Suits the C-Suite

27 January 2025

Danielle Irma D. Arellano and Jan Kriezl M. Catipay

AI and taxes: a new era of efficiency and innovation

IN BRIEF: From streamlining communications with taxpayers to leveraging AI for high-impact decision-making, AI can revolutionize the Philippines tax landscape.Automation in tax processes, aided by bots, has been introduced to streamline routine tasks such as collating voluminous data from systems for tax return preparation.Although AI is set to usher in more efficient tax administration and effective tax policy and planning, it also comes with its own set of challenges and risks.PULL QUOTE: AI is here to stay and is poised to transform the tax function, whether in tax administration, policy making, or planning. Artificial intelligence (AI) comes up as a common topic in formal conversations at work and informal talks with friends, family members, and even conversations with strangers. It is also rapidly being integrated into various aspects of business operations, including tax. From streamlining communications with taxpayers to aiding high-impact decision-making, AI can revolutionize the Philippines tax landscape. This article will dive into what AI has already transformed—and has yet to transform—with respect to how tax is practiced and how tax will be administered.AI in tax administration In 2023, the Organization for Economic Co-operation and Development (OECD) found that more than 80% of tax administrations report using or implementing AI for future use of leading-edge technology. This is also mirrored globally, with CEOs increasingly embracing AI. According to a survey conducted by EY involving 1,200 CEOs worldwide, 43% have fully integrated AI-driven products and services and are actively investing in them, while another 45% plan to do so within the next 12 months.In the Philippines, the Bureau of Internal Revenue (BIR) has introduced AI advancements such as the AI-driven chatbot Revie. Revie serves as an Interactive Taxpayer Assistant, addressing general inquiries, finding RDOs, and handling Taxpayer Identification Number (TIN) inquiries, eComplaints, and eAppointments. This innovation allows taxpayers to quickly access information that previously required visiting the BIR tax office or enduring long queues for appointments. This technology application leads to an enhanced taxpayer experience and makes tax information accessible to all 24/7 without an additional burden to the current BIR personnel.AI is not only being utilized by the BIR but is also adopted by taxpayers. Automation in tax processes, aided by bots, has been introduced to streamline routine tasks such as collating voluminous data from systems for tax return preparation. This automation saves time, improves efficiency by reducing human errors, and allows taxpayers to focus their resources on utilizing available information to produce better insights for decision-making and planning.AI in tax policy and planningWith the ongoing Digital Transformation (DX) Program of the BIR, it is expected that the data obtained from the taxpayer’s filings and remittances will be utilized to optimize reporting and analytics. With the continuous accumulation of data, the BIR will also create a data warehouse aimed at viewing taxpayers holistically which may change how tax policies would be crafted in the future.Moreover, to align with future international standards, the BIR is expected to further utilize AI to maximize the data collected from taxpayers, thereby making more informed tax policy decisions.Challenges and risksAI holds great potential, and with proper attention and caution, it can be a futurist tool. It is set to usher in more efficient tax administration and effective tax policy and planning, leading to better service to taxpayers and better compliance with the tax law. However, it also comes with its own set of challenges and risks. Data privacy and securityAI is only as good as the data used, highlighting the need to address concerns about potential data breaches. Sensitive taxpayer information must be secured against being leaked to the public or, worse yet, used to commit cybercrimes. Both businesses and tax authorities employing AI must implement proper measures to ensure the data is thoroughly protected and the management of such data complies with the applicable laws and regulations.Transparency and accountability Transparency and accountability in an AI-driven tax system will be necessary to foster taxpayer confidence in the adoption of these technologies. AI-driven tax systems can provide improved fairness and efficiency by addressing bias, ensuring transparency, and enforcing accountability, benefiting taxpayers as well as tax authorities.Technological and implementation challengesThere is a significant challenge in blending our existing tax infrastructure, either with businesses or the present framework of the BIR, with contemporary AI technologies. There are several important issues that need to be confronted:System Viability: Integrating AI into established tax programs and data may need extensive revisions to current systems and will incur further costs.Data Integration: Data integration can be a difficult process because data comes from multiple sources and is not always standardized. This necessitates extensive data cleaning and standardization.Scalability: AI solutions need to be scalable in order to handle the expanding volume of tax data and the increasing complexity of tax regulations.These are just some things that must be considered as AI starts to impact the tax landscape.Transforming businesses and the tax function Thanks to rapid advances in AI technology, the tax function has changed considerably and continues to evolve. At least a dozen advancements in AI have the potential to transform the way taxes are done by delivering new solutions to improve efficiency, accuracy, and compliance.With the use of Generative AI, there are greater potential opportunities and capabilities to develop more transformative AI applications, as large language models are powered by advanced machine learning models that can comprehend and produce human language. This, in turn, allows taxpayers to build a better tax function that is intelligent and generates value and insights for the company.AI is here to stay and is poised to transform the tax function, to adapt with the expected changes in the tax administration, and policy making. This presents both a challenge and an opportunity for tax professionals, who need to embrace this technological advancement to enhance efficiency, accuracy, and strategic capabilities, ultimately driving better and insightful outputs to keep up with this evolution. Danielle Irma D. Arellano and Jan Kriezl M. Catipay are Tax Senior Managers of SGV & Co.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.

20 January 2025

Thyrza F. Marbas and Rule Amethyst L. Oporto

Ease of Doing Business: the BIR 2028 DX Roadmap

IN BRIEF: The BIR's Digitalization Program aims to modernize and enhance the efficiency, transparency, and effectiveness of tax administration and revenue collection processes.The BIR envisions taxpayers as customers, adopting taxpayer-centric views in their services. Completed projects reflecting this approach include the Online Registration Update System (ORUS), Enhancement of the Electronic One-Time Transaction (eONETT) System, and the Optimized Knowledge Management System for Chatbot Revie.Despite foreseeable challenges such as increased security risks and budget constraints, the BIR is prepared to address them by focusing on system upgrades, modernization, and adhering to its vision of collecting taxes through the just enforcement of tax laws.PULL QUOTE: “Transformation is not just about modernization. It aims to establish a more efficient, transparent, and responsive tax administration capable of addressing the changing needs of the public.” Change is inevitable in today's dynamic environment. To keep pace with rapid modernization, organizations must evolve their offerings to meet public needs. On 8 January 2025, an esteemed speaker and key official of the Bureau of Internal Revenue (BIR) shared insights at the 3rd Tax Symposium of SGV, discussing how the BIR is adapting to modernization and transforming its services to meet the evolving needs of taxpayers.Evolution of the BIR DX RoadmapThe BIR revitalized its digital transformation journey with the issuance of Revenue Memorandum Order (RMO) No. 27-2020, “BIR Digital Transformation (DX) Roadmap 2020-2030.” This initiative was in compliance with Republic Act No. 11032 or the “Ease of Doing Business and Efficient Government Service Delivery Act of 2018,” which mandates government offices to assess and improve their transaction systems and procedures. The DX Roadmap is built on three core principles: adopting a people-first approach, instituting a process perspective, and embracing digital technology, with a digital transformation mindset as its foundation.Recognizing the need for a more comprehensive and updated roadmap, the BIR issued RMO No. 48-2024, “Adoption of the New BIR Digital Transformation Roadmap for CY 2025-2028.” This initiative aligns with Section 43 of RA No. 11976, or the “Ease of Paying Taxes Act”, which mandates the BIR to adopt an integrated digitalization strategy by providing automated end-to-end solutions for taxpayers. The roadmap also reflects BIR Aspiration 2028, which envisions the BIR as highly digital and propelled by empowered Revenuers with integrity, providing excellent services aligned with international tax standards.The BIR digital transformation journey and DX program project updatesThe speaker emphasized that despite recent legislations mandating the digital transformation of BIR services, the BIR has long been committed to making its services convenient and efficient for the public. This commitment is evident in the expansion of eServices and the leveraging of technology for a robust tax administration. It was highlighted that during the time when the world stood still due to the COVID-19 pandemic, the BIR’s Electronic Filing and Payment System (eFPS), e-BIR Forms, and electronic payment facilities were already in place. This allowed taxpayers to efficiently comply with their filing and payment duties. A report on the status of projects under the BIR DX Program for CY2024 as of 30 November 2024 was also presented. There are eight completed projects and eight ongoing projects. Completed projects include the Online Registration Update System (ORUS), Enhancement of the Electronic One-Time Transaction (eONETT) System, Optimized Knowledge Management System for Chatbot Revie, Property Management System (PMS) (National Office Phase), Expansion of Digital Platform and Tools, Establishment of a Command Center with IT Operations Center, Enterprise Risk Management (ERM), and Enhanced Monitoring and Managing Administrative Cases (EMMAC).Meanwhile, ongoing projects include the Project 230X, Electronic Tax Clearance System (eTCS), Electronic Invoicing/Receipting and Sales Reporting System (EIS/SRS), eAppointment (BIR Services under Assessment and Collection Service, Development of Cloud Based Electronic Documentary Stamp Tax (eDST) System, Document Tracking Management System (DTMS), Cybersecurity Program and Internal Revenue Integrated System (IRIS).Eleven other projects under the DX Program are in varying stages of project planning and execution. These include taxpayer-facing projects as well as projects for internal customers.A notable highlight of the DX project is the EIS/SRS Program. Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Law (TRAIN Law) mandated the establishment of a system capable of storing and processing the required data within five years from the effectivity of the Law. Republic Act No. 12066 or the CREATE MORE Law removed the 5-year implementing period. In terms of updates, out of the 100 Pilot Taxpayers, 63 are currently transmitting their sales data.The ongoing Tax Modernization Feasibility Study Project will determine the best way forward for the EIS/SRS program. The study’s result will be out towards the end of the first quarter of 2025. By then, the Bureau can provide firmer guidelines and timelines regarding the EIS/SRS implementation. Further, under the CREATE MORE Law, taxpayers under the jurisdiction of the Large Taxpayer Service and Exporters are still covered both by the requirement of issuing electronic invoices (EIS) and electronic reporting of their sales (SRS) data to the Bureau. What was amended is that those engaged in e-commerce are only mandated to comply with the EIS, but it is not mandatory for them to comply with the SRS program. Instead, they may opt to voluntarily comply.Meanwhile, other taxpayers may voluntarily issue electronic invoices and use an SRS. Those who will volunteer will be granted incentives, specifically an additional deduction from taxable income of 100% total cost for setting up an EIS/SRS for taxpayers classified as micro and small and an additional 50% for medium and large, which can only be availed once.Transforming and modernizing tax servicesTransformation is not just about modernization. It aims to establish a more efficient, transparent, and responsive tax administration capable of addressing the changing needs of the public. As the BIR strives for transformative and modernized services for taxpayers, it acknowledges foreseeable challenges such as increased security risks, budget constraints, customer/taxpayer readiness, among others. Nonetheless, the BIR is prepared to address these challenges.These developments in the BIR’s DX Program give taxpayers a renewed optimism recognizing the significance of its successful implementation in improving tax processes towards realizing BIR’s vision of a modern, efficient, and technology-driven tax system that benefits both the taxpayers and government. Thyrza F. Marbas is a Tax Partner and Rule Amethyst L. Oporto is a Tax Senior Manager of SGV & Co.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.

13 January 2025

Cheryl Edeline C. Ong and Virnee Agot-Ting

Unveiling the Opportunities of the CREATE MORE Act

IN BRIEF: The CREATE MORE Act signals a renewed commitment to fostering a more attractive and competitive environment for both local and international businesses aimed at attracting more FDI into the economy. The Act intends to help the country gain a more significant share in the near-shoring activities of manufacturing plants and support the continued growth of the BPO industry, among others.PULL QUOTE: “By introducing expanded tax incentives, streamlining VAT processes, and clearly defining eligibility criteria, the CREATE MORE Act aims to stimulate economic growth and position the Philippines as a prime destination for foreign direct investments (FDI).” The Philippine government is taking bold steps to significantly enhance the investment landscape and address investor concerns with the enactment of Republic Act. No. 12066 (Maximize Opportunities for Reinvigorating the Economy) or the CREATE MORE Act. This landmark legislation signals a renewed commitment to fostering a more attractive and competitive environment for both local and international businesses. By introducing expanded tax incentives, streamlining VAT processes, and clearly defining eligibility criteria, the CREATE MORE Act aims to stimulate economic growth and position the Philippines as a prime destination for foreign direct investments (FDI).Over the past three years, the Philippines has faced challenges in attracting FDI compared to its neighboring countries. Data from the World Bank as accessed on January 9, 2025, provides that from 2021 to 2023, Indonesia outpaced the Philippines by 122% in FDI inflows. Similarly, Vietnam and Malaysia exceeded the Philippines by 70% and 41%, respectively. Thailand also surpassed the Philippines by 10%. However, with the CREATE MORE Act, the government is poised to reverse this trend and create a more vibrant and investor-friendly economy.What Registered Business Enterprises (RBEs) can expectPre-CREATE RBEs are currently enjoying the sunset provisions under the CREATE Act which provides that those currently enjoying 5% Gross Income Tax (GIT) are given until April 2031 to continue enjoying the said regime. However, with the effectivity of the CREATE MORE Act, these pre-CREATE RBEs are given an extension until 31 December 2034 to continue enjoying the 5% GIT. The clarification on VAT zero-rating as discussed below will also have a positive impact on pre-CREATE RBEs. The CREATE MORE Act introduces the concept of High Value Domestic Market Enterprise (HVDME) in addition to the existing Registered Export Enterprises (REEs) and Domestic Market Enterprises (DMEs). HVDMEs refer to registered domestic market enterprises with an investment capital exceeding Php15B and are engaged in sectors considered as import-substituting, or with export sales in the immediately preceding year of at least USD100M or its equivalent. In other words, HVDMEs can be high export sales but fall short of the 70% threshold requirement to be considered as REEs. In terms of incentives, HVDMEs appear to be a hybrid of REEs and DMEs since HVDMEs can enjoy VAT zero-rating on local purchases, VAT exemption on importation, and customs duty exemption, just like an REE. However, unlike REEs, HVDMEs are not eligible for 5% SCIT, which is also true for DMEs.Another interesting provision is that RBEs now have the option to entirely skip the Income Tax Holiday (ITH). This is particularly advantageous for RBEs that anticipate losses during the initial years following the commencement of their commercial operations. As it is, RBEs now have more flexibility in electing the incentive package it deems most beneficial from a global perspective, taking into account the potential impact of BEPS 2.0. DMEs can take advantage of favorable developments, as they are now eligible for the same duration of income tax-based incentives as REEs of up to 17 years if the project is approved by the Investment Promotion Agency (IPA), or has investment capital not exceeding P15B. Meanwhile, those approved by the Fiscal Incentives Review Board (FIRB) with investment capital exceeding P15B can enjoy up to 27 years.During the CREATE Act, RBEs generally preferred the 5% Special Corporate Income Tax (SCIT) due to its perceived advantages and the simplicity of its calculation. However, with the CREATE MORE Act, those enjoying the Enhanced Deductions Regime (EDR) will get to enjoy the reduced Corporate Income Tax rate from 25% to 20%. Moreover, the additional deduction for power expenses is increased from 50% to 100%, among others. This may be significant for companies, especially those in energy-reliant sectors like manufacturing and heavy industries, considering that high power costs, one of the long-standing challenges in the Philippines, have generally been a deterrent to investment, especially from manufacturers with substantial energy requirements. For RBEs enjoying 5% SCIT, the good news is the SCIT now covers local fees and charges. To recall, these two were explicitly excluded in the CREATE Act. Meanwhile, RBEs enjoying ITH or EDR will now be subject to a local tax of up to 2% (otherwise called as RBE Local Tax or RBELT), which is based on the gross income. The tax base to compute for the RBELT is the same as the MCIT, which is basically gross profit. What’s interesting about RBELT is that this is already in lieu of all local taxes, local fees, and charges. This effectively tackles the concerns of RBEs encountering difficulties in renewing their business permits. However, for its imposition, the Local Government Units (LGUs) must pass a local ordinance, and it is only then that the RBEs can avail of the RBELT and ascertain the exact rate applicable.Another piece of exciting news for REEs is that VAT incentives are no longer timebound. This means that REEs can enjoy the VAT incentives for the entire duration of its registration provided that they continue to meet the conditions. Even after the expiration of the registration period, export-oriented enterprises, meaning not necessarily registered in any IPAs, will get to enjoy the VAT incentives, subject to compliance with certain conditions. This is a very welcome development as this will address the cash flow issues arising from input VAT accumulated by exporters.Customs duty exemption still seems to be timebound. As such, after the end of the registration period and expiration of income tax-based incentives, REEs no longer enjoy customs duty exemption unless there is an applicable Free Trade Agreement (FTA) with the country of origin. For DMEs, the customs duty exemption is coterminous with its income tax-based incentives.The phrase “directly and exclusively used” has been one of the main concerns of the investors when the CREATE Act was implemented since it appears to be very limiting and restrictive. This has been abandoned in the CREATE MORE Act, which now uses the phrase “directly attributable” and refers to goods and services that are incidental to and reasonably necessary for the registered activity or export activity of the export-oriented enterprise. These include janitorial, security, financial, consultancy, marketing and promotion services, and services rendered for administrative operations such as human resources, legal, and accounting. Notably, the enumerated purchases are the exact purchases explicitly provided in RR No. 3-2023 as purchases that are previously excluded from VAT zero-rating. The determination of what constitutes as “directly attributable” will be made by the IPA. It is important to highlight that the option to choose an incentive package is irrevocable and that it will be elected at the time of application. As it is, given several key amendments in the 5% SCIT and EDR, a simulation exercise is necessary for the companies to arrive at a decision that will be most advantageous for their intended investment. Reinvigorating the economyInherent in the enactment of a new law are the questions which we hope to be addressed in the coming weeks once the implementing rules and regulations are issued. With the end-goal to make the Philippines more attractive to investors, the Act intends to help the country gain a more significant share in the near-shoring activities of manufacturing plants and support the continued growth of the BPO industry, among others. It remains to be seen though how these changes will influence economic indicators over time, but clearly the CREATE MORE Act reflects the government's commitment to fostering an environment where businesses can thrive and contribute meaningfully to the nation’s prosperity. Cheryl Edeline C. Ong is a Tax Partner and Virnee Agot-Ting is a Tax Senior Manager of SGV & Co.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.

06 January 2025

Wilson P. Tan

Shaping the future with confidence

IN BRIEF: Confident CEOs are better equipped to navigate macroeconomic and geopolitical changes, driving bold strategic actions.Embracing emerging technologies and data-driven strategies enhances organizational resilience and market positioning.Geopolitical dynamics in regions like ASEAN present significant opportunities for investment and growth.PULL QUOTE: "Confident CEOs who embrace change and leverage geopolitical opportunities are poised to lead their organizations to new heights." In today's rapidly evolving business landscape, CEO confidence plays a pivotal role in shaping strategic decisions and driving organizational success. Confident CEOs are more likely to take bold actions in response to macroeconomic and geopolitical changes, technology shifts, and market disruptions. This article explores how CEO confidence, coupled with an understanding of geopolitical dynamics, can create a competitive edge and foster long-term growth.The importance of CEO confidence CEO confidence is a critical factor in making proactive and strategic decisions. Confident executives are more willing to invest in innovation, expand into new markets, and pursue high-reward opportunities while managing greater risks. This confidence stems from a deep belief in their company's abilities and market position, enabling faster and bolder strategic choices.The latest EY-Parthenon CEO Outlook Survey of 1,200 global executives revealed that the most confident CEOs are better prepared to adapt to macroeconomic, geopolitical, and industry changes. They are more likely to engage in mergers and acquisitions (M&A) and reassess key performance indicators (KPIs) to align with evolving market conditions, positioning their companies for future opportunities and growth.Embracing emerging technologies Confident CEOs recognize the transformative potential of emerging technologies, particularly artificial intelligence (AI). AI can automate processes, enhance decision-making, and create innovative products and services. By leveraging AI, companies can improve efficiency, accuracy, and reliability in their operations, freeing up resources for more strategic activities.For example, an AI-driven payroll chatbot can address employee payroll questions efficiently and accurately, providing quick and accessible answers. This not only reduces the burden on employers but also enhances the employee experience. The implementation of AI in payroll management demonstrates how technology can streamline complex processes and drive significant improvements in organizational performance. In the hiring landscape, which presents various opportunities for deceitful practices, machine learning algorithms are seen to be increasingly adept at analyzing vast amounts of data and detecting patterns of potential fraudulent behavior. Blockchain technology also holds the promise of creating secure, immutable records of hiring candidates’ employment histories, education, and credentials. Through the power of data and technology in hiring candidates with verified profiles, companies can enable a more secure and reliable recruitment process. Across payroll, labor and employment law, and mobility, teams can work together collaboratively to meet workforce compliance needs wherever they are. Global processes, technology, and data models are smoothly integrated, providing a single, cohesive, high-quality service. In addition, AI can help redefine organizational resilience by enabling companies to anticipate disruptions and fortify operations. In order to adapt, businesses are utilizing AI to transform their approach to Business Continuity Management (BCM), enabling proactive risk assessment, dynamic planning, and adaptive response strategies, ensuring organizations are better prepared for disruptions. AI-driven simulations and continuous learning from exercises and real events refine BCM plans while organizations navigate challenges such as resource requirements, data reliability, and ethical decision-making.Geopolitical dynamics and opportunities Geopolitical dynamics, particularly in regions like ASEAN, present significant opportunities for investment and growth. The recent ASEAN Summit highlighted the region's efforts to attract foreign investment and trade by leveraging their relatively neutral geopolitical positions. Investment in ASEAN has increased significantly, with foreign direct investment (FDI) inflows reaching US$230 billion in 2023.Western multinational companies are likely to continue investing in ASEAN amid global supply chain diversification efforts. Middle-income economies in Southeast Asia are particularly attractive due to favorable business environment characteristics such as government stability, institutional predictability, and a skilled labor force. Chinese companies are also expanding their presence in the region to reduce supply chain exposure to geopolitical risks.Navigating disruptions and capitalizing on opportunities CEOs must navigate a complex landscape shaped by emerging technologies, changing customer behaviors, and macroeconomic uncertainties. To capitalize on these opportunities, CEOs should take the following actions:Rethink strategic assumptions. Regularly revisit and update strategic assumptions to ensure alignment with the external environment. This involves monitoring key indicators, staying abreast of geopolitical and industry developments, and reassessing customer needs.Develop a virtual doppelgänger. Leverage AI and advanced analytics to create digital twins that cover the entire business. A digital twin is a virtual model of the physical versions in functional teams, such as an end-to-end supply chain, enabling data-driven decisions using real-time data, and improving agility in both sensing and responding to disruptions. Digital twins can serve as a cornerstone of a company’s digital strategy, where data from various sources and systems — from Internet of Things (IoT) sensors to signals from GPS devices, for example — is connected to create a virtual replica, reflecting the same parameters and financial targets. Predictive analytics can forecast future market movements and inform decisions about which assets to hold, sell, or acquire.Enhance cross-functional collaboration. Encourage cross-functional teams to participate in portfolio reviews, ensuring strategic decisions are informed by a comprehensive understanding of the company's capabilities and market position.Scan, focus, and then act: Establish a culture within the organization that encourages employees at all levels to stay informed about emerging technologies and changing market dynamics. CEOs and all decision-makers need to understand how each development is likely to unfold in the year ahead (scan), assess the impact of each development on specific business functions (focus), and provide considerations for how the company can successfully manage them (act).Enhance customer engagement and insights: Develop sophisticated systems for gathering and analyzing customer data to anticipate shifts in behavior and preferences. This might include implementing advanced analytics tools, conducting regular customer surveys, or creating customer advisory boards to maintain a direct line of communication with key stakeholders.Build agile and resilient business models: Design organizational structures and processes that can quickly adapt to changing market conditions. This could involve diversifying supply chains, creating flexible work arrangements, or developing scenario-based strategic planning processes to prepare for various geopolitical and economic outcomes.Confidently shaping the future of strategic growth Confident CEOs who embrace emerging technologies and leverage geopolitical opportunities are well-positioned to lead their organizations to new heights. By continuously optimizing their portfolios, incorporating flexibility in deal structures, and using scenario planning, CEOs can confidently make informed and resilient strategic decisions. Wilson P. Tan is the Chairman and Country Managing Partner of SGV & Co.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.

30 December 2024

Aaron C. Escartin

Enhancing payroll management with AI

IN BRIEF: AI-driven payroll solutions streamline complex international payroll operations, reducing errors and enhancing efficiency.Automating payroll processes with AI improves accuracy, compliance, and employee satisfaction.AI-powered chatbots provide quick, accurate responses to payroll inquiries, simplifying workloads and enhancing the employee experience. PULL QUOTE: "AI is revolutionizing payroll management by providing real-time insights, reducing errors, and enhancing employee satisfaction." Managing payroll for a global workforce presents a myriad of challenges due to constantly evolving political, legal, social, and economic factors. These changes impact regulatory requirements and reporting, making it difficult to navigate diverse labor laws, tax regulations, data privacy standards, and payment procedures. Consequently, the dynamic conditions increase employee inquiries, complicating payroll management. Companies need efficient, accurate, and cost-effective methods to address these inquiries, enhancing employee satisfaction and trust.The challenges of global payroll managementPayroll errors and delayed responses can lead to fines, damage organizational reputation, and frustrate employees, affecting costs and related functions like recruitment and retention. While preventing errors is crucial, traditional methods for handling these challenges are often costly and ineffective. Businesses are ready for an innovation – a solution that offers something greater than the sum of its parts. Finding a time-efficient, cost-effective, innovative, and globally adaptable solution that can grow with the organization demands taking stock of the entire system and adding something more: an ecosystem approach.How AI can helpArtificial intelligence (AI) presents a significant opportunity to transform payroll functions and enhance efficiency. By automating data collection and analysis, AI can identify trends and anomalies, providing real-time insights into payroll performance. This technology can help monitor payroll metrics, track progress against targets, and identify areas where additional investment or action is needed. By leveraging AI, companies can improve the accuracy and reliability of their payroll processes while freeing up time and resources for more strategic activities.Case study: AI-driven payroll solutionsMany organizations face the challenge of managing complex international payroll operations. One company needed a quick and accurate communication platform with their employees that would answer country- and employee-specific payroll questions within a broader global payroll operations environment. Weighing the desired outcomes and challenges, the company implemented an AI-driven payroll chatbot. This chatbot addressed employee payroll questions efficiently and accurately, providing accessible answers to employee questions easily and quickly. The cloud-enabled development of a large language model helped create a payroll chatbot capable of answering complex employee questions. The chatbot solved the company’s payroll needs in a way that was efficient for them as the employer, but it was also incredibly effective and beneficial for their employees. After the initial launch of a pilot version, the company scaled it to an enterprise-ready payroll chatbot that answered complex payroll questions by using an underlying large language model and vast compliance data. This solution helped reduce the burden on the employer while personalizing the employee experience.In very real terms, there were improvements across the board in providing accurate answers to queries, employee satisfaction, and first call resolution. There was also an overwhelming decrease in cost to serve. This is just one example of how AI can help accelerate and improve payroll management while simplifying the workload.An integrated global payroll solution Taking control and driving efficiency with an integrated global payroll solution involves transforming global payrolls through a unified managed services approach, integrating domestic, mobile, and global payroll services. A centralized, modular platform handles the complexities of an international workforce, connecting legal, advisory, and compliance knowledge for an integrated payroll experience.In today's fast-paced world, where talent is the key resource, managing the payroll of an increasingly international workforce has become very complex and time-consuming. The rapid pace of regulatory compliance, labor and privacy law changes, managing the life experience of employees, and the scarcity of payroll talent are just a few of the hurdles that organizations face. Traditional payroll models struggle to keep up with modern business demands and new ways of working. The risks of non-compliance, data privacy issues, and the high costs and inefficiency of managing multiple vendors are significant challenges.Taking initiative involves governance, oversight, and control. It means having single process ownership across employee entitlement, compliance requirements, and pay distribution. This approach provides a unified view of data, reduces duplication, ensures consistent decisions and reporting, and offers a holistic view of talent and compliance, enabling organizations to plan. Driving efficiency requires providing direct access to all subject-matter-experts and enabling effective risk management across the entire employee population. It helps reduce cost and labor leakage that occurs with disparate vendors, duplication of effort, gaps in essential knowledge and process, and inadequate business controls. Additionally, it improves in-house technology and data assets. Planning enhances the employee experience through advanced technology, streamlined processes, and easy access to on-the-ground knowledge. It also reduces the cost of developing and modifying technology.The future of payrollA next-generation payroll managed service approach combines global reach and deep capabilities, consistent multi-service integration, and direct access to teams across the globe. Across payroll, labor and employment law, and mobility, teams can work together collaboratively to meet workforce compliance needs wherever they are. Global processes, technology, and data models are smoothly integrated, providing a single, cohesive, high-quality service. Access to core service delivery without subcontracting to third parties helps ensure effective communication and improved performance. Being part of an ecosystem facilitates the provision of comprehensive solutions beyond payroll, leveraging deep knowledge to address unique challenges.Organizations can address global payroll operational and service challenges by leveraging AI technology to create innovative solutions, such as a payroll chatbot. The proper use of AI can help simplify employer workload, answer complex payroll employee queries, provide regulatory compliance information, and enhance employee experience, leading to increased operational efficiency. Aaron C. Escartin is a Tax Partner and Philippine Payroll Operate Leader of SGV & Co.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.

23 December 2024

Anna Maria Rubi B. Diaz

Future-proofing finance with future-ready controllers

IN BRIEF:Financial controllers need to step beyond compliance to create value and remain indispensable copilots to CFOs in driving organizational innovation and growth.AI adoption enhances controller impact on enterprise-wide operational efficiency, contributing to macroeconomic growth.PULL QUOTE: “Organizations are sitting on a goldmine of financial data, yet this resource often remains underutilized. This is a crucial area where the expertise of controllers can be fully harnessed.” The rapid acceleration of digital transformation is reshaping the business landscape, compelling finance teams to manage returns on investment goals, meet customer demands for innovation, and align with long-term sustainability objectives — all at the same time.This intersection of often-competing demands characterizes today’s Age of And, where success relies on an organization’s ability to effectively navigate and excel in managing these demands simultaneously. This evolving landscape necessitates a strategic shift in roles. Financial controllers, in particular, are moving beyond their traditional focus on operational tasks such as bookkeeping, compliance, and resource allocation and are now positioned as strategic enablers of value creation.According to the 2024 EY DNA of the Financial Controller Report, 86% of surveyed controllers across 28 countries recognize that their responsibilities will evolve substantially over the next five years. To execute their redefined responsibilities, controllers must harness tools such as analytics, automation, and artificial intelligence (AI) to transform vast amounts of data into actionable insights that can support strategic decision-making. Predictive analytics enables controllers to identify trends, forecast scenarios, and optimize budgeting. For example, analyzing historical financial data facilitates cash flow prediction and improves financial planning, allowing for agile responses to business challenges.Automation tools like robotic process automation (RPA) streamline reconciliations and report generation, reducing errors and accelerating processes. Automating financial statement consolidation enhances accuracy and delivers timely insights, empowering controllers to focus on strategic activities.AI-powered solutions, such as machine learning algorithms, detect anomalies, assess credit risks, and anticipate market trends. These capabilities help controllers proactively manage risks and capitalize on strategic opportunities, reinforcing their role as value creators.However, the successful integration of these tools requires controllers to adapt their skillsets and embrace a more collaborative role with Chief Financial Officers (CFOs) as copilots in driving innovation and organizational agility. This shift fosters greater cohesion within finance teams, breaking down traditional silos that often hinder efficiency and strategic alignment.Creating value from dataOrganizations are sitting on a goldmine of financial data, yet this resource often remains underutilized. Controllers can unlock this value using AI tools to transform complex datasets into actionable strategies. AI automates routine workflows, such as data consolidation and reporting, enhancing accuracy and freeing controllers to concentrate on strategic responsibilities like risk assessment and planning. Additionally, AI-driven analysis empowers controllers to forecast trends and develop proactive strategies, elevating their role as strategic contributors.Beyond its micro-level benefits, AI has the potential to stimulate macroeconomic growth. In fact, a global tech study by a global tech company estimates that AI adoption among local businesses could contribute Php2.8 trillion to the Philippine economy by 2030.In the vital sector of micro, small, and medium enterprises (MSMEs), which account for 99.63% of the Philippine business landscape according to the 2023 List of Establishments by the Philippine Statistics Authority, a data-driven ecosystem is essential for streamlining operations, boosting productivity, and achieving sustainable growth.AI tools play a pivotal role by automating routine financial tasks such as accounts receivable (AR) collections. For instance, an AI-powered AR Collection Assistant helps prioritize accounts, identify at-risk customers, and recommend optimal actions. Integration with enterprise resource planning (ERP) systems creates a unified platform for agents, improving efficiency and simplifying follow-up processes. By leveraging AI and automation, businesses can strengthen governance, reduce costs, and enhance operational efficiency, leading to long-term value creation. Additionally, integrating AI into business processes allows MSMEs to analyze complex datasets swiftly, uncovering actionable insights for strategic decision-making. For example, AI-driven predictive analytics can forecast financial trends, enabling businesses to proactively align strategies with organizational goals.Upskilling for the futureWhile many companies understand the importance of digital transformation, recognition alone will not drive progress. Delayed implementation risks leave organizations mired in inefficiency while competitors advance toward innovation and growth.In the Philippines, a disconnect between ambition and readiness for AI adoption stalls digital transformation among companies. A survey by a different global tech company found that although 65% of local companies allocate 10-30% of their IT budgets to AI adoption, only 22% are fully prepared to implement AI technologies.One critical obstacle is the skills gap, with only 23% of survey respondents reporting employee proficiency in managing AI tools. Within finance teams, this shortfall hinders controllers from meeting their redefined responsibilities, ultimately limiting their contributions and impacting organizational success in an increasingly complex business landscape.Reimagining talent strategiesRedefined roles often encounter resistance, particularly as traditional roles for controllers have focused primarily on value protection (e.g. regulatory compliance) and value optimization (e.g. budget planning, cost analysis, and investment evaluation).To address this, organizations must prepare teams for future-oriented responsibilities in value creation. One clear step is articulating a compelling vision for the controller role, emphasizing how their redefined responsibilities can contribute to the company’s long-term growth strategy. This approach not only clarifies their evolving responsibilities but also motivates teams to align with broader organizational objectives.For new hires, prioritizing adaptable mindsets and a willingness to learn over rigid credentials ensures a more future-ready workforce. Meeting evolving role expectations also requires targeted upskilling through robust training programs, mentorship, and leadership opportunities, enabling controllers to excel in their redefined roles.Actions for finance leadersOrganizational support is critical to empower controllers and their teams to develop the necessary skills while managing day-to-day responsibilities. According to the EY report, 59% of controllers state that their organizations encourage them to evolve into value creators to a large extent. However, many feel they lack adequate resources and support to make the transition.CFOs and senior leaders can address this gap by allocating budgets for technology adoption and fostering cross-functional collaboration. Providing autonomy and facilitating engagement with the C-suite and key stakeholders can transform controllers into strategic drivers of value.CFOs can further empower financial controllers by:Integrating innovation into roles. Redefine job descriptions to include innovation as a core responsibility, directly linking it to performance metrics to ensure that controller efforts contribute to enterprise-wide value creation.Leading transformative projects. Provide controllers with leadership opportunities in transformation initiatives, supported by adequate budgets, staffing, and mentorship. These experiences cultivate strategic thinking and innovation capabilities.Focusing on future-ready skills. Equip controllers with expertise in data analytics, AI, and strategic decision-making. These skills will prepare them for evolving financial landscapes and amplify their organizational impact.Expanding responsibilities strategically. Gradually assign controllers additional responsibilities to deepen their expertise and prepare them for future leadership roles, including the position of CFO.Developing a talent pipeline. Build a robust talent pipeline by identifying high-potential candidates for controllership roles. Provide these individuals with targeted training and mentorship to ensure the role remains a source of innovation and leadership.The future-ready controllerControllers must take an active role in their evolution. By embracing opportunities to view value creation through a broader lens, they can enhance their contributions to financial planning and analysis (FP&A) and investor relations.Strengthening engagement with the C-suite and other key internal and external stakeholders is equally essential. Successful transformation into a redefined role ultimately requires a commitment to continuous personal development. To achieve this, controllers should focus on the following key areas:Embracing uncertainty and disruption. Proactively seek new opportunities to create organizational value, balancing these initiatives with compliance oversight and operational efficiencies.Exploiting the potential of data and AI. Leverage financial data alongside operational and external data sources to generate insights that enable informed executive decision-making. Additionally, develop a roadmap for an AI-enabled controllership team, identifying the necessary data, processes, and controls. Equipping teams for the future. Encourage agility by fostering diverse skills within teams, including business, personal, and technological capabilities. Inspire team members to view themselves as innovators and problem-solvers beyond their roles as financial and compliance experts.Prioritizing cultural adaptabilityOrganizations must embrace a cultural shift that prioritizes adaptability and a growth-oriented mindset over reliance on legacy processes. To complement this shift, organizations must integrate a digital-first culture to break down silos and enhance operational efficiency, giving way for better, data-driven decision-making across all functions. In doing so, controllers can leverage their redefined roles to streamline processes, provide actionable trends and insights, and drive innovation, making them integral contributors to sustainable growth and organizational success. Anna Maria Rubi B. Diaz is an Assurance Partner under the Financial Accounting Advisory Services (FAAS) of SGV & Co.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.

16 December 2024

Maria Kathrina S. Macaisa-Peña

Shopper spending trends this season

IN BRIEF: According to EY research, 69% of global consumers will participate in this year’s value hunt, with one-third indicating they will spend more than last year. Smart, savvy, and shrewd consumers are willing to switch between channels for what they want, intensifying shopping channel fragmentation.PULL QUOTE: “Shoppers are becoming more strategic, concentrating on value, utilizing various shopping channels, and being selective with promotions.” Despite low consumer confidence, shoppers eagerly anticipate this year’s holiday sales. According to the EY Future Consumer Index, which surveys 13,000 respondents, 69% of global consumers intend to participate in this year’s value hunt. The data also reveals subtle yet significant shifts in consumer shopping plans, expectations, and values – trends that are expected to influence consumer behavior well beyond the holiday sales. Shoppers are considered “smart” for utilizing a full range of channels and technologies to obtain what they want; “savvy” for their ability to evaluate marketing and promotional offers; and “shrewd” for being more discerning about what value means to them.Consumers anticipate deals and stretch budgetsThe value hunt began earlier this year, with companies initiating seasonal sales in September or October partly in response to the US Thanksgiving holiday falling at the end of November, shortening the traditional five-week spending period by a week. Despite this, 52% of global consumers will delay spending holiday budgets, anticipating better deals. Most global consumers plan to only purchase products on sale this year, with 67% actively tracking market offers – a figure that rises to 73% among consumers with children.In the Philippines, two local online shopping platforms have seen year on year growth surges, with customers anticipating monthly deals such as 11.11 and 12.12 sales. One shopping platform saw a nine-fold increase in customer engagement throughout its 11.11 sale as customers earned discounts by participating in daily check-ins and challenges. One food and beverage corporation observed strong consumer Christmas spending based on the sales of their gift packages, predicting an increase in sales from the previous year. Shoppers are also more deliberate about when and how they spend, often due to cost concerns. Nearly half will be using loans, credit cards, and buy-now-pay-later solutions to defer shopping costs. However, not all consumers are borrowing; about half report having saved for the festive season. Regardless of the source of their funds, more consumers are determined to spend wisely this year, preferring to purchase items with lasting value and invest more in technology. For many consumers, festive shopping behavior is not driven by bargain hunting, with 48% of global consumers stating they will purchase the ideal gift regardless of whether it is on sale. Additionally, 64% of consumers often question the real value of promotions they encounter in festive sales, while 58% believe that their preferred items will not be on sale anyway.To optimize value, consumer products companies and retailers should concentrate on digital promotions and messaging. They should continuously refine digital promotions to match the consumer quest for value, and create distinctive sales promotions to quickly broaden audience reach and enhance perceived value. In addition, ensure that messaging remains current, integrated, and easily accessible throughout the holidays.Balance physical and social media commerce A physical store remains the primary shopping destination for 68% of consumers, but they are willing to switch between channels for what they want, intensifying ongoing fragmentation of shopping channels. The value of physical stores extends beyond the holiday atmosphere they provide, with many consumers preferring to physically experience a product before purchasing. Nevertheless, platforms such as TikTok, YouTube, and Instagram are set to become significant sales channels this season, particularly among Chinese consumers. In China, 50% of consumers plan to purchase through social media, compared to 24% in the US and 17% globally. According to a TikTok-commissioned study conducted by research company Kantar Profiles, which studied shopping behaviors in Southeast Asia during the festive season, 81% of Philippine TikTok users rely on TikTok to find new brands and products for the holidays while 77% of users use the platform for their Christmas shopping. Notably, 84% of local TikTok users participated in its mega sales events last year, and they are 2.3 times more likely to increase spending in 2024. Global consumers will increasingly adopt social sales channels as new capabilities enable brands to replicate the in-store experience. Leading brands are already using livestreams to create competitor-free spaces where consumers can ask about a product in real-time and click to purchase.While the range of channels might seem overwhelming, data indicates that consumers are adept at selecting the right one for their needs. Consumers are now prioritizing price over product, a shift from the norm as the value from promotions becomes a key differentiator in deciding where to shop. Although this approach works for shoppers, it exacerbates the ongoing challenge of channel fragmentation.To navigate the increasingly complex brand experience, companies must adopt a holistic approach to actively analyze, prioritize, and support the channels delivering the most value. Experiment with shoppable social content to accelerate the purchase journey and take advantage of impulse buying, then incorporate these insights into planning for next year.Gen Z preferences signal a future of sustainable choices Younger consumers are expected to be the most active shoppers this festive season. Gen Z, in particular, plan to increase their spending across nearly every category, including clothing, technology, and experiences. These consumers can be particularly demanding, as they are impatient, seek convenience, and value sustainability, indicating trends that more consumers will likely adopt in the coming years.Gen Z is prioritizing organic or sustainably sourced products, actively seeking brands that align with their values. A third plan to purchase second-hand goods as gifts, either to stretch their budgets or invest in higher-quality items they couldn’t afford if new.The rise of second-hand shopping and gifting could significantly impact categories such as fashion, while popular resale platforms offer Gen Z opportunities to find unique, affordable, and environmentally-friendly gifts. Some brands already capitalize on this trend by establishing or investing in resale platforms for their own goods. These platforms boost sales while helping brands, especially luxury ones, maintain a high-quality experience and limit counterfeit sales.As digital natives, younger consumers prefer using online channels with access to peer reviews and influencer content about potential purchases. Seeing someone relatable unboxing and using items eliminates the need to see them instore.Companies can focus on meeting Gen Z’s expectations for convenience, as they value having more control over deliveries and are likely to choose faster options, free shipping, and flexible delivery windows. For instance, 40% of Gen Z consumers value same-day delivery, compared to just 25% of Baby Boomers.While these expectations are challenging to meet profitably, data shows that 47% of younger consumers are willing to buy extra items to qualify for free shipping, compared to 35% of consumers over the age of 60. Companies that optimize their delivery logistics to meet this demand can drive additional purchases and increase their margins simultaneously.Moreover, themes of self-care and self-reward resonate more deeply with younger consumers. Gen Zers are more interested in beauty and personal care products than clothing, possibly because they are more discerning towards what needs to be new and what can be bought used. To connect with them during the holiday season, rethink product mixes and business models to incorporate preloved items, private labels, and emerging brands aligned with Gen Z values. Companies can create cost and distribution strategies that address their desire for control and convenience, and collaborate with influencers to enhance brand transparency and showcase value.Consumer behavior shifts beyond the holidays Despite global economic uncertainty, most consumers are enthusiastic about this year's festive sales while also becoming more strategic, concentrating on value, utilizing various shopping channels, and being selective with promotions. These trends signify a consumer behavior shift that will persist beyond the holidays. As consumers become more discerning, tech-savvy, and intentional towards deals, retail and consumer product companies must note how this influences their future strategies. Maria Kathrina S. Macaisa-Peña is a Business Consulting Partner and the Consumer Products and Retail Sector Leader of SGV & Co.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.

09 December 2024

Carlo Kristle G. Dimarucut

Guiding Philippine SMEs through the cybersecurity journey

IN BRIEF: Attacks targeting small businesses are on the rise, and a single successful breach could jeopardize operations, customer trust, and business continuity.Rather than try to build a comprehensive security team from scratch — which can be prohibitively expensive — many small businesses are benefiting from "CISO-as-a-Service" models.This model allows companies to bring in experienced security professionals who offer strategic guidance, oversee critical cybersecurity activities, and provide access to a broader team of security specialists, all on a shared-service basis.PULL QUOTE: “By outsourcing key functions, adopting best practices step by step, and focusing on tools that blend security with usability, Philippine SMEs can more effectively protect themselves without overextending their resources.” In the Philippines, medium and small businesses (SMEs) often face significant challenges when it comes to cybersecurity. With fewer than 20 IT personnel on staff, many organizations may only have basic protections — such as antivirus software programs and a firewall — in place. It’s common for these businesses to not have implemented services like Active Directory, and handle cybersecurity as an afterthought rather than a priority.Yet, in today’s increasingly digital economy, these businesses are at risk. Attacks targeting small businesses are on the rise, and a single successful breach could jeopardize operations, customer trust, and business continuity. With that in mind, this article will discuss how Philippine SMEs with limited resources can embark on a cybersecurity journey that’s practical, achievable, and cost-effective.An effective approach: outsource for efficiencyOne of the most effective approaches towards cybersecurity for SMEs in the Philippines is to consider outsourcing cybersecurity functions. Rather than try to build a comprehensive security team from scratch — which can be prohibitively expensive — many small businesses are benefiting from "CISO-as-a-Service" models.A Chief Information Security Officer (CISO) as a service allows SMEs to access top-tier security expertise without having to hire full-time specialists. Through this model, companies can bring in experienced security professionals who offer strategic guidance, oversee critical cybersecurity activities, and provide access to a broader team of security specialists, all on a shared-service basis. This reduces costs while still ensuring that the business benefits from industry best practices.The cybersecurity journeyAssess current state. Begin by assessing the current capabilities of the company. Understand what assets must be protected, identify any existing vulnerabilities, and evaluate all current tools and configurations. An outsourced partner can help facilitate this process, providing an unbiased, thorough review of the company’s security posture.Focus on the fundamentals. For organizations that have limited resources and basic tools, starting with strong foundational controls is key. This includes the following:Endpoint Security: Go beyond simple antivirus programs by considering endpoint detection and response (EDR) tools. These can provide more visibility into potential threats and help respond to attacks quickly. Choose EDR solutions that are simple to deploy and have an intuitive interface, making them easy for the IT team to manage.Network Segmentation and Firewalls: Reinforce the company’s firewall setup and consider segmenting its network. This way, even if an attacker gains access to one part of the system, they won’t be able to move freely. Look for firewalls that offer user-friendly dashboards, allowing the IT team to easily understand and manage network activity.Prioritize identity and access management. Many Philippine SMEs may not have any form of identity management system yet in place. Implementing a cloud-based solution, such as a simple single sign-on (SSO) or even managed identity access solutions, can significantly reduce risk. These solutions simplify login processes for users while enhancing security. An outsourced partner can make these systems easy to deploy and manage, reducing the burden on the internal team.Embrace managed security services. As part of the company’s journey, outsourcing Managed Detection and Response (MDR) can be particularly valuable. Managed service providers have dedicated security operations centers (SOCs) and can monitor the company network 24/7 for suspicious activity — something most SMEs can’t do on their own. The MDR tools often come with simplified reporting and alerts that are easy for the internal team to understand, ensuring that even non-specialist staff can grasp the current security state.Employee awareness and training. Many attacks target employees through phishing or social engineering tactics. Implement regular training sessions for company employees to teach them how to recognize threats. This is also something that a managed partner can easily help facilitate. Look for training programs that are interactive and easy to understand, ensuring employees find them engaging rather than overwhelming.Adopt user-friendly security controls. One concern that often arises when discussing cybersecurity is that it may hinder productivity. However, many of today’s solutions focus on enhancing both security and usability. Multi-Factor Authentication (MFA), for example, may seem like an extra step, but when integrated properly, it makes logging in faster while also being more secure. Choose MFA tools that are simple to use and integrate seamlessly with the company’s existing systems. Prioritize tools that simplify administration and are transparent to users, ensuring security isn’t seen as a burden but rather as an enabler of efficient work.Benefits of outsourcing cybersecurity for SMESCost efficiency. Rather than investing in full-time employees and costly infrastructure, outsourcing enables paying only for what the company needs, when it is needed.Access to expertise. Cybersecurity is complex and constantly evolving. Partnering with a provider provides access to specialists who are on top of the latest threats and trends.Scalable solutions. Outsourcing allows the scaling of security capabilities as the business grows, meaning companies do not have to worry about outgrowing their protections.Faster implementation. Leveraging external resources means that new security controls can be implemented faster, helping the business reach an improved level of security in weeks, rather than months or years.Transforming security for growthAs an example, a local medium-sized business had started with just an antivirus program and a basic firewall. They began their cybersecurity journey by gradually adopting outsourced cybersecurity services, such as MDR and a CISO-as-a-Service. Over time, they were assisted in implementing more sophisticated controls — including endpoint detection, identity management, and cloud security. While their footprint is smaller compared to global organizations, their level of protection is now at par with international standards.Throughout the journey, their service provider kept a focus on ease of administration and usability. The goal of their journey wasn’t just to make the organization more secure but also to make it easy for their employees to operate securely — resulting in a more productive and safer environment for everyone.Beginning the cybersecurity journey todayThe path to cybersecurity doesn’t have to be overwhelming. By outsourcing key functions, adopting best practices step by step, and focusing on tools that blend security with usability, Philippine SMEs can more effectively protect themselves without overextending their resources. Remember, it’s not about where the company starts — it’s about taking that first step towards securing the business for the future. Carlo Kristle G. Dimarucut is a Technology Consulting Partner of SGV & Co.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.

02 December 2024

Joseph Ian M. Canlas and Christiane Joymiel C. Say-Mendoza

Integrating ESG into risk management

IN BRIEF: Integrating environmental, social, and governance (ESG) into risk management is not just a moral imperative but a strategic necessity.As companies are increasingly required to outline their ESG policies and positions, it is crucial to evaluate how these commitments are being assessed and judged.There is a growing consensus that sustainability risk is also a financial risk, and corporate strategies need to reflect this broader perspective. PULL QUOTE: "By integrating ESG principles into risk management, companies can safeguard their operations against climate-related risks and promote inclusive growth, driving real and positive change." Integrating environmental, social, and governance (ESG) into risk management is not just a moral imperative but a strategic necessity. As businesses navigate a landscape where ESG considerations significantly impact operations and reputation, integrating ESG into risk management becomes crucial. This article explores how companies can integrate ESG into risk management to build resilient, sustainable, and ethically grounded business practices.The crucial role of ESG in risk managementAs companies are increasingly required to outline their ESG policies and positions, it is crucial to evaluate how these commitments are being assessed and judged. Most companies release an annual ESG report, which customers and other key stakeholders review to ensure alignment with their values, and which investors use to support their investment decisions. Companies that pursue management system certification (e.g., ISO Management Standards, Environmental and Energy certifications, etc.) can integrate ESG goals from the initial planning stage of the PDCA (Plan-Do-Check-Act) cycle. The check phase allows them to evaluate the effectiveness of their policies and processes in meeting their commitments and take appropriate actions. This approach also helps proactively address potential risks, build resilience against ESG-related shocks, and comply with regulatory requirements. Enhancing existing risk management practices is vital because negative ESG incidents are increasingly damaging and costly. Research by international ratings firm Morningstar Sustainalytics indicates that companies experiencing significant ESG incidents lost an average of 6% of their market capitalization. Additionally, incorporating ESG into risk management is not just about avoiding negative outcomes; it also involves seizing opportunities to create value and drive innovation. Companies that effectively manage their ESG risks are well-positioned to succeed in a rapidly changing global business environment.According to the 2025 Asia Pacific Risk in Focus study, a survey conducted by the Institute of Internal Auditors, organizations consider climate change or environmental risk to be in their top ten risk expectations this year but consider it to be in their top five in the next three years, highlighting its increasing significance and the need to address it sooner than later. Companies with effective ESG practices are less likely to encounter harmful controversies and are better equipped to respond when incidents occur. Medium and smaller firms may not face the same level of stakeholder scrutiny or regulatory requirements, but they are equally at risk from ESG incidents, which can be even more damaging. Without the support of major investors, smaller companies may struggle to recover from adverse events. In essence, ESG risk is a material risk, and failing to address it promptly and appropriately can lead to severe consequences.Integrating ESG principles in the ERM processAccording to the 2023 EY Global Board Risk Survey, highly resilient boards are more aware of the potential of ESG governance to create long term value as well as more aware of the sustainability risks their organization may face. Integrating ESG factors into enterprise risk management (ERM) process is crucial for enhancing executive management’s understanding of risk, encouraging a collaborative relationship with risk owners and risk management units, ensuring regulatory compliance, protecting reputation, mitigating risks, and ensuring long-term sustainability.Boards can accomplish this by incorporating ESG risk assessments into regular risk identification processes and exploring how climate change impacts the business model. Companies should adopt a comprehensive approach encompassing internal and external factors, identifying financially material ESG risk exposures through a materiality assessment. In addition, create strategies to mitigate any identified ESG risks, and regularly monitor these and report progress to stakeholders. The current regulatory landscape In recent years, government regulators have introduced various ESG-related regulations, primarily focusing on reporting and disclosure requirements. However, laws and regulations that mandate a more proactive approach towards ESG were deemed essential. Two significant steps in this direction are the Extended Producer Responsibility (EPR) Act of 2022 and the proposed Local Carbon Economy Law.The EPR Act of 2022 addresses the Philippines' plastic pollution problem by requiring large enterprises to establish programs for the effective recovery of plastic waste. Companies must meet target recovery rates, starting at 40% in 2024 and increasing by 10% annually until 2028. This act aims to ensure that producers take responsibility for the entire lifecycle of their products, particularly in managing post-consumer waste.The proposed Local Carbon Economy Law seeks to create a framework for reducing carbon emissions at the local level, promoting sustainable practices, and encouraging the development of a low-carbon economy. This law aims to align local initiatives with national and international climate goals, fostering a more sustainable and resilient economy.Over the years, the Philippines has made significant strides in promoting ESG practices. In 2019, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 04, requiring publicly listed companies (PLCs) to submit sustainability reports. These reports assess and manage non-financial performance across economic, environmental, and social aspects, enabling PLCs to measure and monitor their contributions towards achieving universal sustainability targets and national policies.The Philippine government is actively working to enhance its ESG regulatory framework. The country has expressed its intention to adopt the International Sustainability Standards Board (ISSB) standards, demonstrating a commitment to align with international best practices. In October 2021, the Sustainable Finance Taxonomy Guidelines (SFTG) for the Philippines were developed through cooperative efforts between the SEC, the Bangko Sentral ng Pilipinas (BSP), and the Insurance Commission (IC). These guidelines, drawing on the ASEAN Taxonomy’s Foundation Framework, initially focus on climate change mitigation and adaptation, with plans to include ecosystems, biodiversity, circular economy, and potential social objectives in future iterations. Additionally, the SEC plans to fully implement the Association of Southeast Asian Nations Sustainable and Responsible Fund Standards (ASEAN SRFS) to enhance transparency and uniformity in reporting.With climate risks looming, the business community has also increasingly integrated ESG into their operations and reporting over the past few years. Several companies in the Philippines have been recognized for leading the way in adopting ESG practices, setting examples for others to follow. To help their organizations manage ESG risks, Chief Audit Executives (CAEs) can help define the Board’s role in sustainability requirements, overseeing the processes around approving disclosure reports. Greenwashing, or the act or practice of making something appear more environmentally friendly than it actually is, poses a new kind of risk that must be incorporated into the overall risk assessment. CAEs can provide assurance for the accuracy of sustainability reporting and guard against potential greenwashing. Driving real and positive changeCompanies that prioritize ESG have been shown to have a positive correlation with financial performance and attractiveness to investors. Many business leaders recognize the importance of strong ESG governance, oversight, and accountability. There is a growing consensus that sustainability risk is also a financial risk, and corporate strategies need to reflect this broader perspective. By integrating ESG principles into risk management, companies can safeguard their operations against climate-related risks and promote inclusive growth, driving real and positive change. Joseph Ian M. Canlas is a Risk Consulting Partner and ASEAN Core Consulting Quality Leader, and Christiane Joymiel C. Say-Mendoza is a Risk Consulting Partner, both of SGV & Co.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.

25 November 2024

Aris C. Malantic and Benjamin N. Villacorte

Beyond Metrics: Creating lasting value in the "Age of And"

IN BRIEF: CFOs are uniquely positioned to integrate sustainability into financial strategies and drive long-term value creation.Advanced AI and data analytics offer CFOs powerful tools to enhance reporting accuracy and transparency.By fostering deeper engagement with investors and stakeholders, CFOs can build trust and confidence in their company's sustainability commitments. PULL QUOTE: "In the Age of And, CFOs must balance short-term pressures with long-term goals to drive sustained performance.”In today's rapidly evolving business landscape, the role of the Chief Financial Officer (CFO) has never been more critical in driving long-term value. Investors are increasingly demanding clear and credible narratives on how companies will create long-term value while managing immediate challenges. However, recent research highlights significant doubts among both CFOs and investors regarding the reliability of non-financial reporting and the achievement of sustainability targets.The challenge of non-financial reportingThe 2024 EY Global Corporate Reporting Survey, which surveyed more than 2,000 finance leaders and 815 institutional investors globally, reveals a concerning level of skepticism surrounding transparency and sustainability. Only about half of the finance leaders and investors surveyed believe that companies will likely meet their stated sustainability targets. This doubt is compounded by perceptions of greenwashing, where companies are seen as overstating their environmental efforts without substantial actions to back up their claims.Non-financial reporting, particularly in the realm of sustainability, is still maturing. Unlike financial reporting, which is governed by well-established standards and metrics, sustainability reporting often relies on voluntary frameworks that widely vary. The lack of standardization can lead to inconsistencies and a lack of confidence in the reported data. CFOs, therefore, face the dual challenge of improving the quality of non-financial reporting while ensuring that it aligns with investor expectations and regulatory requirements.Balancing multiple priorities in The Age of AndIn what is termed the "Age of And," CFOs are tasked with the complex challenge of balancing short-term financial pressures with long-term strategic goals. This involves making informed capital allocation decisions that drive growth in areas such as artificial intelligence (AI) and sustainability while also meeting near-term performance expectations.The "Age of And" reflects a business environment where companies must simultaneously address multiple, often conflicting, priorities. For CFOs, this means developing strategies that ensure immediate financial stability and position the company for future growth. This balancing act requires a deep understanding of both financial and non-financial drivers of value, as well as the ability to communicate these effectively to investors and other stakeholders.Building credibility in sustainability reportingTo address these challenges, CFOs must take proactive steps to enhance the credibility of their sustainability reporting. This involves understanding investor requirements, resetting non-financial reporting standards, and integrating sustainability into financial decision-making processes. By doing so, CFOs can provide the structured insights needed to distinguish their companies in the market.One of the key steps in building credibility is ensuring that sustainability disclosures are backed by rigorous data and due diligence. This means going beyond mere compliance with reporting standards to provide a transparent and verifiable account of the company's sustainability efforts. CFOs should work closely with sustainability officers and other key stakeholders to develop robust reporting frameworks that can withstand scrutiny from investors, regulators, and the public.The role of AI in enhancing sustainabilityAI presents a significant opportunity to transform finance functions and enhance sustainability efforts. It can improve the efficiency of core processes, enhance data analytics, and generate insights that drive value creation. However, the successful implementation of AI requires strong data and technology foundations as well as a responsible approach to building trust in AI systems.AI can help CFOs address some of the key challenges in sustainability reporting by automating data collection and analysis, identifying trends and anomalies, and providing real-time insights into the company's performance. For example, AI tools can be used to monitor sustainability metrics, track progress against targets, and identify areas where additional investment or action is needed. By leveraging AI, CFOs can improve the accuracy and reliability of their reporting while also freeing up time and resources for more strategic activities.Recommendations for CFOsEnhance reporting credibility. CFOs should ensure that their sustainability reporting is backed by rigorous data and due diligence to avoid perceptions of greenwashing. This involves developing robust reporting frameworks, conducting regular audits, and engaging with stakeholders to ensure transparency and accountability. To provide additional comfort to their stakeholders, CFOs and financial reporting teams should endeavor to align sustainability reporting with financial and regulatory reporting implications and disclosures to achieve consistency in reporting. Leverage AI. Utilize AI to improve data analytics and decision-making processes, ensuring that the technology is built on solid data foundations and adheres to ethical principles. CFOs should invest in AI tools that can enhance the efficiency and accuracy of their reporting while providing valuable insights into the company's performance. This includes developing a clear strategy for AI implementation, training staff on the use of AI tools, and establishing governance frameworks to ensure the responsible use of AI.Engage with investors. Building deeper engagement with investors is crucial for gaining their trust and confidence. CFOs should regularly communicate with investors about the company's sustainability efforts, progress against targets, and plans for future growth. This includes providing detailed and transparent reports, hosting investor briefings, and seeking feedback from investors to understand their concerns and expectations.Cultivate a sustainability-driven culture. CFOs should play a key role in fostering a culture of sustainability within the organization. This involves promoting sustainability as a core value, encouraging collaboration between different departments, and providing training and resources to support sustainability initiatives. By embedding sustainability into the company's culture, CFOs can ensure that it becomes a key driver of long-term value creation.Driving long-term value through sustainable practicesCFOs play a pivotal role in shaping the future of their organizations by providing credible, transparent, and forward-looking reporting. By addressing investor concerns and integrating sustainability into their financial strategies, CFOs can build trust and drive long-term value creation. In doing so, they position themselves as essential strategic partners to the CEO and the board, capable of navigating the complexities of the modern business environment.The journey towards reliable non-financial reporting and sustainable value creation is challenging, but it is also an opportunity for CFOs to demonstrate their leadership and vision. By taking proactive steps to enhance reporting credibility, embed sustainable principles into their core operations, leverage AI, engage with investors, and foster a culture of sustainability, CFOs can ensure that their companies are well-positioned for long-term success in the Age of And. Aris C. Malantic is the Financial Accounting Advisory Services (FAAS) Leader, and Benjamin N. Villacorte is the Sustainability Services Leader, both of SGV & Co.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.