Suits the C-Suite

10 October 2022

Maria Margarita D. Mallari-Acaban and Michelle C. Arias

BEPS 2.0: A Philippine perspective

More than a year since the OECD/G20 Inclusive Framework proposed the two-pillar approach, we have heard much about BEPS 2.0 from a global standpoint. In this article, we now look at the Philippine perspective, what MNEs in the Philippines should start considering and what’s at stake once it is implemented.LOOKING BACK ON BEPS 1.0BEPS 1.0 started back in 2015 when the Organization for Economic Cooperation and Development (OECD) and the G20 countries led the first ever global initiative to address base erosion and profit shifting (BEPS) practices. Essentially, these referred to aggressive tax planning strategies that tend to exploit gaps and mismatches in the tax rules of various countries. Some Multinational Entities (MNEs) would often choose to locate in lower tax jurisdictions and treat their profits as sourced from that country instead of the jurisdiction where the activity creating those profits takes place (profit-shifting) or reduce tax bases through certain deductions (base erosion). While not illegal per se, BEPS practices were viewed as unfair since they allowed international companies to reduce their effective tax rate and gain competitive advantage over local competitors.The rise of the digital economy in recent years created another gap in prevailing tax rules as MNEs took advantage of online platforms to enter foreign markets without having to establish a physical presence. Some of the early responders began imposing a “Digital Services Tax” on the revenue of MNEs engaged in online economic activity. However, this approach was viewed as ineffective not only because the additional tax cost will likely be passed on to the consumers, but also because it could lead to double taxation and other trade-related issues due to inconsistent tax treatment.ENTER BEPS 2.0To effectively address the increasing tax challenges and complexities arising from the digitalization of the economy, the OECD introduced BEPS 2.0.A two-pillar approach was proposed under this reform package to help ensure that MNEs pay their fair share of taxes wherever they operate in the world:(1) Pillar 1 on new nexus and profit allocation rules aims to reallocate a certain portion of taxable profits of MNEs with more than €20 billion in global revenue and profitability above 10% to market jurisdictions.(2) Pillar 2 has two components: the Global Anti-Base Erosion (‘GloBE’) Rules, which seek to ensure that MNEs pay a 15% minimum tax and the Subject To Tax Rule (STTR), which seeks to limit the treaty benefits on certain related-party payments.PILLAR 1: NEW NEXUS AND PROFIT ALLOCATION RULEPillar 1 proposes a new taxation system to capture and reallocate 25% of excess profits of MNEs to the various jurisdictions where the goods and services are actually sold and consumed. Ultimately, it will give a taxing right to these market jurisdictions to facilitate re-allocation.Realistically, however, Pillar 1 may take longer to implement given the complexity of the issues at the MNE Group level as well as the removal of the Digital Services Taxes (DST) from some jurisdictions. Hurdling these issues is necessary before Pillar 1 can take effect. Pillar 2, on the other hand, is more likely to take off earlier as some jurisdictions are already looking at legislation to implement the minimum tax. Given this, it is imperative to understand the concept of global minimum tax and how it stands to affect MNEs headquartered or operating in the Philippines.PILLAR 2: GLoBE RULESTo start off, Pillar 2 does not require any country to increase corporate income tax rates. Instead, it envisions imposing an additional tax (top-up tax) to bring the total Effective Tax Rate (ETR) for MNEs in that particular jurisdiction to 15%.The GloBE rules are intended to cover only MNE groups with consolidated annual revenue of more than €750 million. Moreover, government entities, international organizations, non-profit organizations, pension funds or investment funds that are ultimate parent entities of an MNE group or any holding vehicles used by such entities, organizations or funds are exempt.Now, the mechanism for the 15% minimum tax is quite tricky as Pillar 2 talks about three kinds of top-up taxes (Qualifying Domestic Minimum Top-up Tax, Income Inclusion Rule and Undertaxed Payments Rule) imposed either at Subsidiary or Parent level.In applying these top-up taxes, Pillar 2 contemplates a hierarchical approach where the taxing right is primarily exercised at the subsidiary level of an MNE, followed by parent level and then finally by another subsidiary within the group (in case any residual amount of the top-up tax remains unpaid).CONSIDERATIONS FOR MNEsAs MNEs continue to do business and invest in the Philippines and overseas, much thought should now be given on how they should approach the future with the GloBE rules in mind. Some initial considerations and action items for the MNEs are:• Review of the group structure to determine (1) whether one is likely to fall within the scope of the GloBE rules under the €750-million consolidated revenue test, (2) which are in-scope entities where the top-up taxes may be applied and (3) which are excluded entities.• Run initial simulations on GloBE Income and ETR of each in-Scope entity. For this purpose, the group should consider subsidiaries in the Philippines (and elsewhere) enjoying income tax holidays and special income tax rates in the ETR calculation.• Conduct a resource assessment across functions such as Tax, Treasury, Internal Audit and IT to determine if any capability is lacking and consequently tap the necessary internal or external resources to ensure the group’s overall preparedness.• Consider any potential accounting, legal, transactional issues and other complications resulting from potential application of different top-up taxes.It is also important to note that even in cases where the GloBE ETR of a group is more than 15%, it is not necessarily compliance-free. There could still be compliance and calculation requirements to be made especially if the jurisdictions involved have local GloBE legislation in place.REGULATORY AND POLICY CHALLENGESAdmittedly, developing countries like the Philippines stand to gain tax revenue if and when they implement local top-up tax rules. However, this must be weighed against possible foreign investment flight and other adverse effects on investment promotion efforts. In such a case, the government will have to revisit our investment packages to maintain our competitive advantage.The other practical consideration is the resources needed to manage the complexity of the implementation framework and address possible challenges at every stage. Without a tried and tested framework, the top-up tax may not translate to real tax collections and instead end up as disputed assessment cases in the tax courts. CONCLUSIONThe Philippines has yet to adopt its own legislation to implement Pillar 2. For now, it appears that it is not yet at the top of the government’s tax agenda. From an MNE perspective, however, the top-up tax could always find its way into the group — with or without a local top-up tax as yet. Accordingly, there is clear value in preparation and early Pillar 2 impact assessment. Without it, MNEs may not have sufficient time and resources for potential restructuring and other planning opportunities to address associated risks. 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.Maria Margarita D. Mallari-Acaban is a lawyer and tax principal and Michelle C. Arias is a tax senior director of SGV & Co.

03 October 2022

Thyrza F. Marbas

What to expect when BIR tax audits resume

At the start of the third quarter, the Bureau of Internal Revenue (BIR) declared a moratorium on the conduct of BIR audits via Revenue Memorandum Circular (RMC) No. 77-2022. The RMC suspended all field audits and other field operations covered by Letters of Authority/Mission Orders relative to examinations and verification of taxpayers’ books of account, records, and other transactions, including suspending any field audits or any form of business visitation. No new orders to audit or investigate taxpayers were issued or served.The suspension was not without exceptions though. The exception included, among others, the investigation of cases prescribing on or before Oct. 31, which generally covers taxable years 2019 and prior.Consequently, RMC No. 121-2022 was issued setting the guidelines for the lifting of the suspension on field audits and operations pursuant to RMC No. 77-2022. Accordingly, the lifting will be on a per investigating office basis upon the approval of the Commissioner of Internal Revenue (CIR). Once approved, the investigating office is to immediately resume its field audit and operations on all outstanding LoAs/Audit Notices and Letter Notices. However, no new LoAs are generally be issued/served until further instructions from the CIR.Thus, in recent weeks we have seen numerous Notices of Discrepancies (NoDs) in connection with prescribing cases being served as the respective Investigating Offices comply with RMC No. 121-2022.Some taxpayers who have multiple existing LoAs covering prescribing cases have, in fact, received NoDs one after the other. Tax professionals are also frantic after having to deal with multiple, sometimes simultaneous, deadlines for the respective replies to the NoDs due to the numerous cases being handled.This has raised the eyebrows of some taxpayers who feel that the periods given to respond to audit notices, especially when a NoD is already served, have been abbreviated considering that the nature of the issues usually raised by the BIR require tedious reconciliation procedures, collation of voluminous supporting documents, and the drafting of protest letters.In one of the breakout sessions in the recently concluded 1st SGV Tax Symposium held on Aug. 19, the author facilitated a discussion on BIR audits in which participants were refreshed on the assessment process. It also focused on taxpayer remedies and periods to file replies or protest letters, as well as a discussion on the latest court decisions relevant to BIR audits.Receiving a NoD, or any kind of assessment notice for that matter, can be overwhelming. Imagine addressing multiple assessment notices at the same time. In such situations, having a deep understanding of the tax assessment rules, procedures, and remedies, as well as periods and deadlines, will significantly help ease the stress and pressure of managing simultaneous BIR audits.Consider, for example, how a taxpayer who is not familiar with the deadlines under the rules might react with panic once he or she receives a NoD, particularly upon reading the standard statement in the NoD that the presentation of a response, in a Discussion of Discrepancy (DoD), is needed within five days from receipt. A five-day period to respond is admittedly too short to prepare the necessary reconciliations and supporting documents, which may involve massive piles of paper receipts and invoices.However, those who understand the rules will know that taxpayers are afforded a 30-day period for the DoD. And while taxpayers can maximize this full 30-day period, they should also coordinate closely with the handling examiner on the proposed schedule of discussions. Generally, it is better to settle as many issues as possible at the NoD level or at the earliest stage of the audit.Taxpayers may also consider pursuing discussions with the handling examiner and submitting documents, reconciliations, and position papers with factual and legal bases in tranches as they become available. In this way the handling examiner will have a better chance of appreciating the taxpayer’s submissions.Taxpayers who are subject to audit should understand just how fast-paced the response time for all types of assessment notices can be. Given such a short window of time to prepare response letters and supporting documents, it would greatly benefit taxpayers to proactively prepare for tax audits. They can do this by carrying out advance reconciliation work. Another thing taxpayers can also do is to keep accurate, detailed and easily accessible records of transactions and documents so they can quickly and easily address any questions from the BIR. These and many other areas are where a robust and experienced tax team or the support of trusted tax professionals can make a significant difference in reducing time, costs, and anxiety overall.Given the BIR’s intent to transform the way it conducts audits with digital transformation, such as with the use of electronic invoicing and receipting systems (EIS), taxpayers will also need to quickly evolve their strategy and approach to handling BIR audits. These are possibilities we generally see in the future of tax audits. For now, taxpayers who have already received NoDs will be under pressure to act quickly to timely respond to the BIR. At the same time, taxpayers who have not received a NoD should not be complacent. As we approach the close of the calendar year and the lifting of audit suspensions, we can expect the BIR to go full throttle very soon. 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.Thyrza F. Marbas is lawyer and a tax partner of SGV & Co.

26 September 2022

Victor C. De Dios and Josephine Grace R. Sandoval

Risk vs reward: Are VAT refunds worth it?

Most taxpayers generally have a negative impression of the process for seeking VAT refunds, whether from personal experience or from word of mouth. Some dread the many requirements that need to be prepared, as well as the challenges of having to file the claim, monitor its slow movement, and hurdle the strict scrutiny of BIR examiners. Others believe that the chances of winning approval are slim, and may just attract further scrutiny from the Bureau of Internal Revenue (BIR). For many taxpayers, the burdensome experience has discouraged them from pursuing repeat claims.Our lawmakers enacted the TRAIN law to address various tax issues, including institutionalizing an efficient VAT refund mechanism. The BIR then followed suit by issuing rules and regulations that streamlined the review process for refunds, which in part trimmed down the documentary requirements to support a claim. With these changes, many taxpayers were hopeful that the refund process would be eased.However, with denial of claims still a recurring topic of conversation, taxpayers ask themselves: is it really worth pursuing?THE COMPLEXITY OF VAT REFUNDS: WHAT HAPPENS IN THE BACKGROUNDTax refunds are complicated. Specifically for VAT refunds, claimants are faced with the pressure of being able to prepare the application package before a prescribed deadline. The package should be complete and accurate as they will undergo rigorous review by the BIR. True to its billing as a “mandatory audit,” the review is conducted every single time to cover all submissions. If the package is found to be lacking or non-compliant, the claim likely ends up in a denial, or worse, may trigger in the issuance of a letter of authority to formalize an assessment.The preparation alone can be daunting. Companies will usually designate a point person or team, typically within the finance or tax function, to retrieve records, sort them out, and prepare corresponding schedules in a timebound manner. The investment in time and effort will be significant, particularly if the same person or team also needs to handle equally important day-to-day functions while preparing the application.Filing the claim is an experience in itself. For reasons attributable to delayed preparation, companies almost always find themselves filing claims at or near the deadline. Often, the stress of rushing to the BIR for a routine “checklisting” prior to being stamped “received” can be a struggle, especially when the claim is refused acceptance for being incomplete. Time management and planning are crucial, although often, this just adds to the pressure of preparation.The difficult part is not even in the filing, but in the monitoring. After filing, the company, through its point person or team, needs to monitor the BIR’s review process, and this is possible only by way of effective coordination with the assigned BIR examiners and reviewers. From experience, the BIR can pose questions around the claim, which the company needs to quickly address or risk summary denial of the application. Questions can vary from legal basis to additional documentary support. By law, refunds are strictly construed against the taxpayer, and with this, the importance of addressing questions that cast doubt on the claim’s validity cannot be over emphasized.The VAT refund process is time-consuming and requires significant expense and effort — with no guarantee of return. Because of this, decision makers often have to make a tough choice between pursuing or forgoing their claims.In this situation, determining the best option for the company is never easy. Some would attempt to identify and quantify the possible risks, and then proceed to assess whether the possible grant of claim is adequate to compensate. Striking a balance between risk and reward, therefore, becomes vital particularly when the risks are outweighed by the rewards. However, the real issue lies in defining what “reward” really means. Is it simply the refundable amount, or can it be some other potential that can be unlocked in the process?In one of the breakout sessions in the recently concluded 1st SGV Tax Symposium held on Aug. 19, one of our authors delivered a presentation, “Balancing Risks and Rewards in VAT Refund Claims.” The main goal of the session was to get the message across that companies need to consider the balance of risk and reward, where risks are lowered by means of active preparation, and rewards are increased as a necessary consequence of the exercise. The rewards take the form of a grant or a seal of overall tax compliance.LOWERING THE RISKSActive preparation is very critical to the success of any VAT refund claim. In an ideal world, companies should strive to be proactively VAT refund-ready at all times. This can be done by developing and maintaining a well-organized record-retention system where relevant documents can be quickly and easily retrieved for package preparation. They can also conduct internal reviews to examine current levels of compliance and try to improve them by way of process improvement and suggested remediation. This exercise, incidentally, helps companies identify issues, giving them a preview of the actual refund process, and an opportunity to simulate and strategize for better ways to address issues raised in the process.To ease the burdens and demands required by the refund process on the persons tasked with preparation, companies can also explore outsourcing the task to tax experts who specialize in handling claims. The outsourced tasks are usually designed to be end-to-end to cover internal review, preparation of the refund package, filing, and monitoring. Having the guidance of tax experts also helps keep internal teams abreast of relevant laws, rules and regulations, and the current position of the BIR on certain issues. The interaction with tax experts inevitably leads to an overall improvement in internal teams, an investment in resources that lowers the companies’ risks over time.INCREASING THE REWARDSIt must be stressed that choosing to lower the risks by active preparation already tilts the balance in favor of successful refunds. By being VAT refund-ready, companies are likely able to resolve potential issues even before they ripen into real ones during the BIR’s review. Companies also get a better shot at presenting a complete set of documents and attending to inquiries that may be raised during the review. While companies envision the refund as the instant reward, they should also recognize that improved overall tax compliance will redound to more value for the company in the long term.THE FUTURE OF VAT REFUNDSThe BIR is already actively promoting the implementation of its digital transformation program through its new Electronic Invoicing System (EIS). With digitalization, stakeholders can look forward to a simplified VAT refund process, hopefully doing away with the need to submit voluminous hard copies of invoices and official receipts. The potential for a simplified process should make refunds more attractive to taxpayers. Digitalization is a change in process enabled by technology. It can be a complementary solution to easing the usual refund concerns relating to proper substantiation and adequate presentation.The recent granting by the BIR of VAT refund claims is certainly encouraging news and tax experts hope that it is a precursor of more refunds to come. Yet, while encouraging, this does not change the fact that the BIR will continue to adhere to the strict review guidelines required by law. More than ever, companies that intend to file refund claims should ensure that they are VAT-refund ready at all times, both to improve their chances as well as enhance their level of tax compliance. After all, as Benjamin Franklin once said, “failing to prepare is preparing to fail.” 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. Victor C. De Dios is a tax principal and Josephine Grace R. Sandoval is a tax senior director, respectively, of SGV & Co.

19 September 2022

Cecille S. Visto

Ready to ride the digital wave

The current buzzword in tax is digital transformation. The business sector is well aware that riding the digital wave is necessary and inevitable. Companies that can leverage and successfully implement digital transformation — if they have not yet done so — have the distinct opportunity to seize new growth opportunities ahead of competitors and smoothly transition as government rolls out digital innovation initiatives.At the 1st SGV Tax Symposium organized by SGV & Co. and held on Aug. 19, digital innovation and business transformation were widely discussed by guest speakers and panelists, in alignment with the main theme, The Future of Tax.One of the highlights of the symposium was the presentation of BIR Commissioner Lilia C. Guillermo, which zeroed in on digital transformation in tax administration.Ms. Guillermo centered on the BIR’s 2030 digitalization vision, which is composed of four pillars: the strengthening of the BIR organization; modernizing the BIR digital backbone; enhancing policies, governance, and standards; and elevating taxpayer experience and innovating BIR services. In her presentation, she said digitalization is not a one-person show, but a long and deliberate process in which all stakeholders must be fully engaged.The BIR’s digital transformation program aims to transform the BIR into a data-driven organization through a digitally empowered and resilient workforce utilizing reliable, scalable, and robust digital technologies and infrastructure to innovate BIR services and elevate taxpayer experiences.During the Conversation with C-Suites session, which was moderated by SGV Tax Head Fabian K. delos Santos, executives from the logistics; information and communications technology (ICT); and property development and retail sectors emphasized that businesses must keep pace with the ever-changing digital landscape and prepare to harness the benefits of a truly digital economy.International Container Terminal Services, Inc. Chief Financial Officer (CFO) Rafael D. Consing, Jr., Converge ICT Solutions, Inc. Chief Executive Officer Dennis Anthony H. Uy, and SM Prime Holdings, Inc. CFO John Nai Peng C. Ong all acknowledged the paramount need for companies to equip themselves with the necessary tools to be ready for the digitalized mode of tax administration and enforcement.As the Department of Finance and Bureau of Internal Revenue are poised to adopt the electronic invoicing system (EIS), taxpayers — particularly those who have been selected to participate in the pilot program — must have readied their infrastructure for the EIS implementation.Mr. Consing said e-invoicing is a breakthrough project that is aligned with ICTSI’s own digital initiatives. The logistics company was among the early preparers, recognizing the benefits of digitalizing a portion of its finance function, mainly since it operates in various jurisdictions.E-invoicing could bring about ease of compliance for the private sector and at the same time, real-time monitoring on the part of the BIR. Compliance with the invoicing requirements for those seeking refund claims will also largely gain from electronic receipting.Mr. Uy, meanwhile, stressed the important role that the ICT sector will play in the government’s digital transformation.The digital infrastructure must be established to pave the way for wider broadband penetration and improved speed quality. Without a mature digital framework, full implementation of any digital endeavor may prove to be challenging.The discussion also delved into recent legislative changes that have had a major impact on business and are expected to foster a more vibrant economy.Mr. Ong said the passage of Republic Act 11032 or the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, is lauded by the property sector, especially companies like SM Prime, which is engaged in nationwide mall operations and real estate development. Permit filings and securing of licenses were made more convenient, principally in areas where government agencies have set up satellite offices in malls.He cited other developments that will drum up more economic activity in the short- to medium-term, such as the liberalization of the Retail Trade Law and the harmonization of tax incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, including the publication of the Strategic Investments Priority Plan, which includes the establishment of smart cities.The retail sector, he said, will likely take advantage of the trade liberalization rules allowing foreigners to set up shop in the Philippines with lower investment requirements. The more relaxed rules are expected to encourage more direct investments into the malls. Mr. Ong added that smart cities can bring about progressive developments envisioned under the current administration’s socioeconomic agenda.ICTSI’s Mr. Consing said industries heavily immersed in science, technology, engineering, and mathematics should still be encouraged to sustain the country’s growth.Digitalization can also provide previously considered sunset industries with a new lease on life. Online selling, for instance, grew by leaps and bounds during the pandemic. Giving this sector access to digital infrastructure allowed it to electronically market and sell products, which was previously not widely available.All these economic activities will result in more taxable revenues and the corresponding taxes collected can be funneled back into the economy.While the digital shift may face challenges in areas where manual procedures have been the norm, executives are confident that these are only temporary. They, however, cautioned that there is a need for strong regulations to prevent any technological abuse.Even the BIR recognizes that true and lasting transformation will not be achieved overnight. Among the first steps that must be taken is to learn and build the capabilities of BIR examiners and personnel using a specialized BIR learning platform. The BIR wants to train and introduce its personnel to the industry’s best practices, including analytics and systems development, the establishment of a cybersecurity framework, enterprise architecture, advanced data warehouse solutions, and project management methodologies.Indeed, it will still take time before full digital compliance and monitoring will be the rule more than an exception. But both the public and private sectors need to gear up to ride the digital wave, which may be the only way to successfully navigate the business world in the foreseeable future. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.Cecille S. Visto is a tax senior director and lead manager for the Entity Compliance and Governance Services of SGV & Co.

12 September 2022

Fabian K. Delos Santos

The future of tax

In recent years, tax administrators have begun shifting their focus from being regulatory and tax-collecting to becoming transformational. This trend has been further accelerated by the exigencies of the COVID-19 pandemic. Tax authorities have harnessed the latest advances in technology, taking major steps to strengthen their organization and enhance the taxpayer experience. Integrating digital into modernization programs, designing customer-centric services, and fine-tuning age-old policies are at the heart of this global digital transformation — with improving compliance the ultimate objective.But the digital revolution is only one component of a multi-faceted tax ecosystem needed to drive much-needed transformational change.Taxpayers, regulators, and tax practitioners have crucial roles to play to make the Philippine tax ecosystem more transparent, accountable, and vibrant.With these goals in mind, SGV & Co. organized the 1st SGV Tax Symposium to bring in these stakeholders to share ideas, insights, and experiences that could help to further evolve our tax ecosystem. True dialogue, after all, starts from people coming together with a shared goal and common starting point.Aligned with the firm’s purpose of nurturing leaders and enabling businesses for a better Philippines, SGV Tax articulates its vision towards a sustainable Philippine tax ecosystem, where taxpayers are knowledgeable on tax rules and willing to comply. A sustainable tax ecosystem starts from the taxpayers, who can help build a culture of ethics with better tax knowledge and appreciation of their social responsibility and commitment to nation-building by paying the correct taxes.The importance of closely collaborating with regulators, who are business partners in achieving inclusive and resilient economic growth cannot be underestimated. When tax practitioners are armed with the necessary technical skills, while embracing the value of integrity, they foster an environment where taxpayers are compliant, employment soars, the Philippines becomes an investment haven for potential investors, and businesses flourish.We all want to see a more evolved, advanced and effective tax system. We all understand the critical importance of taxation to national socio-economic development. We all want a system that is fair, equitable and progressive, one that is less complex and more value-adding.At the SGV Tax Symposium, we shared the latest developments in taxation and the economy, in the hope of stimulating new conversations on where we want our tax system to go despite the many complex issues facing us today post-pandemic. Increasingly, tax is becoming the business and economic gamechanger in this period of recovery.The role of tax is particularly important given the priorities of the new administration, as discussed by various government leaders during the SGV Tax Symposium.National Economic and Development Authority Undersecretary Rosemarie G. Edillon kicked off the plenary sessions by discussing the recent economic performance and outlook, describing as the key to economic recovery the full reopening of the economy through well-crafted policies and programs. She also noted the risks to accelerated and sustained recovery, such as inflation, the fiscal deficit, and the slowdown in global demand.Trade and Industry Undersecretary Rafaelita M. Aldaba discussed competitiveness, innovation, and the 2022 Strategic Investment Priority Plan, touting the recent liberalization reforms and the push to attract more investment in science, technology, and innovation. She said the Philippines is ready to embrace more investment that will bring in new technology, innovative processes, and disruptive business models. She also assured investors of a conducive innovation and business environment awaiting them.Representative Jose Ma. Clemente S. Salceda discussed the Department of Finance’s priority measures as well as the tax agenda that the House Committee on Ways and Means will focus on. He said Congress will study the feasibility of a 15% minimum tax on book income, address base erosion and profit-shifting through measures such as aggressive transfer pricing policies, and promote legislation that will allow the Philippines to gain a just share of global tax revenue.Bureau of Internal Revenue (BIR) Commissioner Lilia C. Guillermo focused on the digital transformation of tax administration. She outlined the BIR’s path to its 2030 digitalization goals, which comprise four pillars: the strengthening of the BIR organization; the modernization of the BIR digital backbone; the enhancement of policies, governance, and standards; and the elevation of the taxpayer experience via innovative BIR services. There are specific projects for each pillar, but the majority of the positive feedback was on the BIR’s planned implementation of convenient, fast, and reliable online or digital transactions in the areas of registration, filing, payment, audit and enforcement.Over the years, we have seen the progression of tax administration in the Philippines — from manual filing towards e-filing and e-payment and recently, increasing digital transformation. With the policy already laid down by both the BIR and the Department of Finance, supported by the Marcos administration, we expect to witness a rapid evolution of tax administration.From level 1 of the digital tax administration life cycle, the government is moving towards levels 2 and 3 with the impending full roll-out of the e-invoicing or e-receipting system (EIS). Under Levels 2 and 3, the focus will be on the real-time reporting of data to drive compliance and collection where tax authorities will have direct access to company data. In some instances, the BIR may allow taxpayer information to be cross-referenced and shared across agencies to eventually allow for the electronic audit and assessment of taxpayers.EY ASEAN Tax leader Amarjeet Singh and EY Asia-Pacific Tax Leader Eng Ping Yeo, who both spoke virtually at the event, agreed that digital transformation is necessary and choosing the right operating model, partners, and systems is key on the road to transformational success. However, a tax administration cannot transform on its own. It needs to, among others, build in significant time for consulting and engaging with taxpayers and the private sector.The vital need for organizations to focus on digital transformation was further highlighted by executives from some of the major business groups, such as John C. Ong, Chief Financial Officer (CFO) of SM Prime Holdings; Rafael D. Consing, Jr., CFO of International Container Terminal Services, Inc.; and Dennis Anthony H. Uy, Chief Executive Officer of Converge ICT Solutions, Inc. They shared key insights into how their respective industries are gearing up as government embraces digital transformation.In our relentless effort to see our purpose come to life, SGV Tax has collectively envisioned what this Future of Tax could be. It is our hope that the SGV Tax Symposium has inspired all those who participated to pursue greater work and success, all towards the aim of a better Philippines.There is more work to be done as tax administration continues the shift to being transformational. More robust and involved discussions are expected in future SGV sessions. 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. or EY.Fabian K. Delos Santos is the head of Tax of SGV & Co.

05 September 2022

Rossana A. Fajardo

How tech companies can stay agile in an uncertain world (Second Part)

Second of two partsTechnology companies are stepping into a new era of uncertainty as they develop their global operational models. Decisions on sourcing, supply chains, product and service manufacturing, and distribution are impacted by the accelerated changes affecting complex economic, political, and regulatory changes in the larger corporate environment.To better understand the additional risks and challenges that technology companies must deal with, EY undertook a global research study with 750 technology executives to help consumers comprehend what technology companies must do to flourish in a changing environment. Moreover, the EY Global Technology Sector team supplemented the findings with additional insights and recommendations.In the first part of this article, we discussed how technology companies need to withstand uncertainty, address critical regulatory issues, optimize their supply chains, and choose the right operating model.In this second part, we continue by discussing rethinking the workplace, focusing on continuous change, ensuring worldwide compliance and reporting, and adopting ESG commitments.RETHINKING THE WORKPLACEInertia and uncertainty are frequent obstacles to change. In a recent EY return-to-work study, roughly 54% of employees worldwide shared that if they were not given sufficient flexibility in where and when they work, they would think about leaving their jobs after COVID-19.Because of this, executives in almost all of the surveyed industry sub-sectors regarded employee satisfaction and well-being as the most crucial factor. Tax and other statutory requirements were ranked as having the highest priority by FinTech executives, followed by the capacity to access or manage labor and skills and employee satisfaction and well-being.When redesigning work, important factors to keep in mind include:• Examine what new opportunities will arise as a result of the new, more collaborative ways of working and how roles may alter as a result.• Check to see if the organization’s new working methods complement its mission, culture, productivity, and performance.• Determine how much space is needed and how it will be used, while making accommodations for at-home workplaces and technological enablement.• Consider the ramifications for payroll, regulations, corporate taxes, international employment taxes, and cybersecurity before making decisions.Technology businesses claimed they are also taking steps to address the evolving nature of work. Talent is an essential resource for the sector, with key performance indicators that include the availability of talent, employee happiness, and attrition rate.As a result of COVID-19, 87% of executives from technology businesses reported that their organizations had reduced the number of physical workspaces they occupy, and 66% intend to expand their employees’ alternatives for working from home during the next three years. In the post-pandemic context, new operating models and modes of working should successfully combine people, place, and technology, changing how people operate across numerous working environments while keeping essential values and cultural characteristics.FOCUSING ON CONTINUOUS CHANGETechnology firms will need a comprehensive and holistic global trade strategy through an agile operating model to thrive and accelerate growth in this continuously changing business environment. It must be able to adapt to changes in international compliance regulations, rethink its staff, and make a commitment to environmental, social and governance (ESG) needs. Every C-suite executive will have to ask themselves if their operating model is prepared to support new initiatives and propel future success in the face of an unpredictable future.Two out of three technology executives emphasized the need to be flexible and agile, as well as the need for plans to change their operating model over the next three years to serve both current and changing business needs. However, the question of whether they have the tools and systems in place to make changes in real time while considering the overall effects each discrete change will have on the financial conditions and operational effectiveness of the business remains to be answered.Overall, the executives surveyed indicated that the most important areas they will invest in as enablers to improve their operating models over the next three years are technologies and tools related to customer transactions, relations, and support (58%); supply chain optimization (53%); and supply chain transparency (45%). Majority at 64% intend to alter the organizational structure to enhance tax planning and financial reporting. Due to the increasingly complicated compliance and reporting requirements everywhere in the world, there is a demand for global visibility and risk management.ENSURING WORLDWIDE COMPLIANCE AND REPORTINGCompanies can use combined tax and financial operating systems to support their complicated requirements, which can be easier said than done and expensive for businesses that must continually adjust their own capabilities. To reduce risk and improve both visibility and efficiency, finance functions can utilize standardized methodologies and advanced analytics to stay ahead of the digital curve.Technology companies will have to keep these key considerations in mind to ensure effective worldwide compliance and reporting:• Adopt a coordinated strategy for adjusting global tariffs.• Reduce trade network costs, risks, and delays.• Create a solid data foundation to increase the effectiveness of reporting and compliance.• Leverage the proper technologies.Over the next three years, technology companies will restructure their operational models, prioritizing the commitment to a sustainable future. Nearly two-thirds of the IT leaders who participated in the EY survey agreed that ESG considerations were important when developing their operating model. Reduced shipping costs and energy consumption will also be crucial considerations in operating model design. Long-term sustainability and ESG value can be created by applying the appropriate strategy and optimizing the supply chain, capital allocation, and portfolio, as well as by developing assessment frameworks to measure both financial and non-financial outcomes.ADOPTING ESG COMMITMENTSThe relevance of ESG, agility, speed, and flexibility are also high on the agenda in specific areas of change and focus over the next three years. ESG emerges as a factor in changes to the supply chain and operations. By implementing the following actions, technology companies can achieve high sustainability performance while giving shareholders profitable returns:• Recognize the development and efficacy of the present ESG strategy.• Examine ESG opportunities, impacts, and risks.• Include ESG in your organization’s overall strategy.• Communicate with stakeholders and provide performance reports on ESG.ADAPTING TO HANDLE CONSTANT CHANGEThe one constant in the world economy and the technology sector is the unrelenting and accelerating rate of change. Even the most adaptable firms are finding it difficult to keep one step ahead in this era of extraordinary change, whether it be a game-changing breakthrough or a once in a thousand-year black swan occurrence.The EY survey discovered that technology company executives are frequently attempting to respond to concerns that impact their functional issues while continuously reviewing their business and operating models. Addressing the immediate problem instead of realizing that there will always be problems requires a comprehensive, holistic strategy to handle ongoing change and expand the company.The study also notes that changing the operating model to increase company resilience and concentrating on issues like ESG are not separate initiatives. Instead, in the search for technology businesses to become truly adaptive, these become guiding principles that influence practically all upcoming organizational change initiatives. These changes progressively extend into the connections between the key stakeholders of a technology enterprise, from suppliers to consumers. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

29 August 2022

Rossana A. Fajardo

How tech companies can stay agile in an uncertain world (First Part)

First of two partsThe recent surge in risks associated with international commerce and technology nationalism has had a significant impact on the technology sector. Tariff increases, export limitations, stricter privacy regulations that include data onshoring, changes to employment requirements, and a closer examination of mergers and acquisitions (M&A) and ownership regulations are just a few of these.The borders between technology and other sectors are dissolving rapidly due to digital disruption, and technology companies must address this now more than ever. A shared demand for data and technologies, as well as cross-sector trends, are fostering industry convergence. These include the establishment of alliances centered on data and technology, the development of industry ecosystems, the exploration of new business models, the increase in investments in new hybrid technologies, and the digitalization of everything.EY teams conducted a global research study with 750 technology executives to have a better understanding of the increased risks and difficulties that global technology companies must face. Additional insights and suggestions from the EY Global Technology Sector team were added to the findings to help people understand what technology companies must do to succeed in a constantly changing environment.In the first part of this article, we discuss how technology companies need to withstand uncertainty, address critical regulatory issues, optimize their supply chains, and choose the right operating model.WITHSTANDING UNCERTAINTYThe results of the EY survey show that technology leaders are coping with shifting political costs, political volatility, and new limits that are posing both possibilities and problems for their supply chains and operating models. Many technology companies have adopted a “China-plus-1” strategy as a result of tariffs and increased labor expenses. Asia-Pacific nations including Vietnam, Malaysia, Thailand, and India gain advantages from new investments that diversify risks in their supply chains. There is also a greater sense of threat since businesses around the world may experience more frequent cyberattacks that have an impact on their operations.Technology businesses increasingly view government intervention through two distinct lenses, depending on their position in the value chain. On one hand, governments that are worried about protecting their access to crucial technologies are developing new, multibillion-dollar incentive programs to encourage the expansion of new research and development (R&D) and fabrication capacity, such as the proposed US Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act and the European Union’s proposed Chips Act.On the other hand, governments are increasing the complexity of the situation with new laws and regulations. Federal contractors are subject to US government procurement limitations that are motivated by national security concerns and have an impact on their supply chains. The Digital Markets Act was passed by the European Union to place restrictions on digital platforms, including guidelines on their ability to grow and the requirement to give users access to competing services.ADDRESSING CRITICAL REGULATORY ISSUESThe complexity of ensuring compliance has increased as a result of current geopolitical issues, which have also led to new export control measures. These include new export bans on sensitive technologies, telecommunications, encryption security, semiconductors, sensors and software.For instance, the Export Administration Regulations, which are overseen by the Bureau of Industry and Security of the US Department of Commerce, are “extraterritorial,” meaning that they place restrictions on products that are manufactured outside the US using software or technology that has US origins. To make sure they are compliant with these and any upcoming rules, technology businesses will need a comprehensive understanding of their upstream value chains.The study highlights the following critical regulatory issues affecting technology enterprise operational practices:• Trade taxes, sales/use taxes, value-added taxes, and taxes on digital services• European Union’s approach to competition• The OECD Base Erosion and Profit Sharing (BEPS) 2.0 projects with Pillars One and Two• An executive directive prohibiting anticompetitive behavior• Review of crucial supply networks for producing semiconductors and other cutting-edge technology via executive order• Intellectual property taxes (IP)Technology companies worldwide are being increasingly impacted by a wave of regulatory and tax environment changes. Countries aim to broadly tax their digital economies and transactions, potentially driven by recent political shifts. Legislators are concentrating on new tax and regulatory regimes as a result of the evolution of digital services and operating models such as over-the-top and Software-as-a-Service (SaaS). Findings from the EY survey revealed that efforts to update antitrust and competition laws in the technology sector, data transfers, and trade and taxation regulations were the main influences to changes in operating models.A closer examination of the survey results reveals some notable differences between various facets of the technology industry. Executives at internet, e-commerce, IT services, and cloud companies consistently expressed more concern about the effects of nearly all the previously mentioned regulatory issues. According to legacy technology executives, they are affected by the General Data Protection Regulation (GDPR) of the European Union, digital services taxes, and global minimum taxation. On the other hand, emerging technology company executives focused more on sourcing of raw materials and the impact of sector competition/antitrust policy.OPTIMIZING SUPPLY CHAINSTechnology companies had to rethink their supply chains after the impact of COVID-19 and a host of new “black swan” events. The pandemic put further strain on the global supply chain, which was already coping with the effects of the US and China trade issues. Importers had trouble buying manufacturing supplies on time, and exporters had trouble getting bookings on ships due to worldwide factory closures and a lack of shipping containers. It may not come as a surprise that 95% of the executive respondents said their organizations are changing their operational model and supply chain.The desire of technology executives and their organizations to nearshore and reshore their supply networks was significant in the survey results, reflecting how the effects of the pandemic on supply chains have increased the focus on resiliency and sustainability. As much as 71% of executives said their companies expect to move their manufacturing to be more localized over the next three years, compared to 19% who said their companies have already done so. The fact that 68% of the CEOs agreed that tech firms will need to take better efforts to reduce global emissions over the next three years is likely a linked aspect that also strengthens the case for near/reshoring.CHOOSING THE RIGHT OPERATING MODELExecutives recognize the need to continually and proactively update their operating models. They noted that they look for benefits such as higher revenue growth and employee satisfaction — the top benefits realized from operating model changes. However, many are also addressing tactical and functional issues, giving the impression that there is much more to do. Industry leaders were more positive about the advantages of implementing the right operational model. In terms of both financial performance and customer or employee satisfaction, these benefits should show a direct correlation between having the right operating model and significant improvements in business performance.The EY survey found that 65% of respondents have changed their operational model at least once in the previous 12 months. While highlighting the importance that the top technology businesses play in the effort to become adaptive digital enterprises, these technology executives nevertheless note that they still face difficulties. As a result, planning and evaluation paces are accelerating. Technology leaders reported that in light of the operational environment’s rapid change, they routinely examine their operating model either completely or in part. Nearly half of respondents claimed they now perform this assessment a few times a year.More than half of executives (55%) stated that they still think their operating models need to change while 50% are actively planning improvements despite more frequent evaluations of their operating models and more frequent revisions based on these reviews.Companies also became more certain that they had the right operating models, as their size and revenue increased. The majority of small- and medium-sized businesses or businesses with low to medium revenue believe they do not have the correct operating model and seek further enhancements, whereas high-revenue technology enterprises believe they already do. Executives in other sectors were evenly split or said they need to plan for future improvements, in contrast to the majority of executives in the autotech and technology infrastructure sectors who believe their companies have the correct operating model. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

22 August 2022

Warren R. Bituin

Embracing the power of technology beyond the COVID-19 crisis

As the pandemic slows down in many parts of the world, many companies will find that digital technology will be one of the most powerful options for recovery during this next phase of the COVID-19 crisis.Businesses will also undertake this challenge despite severe obstacles which include inconsistent revenue, disorganized workforces, broken supply chains, and a persistent lack of investment capital.In the Philippines, companies have been forced to adopt new business models, including managing a hybrid work environment, expanding on digital business channels, and providing customers with a more pleasant and holistic digital experience that increases engagement.Many organizations still struggle to embrace these new technologies. Their legacy technologies have been deemed a liability as they hamper their ability to quickly adopt new and improved way of operations. As the cyberattack threat increases, they are also now more susceptible to cyber incidents as cybercriminals exploit opportunities in these newly digitized operations.Because of the nature of this unprecedented environment, digital technologies are one of the most effective solutions for recovery. More specifically, a proactive technology strategy built around adapting operations and building resilience can equip businesses with a stronger competitive edge as they recover from the pandemic.ADAPTING BUSINESS OPERATIONS IN EVER-CHANGING CONDITIONSFacing uncertainty during this pandemic is one of the greatest challenges businesses must address. The impact of COVID-19 on the economy as well as in our daily lives continues to evolve. This presents an unknown operating environment for enterprises.The capacity to adapt to these challenges will be crucial in this new way of doing business during these ever-changing conditions. Although it will be difficult to predict how conditions may change, companies can utilize these key actions as discussed in a recent EY article on how embracing technology can bring success:• Reevaluate infrastructure to support a hybrid workforce. This includes a flexible communications plan that supports the return-to-office situation. New infrastructure will benefit the company more in the long run by helping facilitate collaboration, remote working and higher levels of automation in operations. Teams will be able to better manage resources, track production, and protect the enterprise through a collaborative software platform.• To ensure business continuity, cloud adoption will help business operations transition more smoothly to support an ecosystem-based approach. This will allow more collaboration and connection among various teams that will improve decision making. Using the cloud will also allow companies to ramp up and down its supporting infrastructure as economic conditions change, linking suppliers, customers, shippers and employees to gain a flexible advantage.• Automation remains a key pillar of any digital transformation for a business. This offers tremendous potential for leaders looking to drive transformation in their organization: from cost savings and increased delivery speed to new operating models, to higher-value efforts for their people.BUILDING RESILIENCY AND FLEXIBILITY INTO THE ENTERPRISENew business models are being introduced because of the pandemic, such as hybrid work situations where employees work from home and in-office, a digital experience that boosts customer engagement, and the acceleration of digital businesses at the expense of traditional physical channels.However, many organizations have struggled to catch up and be more digitally prepared. Traditional technologies — always high-cost and slow-moving — have become a much greater liability. Moreover, as hackers take advantage of newly digitalized activities, more companies are now frequently being targeted by cyberattacks due to their lack of adequate cyber protection.Focusing on the following three key areas can help companies build a more resilient and flexible enterprise where digital technologies will be critical:1. Restructure IT operationsUpgrading digital infrastructure can enhance digital sales channels, the virtual customer experience and direct-to-customer delivery methods. This is evident even in the case of public services where government agencies now allow a more seamless engagement with the citizenry. For example, the Bureau of Internal Revenue (BIR) now accepts not only tax returns but also payments via electronic channels. Soon, its e-invoicing facility will expand and further facilitate online interaction between the Bureau and the taxpayers, be it large or micro, small and medium enterprises (MSMEs).2. Reevaluate digital strategyNow is the time to assess which new technologies the company will need to improve on, such as expanding cloud infrastructure and contactless payments and adopting 3D printing and augmented and virtual reality. In addition, companies will need to make difficult decisions around replacing legacy technologies sooner than later.3. Double down on cybersecurityCompanies should ensure that the virtual infrastructure is secure and that their data is safe and backed up. Leaders should also review their cybersecurity infrastructure and improve where necessary. Moreover, they must consider how to better support the security of third parties such as suppliers, customers and contractors. Companies should also keep in mind that strengthened security measures across its ecosystem should complement and provide a more effective defense against the current generation of security threats without slowing the business down.ACCELERATING DIGITAL TRANSFORMATIONAccording to a 2010 Harvard Business Review study that looked into how business fared during the 2008 recession, less than 10% of companies emerged stronger than before the crisis. They did this despite the global crisis by balancing strategic investments that focused on new technologies while cost-cutting through divestments.With COVID-19 creating fundamental changes to how we live and work on a larger scale than in the 2008 recession, the gap will only widen between leading and underperforming companies. The successful businesses of tomorrow will be those that embrace and accelerate their digital transformation to fast-track recovery and create a competitive advantage in a post-pandemic world. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Warren R. Bituin is the technology consulting leader of SGV & Co.

15 August 2022

Maria Kathrina S. Macaisa-Peña

Consumer values in a world in crisis (Third Part)

Last of three partsConsumers around the world are settling into life amid uncertainty, adapting by assigning greater importance to taking control over their finances and favoring sustainable practices.The EY Future Consumer Index, which examines shifting consumer attitudes and behaviors over a range of time horizons and across international markets, demonstrates how accustomed people are to living in a constant state of crisis and uncertainty.In the previous parts of this series, we discussed three key shifts in play that differentiate the current crisis from previous ones, and the key trends in consumer behavior as identified in the Index. In this final part, we discuss the four imperatives that businesses have to take into account.FOUR IMPERATIVESBusiness leaders will have to adapt to meet the needs of consumer values that have shifted during the pandemic experience. Consumers are actively seeking more control over their lives instead of simply reacting to events.To address this, businesses will have to review their operations to optimize for better pricing, approach sustainable products as a cost-effective option instead of a premium choice, explore new and targeted ways to engage consumers on multiple digital channels, and reconsider what their purpose is as well as what KPIs they want to set.1. Review portfolios and operations to ensure affordability.To get the products they want at prices they can afford, consumers are more and more likely to trade down. Companies must think about how to manage their product portfolios in this inflationary environment to improve pricing outcomes.Prior iterations of the Consumer Index have demonstrated how the pandemic has increased the willingness of customers to switch to private label products. Retailers now have the possibility to broaden their selection of private label products. To ensure that they can best optimize for pricing, brands must also look for alternate supply chains, ingredients, or components and experiment with other product characteristics, such as packaging and package sizes.Due to ongoing price and revenue worries, this necessitates and facilitates improved supply chains and industrial resilience, but it is also likely to be more than a temporary remedy.2. Tailor sustainability strategies to offer affordable fixes.Despite their increased resolve to live more sustainably, consumers are becoming more price sensitive. Many businesses will need to switch approaches and explore how to make sustainable goods and services become the affordable norm for consumers, rather than as premium alternatives.The need to look into business models like renting, reselling, and mending to keep goods in use for longer is at the heart of this mindset. This creates a need to scale up current sustainability solutions so they can be more affordable from a procurement standpoint.For instance, the increase in energy costs brought on by the increased price of fossil fuels may encourage more investment in alternative energy, enabling scalable and inexpensive green energy and providing a chance for innovation to produce more sustainable products.3. Adjust investment in engagement to take advantage of new digital opportunities.The importance of digital channels during the pandemic is likely to continue increasing. However, the physical world will not become subordinate to the digital one overnight. Brands will have new opportunities to interact online and in the still emerging metaverse as a result.Now that consumers are becoming less brand loyal in their buying decisions, brands that have been generally decreasing marketing budgets during economic downturns run the danger of greater disintermediation. Businesses need to step up their efforts to clarify and define their unique brand offer by looking at fresh, focused approaches to connect with and engage with consumers through a variety of channels. This entails testing new digital technologies as well as gathering and using consumer data in ways that improve both physical and virtual customer experiences.However, these initiatives must be weighed against customer worries about data privacy and cybersecurity. Not only is it crucial to protect consumer data, but businesses can also gain the trust of their customers by demonstrating how they responsibly use their data to benefit them in real ways.4. Set KPIs that take shifting customer values into account.The extent to which consumer values are shifting is highlighted by the current and previous waves of the Index. People are less driven by monetary gains, and sustainable behaviors rather than wealth are more used to determine status. The way that consumers use their time is changing, and they are searching for ways to alternate between saving time on the things they dislike and spending time on the things they enjoy. Instead of focusing on salaries and careers, people are now increasingly concerned by purpose and flexibility.Companies need to reevaluate their goals, KPIs, and purpose in order to align with these developing values. Non-financial indicators like emissions, diversity, and innovation are progressively taking the place of traditional financial measurements like growth, profitability, share price, and shareholder returns. Companies must consider and evaluate these indicators in the context of the clients and staff they serve, and they must create new KPIs that instill non-financial values into their corporate culture.ADAPTING TO CONSUMERS IN A WORLD IN CRISISWhen their finances are stressed, people look for ways to save money and companies may feel the same way. This is a typical response, and for many people, it is also their only possible option. However, having experienced a pandemic, many customers now approach crises differently.In order to keep a sense of control over their lives, consumer values have altered, and they are determined to abide by them. They are more concerned with acting sustainably than they are with purchasing things they do not believe they need. To stay aligned with these evolving consumer needs and behaviors, businesses will need to start taking action as soon as possible if they wish to remain competitive and relevant. 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.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

08 August 2022

Maria Kathrina S. Macaisa-Peña

Consumer values in a world in crisis (Second Part)

Second of three partsThe most recent edition of the EY Future Consumer Index reveals how accustomed people are to living in a constant state of crisis and uncertainty. As consumers continue to express concern about the future, they prioritize ideals that focus on more control over their finance and sustainable practices.In the first part of this three-part article, we discussed three key shifts in play that differentiate the current crises with previous ones. Consumers now have greater control over how they organize their time due to the rise in remote working, but they also want more control over other aspects of their lives including how they spend their money and disclose their personal information.In this second part, we discuss the key trends in consumer behavior that were identified in the Index.KEY TRENDS IN CONSUMER BEHAVIORLeaders must adapt since it is obvious that consumer beliefs and habits are continuing to change rapidly on many fronts. How effective is a “Sell more items” strategy when many customers claim they wish to make smaller purchases? There are four imperatives that leaders will have to take into account, starting with some of the key trends that the most recent Index has shown.Cost cutting: Consumers are substituting but not sacrificingCurrently, the “Affordability first” consumer category is the dominant one, but the cost of living is a concern for all consumers: 79% of respondents express concern about their financial situation; 35% worry about having enough money for expenses other than basic necessities; 66% are concerned with getting value for their money.Many consumers would consider buying private label packaged food (49%), while 48% are purchasing cheaper alternatives. Consumers are, in many respects, returning to what worked for them in the last two years when they were able to save money by working from home, spending more time at home, cooking their own meals, and not feeling the need to buy new clothes or use cosmetics regularly. For many brands, this creates a challenging environment.People typically reduce their expenditures in a limited number of categories when money is tight while still rewarding themselves with “treats.” However, customers are now using their money-saving strategies in all areas. For instance, there is a thriving social media culture in the cosmetics industry where influencers share “dupes” — cheaper versions of luxury goods that, in their opinion, perform just as well and offer better value.The findings from the study demonstrate that this isn’t only about cutting back on spending; rather, it’s a continuation of pandemic-era habits. Some of the brand attributes that have historically conveyed prestige no longer appeal to customers as much. A deep-seated yearning to live and spend more “authentically” exists. Instead of replacing things, more people are committed to mending them. Seasonal fashion trends are less popular, with 79% of “Affordability first” shoppers and 55% of the more hedonistic “Experience first” consumers ignoring them.Sustainability: People are clinging to their principlesMany consumers struggle to balance their desire to live more sustainably with their need to live more inexpensively, especially as many believe sustainable goods to be expensive, with 67% of consumers claiming that the high cost considerably discourages them from purchasing sustainable items. However, resistant shoppers are looking for more affordable ways to achieve their goals of sustainable living rather than simply giving up on them.Many claim they are working harder to reduce trash and purchase used goods. By maximizing for both economic and environmental benefits, consumers are taking charge. As much as 87% are attempting to reduce food waste and 85% are attempting to reduce their energy use. Meanwhile, 36% report increasing their use of used goods, while 24% have either ceased buying or have bought less from a company that is not doing enough to protect the environment.This shows that attitudes toward sustainable goods and products have changed for the better. Not as many consumers still believe these products to be of poor quality or lacking in durability. Importantly, people place more and more faith in the information they receive about sustainable products from the manufacturers.Customers do not believe information from just any sources. They look for information that they believe to be trustworthy and transparent, and they value ways to filter and personalize the information they are exposed to. This broader trend can be seen playing out regarding sustainability, with over a third of customers having registered for an app or service that tracks aspects of their carbon footprint or environmental impact. Consumers are increasingly seeking reliable sources to help them make informed judgments about the things they buy.Consumer-facing businesses are also searching for reliable suppliers because they are applying “sustainability tech” to enhance their products. Many already collaborate with sustainability tech firms to gain access to data and insights that bring them closer to the consumer. New consumer insights are being produced by these relationships, which aid businesses in interacting with customers, promoting sustainable innovation, and achieving sustainability objectives.Digital: Customers value alternative experiences and products more and moreA small but expanding segment of customers is interested in investigating cutting-edge technologies and digital platforms, according to the Index. The metaverse, digital currency, or buying virtual goods have all been used by almost one in 10 consumers. It’s interesting to note that this baseline level roughly corresponds to where e-commerce was in 2005. Its 10% retail market share from 2017 has since doubled. Some analysts predicted the demise of high street shopping at that level of retail penetration. Could the retail sector be reaching a similar turning point?Due to the pandemic, many aspects of daily life are now “digital first.” Consumers are once more turning to digital as they want greater financial control. For instance, people are substituting lifestyle choices rather than making lifestyle sacrifices by balancing digital and physical experiences.The use of more recent digital products and services opens up new business options for firms. It becomes a question of whether they can invest in digital in ways that distinguish their brand experience, foster creativity, gather more customer data, allow for digital product line creation, and promote innovation.Trust will be a critical factor, as consumers express great concern about who they share their data with. They want to know how it will be used and protected, expanding their post-pandemic, always-on emergency posture to include a safety-first component.In the last part of this article, we will discuss four imperatives that consumer companies must consider to meet the needs of consumer values that have shifted during the pandemic experience. Maria Kathrina S. Macaisa-Peña is a Business Consulting Partner and the Consumer Products and Retail Sector Leader of SGV & Co.

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How tech companies can stay agile in an uncertain world (Second Part)

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Consumer values in a world in crisis (Third Part)

Consumer values in a world in crisis (Second Part)

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