October 2024 Articles - Suits the C-Suite | SGV & Co. | EY

28 October 2024

Victor C. De Dios

The far-reaching effects of VAT on digital services

IN BRIEF: As more countries legislate on the imposition of consumption tax on digital services, the Philippines joins the list with the recent enactment of Republic Act No. 12023, commonly known as the VAT on digital services law. The law defines digital service providers (DSPs) as the suppliers of digital services consumed in the Philippines, and sets certain VAT obligations upon them, both resident and non-resident.The far-reaching effects of the new law are to be felt more by non-resident DSPs who are assigned unprecedented VAT responsibilities.PULL QUOTE: “For the very first time, a Philippine law calls the attention of non-resident businesses, DSPs in particular, to comply with local VAT requirements such as registration, invoicing, and more importantly, VAT payment.” The digital economy significantly changed the landscape of doing business worldwide, and with this change comes the obvious need for governments to regulate, as well as the opportunity to conceptualize measures for raising revenue. As more countries legislate on the imposition of consumption tax on digital services, the Philippines joins the list with the recent enactment of Republic Act No. 12023, commonly known as the VAT on digital services law. This new law took effect last 18 October 2024. According to the Department of Finance, the initiative is set to generate an estimated Php16 billion VAT collection annually, and somehow level the playing field between traditional and digital businesses. It introduces amendments to the general VAT provisions of the Tax Code, putting emphasis on ‘digital service’ as among the services subject to VAT. It defines digital service as any service supplied over the internet or other electronic network with the use of information technology, describing the supply as essentially automated. Included in the definition of digital service are online search engines, online marketplace or e-market places, cloud services, online media and advertising, online platforms, and digital goods. Defining digital service providers The law defines digital service providers (DSPs) as the suppliers of digital services consumed in the Philippines, and sets certain VAT obligations upon them, both resident and non-resident.Resident DSPs, being local service providers, are presumed to have been operating within the purview of the old VAT provisions. Thus, for them, the new law would serve as a reaffirmation of the obligation to report and remit VAT. The far-reaching effects of the new law are to be felt more by non-resident DSPs who are assigned unprecedented VAT responsibilities. These responsibilities are anchored on the core of the law, which treats digital services by non-resident DSPs as performed or rendered in the Philippines, provided that they are consumed in the country, thus subjecting them to VAT.VAT implications The following are VAT implications of the new law as far as non-resident DSP transactions are concerned, highlighting what transacting parties should be on the lookout for:VAT registration. The law requires non-resident DSPs to register with the BIR for VAT purposes if their gross sales for the past three months exceed Php3 million or if there are reasonable grounds to believe that their gross sales for the next 12 months will exceed the same threshold. The actual requirements and process for VAT registration are not yet clearly set out. In any case, non-resident DSPs are advised to watch out for the ‘simplified automated registration system’ that the BIR is mandated to establish. Invoicing and accounting. The law requires non-resident DSPs to issue VAT invoices for digital services consumed in the Philippines. In any case, the law ensures that a non-resident DSP’s invoice is simplified in terms of contents as compared to mandatory contents of a regular local invoice. A non-resident DSP invoice only needs to reflect the date, transaction reference number, consumer identification, brief description of the transaction, amount, and breakdown of sale price by component if subject to VAT at 12%, VAT zero-rated, or VAT exempt, if necessary. Non-resident DSPs are advised to be on standby for announcements on when the government will operationalize the invoicing requirement. For accounting purposes, non-resident DSPs are not required to maintain subsidiary sales and purchase journals.VAT payment. The law mandates the manner of VAT remittance, which depends on whether the non-resident DSP transacts with a non-VAT consumer or VAT-registered consumer in the Philippines. For transactions with non-VAT registered consumers, the non-resident DSPs are the ones required to directly remit the VAT to the BIR. For transactions with VAT-registered consumers, the said consumers are the ones supposed to withhold VAT and remit the same to the BIR. This process is referred to as the ‘reverse charge mechanism,’ a similar mechanism to our existing withholding VAT. The BIR will likely soon release mechanics for VAT payment, whether via direct remittance or reverse charge. In either case, transacting parties are advised to assess whether the imposition of VAT on the digital services would have an effect on agreed pricing between them.Special rule for online marketplaces or e-marketplaces. Online marketplaces may also be required under the law to remit the VAT on behalf of its non-resident sellers, if the online marketplaces are involved in setting the terms and conditions of supply, or are involved in the ordering or delivery of goods. Recognizing the far-reaching effects of VAT on digital servicesFor the very first time, a Philippine law calls the attention of non-resident businesses, DSPs in particular, to comply with local VAT requirements such as registration, invoicing, and more importantly, VAT payment. The law even goes on to say that, in case of failure to register and non-compliance, the BIR, through the Department of Information and Communications Technology, can suspend business operations by blocking access to their digital services in the Philippines.At the same time, the law subtly calls the attention of Philippine customers transacting with DSPs. With a local tax ecosystem that encourages taxpayers to comply, Philippine customers, especially businesses placed on the receiving end of tax audits, should assess its implications from various angles. Questions around the consequences of transacting with unregistered non-resident DSPs, transacting with DSPs that issue non-compliant VAT invoices, and the applicability and proper implementation of the reverse charge mechanism are just some of the valid concerns consumers should recognize in view of the recent VAT law development.The effects of the VAT on digital services law are far-reaching. For now, taxpayers can expect further clarifications to come from the tax authority as it designs the rules and regulations for effective implementation. Atty. Victor C. de Dios is a Tax Principal 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 opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

21 October 2024

Henry M. Tan

Why entrepreneurs are critical to the Philippine economy

IN BRIEF:While entrepreneurs represent 10% of the adult population, their ventures account for 70% of employment, making them the most important drivers of job creationEntrepreneurs solve the most complex challenges in today's world and boost the overall economyPhilippines ranks as the world’s 18th most entrepreneurial country, besting developed nations like Denmark, Switzerland, Taiwan, Japan, Singapore, Italy, and New ZealandPULL QUOTE: “When you solve problems, you also attract capital and investments. The Philippines has already produced three unicorns—privately-held startups valued at USD 1 billion or more—with each finding its niche.” There are 594 million entrepreneurs worldwide, according to the Global Entrepreneurship Monitor, representing 7.5% of the global population, or about 10% of the adult population. This makes entrepreneurs a minority, but their impact on the world is unmistakably massive, as ventures by entrepreneurs account for 70% of total employment—making them significant drivers of job creation and critical for economic development.In this article, we run down the reasons why we should celebrate the successes of entrepreneurs and why we should enable more of them to succeed and flourish.Solving the most complex challengesWe recognize the importance of entrepreneurs because they solve the most complex challenges in today's world by bringing new ideas, products, and services to the market. The essence of entrepreneurship is finding innovative ways to solve seemingly impossible problems—from driving healthcare revolutions to enabling financial inclusion and advancing education technology. The pandemic showcased how entrepreneurial agility in startups can respond to global health crises, giving rise to telemedicine, AI-driven diagnostics, personalized medicine, and vaccine development at unprecedented speeds.Entrepreneurs have created platforms that provide financial services to underserved populations, making it easier for people to access banking services, thus enabling economic growth and helping reduce poverty. Through EdTech, free or affordable education has bridged the gap between formal education and those who need it most, at a time and place they prefer.Entrepreneurs are also bringing the world closer to solving the toughest challenges, such as climate change and the destruction of natural ecosystems. The World Economic Forum points out certain grim realities—10% of the global population still live in extreme poverty, 8 million tons of plastic are deposited into the ocean each year, and an area the size of a football pitch is deforested every second. However, the new generation of entrepreneurs is using technology such as drones and satellites to monitor and heal our planet.Being able to solve problems can also potentially attract capital and investments. The Philippines has already produced three “unicorns”—privately-held startups valued at USD 1 billion or more—with each finding its niche. Two of these unicorns notably emerged during the pandemic. Specifically, a developer of prefabricated properties became the nation's first unicorn in October 2017. A digital wallet and lending platform followed in November 2021, and a payment gateway solutions provider joined the ranks in April 2022.Creating jobs and boosting the overall economyWe celebrate entrepreneurs because they excel at creating jobs and boosting economic growth by introducing innovative technologies, products, and services. In the Philippines, MSMEs make up 99.59% of businesses, providing 65.1% of national employment.Filipinos are very entrepreneurial. Data compiled by the business publication and news site CEOWORLD Magazine ranks the Philippines as the world’s 18th most entrepreneurial country, besting developed nations like Denmark, Switzerland, Taiwan, Japan, Singapore, Italy, and New Zealand.This buoyant entrepreneurial environment is likely to inspire more entrepreneurs to join the ranks. A recent research survey by polling firm OCTA found that four out of five Filipinos would prefer to own their own business. Conducted among 1,200 Filipinos aged 18 and above, the survey revealed that 31% of respondents were motivated by the desire to manage their own time and explore horizons that offer limitless opportunities.By offering something better or new, entrepreneurs create competition within the ecosystem, challenging existing firms to become more competitive. This, in turn, creates more jobs and investments in a wide range of industries.All of this results in increased productivity–which Ray Dalio, founder of the world's largest hedge fund firm, Bridgewater Associates, and author of Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail—argues is the most important force in causing the world's total wealth, power, and living standards to rise over time.“Without innovation, productivity growth would grind to a halt,” he said. “In a market-based system, the most powerful way to drive innovation is to bring new ideas to market and to commercialize and profit from them. The marketplace is incredibly efficient at weeding out bad ideas and pricing good ones. In this way, the concepts of innovation and commercialism go hand in hand.”By encouraging a culture of innovation, entrepreneurs enable countries to produce more relative to the rest of the world, making them more attractive places to do business. By doing what they do best, entrepreneurs also create a platform with the potential to lift people out of poverty and improve the overall quality of life. Many international and local studies have shown that entrepreneurship has a positive and significant impact on poverty reduction. There is evidence proving that entrepreneurship increases the probability of individuals moving out of poverty and remaining above the poverty threshold in the Philippines.Empowering entrepreneurs to shape opportunitiesTo empower more entrepreneurs to shape the future of their businesses with confidence, we are pleased to have once again launched a search for entrepreneurs who are shaping opportunities through the EY Entrepreneur Of The Year Philippines 2024.Formed in 1986, the EY Entrepreneur Of The Year program seeks to honor entrepreneurs whose ingenuity and perseverance have created and sustained successful ventures. In 2003, the SGV Foundation first launched the program in the Philippines and has since been recognizing impactful business who can mold and reshape the country’s economic landscape to build a better Philippines and a better working world.This year’s theme, “Shaping Opportunities,” honors individuals who are turning possibilities into realities and making a profound impact on both the country and the world. The current theme recognizes the transformative ability of Filipino entrepreneurs in reimagining and advancing economic and national development with vision, passion, and innovation, according to the SGV Foundation.Inspired by their dreams and propelled by their unwavering resolve, these Filipino business leaders have played a pivotal role in elevating the country. Over the recent weeks, their narratives have been featured in BusinessWorld, sharing their stories of challenges and triumphs to hopefully encourage current and aspiring entrepreneurs. Henry M. Tan is a Partner and the Entrepreneur Of The Year Philippines Program Director 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 opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

14 October 2024

Carlo Kristle G. Dimarucut

Bridging the cybersecurity and business strategy gap

IN BRIEF: Today’s cyber risks go beyond technical vulnerabilities, where a breach can disrupt supply chains, damage brand reputation, and lead to significant financial losses. To mitigate cyber risks and protect business interests, cybersecurity must be integrated into the highest levels of decision-making, aligning security measures with the business’s overall objectives to enhance both security and performance.By embedding cybersecurity into the organization’s DNA, C-suite leaders can protect their assets, enhance innovation, and strengthen customer trust.PULL QUOTE: “To effectively safeguard intellectual property, business continuity, and customer trust, companies must bridge the gap between cybersecurity and business objectives for maximum protection. In the digital era, cybersecurity is no longer just a technical concern—it is a strategic imperative. As organizations embrace new technologies to drive growth, the urgency for robust cybersecurity has escalated. However, many businesses still see cybersecurity as a separate function rather than a critical component of their overarching strategy. This disconnect can be costly, as cyber incidents have far-reaching consequences that threaten every facet of the enterprise. For C-suite executives, integrating cybersecurity into the core business strategy is essential. Cyber threats are increasingly sophisticated, targeting intellectual property, business continuity, and customer trust. To effectively safeguard these assets, companies must bridge the gap between cybersecurity and business objectives, aligning them for maximum protection.Cybersecurity: more than an IT issueTraditionally, cybersecurity was relegated to IT departments as a defensive measure against data breaches, malware, and other threats. However, today’s cyber risks go beyond technical vulnerabilities. A breach can disrupt supply chains, damage brand reputation, and lead to significant financial losses. The average cost of a data breach in 2023 reached $4.45 million, underscoring the financial impact of cyber incidents.High-profile ransomware attacks on global companies demonstrate that cyber threats are not just IT issues—they are business risks that demand executive attention. For businesses to thrive, cybersecurity must be viewed as a strategic priority that permeates all levels of the organization.The cost of misalignment The misalignment between cybersecurity and business strategy stems from how risk is perceived at the executive level. While financial, market, and operational risks are often discussed in boardrooms, cybersecurity remains the domain of technical experts. As a result, cybersecurity measures frequently lag behind business initiatives like mergers, acquisitions, or digital transformation projects, leaving companies vulnerable.This reactive approach can lead to crisis management scenarios rather than proactive risk mitigation. For example, adopting cloud solutions without fully assessing security implications exposes sensitive data to potential attacks. When cybersecurity is treated as an afterthought, companies are forced to respond to breaches rather than preventing them, resulting in increased costs and lost opportunities.To mitigate cyber risks and protect business interests, cybersecurity must be integrated into the highest levels of decision-making. The goal is not just to prevent breaches but to align security measures with the business’s overall objectives, enhancing both security and performance.Embedding cybersecurity in digital transformationDigital transformation initiatives aim to enhance customer experience, optimize operations, and streamline processes. However, these efforts can introduce new vulnerabilities if security is not embedded from the outset. For example, integrating internet of things (IoT) technologies or migrating data to the cloud can open up new attack vectors.Cybersecurity should not be seen as a barrier to innovation but as an enabler. By incorporating security considerations into digital transformation, businesses can mitigate risks while maximizing the benefits of new technologies.Cybersecurity as a value propositionIn industries such as financial services, healthcare, and e-commerce, where data breaches can have severe consequences, demonstrating robust cybersecurity practices can differentiate a business in the market. Customers are increasingly aware of how their data is handled, and a strong cybersecurity framework can foster trust and loyalty and create a competitive advantage.By communicating the company’s commitment to data security, executives can build trust and position their brand as a leader in privacy protection.Integrating cybersecurity into risk managementCybersecurity is not just a technical challenge; it is a critical component of enterprise risk management. A cyber incident can affect a company’s finances, operations, and reputation, making it essential to integrate security into the broader risk framework.C-suite leaders and board members should regularly review cybersecurity performance metrics, monitor emerging threats, and ensure that security investments align with the company’s risk profile. This proactive approach enables companies to anticipate and address cyber risks before they escalate, protecting both the business and its stakeholders.Effective cybersecurity requires collaboration across all business functions. From HR to finance and operations, each department plays a role in maintaining security. For example, HR can drive a security-first culture through regular training, while finance can ensure that security investments align with business goals.The C-suite must foster cross-functional collaboration to create a unified approach to cybersecurity. Breaking down silos ensures that security considerations are embedded into every aspect of the business, enhancing resilience and maximizing ROI.The role of leadership in cybersecurity integrationSuccessful integration of cybersecurity into business strategy requires strong leadership from the top. Executives must champion cybersecurity as a core business priority, actively participating in shaping security strategies and ensuring alignment with business objectives.This begins with a shift in mindset: understanding that cybersecurity is not just about preventing breaches but enabling secure, long-term business growth. Regular communication between cybersecurity teams and the board ensures that the organization remains agile and prepared for emerging threats.In an era of escalating cyber risks, companies that fail to align cybersecurity with their business strategy do so at their own peril. By embedding cybersecurity into the organization’s DNA, C-suite leaders can protect their assets, enhance innovation, and strengthen customer trust. Those that bridge the gap between cybersecurity and business strategy will be better positioned to navigate the complexities of the digital age, turning security from a defensive measure into a strategic advantage.To thrive in the digital age, executives must integrate cybersecurity into their business strategies, emphasizing the importance of aligning security with organizational goals for a holistic, proactive approach. 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.

07 October 2024

Rossana A. Fajardo

Realizing transformation success through the human element

IN BRIEF: Companies are engaging in transformational activities at an accelerated rate, making the ability to transform successfully and continuously in response to disruption essential for an organization’s survival.Human factors were commonly identified as a primary reason for the result of transformations.To take their transformation efforts to a higher level, organizations must focus on placing humans at the heart of their strategies.PULL QUOTE: “The complex factors that determine whether a transformation succeeds or fails are deeply connected to the human element.” Transformation is important for the enduring success of any organization. However, there has recently been a noticeable shift in its frequency and pace. The EY Global Board Risk Survey revealed that 82% of board members and CEOs believe market disruptions are happening more frequently, and with greater impact. As a result, companies are engaging in transformational activities at an accelerated rate – making the ability to transform successfully and continuously in response to disruption, essential for an organization’s survival.EY and the University of Oxford’s Saïd Business School collaborated to look into more modern and effective methods for driving organizational change. The approach placed a greater emphasis on human factors, which was commonly identified as a primary reason for the failure of transformations. It was observed that not only is the rate of transformation failure excessively high, but it also imposes a human toll that organizations can no longer tolerate.The research indicates that 85% of senior leaders have participated in at least two major transformations in the past five years. Furthermore, 67% of those surveyed acknowledged that they have been part of at least one transformation that did not perform well during this period. While not surprising, it was astonishing that companies continue to accept this high rate of failure as the cost of change. By any other measure or in any other scenario, such a level of performance would be unacceptable.This research underscores that the complex factors determining whether a transformation succeeds or fails are deeply connected to the human element, a pattern that holds true across various industries and geographies. Adequate support can transform the increased stress associated with transformation into a catalyst for enhanced performance and drive progress. To optimize their chances of success, organizations must become proficient in these key areas.Cultivate essential leadership skillsIn the study, employees identified leadership as the primary factor influencing transformation outcomes, regardless of whether it was successful or not. Leaders themselves considered leadership to be the most critical element in successful transformations, but deemed it insignificant when the transformation did not meet expectations.It's essential for leaders to confront their own fears, worries, and uncertainties about the path that lies ahead. For instance, 47% of participants from highly successful transformations reported that leaders were open to ideas from junior staff members, compared to 29% from less successful transformations.Inspire through a shared and compelling visionThe vision is the cornerstone of any transformation. Leaders should extend their search for an inspiring vision beyond their personal scope, their organization, and even their industry. They should cast a broad net to employ future-oriented planning to uncover bold new possibilities, shaping a vision that garners widespread support and resonates emotionally with everyone involved. Close to half (47%) of participants from highly successful transformations acknowledged that the vision was clear and persuasive, in contrast to just 26% from transformations that did not perform well.For the vision to take hold, leaders must effectively convey the reasons behind the need for transformation, rather than merely dictating the actions required. Nearly half (48%) of employees from successful transformations reported that leaders successfully communicated the reasons for organizational change, as opposed to 25% from unsuccessful transformations.Foster a culture that encourages inputIn the qualitative analysis of the research, employees involved in unsuccessful transformations expressed feelings of being ignored, unsupported, and stressed both during and after the process. Subsequent discussions found leaders surprised at these findings and their lack of awareness regarding the significant emotional impact an unsuccessful transformation has on employees.Leaders must channel the appropriate emotions to keep employees committed and driven, while also offering sufficient emotional support to stave off worry and exhaustion. According to the predictive model used in the study, increasing emotional support raised the average probability of a successful transformation by 17%. By being attuned to the emotional state of employees throughout the transformation, leaders can detect early signs of trouble and implement changes to steer the transformation back on course.Empower through clear responsibilitiesThere will be unexpected developments, and intermittent pauses in any transformation journey. Leaders must strike a balance between providing structure and discipline while allowing space for creativity and innovation. Over half (52%) of participants from successful transformations reported that employees had well-defined roles and responsibilities, and 49% indicated that decision-making powers were distributed clearly and suitably throughout the organization.Leaders should promote a culture of trial and error by shifting from a mindset of avoiding failure at all costs to one that embraces rapid learning from failures. Minor setbacks can pave the way for significant achievements, while a fear of failure often results in lost opportunities. Forty-six percent of respondents from successful transformations said they established a process that fosters innovative experimentation without the risk of such experimentation adversely affecting careers or compensation.Leverage technology and skills to drive actionTechnology is not the end goal, but it is instrumental in bringing the vision to fruition. Selecting the appropriate technology is essential to achieving the vision and streamlining the transformation process. Leaders identified the effective deployment of technology as the second most important factor for a successful transformation and its ineffective use as the second leading cause of poor performance. Nearly half (48%) of those from successful transformations reported that their organizations had made the right technological investments to support their transformation goals, as opposed to 33% from less successful transformations. It's vital to consider the emotional reactions that come with the introduction of new technology. Employees from underperforming transformations are 25% more likely to associate transformation with concerns about job stability (49% compared to 39%). Others might view technology as a substitute for human interaction, which is crucial for the emotional health of employees and the smooth functioning of the organization.Leaders should focus on demonstrating progress rather than striving for perfection. By combining recruitment, upskilling or reskilling, partnerships, and outsourcing, leaders can foster the appropriate digital mindset and skills to actualize the potential benefits of technology. Forty-nine percent of participants from successful transformations indicated that their organizations possessed the necessary digital skills and mindset for the transformation, compared to 35% from less successful transformations.Collaborate to connect and createIn contrast to traditional corporate cultures that favored a directive, top-down hierarchy with employees carrying out a vision dictated by their leaders, the current continuous state of transformation demands mutual reliance and teamwork. Leaders must cultivate a culture that promotes connectedness and inventiveness, creating an environment where employees feel secure to explore new methodologies — both digital and agile — that foster innovation, engagement, and rewarding work experiences. Forty-four percent of those from successful transformations reported that their organization's culture supported the adoption of new work practices, as opposed to 28% from less successful transformations. For new work practices to thrive, leaders and employees must work together to recalibrate the dynamics of delegation, ownership, and empowerment. Forty-two percent of participants from successful transformations noted that a new organizational culture was intentionally defined and put into practice as part of the transformation initiative.Harness the human element to achieve transformation successLeaders are aware that their organizations must undergo change, yet the challenge of transformation can leave many feeling inundated. In a time characterized by relentless change, complacency is not a viable option. By tapping into the collective strength of their employees and by applying best practices in relation to each of the factors mentioned, leaders can steer their organizations towards a successful transformation. To take their transformation efforts to a higher level, organizations must focus on placing humans at the heart of their strategies. Rossana A. Fajardo is the Consulting 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 opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

October 2024

The far-reaching effects of VAT on digital services

Why entrepreneurs are critical to the Philippine economy

Bridging the cybersecurity and business strategy gap

Realizing transformation success through the human element

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