Suits the C-Suite

19 December 2022

Warren R. Bituin

Cybersecurity as a board priority

Cybersecurity came to the forefront of critical concerns when companies had to shift to remote working at the height of the pandemic. Businesses continued to accelerate their transformation to address disruption, but many did not consider cybersecurity as part of the decision-making process — likely due to business urgency or oversight. As a result, as much as 73% of Asia-Pacific businesses saw an increase in disruptive attacks, according to the EY Global Security Survey 2021 (GISS), with new vulnerabilities entering the rapidly evolving business environment.The industrialization of cyberattacks led to an increase in their volume and severity, but Chief Information Security Officers (CISOs) are faced with challenges that inhibit the cybersecurity function. These include inadequate budgets, which can be seen in the cyber spend of Asia-Pacific businesses totaling only 0.05% of their annual revenue, according to the GISS. This cost-cutting has severe implications, as the GISS reveals that 41% of businesses in the APAC region expect major breaches that could be anticipated and averted with better investment. There is also a lack of preparedness due to the limited visibility of cyber risk within an organization, coupled with outdated or disparate regulations.The GISS further shows that CISOs demonstrate a lack of confidence when faced with threat actors. Cybersecurity strikes a fine balance between usability, security and cost, but it is only possible if the board is proactively testing and challenging the existing status quo.BOARD RESPONSIBILITIES TOWARDS CYBERSECURITYBoard members must review the company organizational structure to ensure that the cyber security function is adequately represented, and should promote systemic resilience and collaboration to account for risks stemming from broader industry connections. They should encourage a continuous analysis of comparative metrics, such that industry-accepted cyber frameworks guide data driven decisions, aligning risk appetite with organizational goals and strategy. It is imperative to understand tomorrow’s cyber threats today by proactively investigating emerging threats.Board directors will have to identify their business-critical systems and data, and how their criticality is assessed. They are responsible for key business risks per local applicable Corporations law requirements. In some jurisdictions such as Oceania, directors are now required to take all reasonable steps to be in a position to “monitor and guide” the company and have information made available to them to exercise their responsibilities.The board must also determine how effective the controls protecting their critical systems and data are, and how often these are tested. In addition, they have to be aware of how their current data privacy and data retention policies align with government and industry regulations, and how third-party suppliers are protecting the company systems and data. Moreover, cyber investments must be focused on mitigating the risk scenarios that the company would be most exposed to. In case of a cyber incident, there has to be an organization-wide response plan capable of addressing it, where employees understand their roles in managing the crisis.It is the responsibility of directors to consider proactive management of the risks associated with critical assets and data to maintain market and consumer trust, as well as adhering to legislative obligations or best practice expectations to secure personal information.Thus, it is important to hear from external sources, not just management, about the potential threats and the independent assessed level of controls currently in place. While management can provide updates on the status of the company’s cybersecurity programs, an independent party can help the board gain assurance that the programs are adequate with respect to the existing cyber threats that the company is facing.CYBERSECURITY INSIGHTS FOR BOARDS TO CONSIDERAccording to the EY Global Risk Survey (2020), boards stay updated through external advisors or industry analysts (40%), interactions with or data on peer companies (32%), and through management briefings (20%). Almost half of the surveyed respondents consider unfavorable economic conditions, cyber incidents and the pace of technology change to be their top risks.In light of this, there are several insights gleaned through director dialogues held through the survey. One is to set the cultural tone — boards must demonstrate that cybersecurity and privacy risk are critical business issues by increasing the board and/or committee’s time and effort spent discussing the topic. They must also stay updated by increasing the frequency of board and/or committee updates on specific actions to address new cybersecurity and privacy issues and threats.Moreover, boards must understand the necessary protocols. They have to obtain a thorough understanding of the cybersecurity incident and breach escalation process and protocols, including a defined communication plan for when the board should be notified. By understanding the processes of management to identify, assess and manage the risk associated with service providers and supply chains, they can better manage third party risk. Boards also have to test response and recovery by enhancing enterprise resilience and having the company’s ability to respond and recover tested through simulations and arranging protocols with third-party professionals before a crisis. Lastly, boards must monitor evolving practices. They should stay attuned to evolving board and committee cybersecurity oversight practices and disclosures, including benchmarking against peer disclosures for the last two to three years.SUCCESSFUL AND SECURE TRANSFORMATIONBoards must have a clear understanding of the company’s cybersecurity program and how they are effectively implemented to address immediate and near-term cyber threats. Fortifying cyber resilience requires boards to act decisively as major pressures threaten the ability of cybersecurity to effectively address potential risks. They must play an active role in bringing cybersecurity to the rest of the business. By taking more time to discuss cybersecurity risks, the board can send a clear message that the cybersecurity function is a strategic business partner, and that the risks involved are critical business issues. Not only will this help the cybersecurity function work more effectively with the business, but it will also help the function execute transformation programs that are successful and cyber secure. 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.Warren R. Bituin is the Technology Consulting Leader of SGV & Co.

05 December 2022

Margaux A. Advincula and Donna Frances Ylade-Torres

Brace for impact: The future of taxation

In a span of three months, we have published a series of articles based on carefully curated topics from the first-ever SGV Tax Symposium held on Aug. 7. These articles covered pivotal areas and emerging developments in taxation significantly affecting the business landscape in the Philippines.In this last article of the 1st SGV Tax Symposium publication series, we are putting a spotlight on the proposed digital transformation in tax administration so that readers can better brace for the impact of the future of taxation in the Philippines.PROPOSED DIGITAL TRANSFORMATION IN TAX ADMINISTRATIONDigital agility was never more pivotal than during the pandemic. Globally, businesses are finding themselves on the frontlines of rapid digital transformation.Following suit, tax regulators are harnessing digital tools to automate tax invoicing and reporting, simplifying tax policies and compliance for a more seamless taxpayer experience, and automatically integrating taxation processes into taxpayer systems for accelerated tax revenue collection.Regulators are likewise leveraging information from digital analytics tools and data shared by global tax administrations to extract errors and inconsistencies, enabling them to automate checks and audit selection processes. The digitalization of multi-jurisdiction reports filed by companies further enables regulators to access, assess and compare tax loopholes, trends and risks, thus enhancing the efficiency of tax revenue programs.In the Philippines, the Department of Finance (DoF) is adopting a Medium-Term Fiscal Framework (MTFF) as the government’s economic blueprint to enhance the efficiency of the tax system. The Bureau of Internal Revenue, in particular, has been improving its online filing and payment systems, introducing mandatory e-invoicing in pilot programs and deploying an automated tax registration system for selected taxpayers (i.e., Online Registration and Update System).The MTFF is further accelerating priority tax measures to catch up with the digital economy, such as the imposition of VAT on digital service providers and reinforced tax collections from online content creators, which are expected to bring significant additional tax revenue. With efficient tax administration through digitization, the DoF is optimistic that the economy will continue to bounce back to its pre-pandemic high-growth trajectory.FUTURE OF TAX AS A DOUBLE-EDGED SWORDThe future of tax can be a double-edged sword. With the digital revolution already transforming tax administration around the world and rapidly becoming sophisticated and agile, it cannot be ignored that it will also deliver sharp, costly and taxing changes in the way we navigate the tax ecosystem.Critical to businesses is whether they have the right technology, infrastructure and upskilled talent who are fast enough and prepared to ensure that their tax functions are ahead of the regulators, and that they are digitally ready for an advanced level of scrutiny. Without a future-ready tax function, companies may be exposed to new tax risks.Therefore, with the ascendance of technology, the tax function can no longer remain a mere support system in business organizations. The tax function must transform into a key business and strategic partner of operating units. In essence, the value of the tax function to companies has never been as important as it is now.An important assessment that needs to be made in a future-proof tax function is the choice of automation tool such as robotics and artificial intelligence (AI). These solutions can be fast, systematized and less prone to errors, but they can fall short in areas where human insight, experience and judgment are required.Without a doubt, rapid technological change can also play a massive part in identifying shadow economies and curbing any informal activities and interactions among the players, which in turn, will create opportunities for regulators to recover missed tax revenue arising from under-reporting of sources of income or non-registration of businesses. However, with the sudden growth of various business models (e.g., e-commerce, e-banking, e-education, e-health), and the proliferation of shadow economies, it will be no surprise if regulators eventually utilize these digital platforms as extended agents to carry out the tax administration processes within their jurisdictions.However, it is also important for regulators to understand the need to strike a balance between increasing government coffers through greater tax collection efficiency and sustaining local entrepreneurship by strengthening taxpayer morale while also increasing taxpayer confidence in a progressive tax system.PRIORITY SOLUTIONSOrganizations should continuously re-assess their operating model and functions to identify gaps in data, technology and people, as well as to meet the heightened level of tax and regulatory compliance brought about by the pivotal shift towards the future of taxation in the Philippines.To achieve this, companies can prioritize the following solutions to brace for the impact against the future of taxation:1. Meet compliance obligations by upgrading the tax function, either by investing in advanced digital technology for accurate tax reporting, or outsourcing it to expert tax advisers who can leverage high-end technology solutions that may otherwise be too costly for companies to acquire on their own;2. Reshape human resource functions through a well-designed global mobility program with comprehensive employment, tax and immigration solutions ahead of any modern workforce disruption;3. Prepare a well-developed transfer pricing framework that is globally cohesive and aligned with contemporary international tax rules governing cross-border transactions;4. Provide internal tax teams with adequate support from tax advisers who have relevant expertise in dealing with multi-jurisdictional tax controversies; and5. Revisit indirect tax compliance and customs reviews focusing on disruption to globalization and digital trade.With the rapid use of technology to make tax administration more advanced, efficient, seamless and integral to the natural systems of businesses, it is imperative for companies to stay at the forefront of these changes. Those that do not keep up could find themselves left behind and exposed to new tax and reputational risk.Indeed, the future of taxation in the Philippines has begun. Whether it is viewed as positive or negative, it is here to stay. The question to companies now is — are you ready? 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.Margaux A. Advincula is a lawyer, tax partner and the head of the SGV Clark Office and Donna Frances Ylade-Torres is a lawyer and tax senior director.

05 December 2022

Margaux A. Advincula

Clark, ready for takeoff as the Philippines’ city of the future

On Nov. 7, SGV Clark successfully launched the inaugural publication of Doing Business in Clark: 2023 Edition to key officers of Clark-based organizations, such as the Bases Conversion Development Authority (BCDA) and Clark Development Corp. (CDC), representatives of embassies, as well as the Clark business community. The publication is an iteration of SGV’s Doing Business in the Philippines brochure series, which highlights the excellent investment opportunities in the country and in various localities.Clark, which rose from the ashes of the 1991 Mount Pinatubo eruption and became a prime investment destination in the Philippines, is composed of the Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Clark is further subdivided into four main districts: the CFZ, Clark International Airport, Clark Global City, and New Clark City (NCC). Administered by the BCDA and CDC, Clark has registered more than a thousand export and domestic market enterprises in manufacturing, information technology and business process management (IT-BPM), aviation, logistics and tourism sectors, among others. The CDC has disclosed on its website that it is a home to key investors from South Korea, the US, Australia, and Japan.The catchphrase coined by the BCDA and CDC, “Clark: It Works. Like a Dream” sums up what they say Clark stands for: efficiency, processes that actually work, convenience and ease of doing business. While locators continue to face challenges, mainly due to changes in tax rules and the pandemic, they say that Clark remains attractive to investors because of the ease of doing business, tax incentives, a rich talent pool, and infrastructure connectivity, to name a few.To ensure ease of doing business, the CDC operates a one-stop shop that promotes efficiency in the registration process. It is currently working on automating and streamlining processes that promise application approvals in less than three weeks. Unlike in other locations, businesses have to deal with only the CDC to locate in Clark. This removes the need for dealing with a number of government agencies, which can delay permits and licenses.From a tax perspective on fiscal incentives, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act) now allows the CDC to grant an income tax holiday (ITH) for a number of years depending on the project’s classification in the Strategic Investment Priority Plan (SIPP) subject to approval of the Fiscal Incentives Review Board for investments of more than P1 billion. The SIPP supports technological advancement, research, and innovation on top of the current SIPP-eligible activities in Clark. Existing locators continue to enjoy incentives under the 10-year transitory provision of the CREATE Act. Exporters can opt for a 5% special corporate income tax or enhanced deductions after the ITH period. Clark also ensures free flow of goods and grants duty and VAT exemption to qualified imports. To better attract local talent, the BCDA promotes a “Live, Work, Play” lifestyle in Clark that fosters innovation and inspiration. A number of Metro Manila businesses have recently expanded to Clark to cater to talent demand and take advantage of the talent pool in Central Luzon. Clark’s accessibility to nearby cities also makes it an excellent choice for hosting international and local athletic competitions.The BCDA has also lauded Clark’s accessibility with its infrastructure network that promises a strategic international and domestic location for investors. On Sept. 28, President Ferdinand R. Marcos, Jr. formally inaugurated the new world-class and state-of-the-art terminal of the Clark International Airport (CRK). CRK can welcome eight million additional passengers annually and is equipped with the latest technologies to make travel easier. The Philippine National Railways Clark (PNR Clark), the northern section of the North-South Commuter Railway, is also expected to significantly reduce travel time from Clark to Metro Manila to less than an hour.The iconic Sacobia Bridge, the cover photo of Doing Business in Clark: 2023 Edition, connects the present CSEZ to the NCC. The NCC envisions itself as the future smart city in the Philippines. It is currently home to the National Government Administrative Center, Athletes’ Village, Aquatics Center, Athletics Stadium, and the Filinvest Innovation Park. The NCC has announced that it will soon have an integrated luxury mountain resort that will host golf courses, ultra-luxury hotels, premium villas, an international school, and a public park. It will also benefit from the Luzon Bypass Infrastructure Project, which will equip it with digital connectivity comparable to South Korea and Japan.All of these developments support the CDC’s vision for Clark to become a modern sustainable aerotropolis and a premier business destination. As a haven for meetings, incentives, conferences and exhibitions (MICE) and home to major investors in the semiconductor, IT-BPM, and tourism sectors, Clark is developing to be the Philippines’ city of the future.In fact, in September, the BCDA signed a Memorandum of Understanding with Enterprise Singapore to create a framework for affordable housing, estate management, transportation, solid waste management, waste-to-energy technology, smart cities, sustainability, green data centers, urban development and people-centric programs. Businesses in these sectors would benefit from the incentives of a future Clark registration. There are also pending bills in Congress that support Clark’s development as a priority investment destination in the Philippines, and in Asia.The launch of Doing Business in Clark, therefore, supports the government’s efforts to promote Clark as Asia’s investment haven. Borrowing the words of Finance Secretary Benjamin E. Diokno in his message for Doing Business in Clark, “The best time to do business in the Philippines is now.” Indeed, and one of the best places to do this is in Clark.The history of Clark, starting from a US military base and becoming a prime investment hub, demonstrates its resilience and high potential. It is, perhaps, best represented by the Sacobia bridge, which was somewhat whimsically described in one of the BCDA’s 2020 newsletters as connecting not just the old and the new Clark, but also linking the nation’s heritage to promising times ahead.Certainly, setting up new business operations, or moving existing ones, is a complex process. However, investors and businesses who can meet the requirements set out in the CREATE Law and other legislation would do well to consult with trusted business advisors on whether the advantages of doing business in Clark will make it worth their while and present long-term strategic opportunities for their enterprises. 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.Margaux A. Advincula is a lawyer and Tax Partner of SGV & Co. and the Head of the SGV Clark Office.

28 November 2022

Jules E. Riego

A question of trust: Revocable or irrevocable?

The pandemic introduced a tectonic shift of perspective about wealth planning, changing from “it’s never too late to plan” to “it’s never too early to plan.” As people become more cognizant of their own mortality, they have also become more pragmatic because, as Dr. Susan David, award-winning Harvard Medical School psychologist and named one of the world’s most influential management thinkers, aptly said, “Life’s beauty is inseparable from its fragility.” Given this change in mindset, one favored tool for wealth planning is a Trust — a malleable tool even with the backdrop of the particularly challenging and sometimes complex compulsory heirship rules in the Philippines.A Trust is primarily a fiduciary relationship between a person called a Trustor or Settlor and a Trustee. The Trustor sets up a Trust, i.e., putting assets in a Trust or under the name of a Trustee. The Trustee is a person or entity appointed by the Trustor to take care of the assets placed in the Trust on behalf of or for the benefit of the Beneficiaries named in the Trust. As the Trustor is trusting the Trustee to take care of assets in favor of designated beneficiaries, the Trustee has a fiduciary obligation to the Trustor. Fiduciary obligation here means that the Trustee’s responsibility is not just within the level of a “good father of the family;” the Trustee should handle the Trustor’s and beneficiaries’ interests with the highest meticulous care. They hold a duty to preserve good faith and the trust reposed upon them.A TRUST AS A WEALTH OR ESTATE PLANNING TOOLEmploying a Trust is similar to writing a Last Will and Testament but without the burden of a costly, cumbersome and possibly protracted probate proceeding. Under Philippine rules, a Last Will and Testament has to be probated or have its legal validity recognized before a court. Because a probate proceeding is a judicial process in our jurisdiction, it will require lawyer’s fees and may result in considerable delays in the distribution of the benefit to the heirs.It is in the Trust Deed or Trust Agreement that the Trustor should put all their instructions as regards who should be benefited, when they should be benefited, what they will get (if hard assets), how much (if cash), and what conditions the beneficiaries must fulfill to be entitled to the income and/or principal of the Trust. In all of these, the Trustor must bear in mind the concept of “legitime” or the minimum entitlement under the law of compulsory heirs, which cannot be burdened with any condition.Once the Trustor passes away, the Trustee simply implements the distribution to the heirs/beneficiaries in accordance with the instructions of the Trustor. In most Trust arrangements, the Trustor is free to appoint a Protector or Overseer (usually a close and trusted family friend) who is tasked to see to it that the Trustee will perform all of its fiduciary obligations to the letter.REVOCABLE OR IRREVOCABLE?When deciding whether the Trust should be revocable or irrevocable, the following points should be considered:Generally, the substantial terms and conditions of an Irrevocable Trust (e.g., addition or subtraction of named beneficiaries) can no longer be changed. In a Revocable Trust, the Trustor can change the terms and conditions of the Trust for whatever reason. There is more flexibility for the Trustor in a Revocable Trust in terms of control over the assets in the Trust and in adding or removing beneficiaries.Transfers of assets to an Irrevocable Trust is essentially a donation, attracting a donor’s tax of 6%. This means that assets transferred to an Irrevocable Trust are no longer part of the estate of the Trustor and will no longer be subject to the 6% estate tax upon the passing of the Trustor. Therefore, the decision to set up an Irrevocable Trust is also a choice between paying a 6% donor’s tax at today’s value or paying the 6% estate tax based on the prevailing value later. This is particularly crucial for real property assets to be passed on to the next generation since the appreciation in value of real estate, especially those in prime locations, is unbelievably exponential.On the other hand, assets transferred to a Revocable Trust are still considered assets of the Trustor, such that upon the Trustor’s demise, the assets in a Revocable Trust will still be subject to 6% estate tax as donor’s tax was not paid during the transfer of assets to the Revocable Trust.Assets transferred to an Irrevocable Trust are also protected from creditors of both Trustor and beneficiaries, subject to certain rare exceptions. This also means that assets in an Irrevocable Trust are protected from future in-laws. This is the complete opposite in the case of assets transferred to a Revocable Trust, as future in-laws can potentially acquire assets from the Trustor’s family line due to Philippine compulsory heirship rules or other contingencies like annulment. This is also the reason why an Irrevocable Trust is very useful in wealth planning if the Trustor intends for specific assets not to cross family lines. For example, an Irrevocable Trust can shield shares of stock in a family-owned corporation if it is the family’s policy not to allow in-laws from owning shares in the family corporation to prevent potential complexity to the family dynamics.In an Irrevocable Trust, as long as the title to the assets is in the name of the appointed Trustee, estate tax will not apply even if any of the beneficiaries passes away since none of the latter own any assets in the Trust. This means that several generations of estate tax can be saved for as long as the corpus of the assets remain in the Irrevocable Trust. This benefit is not present in a Revocable Trust arrangement as assets from a Revocable Trust are distributed to beneficiaries upon the death of the Trustor.An Irrevocable Trust can also be used for wealth replenishment or “reforestation” if used in combination with life insurance. The fund of an Irrevocable Trust can be used to insure the life of the beneficiaries, and name the Trustee of the Irrevocable Trust as custodian of the proceeds of the life insurance policy for the benefit of or on behalf of the next generation. As long as the designation of the intended beneficiaries is irrevocable, the beneficiaries of the policy will get the proceeds tax-free. This cycle can be repeated in every generation to replenish the fund in the Trust.This arrangement is also useful when the intended beneficiaries of the life insurance policy are minors, suffering from any physical or mental disabilities and require life-long care, or when the parents believe that the beneficiaries would not be able to handle their own finances. Appointing a Trustee to manage, grow and control the periodic distribution of the funds would be ideal. However, when the named beneficiary of a life insurance policy is the Revocable Trust, the proceeds of the life insurance policy will be subject to estate tax, since a Revocable Trust has no personality distinct and separate from the Trustor.In a blog article, “Are trusts on your radar for succession planning?” Michael Parets, EY EMEIA Private Tax Desk Leader, offered other insights about Trust as wealth planning tool, such as choice of jurisdiction and the presence of laws recognizing Trusts; the domicile and citizenship of intended beneficiaries; the competence and reputation of the Trustee; and of course, the expertise of the tax advisor.FUTURE-PROOFING WITH TRUSTA Trust is not just a planning tool for the wealthy, but a viable wealth management tool for everyone who wishes to future-proof their assets for their heirs. In addition, we should remember that while there is certainly a cost in planning, there is a potentially higher cost in doing nothing – not just in tax, but more importantly, in maintaining peace and harmony within the family.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.Jules E. Riego is the Business Tax Services (BTS) Leader of SGV & Co. and the EY Asean BTS Leader.

21 November 2022

Henry M. Tan

Undaunted and unstoppable in the face of uncertainty

Throughout history, we have seen how times of great uncertainty and disruption have triggered sudden leaps and progress despite the problems and challenges they bring. The COVID-19 pandemic is no exception, it being the greatest global disruption the world has seen in many decades. Yet while the pandemic practically brought the world to a halt, it is also heartening to see how this period brought with it immense opportunities amidst many challenges. While is it true that many businesses suffered because of it, with many forced to close down, we have also seen numerous businesses accelerate their transformation and evolved to survive and then thrive as the world moved closer to post-pandemic recovery, pivoting their own business models and creating new ones.When the pandemic disrupted business strategies and challenged continuity, companies were forced to place a renewed focus on people, purpose and technology. Crisis, after all, inspires innovation, and this holds especially true for entrepreneurs.ENTREPRENEURSHIP AND INNOVATION DURING THE PANDEMICThough the pandemic caused many to lose their jobs, it also served as a catalyst for many others to enter the business landscape as entrepreneurs. According to a survey by Sales Force, the pandemic created a unique batch of startups that saw new opportunities to create new markets and attract new customers during a period of heightened uncertainty. As much as 56% of the survey respondents share that starting a business now was easier than before the pandemic. Most of the new startup founders embraced technology from the beginning, using digital tools and searching for more technology-based solutions to fuel business growth.NBC News reveals that entrepreneurs opened their own businesses at more than twice the rate seen in pre-pandemic times, aided by improved remote technology previously unavailable during other economic downturns like the Great Recession. Data from the US Census Bureau also shows that business applications nearly doubled during the first few months of the pandemic, remaining elevated and well above pre-pandemic levels. Economist Leila Bengali from the UCLA Anderson Forecast identifies lower fixed costs as one of the reasons for this, with the availability of the internet and a deeper familiarity with technology making it all the easier for innovative individuals to get their business online.In an interview, Christy Wyskiel, Senior Advisor to the President of Johns Hopkins University for Innovation and Entrepreneurship, said that the essence of entrepreneurship is identifying an unmet need and moving as fast as possible to get a meaningful product to market — which is exactly what society needs during a crisis. The pandemic dramatically accelerated productive collaboration in the service of society, and the paradigm has now changed, particularly in this period of post-pandemic recovery. Entrepreneurs should not be paralyzed by uncertainty, but instead should seek long-term value and success by continuing to serve their existing customers while being ready to pivot when needed to address potential opportunities.The pandemic also created a massive push towards digital transformation. In the Philippines, we now find almost every product or service available on online shopping platforms. Almost every brand in the country rapidly transitioned to existing online selling platforms or invested in developing their own online sales mechanisms. In the micro-sized enterprise space, people have gotten more used to the idea of starting their own businesses using digital tools and leveraging social media to take advantage of existing conditions — for example, during the lockdowns, the number of home-based online food sellers mushroomed like never before. Many found surprising success and were able to cultivate regular customers due to people being unable to go out and dine. The pandemic also gave rise to new business opportunities in logistics, entertainment, personal care and many other areas.CELEBRATING THE SPIRIT OF ENTREPRENEURSHIPAnalysts predict that the rate of growth of entrepreneurship will remain high in the post-COVID-19 economy, as shared by Forbes. Because of the massive increase in startups caused by the pandemic, developments on an individual entrepreneurship level will likely aid numerous economies.As Gaston Taratuta, EY World Entrepreneur Of The Year 2022, said in his acceptance speech in Monaco, “Being an entrepreneur is more than just building a successful business. It’s about creating and seizing opportunities where ones don’t readily exist or aren’t easily attainable.” This has never been truer than in the stories of 18 indomitable Filipino entrepreneurs that we are celebrating in the Entrepreneur Of The Year 2022 Philippines program. The program recently concluded its search for the country’s most successful and inspiring entrepreneurs with the theme of Undaunted. Unstoppable. And will be holding its awards gala tonight.Guided by their purpose, motivated by their aspirations and fueled by their relentless determination, these Filipino entrepreneurs helped empower communities and uplift the nation. Their stories have been published in BusinessWorld over the past few weeks with the hope that in sharing them, present and future entrepreneurs can be further inspired by their struggles and successes.Entrepreneurs showed us that a single idea can spark positive change and disrupt the status quo. According to a 2023 study, “Entrepreneurship during a pandemic,” entrepreneurs have been known to act as focal points during a time of crisis, playing a critical role in the context of post-disaster recovery by providing leadership and signaling that their communities are likely to survive. This same spirit burns strong within Filipino entrepreneurs who lead as Undaunted visionaries, equipped with Unstoppable resilience and the ability to adapt. 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.Henry M. Tan is a Partner and the Entrepreneur Of The Year Philippines Program Director of SGV & Co.

14 November 2022

Cheryl Edeline C. Ong and Karen Mae L. Calam-Ibañez

What’s new with Philippine investment incentives

2022 has ushered in several changes to the Philippines: a new administration, the winding down of the COVID-19 pandemic, and updates to the country’s investment incentive strategy.Investment incentives are government concessions meant to attract inbound capital. Taking advantage of these incentives is integral to strategic business optimization. From the relaxing of foreign equity restrictions, to the 2022 Strategic Investment Priority Plan, to environmental laws and more, entrepreneurs should be aware of every opportunity to decrease the cost of doing business in the Philippines.ENCOURAGING FOREIGN EQUITYForeigners have been gradually given more freedom to invest. They may enter industries previously exclusive to Filipino citizens, subject to reciprocal treatment. Instead of dreading competition, organizations should use this opportunity to seek more funding for their operations.Amendments to the Public Service Act limited the activities that are considered public utilities, namely the distribution of electricity, transmission of electricity, petroleum and petroleum products pipeline transmission systems, water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems, seaports, and public utility vehicles. This effectively removes from the “public utility” classification the domestic shipping, railways and subways, airlines, expressways, tollways, and transport network vehicles services, among others. These can now be fully owned by foreigners.Telecommunications and other vital services are subject to safeguards for critical structure and the reciprocity rule. On the other hand, the amended Retail Liberalization Act grants foreign enterprises the right to invest in retail trade businesses with a minimum paid-up capital of P25 million. If it owns more than one physical store, the investment per store should be at least P10 million.If successful, these equity market liberalizations could lead to increased foreign direct investment (FDI). A higher FDI means an improved exchange rate for the peso. Furthermore, investment incentives can also be used to boost job creation as well as job quality. The latter is crucial amid rising underemployment rates.For example, the amended Foreign Investments Act of 1991 lets foreigners invest in micro and small Domestic Market Enterprises (DMEs) with a minimum paid-up capital of $100,000.00. The DMEs should either involve advanced technology; or be endorsed as startup enablers; or directly employ at least 15 Filipinos, with a majority of its employees being Filipino citizens. This has been amended from the previous requirement of at least 50 direct Filipino employees.AN OVERVIEW OF THE 2022 SIPPTo effectively implement the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, Memorandum Order No. 61 was issued to approve the 2022 Strategic Investment Priority Plan (SIPP). It grants investment incentives to entities registered as Registered Business Enterprises (RBEs). RBEs are categorized as either Export Enterprises (EEs) if 70% of their output is directly or indirectly exported, or as DMEs if the situation is otherwise.The regulatory power of investment incentives can be observed in the following aspects of the SIPP and the CREATE Law:Export Enterprise vs. Domestic Market Enterprise. To address the trade deficit, EEs get additional benefits over DMEs. EEs get VAT incentives and have the option to avail of either a 5% tax on their gross income earned, in lieu of all national and local taxes, or Enhanced Deductions (ED) for 10 years following the end of the income tax holiday (ITH) period. Meanwhile, DMEs have no VAT incentives, and can only avail of the ED for five years after the lapse of the ITH period.Provincial benefits. The period to enjoy the benefits of the 2022 SIPP depends on both the kind of RBE (whether DME or EE), as well as the location of the registered project or activity. Following the push towards rural development as embodied in the Balik Probinsya program, the CREATE Law gives longer ITH periods to RBEs operating outside of the National Capital Region and other metropolitan areas.Priority activities in the tier system. The administration aims to create a self-sufficient Philippines. Thus, longer benefits are granted to industries such as agriculture to promote food security, healthcare to better withstand future pandemics, power to reduce reliance on imported fuel, and higher tier activities. PUSHING FOR A GREEN ECONOMYThe right of Filipinos to a balanced and healthful ecology goes hand-in-hand with the need for economic development. Hence, the current administration’s socioeconomic agenda includes the pursuit of a green economy. It is willing to compensate sustainable, eco-friendly businesses through investment incentives under the Renewable Energy (RE) Law, as implemented by Revenue Regulations (RR) No. 07-2022.Under the RE Law, RE developers may avail of a seven-year ITH. Afterward, the developer is to pay 10% corporate tax on taxable income, provided that the resulting savings are passed on to end-users in the form of lower power rates. They may also avail of the incentives under the CREATE Law, e.g., four to seven years of ITH, depending on location and industry tier, followed by five years of Enhanced Deductions. The main consideration in determining which incentive to apply for is the time-bound incentives under CREATE Law which is not applicable under the RE Law.In addition, the Philippine Green Jobs Act of 2016 promotes the creation of “green jobs,” or employment which contributes to environmental preservation. Under RR No. 05-2019, businesses offering green jobs will be granted an additional deduction equal to 50% of the total expenses for skills training and research development. The law also provides that capital equipment that are actually, directly and exclusively used in the promotion of green jobs, may be imported free of taxes, though the government has not yet issued any implementing rules for this provision.BALANCING INCENTIVES WITH SUSTAINABLE GROWTHInvestment incentives have been introduced by the government in a conscious effort to remain globally competitive. Granting incentives must nonetheless be balanced with sustainable growth.Every concession comes with an equivalent benefit to ordinary Filipinos, either through employment opportunities or through eco-friendly communities. Companies have just as much to gain from investment incentives as their foreign counterparts and taking advantage of tax and regulatory benefits is integral to any business strategy. 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.Cheryl Edeline C. Ong is a tax partner and Karen Mae L. Calam-Ibañez is a tax senior manager of SGV & Co.

07 November 2022

Ana Katrina C. De Jesus and Natasha Kim R. Tec

Transfer Pricing is here to stay

Whether before or during the pandemic, related party transactions continued to proliferate both on a domestic and global scale. Business organizations should be mindful of the complexities of the rules surrounding their transactions with related parties. Philippine taxpayers have been anticipating transfer pricing audits by the Bureau of Internal Revenue (BIR) as it intensifies its risk assessment and audit activities.The regulatory framework for transfer pricing is envisaged to alter the overall tax architecture under which related party businesses operate. A thorough understanding of transfer pricing would allow businesses to effectively plan and future-proof their operations. We take a step back as we look into the evolution of rules in the Philippines and what the future holds for transfer pricing.TRANSFER PRICING THROUGH THE YEARSTransfer pricing is rooted in Section 50 of the National Internal Revenue Code which empowers the Commissioner of Internal Revenue to make an allocation of income and expenses between or among controlled group of companies if he determines that a related taxpayer has not reported their true taxable income. Prior to the issuance of local regulations, the BIR sought guidance from the Organization for Economic Cooperation and Development (OECD) transfer pricing guidelines.In 2013, the BIR issued the Transfer Pricing regulations to provide a set of rules in the determination of the appropriate revenue and taxable income of parties in a controlled transaction. The regulations require the maintenance of contemporaneous transfer pricing documentation, which must exist when the associated enterprises develop or implement any arrangement, or at the latest, when preparing the annual income tax return.In 2019, the implementation of transfer pricing was given more teeth when the BIR issued the Transfer Pricing Audit regulations. These provided a set of guidelines for revenue officers to propose adjustments by imputing an arm’s length price on related party transactions that are not in accordance with the arm’s length principle.The next set of relevant BIR issuances on transfer pricing were released in rapid succession during the height of the pandemic, progressing to the next phase of transfer pricing from compliance to enforcement.In 2020 and 2021, to generate new sources of funding for the government’s pandemic response, the BIR prescribed rules on the disclosure of related party transactions and submission of a transfer pricing form for taxpayers which are covered by the documentation requirement. Through these disclosures, the BIR has clearer visibility on taxpayers with related party transactions, which could be the target for transfer pricing audits.In 2022, new regulations on Mutual Agreement Procedures (MAP) provide Philippine taxpayers with an alternative mode to resolve disputes from differences in the interpretation or application of tax treaties. One of the typical scenarios requiring MAP assistance is when a taxpayer is subjected to additional tax in one country due to a transfer pricing adjustment from a transaction with its related party in the other country.THE NECESSARY PREPARATION OF TRANSFER PRICING DOCUMENTATIONWith the issuance of amendatory regulations limiting the scope of preparation of transfer pricing documentation to certain types of related party taxpayers and providing for materiality thresholds on the amount of their transactions, other taxpayers with related party transactions are still enjoined to prepare transfer pricing documentation. After all, the burden of proof rests upon the taxpayer on whether its related party transactions adhere to the arm’s length principle. The Transfer Pricing Audit regulations provide that taxpayers must ensure that the related party transaction they enter into is commercially realistic and makes economic sense. As such, taxpayers are expected to maintain contemporaneous documentation. In case of operating losses, the documentation must outline the non-transfer pricing factors that contributed to the losses. In light of the pandemic, affected taxpayers with related party transactions should carry out a Special Factor Analysis in their transfer pricing documentation where all legal and economic justifications are in place to establish a defensible position for business losses or reduced profits during the covered periods.With the issuance of a Revenue Memorandum Order in 2021 streamlining the procedures and documents for the availment of treaty benefits, taxpayers applying for a tax treaty relief application or request for confirmation in relation to interest income are now required to present proof that the interest rate used in the finance transaction is arm’s length. In addition, we have seen the BIR request for the submission of transfer pricing documentation even for tax treaty relief applications or requests for confirmation for other types of cross-border transactions such as business profits and royalties.There is also an interplay with the Bureau of Customs as it has the authority to question the determination of customs valuation relating to cross border transactions between related parties. A transfer pricing documentation could help support and justify the value of the imported goods purchased from foreign related parties.Further, the MAP regulations make it clear that the preparation of a transfer pricing documentation is a prerequisite in availing of MAP assistance.THE FUTURE OF TRANSFER PRICINGGovernment tax policymakers around the world are working together on proposals for significant changes to long-standing international tax rules in light of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative on the globalization and digitalization of the economy. These developments would significantly alter the overall international tax architecture under which multinational businesses with related party transactions operate.In the Philippines, tax audits with transfer pricing issues have yet to be fully operationalized by the BIR since the inception of transfer pricing audit guidelines. However, taxpayers should not rest on their laurels because the BIR is continuously beefing up its capabilities through continued training of its revenue officers.With the recent issuance of the MAP regulations, it will only be a matter of time before the Advance Pricing Arrangement (APA) regulations will be released. An APA is an arrangement that determines in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for transactions over a fixed period of time. The APA has always been a part of the BIR’s strategic plan for 2019-2023 because it is expected to address the country’s growing transfer pricing problems with the cooperation of taxpayers, particularly in relation to tax base reduction and profit apportionment schemes.While the OECD BEPS Action Plan 13 has not yet been adopted in the Philippines, multinational companies operating in the Philippines and Philippine conglomerates may still be required to comply with the Master File, Local File and Country-by-Country Reporting requirement.Now that the BIR has information on related party disclosures that are not otherwise disclosed in traditional tax returns, we may expect increased traction in the conduct of transfer pricing audits. In view of the upcoming e-Invoicing System implementation by the BIR, taxpayers with related party transactions must be aligned with their transfer pricing policies as they will be providing information to the BIR in real time. Taxpayers should be proactive in examining their transfer pricing risks by preparing contemporaneous transfer pricing documentation.This means a comprehensive approach to systematically address transfer pricing issues and the preparation of robust transfer pricing documentation will be critical to ensure compliance with the arm’s length principle. 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.Atty. Ana Katrina C. De Jesus is a tax principal and Atty. Natasha Kim R. Tec is a tax associate director of SGV & Co.

31 October 2022

Lucil Q. Vicerra and Yzrael Edwin V. Pineda

Navigating Customs audit and prior disclosure

After more than three years from the time the Bureau of Customs (BoC) resumed the conduct of customs audits, many importers stepped forward and voluntarily paid deficiency duties and taxes by availing of the Prior Disclosure Program (PDP).Based on international best customs practices, the PDP authorizes the BoC Commissioner to accept, as a potential mitigating factor, the prior disclosure by importers of errors and omissions in goods declaration that resulted in the deficiency in duties and taxes on past imports. It is both a compliance and revenue measure aimed to generate additional revenue with the least administrative cost both to government and importers. The PDP also helps importers avoid a full customs audit and the steep penalty in case of deficiency duty and tax findings in the course of an audit.In availing of the PDP, the bigger question is — is it worth the potential risk of being exposed to closer scrutiny? We break down our observations to assist importers in navigating their customs audits and in deciding whether to avail of the PDP or not.WHAT IS THE STATUS OF THE BOC POST CLEARANCE AUDIT?Since January 2019, the BoC has issued almost a thousand Audit Notification Letters (ANLs) to conduct audits on importers, covering companies from various industries and groups such as oil and gas, automotive, pharmaceutical, consumer, and those in the Super Green Lane category, etc. Based on information from the BoC website as of June 2022, the BoC Post Clearance Audit Group (PCAG) has collected about P600 million from audit findings and P5 billion from PDP applications filed by importers, whether under audit or not. Based on these figures alone, around 90% of the PCAG’s collection came from PDP applications.It appears that there were several companies under audit who availed of the PDP. Moreover, there were also companies who, even without an ongoing audit, availed of the PDP. This goes to show that importers who are not under audit may come forward at any time and volunteer to pay their deficiency duties and/or taxes to show good faith and commitment to comply with the customs laws and its rules and regulations. WHO MAY FILE AND WHEN TO FILE A PDP?Importers who are not undergoing an audit may file a PDP at any time. Those undergoing audit should file the PDP within 90 days from the receipt of the ANL as provided under Customs Administrative Order (CAO) 1-2019. In this case, the PDP application may be amended within 30 days from the filing of the initial PDP.Some of the common issues covered by the PDP applications filed include dutiable royalties, upward transfer pricing adjustments, error in value declared, excise tax on sweetened beverages, industry specific issues, among others.Moreover, importers may avail of the PDP for the following reasons without penalty and interest: dutiable royalty payments; other proceeds of any subsequent resale, disposal, or use of the imported goods that accrue directly or indirectly to the seller; or any subsequent adjustment to the price paid or payable. For these, the PDP application should be filed within 30 calendar days from the date of payment or accrual of subsequent proceeds to the seller or from the date of the adjustment to the price paid or payable is made.PENALTIES TO BE PAID FOR AVAILING OF PDP AND HOW TO AVOID OR MINIMIZE THEMWhile the PDP provides for a facility to pay deficiency duties and taxes, the same is subject to penalty and/or interest depending on whether the importer is under audit or not. If the importer is under audit, the availment of the PDP with the 90-day period is subject to a 10% penalty and 20% interest per year.On the other hand, an importer who is not under audit will only be subject to 20% interest per year. Since the penalty and/or interest may be significant, importers availing of the PDP normally request for its waiver pursuant to the power of the BoC Commissioner to compromise any administrative case arising under the Customs Modernization and Tariff Act (CMTA) involving the imposition of fines and surcharges, including those arising from the conduct of a post clearance audit. The BoC Commissioner’s power to compromise, however, is subject to the approval of the Secretary of Finance.Since there is no specific guidance on the parameters or requirements for the approval of PDP applications with request for waiver of penalty and/or interest, the PCAG has to consider on a case-to-case basis the PDP applications that they will endorse to the Commissioner and ultimately to the Secretary of Finance for approval. We understand that for PDP applications of importers without an audit and which are found to be complete and accurate, the same are being approved by PCAG and endorsed to the Commissioner for approval.Meanwhile, PDP applications of importers with an audit which are also found to be complete and accurate will be subject to evaluation by PCAG. These applications may or may not be endorsed for approval depending on the issues applied for PDP and the relevant facts and circumstances.To ensure the approval of PDP applications, the same should be filed on time and should include a full disclosure of the relevant issues. Moreover, the same should comply with the documentary requirements provided under CAO 1-2019. If importers fail to comply with these, the PDP application may be denied.THE BEST TIME TO AVAIL OF THE PDPGiven the greater certainty in the approval of the PDP filed by importers not undergoing an audit, it seems more prudent to avail of the PDP while the company is not yet under audit. Though some importers think that availing of the PDP when they are not yet under audit may expose them to additional risks and potential liabilities, it seems this is not the case based on previously filed applications.We are not aware of an importer who is not under audit and availed of PDP who was subsequently subjected to a full-blown customs audit. It appears that the BoC recognizes the good faith of the voluntary payment made given that there is no on-going audit that may possibly result in deficiency findings.PROACTIVITY IS THE KEYIt is prudent for importers to review their customs practices and procedures without waiting for an ANL. Upon determination of the actual exposure, importers may consider availing of the PDP considering that the benefits far outweigh the risks, if any. The filing of PDP without awaiting an ANL may potentially save importers from the customs audit for a certain period. This may also help importers avoid the hassle of going through a three-year audit, saving time, effort, steep penalties and interest.This will also enable importers to contribute to the collection efforts of government while complying with customs laws and regulations. Moreover, importers who are aware of their exposure and risk areas can better implement corrective measures to strengthen compliance with existing customs rules and regulations.To encourage more importers to avail of the PDP, the BoC and the DoF should continue to exert their best efforts in expediting the processing of filed PDP applications. In the end, success in any initiative will undoubtedly be achieved when all stakeholders work together. 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.Lucil Q. Vicerra is a Tax Principal for Indirect Tax Services – Global Trade & Customs and Yzrael Edwin V. Pineda is a Tax Senior Director, respectively, of SGV & Co.

24 October 2022

Marivic M. Rebulanan

Transformative-tax-compliance-requirements

In the last two years, the world has witnessed how an unforeseen event can bring about a major shift in the business environment, forcing governments and business leaders to make drastic changes. Accountants and tax practitioners became economic frontliners for a struggling economy during the pandemic. Fast-forward to 2022. Businesses are slowly reopening and their operations are recovering. Offices are transitioning to either 100% face-to-face or hybrid set-ups. Simultaneously, the Bureau of Internal Revenue (BIR) is also keen to implement transformative changes to adapt to these developments to ease the process of paying taxes and comply with administrative requirements. By streamlining these processes, the government is effectively helping taxpayers meet the social responsibility of paying their tax obligations. These can pave the way for changes in policy that are sustainable and, at the same time, environment-friendly, resilient against unforeseen events, with the potential for reducing the financial burden on taxpayers.In this regard, the BIR issued Revenue Regulations (RR) No. 6-2022 to remove the five-year validity of receipts and invoices. This RR covers manual receipts and invoices with Authority to Print, those that are generated by Computerized Accounting Systems (CAS) and related components, and those issued from Cash Register Machines (CRM) and Point of Sale (POS) Machines with Permit to Use. This removal took effect on July 16, 2022. The implementation of this RR will reduce the burden on taxpayers to comply with the BIR’s administrative requirements when the receipts and invoices expire. This may also reduce the cost of doing business, allowing taxpayers to improve their financial performance.This initiative is also in line with the BIR’s adoption of the Electronic Invoicing/Receipting System (EIS). This requires certain taxpayers to electronically report their sales data to the BIR, which should be implemented within five years from the effectivity of the TRAIN Law, and upon establishment of a system capable of storing and processing the required data used by electronic point of sale systems. This will be mandatory for taxpayers engaged in the export of goods and services, those engaged in e-commerce, and taxpayers under the jurisdiction of the Large Taxpayers Service. The EIS is capable of storing and processing the data that taxpayers must transmit using the taxpayers’ Sales Data Transmission System (SDTS).Now, taxpayers are required to issue electronic receipts and invoices, and the related sales data should be transmitted to the BIR within three calendar days from the date of transaction, which is almost real time. With this, taxpayers are no longer required to issue hard copies of receipts and invoices with ATP, or print those that are generated from the CAS, CRM, and POS machines. The soft copies of these documents are considered valid for tax purposes. Relative to sales data transmission, taxpayers are required to develop a BIR-certified SDTS. Moreover, taxpayers are required to submit an application for the issuance of the Permit to Transmit to allow transmission of sales data to the EIS. The SDTS will effectively link the taxpayers’ accounting system with the BIR’s EIS.The implementation of the EIS may result in long-term cost savings in doing away with the cost of paper and supplies, mailing, handling, archiving, storage, and labor, among others. While refining the administrative aspect of the business processes, this may also result in improved financial performance for taxpayers. To add, this change is environment-friendly and more sustainable in the long run. However, taxpayers will have to incur costs at the start, particularly the cost of developing the SDTS. Nonetheless, this is a forward-looking investment and the benefits from implementation may eventually outweigh the related costs.Another important change implemented by the BIR is the removal of the 25% surcharge in amending tax returns. This is to ensure consistency with the rules applicable when paying deficiency taxes and penalties during a BIR audit. To provide context, in 2018, the BIR set the rule that a 25% surcharge will be imposed on additional tax payments arising from the amendment of tax returns. However, no 25% surcharge is imposed if the additional tax payments are made in the course of a tax assessment. In effect, taxpayers are being unduly penalized for voluntarily amending their tax returns to pay their taxes correctly. Under this recent RMC, the 25% surcharge for amending tax returns will be removed, provided that the original tax returns were filed on time. With this new rule, taxpayers may be encouraged to voluntary amend their tax returns to address any errors or corrections in their original filings.Given the economic agenda of the new administration, investors and business owners would do well to closely monitor the government’s efforts to rationalize tax policies to ensure not only compliance, but to also take advantage of any beneficial changes to the tax filing and payment process. Prudent business entities would be wise to consult experienced tax professionals as early as possible to better transform their tax compliance efforts, and by doing so, more effectively support the resurgence of our country’s economy. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Marivic M. Rebulanan is a tax senior director of SGV & Co.

17 October 2022

Jocelyn M. Magaway

Tax issues arising from cross-border WFH arrangements

Before COVID came, flexible work arrangements, such as work-from-home (WFH), were for the large part unheard of, at least in the Philippines. However, when lockdowns were implemented, there was no other choice but to embrace WFH to continue business operations.Lockdowns have now been lifted, but the COVID threat remains, resulting in WFH arrangements becoming accepted as the new normal. In fact, in the EY 2022 Work Reimagined Survey, 40% of respondents from the Philippines indicated that they would like to work remotely more than five days a week (essentially the entire work week), 20% prefer four days a week, 24% three days a week, 12% two days a week, 2% once a week and only 2% want to return full-time to the office. We can also see an increasing number of companies supporting their employees with WFH allowances and subsidies (e.g., internet allowances and equipment subsidies) so that they can set up their workstations and be able to carry out their tasks efficiently and effectively at home.The WFH arrangement has also expanded to the cross-border workforce. Some foreign companies are now engaging Filipino or foreign nationals in the Philippines without physically moving such talent to foreign/host locations. There are also cases where foreign nationals are hired/assigned to Philippine entities but continue to work outside the country or from their foreign residences. While cross-border WFH may satisfy an employee’s remote working preferences, it may pose some tax issues to both the employer and the employee.The Philippine Tax Code, with its various amendment in recent years, still considers the situs of taxation for income on services as the place where the personal services are rendered. Thus, compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, or of the place in which the contract of services was made, or the place from which payment was made, is considered Philippine-sourced income. The determination of the tax residency also remains unchanged and so is the scope of taxation, based on the tax residency status of the taxpayer/filer.To illustrate what these issues are, let us take as an example a Filipino citizen, Juan, who was hired by a Japanese entity, receiving payroll from Japan but living in the Philippines due to a WFH arrangement with the employer. For tax purposes, Juan will remain a resident Filipino citizen and is subject to tax on his worldwide income. His Japan-paid salary is Philippine-sourced income. Thus, even if his salary is paid by his Japanese employer and taxed in Japan, he will not be able to claim Japan-paid taxes as foreign tax credits for his Philippine income tax return because the salary, on which Japan imposes taxes, is not foreign-sourced but Philippine-sourced income. Consequently, there may be double taxation on the same income. Also, as Juan is an employee of the Japanese entity, there is a risk that his presence in the Philippines is creating a permanent establishment (PE) in the Philippines for his employer. If a PE status is created, the Japanese entity may be exposed to corporate taxes (i.e., income tax, VAT or withholding tax) and will be required to fulfill administrative tax compliance here in the Philippines.Consider another example, this time a foreign national, John, who is on assignment to a Philippine entity, receives his payroll from the Philippine company but stays in his home country while on foreign assignment. Technically, John should not be subject to tax in the Philippines. As a foreign national, he is subject to tax only on his Philippine-sourced income. As he is rendering his services in his home country, the remuneration that he receives for such services is foreign-sourced income, not Philippine-sourced compensation. However, a corporate tax issue arises if the Philippine entity claims John’s salary as an expense in its books. There is a risk that the tax authorities may disallow the tax deduction of such salaries if these were not subjected to Philippine withholding taxes. Furthermore, as an employee of a Philippine entity working in a foreign jurisdiction, there is again a PE risk being created in that foreign jurisdiction. If PE is created, the Philippine entity may be subject to tax and administrative compliance in such foreign jurisdiction.There are other variations to WFH arrangements (e.g., split payroll, working in third country, among others) that would likely result in the same double taxation, PE creation and tax deduction disallowance risks). Given that cross-border tax on WFH scenarios can be significantly more complex than what most people believe, it is advisable for both companies and their cross-border employees to proactively consult tax professionals who are well-versed in these issues before entering into such arrangements, if possible. For companies that have pre-existing cross-border employees, they should consider conducting a review well ahead of the actual filing of tax returns to ensure that they are not only compliant in both home and host jurisdictions, but that they also understand what options they have to address possible challenges that may arise. 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.Jocelyn M. Magaway is a tax senior director of SGV & Co.