment when disgruntled staff can feel left out of the perceived benefits of remote work, or conversely, remote employees may feel that those physically present in the office are more “favored” by the managers. It’s friction that, if left unresolved, may eventually create trouble within and among teams and stand in the way of productivity. However, building a company culture that fosters inclusion and a sense of belonging will help prevent this from happening.With a remote workforce, an inclusive workplace culture becomes all the more important in keeping employees engaged. It all begins with a sense of belonging that can translate to employee satisfaction with work and productivity. In the traditional work arrangements, it is easier to cultivate that much-needed sense of community among team members. Remote work, however, can hinder interaction that is a building block to building belonging.Leadership can play a vital role in this department to ensure that employee welfare programs adapt to these realities. The hybrid workplace also presents an opportunity to revisit programs on diversity, equity, and inclusion (DE&I), as this can contribute to successful recruitment and employee retention.There can be many more challenges to learn along the way as most organizations take this route. Leaders’ responses can vary from one organization to another, but what matters is keeping morale and productivity high. In designing remote and hybrid work strategies, it is best for leaders to place employee well-being at the forefront and optimize available resources to support employees. 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.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

25 April 2022

Czarina R. Miranda

Managing the hybrid workforce (First Part)

First of two partsFor many organizations trying to regain their footing post-pandemic, it can be quite a paradigm shift to make decisions on adopting hybrid work models, especially since health alert levels continue to be lowered as a means of stimulating economic activity. Hence, under the new normal, corporate leaders will have to address new challenges and questions in managing hybrid teams.There can be great reluctance on the part of organizations to come to terms with the need for a flexible workforce post-pandemic. While opinions vary on the actual productivity that remote work has delivered in the past two years vis a vis pre-pandemic operations, flexible work arrangements offered an avenue for many organizations to remain operational despite the lockdown. There is also anecdotal evidence in support of how various organizations remained productive with telecommuting. However, each organization will need to gauge productivity for themselves given the scale and nature of their operations.A look into worker sentiment points to a general preference for an arrangement that involves flexibility in when and where employees perform their duties. The recent EY Future Consumer Index shows employees “losing interest in pre-pandemic work patterns,” a finding that reinforces those made in the EY 2021 Work Reimagined Employee Survey that showed the majority of surveyed employees in Southeast Asia preferred not to return to pre-COVID ways of working.In the case of the business process outsourcing industry, which employs an estimated 1.4 million workers, there has been overwhelming preference on the part of the talent for a balanced, hybrid work arrangement. This has prompted industry leaders to propose that the government reconsider its order for the outsourcing companies to prepare for a return to full office operations lest they lose their tax perks that are contingent on full on-site operations.Over the past two years, hybrid teams have attracted an abundance of attention. Employees generally favor the opportunity to distance themselves from the workplace — both geographically and emotionally. Filipinos working in the National Capital Region and key cities notorious for traffic congestion found great relief from the hassles of the daily commute. In the human resources domain, the conversations these days among experts often gravitate to the paths that organizations plan to take post-pandemic.The idea of hybrid work models being in the forefront of conversations in human resources did not happen by chance though, even with the lockdowns providing the impetus for organizations to stay agile and quickly find ways to keep operations going amid the restrictions on mobility especially in the first few months of the community quarantine. If you look at legislation related to hybrid work models, telecommuting was a concept already found in our legislative bills before health authorities detected the first COVID-19 case in the Philippines.REMOTE WORK POLICYRepublic Act 11165 or the Telecommuting Act was signed in Dec. 2018 or more than a year before the pandemic. The law formalizes the option for employees to work from home and declares telecommuting as an alternative work arrangement that both employers and employees may implement upon mutual consent. The law also sets out the rights and duties of both employers and employees and promotes employee welfare.Telecommuting and other alternative work models have since become an important subject for legislation and policymaking.A look into our evolving policy regime on flexible work models brings to mind the Department of Labor and Employment’s Labor Advisory No. 09 Series of 2020 which seeks to assist and guide employers and employees in the implementation of “various flexible work arrangements as alternative coping mechanism and remedial measures” during the pandemic. This may not, however, bolster the narrative for hybrid teams because its use of the term “flexible work arrangements” can actually worry employees; “arrangements” referred to in the policy are reduced work hours or workdays, rotation of workers, and forced leave — so-called “better alternatives than outright termination of the services of the employees or the total closure of the establishments.”Responsibilities of employers to their employees are likely to evolve as well if hybrid work models were indeed to become the norm.The experience with telecommuting during the pandemic has, in fact, called the attention of lawmakers to the issue of rest hours as employers’ control over employees now extends beyond work hours through the use of phone, email, and messaging apps. With technology and the ease of communication that it brings, it is easy for lines to blur between work and home. Employees can easily fall into the trap of voluntarily keeping lines of communication open and their devices switched on beyond work hours even if not required by their superiors.Senate Bill 2475 or the Workers Rest Law proposes penalties on employers who intrude on workers’ rest hours to prevent work from depriving employees of their personal time.COMPRESSED WORKWEEKThe government’s economic managers have also considered a proposal for a four-day workweek to help businesses cut costs. There are still no clear signs on whether this proposal will lead to a new law or a department order since the government is likely to present this as management prerogative rather than a mandate for companies to follow.Two years of telecommuting has also given rise to a host of concerns on the part of employees who are responsible for staying available for tasks and meetings during work hours. While remote work saves them the costs and hassles of the daily commute, in return they carry the burden of logistics, internet and utility expenses. Senate Bill 1706 seeks to ease this burden by providing a tax break equivalent to a P25 reduction from the taxable income for every hour worked from home.There have been companies that have opted to extend financial assistance to specific teams within the organization, whose continued productivity weigh more than the cost of any internet connectivity subsidy.OFFICE SPACEOther practical considerations that many companies choosing the hybrid team path will have to tackle include the use of leased office space. Some have had to contend with being unable to negotiate significant discounts on office lease contracts despite the extended lockdowns in the Philippines that kept most workstations unoccupied. A decision to pursue a hybrid work model post-pandemic will mean reconsidering an organization’s pre-pandemic need for space.As organizations explore options to adjust their use of space and optimizing every square meter, some have looked into the hoteling concept (telecommuters reserve a workstation or desk for their in-office days) or hot desking (an employee finds and works at any open seat when in the office). Hoteling is seen as a way of cutting an organization’s office space requirements and costs while also ensuring that social distancing can be managed should employees physically enter the workplace. This can offset investments in equipment and technology that may be needed to support a hybrid team and keep members collaborating as well as responsive to client needs.There can be many more challenges to learn along the way as most organizations take this route, and leaders’ responses can vary from one company to another. As organizations devise their own mix of work arrangements that are suitable to their business models, this direction cannot be seen as a partial return to the old “normal.” Instead, this charts a new path forward that acknowledges the changes in workforce needs and the opportunity for leadership to reimagine the future of work.In the second part of this article, we will talk about the challenges of keeping employee well-being at the forefront in the hybrid work environment. 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.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

18 April 2022

Aris C. Malantic

Why analytics are essential to quality non-financial corporate reporting

EY’s recent Global Corporate Reporting Survey tells us that change in corporate reporting is accelerating. In particular, the need to better communicate an organization’s ESG performance is putting significant pressure on the finance leaders responsible for its preparation — requiring finance teams to beef up their analytics capabilities.Late last year, more than 1,000 CFOs, financial controllers and senior finance leaders of large organizations across 26 countries — including 250 in Asia-Pacific — were surveyed to understand the challenges they face in corporate reporting.The biggest theme emerging from this research is that, alongside the traditional financial reporting that finance leaders oversee, investors and other stakeholders want consistent and credible ESG disclosures on material issues to help them understand how a company creates long-term value and sustainable growth.EY survey participants are not alone in noticing this trend. At EY, we’re seeing growing increased pressure on corporates to improve their ESG reporting — from equity investors, insurers, lenders, bondholders and asset managers, as well as customers who all want more details on ESG factors to assess the full impact of their economic decisions.ADVANCED ANALYTICS KEY TO EXTRACTING ESG METRICS AND INSIGHTS Extracting ESG insights from data is complex and time-consuming — an almost impossible manual task. It requires the use of advanced analytics, which are now available to help companies structure, synthesize, interpret and derive insights from voluminous data, and create credible and useful ESG reporting. Advanced analytics is particularly important in ESG reporting because of the need to address and relate significant amounts of unstructured data.Not surprisingly, the EY Global Corporate Reporting Survey found the top technology investment priority for finance leaders over the next three years is in advanced and predictive analytics. This priority is particularly felt in Asia-Pacific where 47% of regional respondents (68% in China) vs. 38% of global respondents have analytics as their top tech investment priority.DATA VOLUME AND QUALITY ARE STILL STUMBLING BLOCKSYet even as finance teams seek to invest in analytics and build a more agile financial planning and analysis approach, several data challenges stand in the way. According to EY Asia-Pacific survey participants, the biggest hurdles include the sheer volume of external data, followed closely by data quality and comparability issues. Lack of timely data and inefficient data integration are also problematic.Analytics starts with data, but techniques such as predictive modeling, statistics and visualization are also important in turning that data into timely and actionable insights.For example, organizations can enhance the quality of reporting by introducing forward-looking insights, using external data to corroborate and provide analysis on future trends. Thereafter, this downstream reporting outcome can be used to streamline upstream activities, such as capturing data in the right format to allow for efficient collection and analysis.However, this requires proper planning from data collection to reporting, with technology as a key enabler. In other words, this process should be considered as part of an organization’s digital transformation journey.COLLABORATION ESSENTIAL TO BUILD NEW ANALYTICS CAPABILITIESDeploying these sorts of advanced solutions requires more than finance teams buying new technology. It will take a cross-disciplinary effort that combines advanced data science skills, business domain expertise, and finance and ESG experience.Developing an approach that mimics human efforts is a guided process. It’s not simply about developing algorithms — it can require learning and incorporating the human decision-making process. The finance team will need to work together with key stakeholders, such as the analytics centers of excellence, to define the use cases for advanced ESG analytics and then collaborate during the development process.RESOURCES AND SUPPORT REQUIRED TO DRIVE REPORTING EXCELLENCEBetter quality non-financial corporate reporting, underpinned by advanced data analytics, will be essential to meet the changing needs of investors and stakeholders. Finance leaders need to drive innovation by setting out a bold technology road map for transforming financial analytics and providing enhanced and trusted reporting, including advanced tools such as AI (artificial intelligence).To support them, boards should assess whether finance leaders have adequate resources and budgets to address these challenges and increase their use of advanced data analytics to deliver more robust non-financial corporate reporting. 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.Aris C. Malantic is a Market Group Leader and the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co., as well as the EY Asean FAAS Leader.

11 April 2022

Arthur M. Maddalora

Accounting considerations for the oil and gas sector as renewable energy adoption drives ESG reporting

Globally, more and more countries continue to increase their focus on developing renewable energy sources, both due to the increasing pressure from various stakeholders, as well as the acknowledgement of the clear and present danger posed by climate change. Because of this, environmental, social, and governance (ESG) reporting has become a top priority for most boards.As the country gains momentum in shifting to renewable energy, we expect that financial reporting will have to reflect the commitments and actions of most organizations, notably those in the oil and gas sector, in tackling climate change. As a signatory to the Paris Agreement, the Philippines, being a country that is particularly vulnerable to climate-related risks, has pledged to reduce its own greenhouse gas emissions by 75% from its 2015 levels by the year 2030.Given the increasing global climate concerns and strong interest in achieving the United Nations Sustainable Development Goal 7 of ensuring access to affordable, reliable, sustainable and modern energy for all, the Department of Energy (DoE) is pursuing a Clean Energy Scenario setting a target of 35% renewable energy share in the power generation mix by 2030 and more than 50% by 2040. As of 2020, renewable energy accounted for 21.2% of the Philippine power generation mix.OIL AND GAS REMAIN VITAL TO ENERGY SECURITYThe DoE reported that in 2020, indigenous sources comprised almost 53% of the energy supply mix, out of which 6.6% was accounted for by the oil and gas sector, mainly from three petroleum service contracts (SCs): SC38 Malampaya, SC14C1 Galoc, and SC49 Alegria. Malampaya and Galoc are projected to be depleted by 2024 and 2025, respectively.However, in October 2020, the President lifted the moratorium on oil and gas exploration in disputed areas in the West Philippine Sea. One of the areas that will significantly benefit from renewed exploration is SC72 Recto Bank, which is operated by a subsidiary of PXP Energy Corp. SC72’s Sampaguita Gas Field is reported to contain prospective resources of 3.1 trillion cubic feet of gas. This project, once developed and made operational, can fill the void that will be left by Malampaya and Galoc.The reality is that until more renewable energy sources are developed, oil and gas will remain a significant component of the Philippine energy mix. This is why, given the global emphasis on climate-related reporting, oil and gas industry players should be seen as being proactive and taking the lead in addressing ESG concerns.FINANCIAL REPORTING FOR CLIMATE CHANGESustainability reporting is an important factor in improving a company’s sustainability commitment and its relationship with investors and customers.With this, the Securities and Exchange Commission, through its Memorandum Circular No. 4-2019, has provided guidance regarding disclosure requirements relating to sustainability reporting as an attachment to Publicly-Listed Companies’ annual reports (SEC Form 17-A).As climate-related matters continue to evolve and entities make further commitments and take additional actions to tackle climate change, it is important that they ensure their financial statements reflect the most updated assessment of climate-related risks. In November 2021, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Boards (ISSB), which is tasked to develop global standards linked to sustainability disclosures including climate and other environmental matters. As of 31 March 2022, the ISSB has issued two Exposure Drafts on IFRS Sustainability Disclosure Standards for public comment.While the Philippine Financial Reporting Standards (PFRSs) do not as yet explicitly reference climate change, climate risk and other climate-related matters, there may still be anticipated impacts on oil and gas companies over several areas of accounting as follows.General disclosure requirements. Entities are required, at a minimum, to follow the specific disclosure requirements in each PFRS standard. In determining the extent of disclosure, entities are required to carefully evaluate whether users of financial statements can assess the effects of climate change on their financial statements. If climate-related matters could reasonably expect to influence the decisions of the users of the financial statements, this information must be disclosed.Going concern. In many cases, climate risk may not add significant going concern uncertainty in the short term. However, Philippine Accounting Standards (PAS) 1 requires disclosures of material uncertainties. Climate-related matters could create material uncertainties related to events or conditions that cast significant doubt upon an entity’s ability to continue as a going concern. In such a case, although going concern may be assumed, additional disclosures explaining the uncertainties associated with the assumption would be required.Exploration and evaluation assets. Entities should consider the impact of climate risk and potential future developments, including the sustainability of its current business model and commercial viability, in assessing the recoverability of its exploration and evaluation assets (i.e., deferred exploration costs) and provide appropriate disclosures.Property, plant and equipment (PP&E). Climate-related matters have the potential to significantly impact the useful life, residual value and decommissioning, and restoration of PP&E (e.g., wells, platforms and related assets, refineries, retail service stations, etc.). Climate change and the associated legislation to promote sustainability increase the risk that PP&E items become “stranded assets” whose carrying value can no longer be recovered within the entity’s existing business model. Given the uncertainties around the impact of climate change, disclosures should be enhanced to allow the users of financial statements to understand and evaluate the judgements applied by management in recognizing and measuring items of PP&E.Impairment of assets. The extent to which certain assets, processes or activities will be impacted by climate-related business requirements and how climate-related risks and opportunities will affect an entity’s forward-looking information, such as cash flow projections, may require significant judgement. Entities should consider what information users rely on in assessing the entity’s (lack of) exposure to climate-related risks.Provisions. As entities take actions and initiatives to address the consequences of climate change, these actions may result in the recognition of new liabilities or, where the criteria for recognition are not met, new contingent liabilities have to be disclosed. Entities should ensure that sufficient disclosures are provided to allow users of financial statements to understand those uncertainties, how climate transition has been considered in the measurement of a provision or disclosure of a contingent liability, and the assumptions and judgements made by management in recognizing and measuring provisions.In a world that is increasingly sitting up and taking note of ESG concerns, the pressure on the oil and gas sector to help address climate risks will likewise continue to mount. While the above list of climate-related considerations is by no means all-inclusive and may vary between entities, they offer a starting point for the industry to take a proactive and progressive stance and demonstrate how it is doing its part to make the global climate change ambition a reality. 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.Arthur M. Maddalora is a senior manager from the Assurance Service Line of SGV & Co.

04 April 2022

Benjamin N. Villacorte and Erika N. Courteille

What the EPR Act of 2022 can mean for businesses

Significant changes are bound to happen to the way manufacturers of products with plastic packaging do business once legislators give final approval to the bills institutionalizing the country’s policy and practice of Extended Producer Responsibility (EPR). Mandates for cutting plastic waste footprint will be clear and measurable. Producers will have to deal with compliance reports, internal systems to record waste reduction, third-party audits, and hefty fines for violations.Plastic generation has continued to rise to approximately 400 million tons per year worldwide, according to the 5th United Nations Environment Assembly, and is estimated to double by 2040. Filipinos use up about 2.15 million tons of plastics annually, and more than one-third of these reach the environment, said the World Wide Fund for Nature.In response, the government has started responding to global efforts and targets. In 2019, the National Economic and Development Authority (NEDA) published the Philippine Action Plan for Sustainable Consumption and Production. House Bill (HB) 9147, also known as the “Single-use Plastic Products Regulation Act,” seeks to promote plastic circularity through reduce, reuse, and recycle practices, as well as the EPR.Senate Bill (SB) 2425 and HB 10696 focus on institutionalizing EPR schemes to tackle the plastic waste problem. Both seek to prevent plastic waste from leaking into the environment by holding those that generate waste responsible for the whole life cycle of their products. The bills, which are currently pending joint resolution, push for the amendment of the Ecological Solid Waste Management Act of 2000 (RA 9003).UNDERSTANDING EPREPR is the environmental policy and practice that gives obliged companies (or producers) responsibility over the entire life cycle of their products. With the EPR, producers should ensure proper and effective recovery, treatment, recycling, and disposal of residual plastics from their products, and should adopt ways to improve plastic recyclability or reusability.EPR schemes are designed for participation by relevant stakeholders — the producers themselves, government, producer responsibility organizations (PRO), waste management operators, and other relevant parties such as the informal sector and third-party auditors.The latest iterations of the bills have two major differences that must be reconciled. SB 2425 obliges large companies only while HB 10696 encompasses medium and large companies. SB 2425 requires companies to target 10% recovery in the first year of implementation and 80% by the eighth year. Meanwhile, HB 10696 starts with 20% in the first year, and targets 80% by the fifth year.To encourage compliance, rewards and recognition will be given to outstanding and innovative initiatives. Tax and duty exemptions on imported capital equipment and vehicles used for the EPR scheme may also be awarded to qualified organizations. On the other hand, organizations who submit false documents, misrepresent themselves or fail to meet targets are liable for hefty fines ranging from one to twenty million pesos depending on the size of the organization. Business permits will also be automatically withdrawn for third offenses. BUSINESSES MUST CONSIDER ZERO-WASTE STRATEGIESThese bills, if passed into law, will surely affect how obliged companies conduct business. Within nine months upon the effectivity of the law, producers or their authorized PRO, shall register their EPR programs with the National Solid Waste Management Council and align their strategies and programs with the mandated recovery targets. Moreover, they will have to submit annual reports to monitor compliance with their respective EPR schemes and targets. Businesses must establish an internal system to record and report their plastic waste footprint, which must be audited by an independent third-party. Recovery or offsetting reports by waste management operators or diverters must also be audited.Waste management operators must ensure that national targets are met. They must coordinate closely with PROs and obliged companies, possibly set up more materials recovery facilities (MRFs) and prepare the necessary resources. Based on the experience of other countries, integration of the informal sector is crucial to the success of EPR schemes since the current bulk of plastic collection, sorting and recycling relies on them. This raises the possibility of developing a plastic management ecosystem where the informal sector provides their knowledge and expertise to the process, and in return, operators can develop formal programs aimed at providing informal workers with secure livelihoods and social protection.EPR also requires buy-in from the consumers. PROs must conduct extensive awareness campaigns on the importance of segregation and sustainability. It is worth noting though that worldwide, it is consumers themselves who are showing preference for brands that are true to their sustainability claims.The EY Future Consumer Index shows that younger generations are critical, skeptical, and willing to switch brand loyalty if expectations are not met. Twenty-four percent of Gen Z and Millennials check the sustainability claims brands make, compared to 4% of Boomers, and they take action, too. Twenty-one percent of Gen Z and Millennials have stopped buying a product because the brand isn’t doing enough for the environment.The point is that while it may be difficult to strike a balance between sustainability and preserving product quality with attractive packaging that ends up in the environment and landfills, consumer attitudes point to a reputational risk for brands that insist on the status quo. It won’t be a surprise if future consumers switch to alternatives and dump brands that are reluctant to change their packaging to more sustainable forms.While waiting for the final passing of the bills, businesses should start monitoring their plastic waste flow and build partnerships for the smoother implementation of their EPR program. They can also start redesigning their products or packaging to reduce their plastic footprint. Ultimately, EPR presents an opportunity for businesses to improve their products, show commitment to the achievement of global climate change targets, and transition towards a circular economy. 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 Erika N. Courteille is a manager from the Climate Change and Sustainability Services team of SGV & Co.

28 March 2022

Cecille S. Visto

Corporate dissolution made easy

The Philippines, it’s often easier to incorporate a new entity than to dissolve an existing corporation. Investors face the tedious and long process of closing their businesses, which requires the cancellation of various registrations with regulators, including the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). The difficulties of dissolution — and eventual liquidation — are one of the factors that affected the country’s ranking in the World Bank’s ease of doing business report in recent years. To address the challenges of corporations contemplating dissolving and eventually, liquidating, the SEC recently issued the guidelines on corporate dissolution consistent with the provisions of Republic Act 11232 or the Revised Corporation Code (RCC).DIFFERENT TYPES OF CORPORATE DISSOLUTION SEC Memorandum Circular No. 5, Series of 2022 prescribes the procedures and requirements for the different types of corporate dissolution, namely voluntary dissolution with or without creditors affected under Secs. 134 and 135 of the RCC, respectively; involuntary dissolution pursuant to Sec. 138; and dissolution by shortening of corporate term provided in Sec. 136. Of the three types, dissolution by corporate life shortening is by far the most common, with a corporation determining at the outset the end of its existence. This is done through the filing of an application for amendment of the Articles of Incorporation (AoI) with the SEC indicating the shortened term or the last day that it operates as a juridical entity. An entity can propose an expiration date of less than one year from the SEC approval or one year or more from such approval. The chosen timing also has a significant impact on the corporation. If the dissolution period is less than a year, the applicant has to submit, among others, a tax clearance certificate from the BIR. On the other hand, if the shortened term is a date that is more than one year from the Commission’s green light, the BIR tax clearance will not be required. While the procedure and process are essentially the same for both options — with the same applications lodged with the same government agencies — the difference is in the sequencing. Under the first option, the company will file and process the application for BIR tax clearance and undergo a rigorous tax audit process prior to filing an application for AoI amendment. The second option allows for the filing and processing by the SEC of the application for shortening of the corporate term without waiting for the BIR tax clearance. After the SEC approves the application, the company continues to operate as a juridical entity until the expiration of the corporate term. The corporation is not yet dissolved until after the last day of its shortened term. Until the release of SEC MC 5, these options were not officially provided in any SEC rulebook, although they were applied in practice. Numerous registered companies have taken advantage of the alternate route, effectively steering clear of the need to first secure the BIR tax clearance prior to the processing of the dissolution application. However, getting the clearance is still required for a corporation to officially close its business operations in the Philippines. In this regard, the BIR will still conduct the mandatory closure audit, which is a condition precedent to the grant of the tax clearance. Under the old rules, the SEC may approve the dissolution provided the end of the corporate term must be at least one year from the filing of the application. In the recently promulgated issuance, it is clear that the end of the corporate existence must be at least one year from the actual approval of the SEC. SEC MC 5 specifically provides that the application must contemplate a future date, and not a date that had already lapsed at the time of the filing of the application.TIMELINE AND COSTS A regular BIR tax audit covering a fiscal or taxable year may take at least one year to close, or longer depending on the complexity of the issues raised by the examiners. In a mandatory closure investigation that will cover the last two to three taxable years, the audit may be completed in approximately two years. Given that the completion of the BIR tax audit may be difficult to estimate, the timeline for the dissolution under option 1 is indefinite and will largely depend on the pace and workload of the assigned BIR examiners. Meanwhile, the timeline under option 2 is definite as to when the corporation is deemed legally dissolved. Upon the expiration of the shortened term, as stated in the approved amended AoI, the corporation is considered dissolved for SEC purposes without any further proceedings. Thus, dissolution automatically takes effect on the day following the last day of the corporate term, without the need for the SEC to issue a certificate of dissolution. The costs for both options are relatively the same, including the filing fees, regulatory fees, and deficiency taxes that may be assessed and paid at the close of the BIR tax audit. However, the simplified dissolution process will result in lower overall costs and time as there is no need to comply with certain requirements, such as filing of audited financial statements, which will save the corporation on professional fees. There will also be fewer personnel expected to be retained on the payroll, particularly those who will be in charge of the BIR tax audit and the related liquidation process. Likewise, the corporation is not required to maintain the office lease. Under Sec. 139 of the RCC, a dissolved corporation will continue to exist for three years after the effective date of dissolution to generally wind up its affairs, including the disposal of its properties and distribution of its assets. Notably, given the expected time lag between the SEC approval and the BIR tax clearance, corporations in the process of liquidation often opt to maintain a bank account for the settlement of any deficiency tax assessment by the BIR. As the SEC has clarified the two available options in the shortening of the corporate term, registered entities have the opportunity to carefully weigh the method that will better address their needs, taking into consideration the processing period, available administrative resources, and the targeted timeline for the dissolution. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.CECILLE S. VISTO is a tax senior director and lead manager for the Entity Compliance and Governance Services of SGV & Co

21 March 2022

Christiene R. Matic

New VAT zero-rating rules and requirements under CREATE

Upon the effectivity of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on April 11, 2021, a new requirement to support the VAT zero-rating of local purchases of registered business enterprises was introduced.CREATE required registered business enterprises to prove that their local purchases of goods and services are directly and exclusively used in their registered activities to be accorded 0% VAT rating. Several issuances were subsequently published, which placed many taxpayers in limbo because of the seemingly conflicting provisions related to the VAT zero-rating of local purchases.Almost a month before the anniversary of CREATE, the Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 24-2022, which intends to harmonize and clarify the new VAT zero-rating rules and requirements under CREATE.CROSS-BORDER DOCTRINE NOW ‘INEFFECTUAL AND INOPERATIVE’Before CREATE, Ecozones and Freeport zones were regarded as foreign territories (by way of legal fiction) under RMC No. 74-99 and RMC No. 7-2007. Under the cross-border doctrine, sales to registered business enterprises located within these Ecozones and Freeport zones could be treated as constructive exports subject to 0% VAT.However, following the effectivity of CREATE, the cross-border doctrine is no longer applicable. This is because CREATE expressly requires registered export-oriented enterprises to prove the direct and exclusive use of their purchases of goods and services in its registered activities, a departure from the old rule which generally anchored zero-rating of purchases on being economic zone locators.To add, the availment of VAT zero-rating for registered export-oriented enterprises becomes subject to certain parameters regardless of location (i.e., time-bound as it becomes subject to the conditions and period of availment in Sections 295 and 296 of CREATE) under Section 294(E) and Section 295(D) of the Tax Code, as amended by CREATE.It now provides that the effective VAT zero-rating will only apply to the sale of goods and services rendered to persons or entities which have direct and indirect tax exemptions pursuant to special laws or international agreements to which the Philippines is a signatory.Based on these developments under CREATE, investors may now consider reassessing incentives that were previously location-based.CHANGES TO VAT ZERO-RATINGSince the effectivity of CREATE, the VAT exemption on imports and VAT zero-rating of newly registered and existing registered business enterprises (RBEs) only applied to goods and services that are directly and exclusively used in the registered project or activity of registered export enterprises. The phrase “directly and exclusively used in the registered project or activity of registered export enterprises” was explained under Q&A No. 13 of RMC No. 24-2022 as those raw materials, inventories, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, maintenance, repair and overhaul of equipment, and other expenditures that are directly attributable to the registered project or activity, without which the registered project or activity cannot be carried out.In the case of common expenses, taxpayers were directed to adopt a method to best allocate goods or services purchased (e.g., the use of separate water and power meters among activities). Otherwise, if the proper allocation could not be determined, then the purchase of such goods will be subject to 12% VAT. The RMC also made it clear that services for administrative purposes, such as legal, accounting and other similar services, are not considered directly attributable to and exclusively used in the registered project or activity.Previously, a VAT zero-rating certificate was the only document that must be provided by a registered export enterprise to their local suppliers. However, RMC No. 24-2022 introduced additional requirements on top of the VAT zero-rating certificate, such as a photocopy of the export enterprise’s BIR Certificate of Registration, a sworn declaration stating that the goods or services being purchased are to be used directly and exclusively in the registered project, and other documents to corroborate entitlement to the VAT zero-rating.These documents include but are not limited to duly certified copies of the purchase order, job order or service agreement, sales invoices and/or official receipts, delivery receipts. Registered export enterprises should also expect some changes in the VAT zero-rating certificate that will be issued by its Investment Promotion Agency (IPA), which would now include the applicable goods and services meeting the direct and exclusive use criteria.Registered export enterprises must strictly observe the abovementioned criteria and documentation in order to prove the VAT zero-rating of its local purchases of goods and services. This means that registered export enterprises may need to factor in additional compliance requirements to avail of the VAT zero-rating and be able to sustain a claim of VAT zero-rating if eventually audited by tax authorities.The role of tax managers, compliance officers, custodians of records, and the like may have to be expanded as well to ensure that the necessary documentary requirements are secured in a timely manner, compliant with the existing requirements under our tax rules, and would still be available in the event of a tax audit.EXPORTER TAX TREATMENT BEFORE CREATEQ&A No. 23 of the same RMC clarified that registered export enterprises existing prior to CREATE continue to enjoy VAT zero-rating on their local purchases until the expiration of their incentives, as specified in the Implementing Rules and Regulations of CREATE. However, the direct and exclusive use criteria must still be met. Otherwise, sellers of goods and services will be required to pass on the 12% VAT to their registered export enterprise customers within the Ecozone.The RMC further explained that any input VAT passed on for purchases of goods and services not directly and exclusively used in the registered project or activity may no longer be used to apply for a VAT refund. Instead, the RMC presented three options that a registered export enterprise may avail of:• A VAT-registered taxpayer enjoying an income tax holiday (ITH) may claim the passed-on input VAT as credit against future output VAT liabilities; or• Accumulate the input VAT credits and claim for VAT refund upon expiration of its VAT registration (i.e., end of ITH and 5% SCIT incentive commences); or• Charge to cost or expense account if non-VAT registeredSimilarly, existing export enterprises which are already under the 5% gross income tax (GIT) and special corporate income tax (SCIT) were required to change their registration status from a VAT-registered entity to non-VAT within two months from the effectivity of RMC No. 24-2022.It must be noted, however, that the input VAT charged to cost or expense account may not qualify as a “direct cost” for an export enterprise that is already availing of the 5% GIT or 5% SCIT. In which case, there would be no tax benefit on any input VAT passed on by its local suppliers.ACTION PLAN MOVING FORWARDWith the effectivity of RMC No. 24-2022, registered export enterprises and their domestic sellers of goods and services must familiarize themselves with the new principles and additional requirements of VAT zero-rating on local purchases.Given the strict “direct use” requirements, registered export enterprises may consider performing a careful review of their local purchases of goods and services to identify whether or not they meet the criteria. Export enterprises with a more complex business structure (i.e., those with multiple registered activities) and those which incur significant amounts in common expenses may revisit their allocation method among registered and non-registered activities.Otherwise, without diligent study, a registered export enterprise may face a significant amount of input VAT that it may not be able to recover. 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.Christiene R. Matic is a director from the Global Compliance and Reporting service line of SGV & Co.