Suits the C-Suite

19 April 2021

Karen Mae L. Calam And Aiza P. Giltendez

Redefining Philippine Taxation: CREATE (Second part)

Second of four partsSaid to be the first-ever revenue-eroding tax reform package and the largest economic stimulus program in the country’s history, Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was signed by the President on March 26. It amends our tax and incentives laws with the goal of helping businesses move into their post-pandemic recovery while encouraging foreign investment.In the first part of this series, we discussed the passing and goals of the CREATE Act and how it reduces Corporate Income Tax. In this second part, we continue by discussing additional changes: the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax (IAET), tax-free exchange, additional provisions to consider and provisions that were vetoed.EXEMPTION OF FOREIGN-SOURCED DIVIDENDSTo better compete within ASEAN, the CREATE Act adds a new provision on foreign-sourced dividends for domestic corporations with outbound investment. Generally, dividends received by domestic corporations from their subsidiaries abroad are subject to tax. This new provision states that these dividends are now exempt from income tax, provided that the domestic corporation directly holds at least 20% of the outstanding capital stock of the foreign subsidiary for at least two years at the time of dividend distribution. The funds must also be reinvested in the working capital, capital expenditure, dividend payments, investment in domestic subsidiaries, and infrastructure projects of the domestic corporation within the next taxable year from the time when the dividends were received. All these conditions must be met, otherwise the foreign-sourced dividends are subject to Philippine tax.This falls within the objective of encouraging businesses — particularly domestic corporations — to reinvest in the Philippines all profits earned here and overseas to help our economy recover from the downturn caused by the pandemic.REPEAL OF IMPROPERLY ACCUMULATED EARNINGS TAXThere will be no more IAET from 2021 onwards, which is great news for corporations that accumulate earnings beyond the reasonable needs of their business or paid-up capital. The imposition of IAET, ironically, compels the distribution of profits to investors or shareholders, or to repatriate the foreign investor’s money out of the Philippines instead of reinvesting or spending it locally. To address this, the CREATE Act now encourages investors to keep their money in the Philippines and potentially reinvest it in business expansion and generate employment.Since the repeal does not provide any retroactivity, it will follow the general effectivity date of the CREATE Act. As such, any excess retained earnings in 2020 and prior years will still have to be dealt with by the taxpayers and be appropriated or declared as dividends. Otherwise, it will be penalized through the imposition of 10% IAET on excess retained earnings.TAX-FREE EXCHANGEThe CREATE Act now expressly provides that a prior Bureau of Internal Revenue (BIR) confirmatory ruling will not be required to avail of the tax exemption in the case of business reorganizations, including mergers or consolidations, further control, recapitalization, and reincorporation. It likewise reiterates the TRAIN Law provisions that the sale or exchanges of property used for business for shares of stock are exempt from VAT and any gain or loss may not be recognized for tax purposes. This, however, only defers the payment of taxes since any subsequent transfer/s will be subject to applicable taxes on a substituted-cost basis. This new provision will ultimately reduce the problematic and long-running backlog of the BIR.One notable wording added to the CREATE Act is on “further control” under Section 40 (c)(2). It has put to rest the further control issue, a gray area in the past, by expressly stating that an exchange is tax-free when the “transferor or transferors, collectively, gains or maintains at least 51% of the total voting power of all classes of stocks entitled to vote of the issuing corporation.”ADDITIONAL PROVISIONSThe CREATE Act includes more provisions surrounding exemption from VAT. Upon effectivity of the Act, the sale, importation, printing or publication of educational reading materials, including those in digital or electronic format not principally used for advertisements, are exempt from VAT. Additionally exempted beginning Jan. 1, 2021 are the sale of medicines for cancer, mental illness, tuberculosis, and kidney diseases. Moreover, the sale or importation of COVID-19 drugs, vaccines and medical devices, COVID-19 treatment drugs for use in clinical trials, and the capital equipment, spare parts and raw materials for the production of personal protective equipment components are exempt from Jan. 1, 2021 to Dec. 31, 2023.VETOED PROVISIONSThe President vetoed the increase of the VAT-exempt threshold for the sale of real property by real estate developers, the 90-day period for the processing of general tax refunds, the definition of investment capital and the special corporate income tax incentive for domestic enterprises. Also vetoed were new incentives for same activity of existing registered enterprises, limitations on the power of the Fiscal Incentives Review Board, specific industries under the activity tiers, the power to exempt any investment promotion agency from the reform, and the automatic approval of applications for incentives.With the veto of the VAT-exempt provision on sale of real property, the sale of house and lot and other residential dwellings with a selling price of more than P2 million, along with residential lots regardless of the selling price, shall continue to be subject to 12% VAT beginning Jan. 1, 2021 except those qualified as socialized housing (based on price ceilings set by the Housing and Urban Development Coordinating Council) which remain VAT-exempt, pursuant to the TRAIN Law.Originally, Congress proposed to increase VAT-exempt thresholds to P2.5 million for the sale of house and lot and other residential dwellings, and to P4.2 million for the sale of residential lots which could have benefitted those who can actually afford proper housing. However, the President vetoed it to avoid potential revenue losses of about P155.3 billion.REDEFINING PHILIPPINE TAXATION FOR RECOVERY AND INVESTMENTThe passage of CREATE is certainly welcome to aid businesses during these challenging times, while also serving as a sign to investors that the Philippines is a worthwhile investment destination. Government efforts to redefine Philippine taxation by developing more globally competitive tax incentives and improving the current corporate tax system through wider tax bases, lowered tax rates and reduced tax leakage will hopefully progress the economy further along the path of post-pandemic recovery.In the third and fourth parts of this series, we continue our discussion on the CREATE Act by covering the rationalization of incentives.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. Karen Mae L. Calam And Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.

12 April 2021

Karen Mae L. Calam And Aiza P. Giltendez

Redefining Philippine Taxation: CREATE (First part)

First of four partsA long period of uncertainty was ended after President Rodrigo R. Duterte signed Republic Act No. 11534, known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on March 26.The CREATE Act is said to be the first-ever revenue-eroding tax reform package and the largest economic stimulus program in the country’s history, with major amendments to our tax and incentives laws. With the pandemic continuing to negatively impact the business landscape, it is hoped that these changes will support post-pandemic recovery while attracting more foreign investment into the country.In the first part of this four-part series, we discuss the passage and goals of the CREATE Act and how it reduces Corporate Income Tax (CIT).IMPROVING THE EFFICIENCY OF THE TAX SYSTEMSet to take effect on April 11, this legislation is part of the Comprehensive Tax Reform Program rolled out by the Duterte administration in 2017. After the passage of TRAIN Law in December 2017, the House of Representatives passed the Tax Reform for Attracting Better and Higher Quality Opportunities (TRABAHO) bill in September 2018. A year after it was transmitted to the Senate, the Senate renamed its version to the proposed Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill.Neither bill had seen the light of day when COVID-19 hit. To combat the pandemic, governments around the world imposed strict lockdown measures that led to the reduction of business operations or outright business closures. Extended lockdowns severely impacted the business community, leading the government to realign its priorities in response to the needs of the economy while simultaneously encouraging investor interest in the Philippines. With this in mind, CREATE was drafted to improve the equity and efficiency of the corporate tax system by lowering the tax rate, widening the tax base, reducing tax distortions and leakages, and developing a more responsive and globally-competitive tax incentives regime that is performance-based, targeted, time-bound, and transparent.The House of Representatives and the Senate approved and passed different versions of the CREATE bill before deliberations by the Bicameral Conference Committee. On the last day of the 30-day period to act on the enrolled CREATE bill, the President signed it into law but vetoed certain provisions. These include the VAT-exempt threshold on the sale of real properties by real estate developers and the special corporate income tax incentive for domestic enterprises, among others.REDUCTION IN CORPORATE INCOME TAXAs of 2020, the Philippines imposes the highest CIT rate at 30% in ASEAN, where the regional average is 23%. To address this, the CREATE Act lowers the CIT rate for domestic corporations (including one-person corporations) to 25% of the taxable income beginning July 1, 2020 while that for companies with total assets not exceeding P100 million and taxable income not exceeding P5 million is lowered to 20% of the taxable income. In valuing the P100 million threshold, we should note that the land on which the particular corporation’s office, plant and equipment are situated shall be excluded as the appreciation of its value may remove small businesses from the 20% bracket. This threshold shall be determined on a taxable year basis.For resident foreign corporations (including branch offices), the CIT rate is lowered from 30% to 25% of the taxable income beginning July 1, 2020 while the interest income from a depository bank under the expanded foreign currency deposit system and gains from sale of shares not traded in the stock exchange received by the resident foreign corporations shall be taxed at 15%.Regional operating headquarters are subject to 25% CIT beginning Jan. 1, 2022. However, they may apply for incentives under the CREATE Act. The CIT rate for non-resident foreign corporations is lowered from 30% to 25% of the gross income beginning Jan. 1, 2021.With the lowering of the CIT rate, the non-allowable deduction for interest expense is likewise reduced from 33% to 20% of the interest income subjected to final tax. However, if the interest income tax is adjusted in the future, possibly in the tax reform package 4 or the proposed Passive Income and Financial Intermediary Taxation Act, the interest expense reduction rate may likewise be adjusted.To compute the CIT due, corporations adopting calendar year ending Dec. 31, 2020 are to multiply the total annual taxable income by the effective rate of 27.5% (under the 25% CIT rate) or 25% (under the 20% CIT rate), whichever is applicable, for domestic corporations, and 27.5% for resident foreign corporations.For corporations adopting fiscal years, the multiplier shall vary depending on the year ending. One way to compute the CIT due for those using fiscal years is to divide the total annual taxable income by 12 and multiply it by the number of months covered by the new rate. For example, for corporations with fiscal year ending March 31, 2021, the total annual taxable income shall be divided by 12 and the aggregate income from April 1, 2020 to June 30, 2020 is to be taxed at 30%, while the aggregate income from July 1, 2020 to March 31, 2021 will be taxed at 25% or 20%, whichever is applicable.This was put in place to ensure that taxpayers do not resort to the allocation of income and expenses that will yield a lower tax due.Since the CIT rate is reduced, a reduction of Expanded or Creditable Withholding Tax (EWT) rate should also follow suit to avoid any tax leakage. This will avoid a situation where the EWT tax due will be much higher compared to the income tax due of certain suppliers and hence, creating tax leakage. As a measure, the CREATE Act directs the Department of Finance (DoF) to revisit or amend EWT rules and regulations, including the tax rates, every 3 years.An additional benefit in the form of a deduction from gross income is also provided under the CREATE Act wherein businesses are given an additional deduction of 50% of the value of labor training expenses incurred for skills gained by enterprise-based trainees enrolled in public senior high schools, public higher educational institutions, or public technical and vocational institutions covered by an Apprenticeship Agreement, provided they secure proper government certification and the additional 50% labor training expense deduction does not exceed 10% of the direct labor wage.The CREATE Act also provides additional temporary relief to taxpayers beginning July 1, 2020 to June 30, 2023 by reducing the minimum corporate income tax from 2% to 1%, the CIT rate for proprietary educational institutions and non-stock and non-profit hospitals from 10% to 1%, and percentage tax from 3% to 1%.The adjustments in CIT rates will not only support big businesses but will ultimately provide relief to micro, small and medium enterprises, which constitute 99.5% of the total business enterprises in the Philippines, employ 62.4% of the total labor force, and account for 35% of gross domestic product and 35.7% of economic value. While this tax reform package will reduce the government’s revenue, the DoF hopes that this will help revitalize businesses and consequently, create more jobs for workers who have been greatly affected by the pandemic.While known for its skilled labor and professionals and relatively lower operating costs, the Philippines has unfortunately been left behind as investors tend to lean towards the more attractive fiscal system of our ASEAN neighbors. This recent development in our tax laws may be a good pull for foreign investors looking for more opportunities.In the second part of this four-part series, we will discuss more effected changes: the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax, tax-free exchange, additional provisions to consider and provisions that were vetoed.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. Karen Mae L. Calam And Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.

05 April 2021

Aris C. Malantic

Embracing a new operating reality for corporate reporting

In the face of COVID-19, finance leaders find themselves having to strike a difficult balance in delivering corporate reporting. On one hand, they must respond to the pandemic with resilience and transparency; on the other hand, they must also generate long-term, sustainable value for stakeholders that focuses not only on financial outcomes but also on environmental and social impact.With performance now measured across broader dimensions, pressure is mounting to meet the demands for non-financial information in addition to credible financial disclosures. Finance leaders need to rethink how finance and corporate reporting can play central roles to meet the changing expectations of stakeholders, such as investors and regulators, and ensure that reporting remains relevant.It becomes imperative for corporate reporting to evolve and fully embrace optimizing value, with the goals of meeting the increasingly wide insight requirements of stakeholders and making corporate reporting central in realizing long-term value ambitions. The pandemic accelerated the demand for richer insights during this period of uncertainty, and such demand is unlikely to decline even when the pandemic is over. Stakeholders will very likely continue to search for organizations with a focus on long-term value creation.For corporate reporting to play an important role, finance teams must transition to the new operating reality and virtual environment imposed by the pandemic and its ongoing implications.THE CHALLENGES OF TRANSFORMATIONRespondents to the 2020 EY Global Financial Accounting and Advisory Services (FAAS) corporate reporting survey, who are composed of a thousand Chief Financial Officers (CFOs), financial controllers and other senior finance leaders, say that they are satisfied with this new operating reality shift, though it is not without its challenges. While communication with existing colleagues is effective, building personal relationships with new colleagues gained through acquisition or investments can prove difficult. More than half the respondents (56%) have also shared resistance to some of the changes introduced in their transformation journey. Moreover, 51% shared that when they failed to adopt new processes, finance team members simply reverted to traditional methods.Returning to previous ways of working could prove disadvantageous and failing to focus on the future of reporting could have significant consequences. It could result in cumbersome operating models and in finance teams being less relevant and agile, hindering their ability to provide the forward-looking insights stakeholders look for.With the increasing demand for non-financial information such as environmental, social and governance (ESG) and sustainability reporting from both stakeholders and regulators, CFOs are tasked with growing value along with their previous mandate of protecting enterprise value.Another challenge lies in the potential obstacles that can obstruct the means of measuring and communicating long-term value. One such obstacle identified by one in five respondents from the EY survey was the lack of formal reporting frameworks showing how the connection between intangible and tangible assets contributes to long-term value creation.Finance leaders need to consider how best to challenge traditional ways of working while mapping out an innovative future for the function. They can step in the right direction by focusing on building trust in technology and transforming finance and corporate reporting operating models.ACCELERATING SMART TECHNOLOGIES TO TRANSFORM THE FINANCE MODELTrusting technology, artificial intelligence (AI) in particular, is difficult when controls, governance and ethical frameworks still need further development and refinement. From the EY survey, nearly half the respondents (47%) share that finance data produced by AI cannot be trusted in quality compared to the data produced by the usual finance systems. This lack of trust could be reflective of a lack of understanding in how these systems work. Both AI and machine learning arrive at conclusions based on a large number of data sets, instead of an individual examining a single set with the possibility of introducing their own biases. This is why smart machines can likely perform data-driven tasks with more consistency, accuracy and efficiency.The future finance function looks very different in the eyes of the survey respondents, specifically due to a major shift to a more open and intelligent finance operating model. The survey shares that 53% of finance leaders anticipate that half of the finance and reporting tasks performed by a human workforce will be done by machines over the next three years. It becomes important to define a partner or managed services strategy to achieve the organization’s transformational goals, where many reporting activities could be handled by accredited providers of managed services instead of handled in-house. A cloud-based solution also becomes a major priority in tandem with advanced analytics and AI, providing infrastructure for AI processing as well as space for vast amounts of data.REINVENTING LEADERSHIP ROLES AND FINANCE SKILLSWith the evolution of the finance function, CFOs and financial controllers are likely to see their roles evolve as well. As much as 67% of survey respondents agree that CFOs will focus more on driving enterprise-wide digital transformation and growth than traditional finance responsibilities.Finance leaders will need to reassess the skills of their teams, and ensure they have people with knowledge of both digital processes and digital accounting. Even though machine learning can perform certain tasks more efficiently, a finance team will always need people capable of reading and understanding International Financial Reporting Standards (IFRS) statements. Finance operations will need problem-solvers with holistic views, logic and critical thinking. Leaders must take an innovative approach to reskill their people and equip them with the capabilities required for the future finance function.EMBRACING THIS NEW REALITY FOR THE FUTUREThough the pandemic continues to pose a significant challenge for finance leaders to deliver corporate reporting, the new operating reality and its implications invite CFOs and finance teams to approach the finance function with a fresh perspective. The New Normal dictates that finance leaders consider the reporting needs Now, anticipate the challenges to come Next and find ways to take the finance function Beyond.Those with foresight will likely find opportunity in today’s uncertain environment to challenge traditional ways of reporting and reaffirm its relevance beyond the pandemic.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.Aris C. Malantic is the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co. and EY ASEAN. He is also a Market Group Leader in SGV & Co.

29 March 2021

Benjamin N. Villacorte

Sustainability reporting in the Philippines: Year One review

Today, as markets become more unstable, companies are obligated to create a sustainable business model and implement environmental and social initiatives that will benefit future generations as well as create long-term value for stakeholders.Now more than ever, organizations need to recognize the value of transparency in reporting by disclosing non-financial information through sustainability reports. Sustainability reporting is no longer just a nice-to-have program but has been elevated as a requirement for publicly listed companies (PLCs).GOVERNMENT MANDATE FOR SUSTAINABILITY REPORTSOn Feb. 18, 2019, the Securities and Exchange Commission (SEC) released Memorandum Circular (MC) No. 4, series of 2019, under the title Sustainability Reporting Guidelines for Publicly-Listed Companies, specifying the procedure for sustainability reporting in the Philippines. They require all PLCs to submit a sustainability report as part of their annual report each year.The Commission said this requirement will help companies assess and manage their contributions towards the attainment of the 2030 United Nations Sustainable Development Goals (UN SDGs) and the Philippine Development Plan 2017-2022 or Ambisyon Natin 2040.The first report was scheduled for submission in 2020, attached to the company’s 2019 Annual Report. For companies already producing sustainability reports in accordance with internationally-recognized frameworks and standards, their reports were considered sufficient compliance with the reporting requirement.The guidelines also mandate a “comply or explain” approach for the first three years upon implementation. This means that companies need to disclose specific non-financial information using a suggested SEC template or a standalone report attached to their Annual Reports. They can also provide explanations for required data that companies are unable to provide. Companies failing to adhere to the guidelines are subject to the penalty for Incomplete Annual Report provided under SEC MC No. 6, Series of 2015, Consolidated Scale of Fines.With the new regulation emphasizing the growing importance of non-financial disclosures, SGV conducted a review of how PLCs responded to the SEC requirement to publish sustainability reports and shared our findings in a study, Beyond the Bottom Line: Sustainability Reporting in the Philippines.The report reviewed 73 PLCs that submitted sustainability reports for the financial year ending Dec. 31, 2019, with the demographic based on the number of PLCs within an industry, information from industry briefings, and changes to local industry regulations. It also included nine listed holding firms that had been reporting on sustainability and non-financial information before the SEC requirement. The study was limited to publicly available information, such as the SEC sustainability templates appended to SEC Form 17-A, standalone sustainability reports, integrated reports and annual reports.The report also leveraged EY sector trends, the World Economic Forum’s Global Risks Report 2020 and SGV’s experience in supporting businesses in sustainability and non-financial reporting.WIDELY USED SUSTAINABILITY REPORTING STANDARDS AND PRACTICESKey findings from the study suggest that 64% out of the 73 companies reviewed used the reporting template provided by the SEC to ensure compliance on the first year. However, more organizations will likely transition to stand-alone or integrated reports moving forward. Of the PLCs assessed, 40% released stand-alone sustainability reports, while 30% disclosed sustainability information as part of their Annual Reports. Moreover, only a small percentage released Integrated Reports, which included financial and non-financial disclosures. These reporting formats are not mutually exclusive, as some PLCs disclosed their non-financial information using more than one reporting format.Among the PLCs submitting stand-alone reports, the most widely referenced or adopted sustainability reporting standard was the Global Reporting Initiative (GRI) Standards. Companies also used other frameworks or standards, like Sustainability Accounting Standards Board (SASB), Integrated Reporting (IR) Framework and Task Force on Climate-related Financial Disclosures (TCFD), to address other topics like climate change or industry-specific material sustainability topics.Further, only 11% of the PLCs obtained independent external assurance, all of which had limited assurance. Notably, obtaining assurance on non-financial information, while not required, is considered a global best practice. In fact, according to the EY Climate Change and Sustainability Services (CCaSS) investor survey, 75% of investors see independent assurance of a company’s processes and controls over sustainability reporting as “valuable” or “very valuable,” in addition to the 70% who say the same for non-financial and environmental, social, and governance (ESG) performance measures.ADDITIONAL INSIGHTS ON SUSTAINABILITY REPORTING PRACTICESAnother significant outcome observed was the focus on the UN SDGs, with 77% of the sustainability disclosures linked to the SDGs, and 45 PLCs using the SDGs to inform about their sustainability strategy, materiality assessment process and/or material sustainability issues. Incorporating the SDGs in a company’s sustainability strategies ensures that their products, services and programs contribute to attaining the global sustainability goals.Moreover, 60% established the scope and boundary of their reports while only 52% disclosed their materiality assessment process, or the method used to determine the sustainability issues material to the company and their stakeholders. Material sustainability issues are the key focus areas addressed by a company and relevant information or plans in these areas are included in its sustainability report. Stakeholder engagement is an important part of the materiality assessment process to demonstrate that companies listen to their stakeholders and address their concerns.Meanwhile, only 32% disclosed having sustainability governance in place, which is not surprising since sustainability reporting is relatively new to the country. However, as sustainability issues continue to take center stage in developing business strategies, business leaders should consider having a member of management spearhead sustainability within the organization.On specific disclosures, Occupational Health and Safety (OHS) was the most disclosed topic by PLCs, while the least discussed were environmental topics. This presents an area for improvement for PLCs as they will not be able to fully address their ESG impacts, risks and opportunities without measuring or reporting on environmental topics.REITERATING THE SIGNIFICANCE OF NON-FINANCIAL REPORTINGThe report reveals that the first year of reporting focused more on compliance. However, it still met the objective of creating awareness and inclusion of sustainability on the board and management agenda. Due to the impact caused by the pandemic, it is very likely that the 2020 sustainability reports will heavily focus on health and safety, with pandemic response programs such as Department of Labor and Employment (DoLE)-mandated safety protocols, testing and vaccinations getting reported as part of ESG concerns. We also expect more robust disclosures on climate-related matters such as decarbonization, baselining energy consumption and air and greenhouse gas emissions.In addition, PLCs can improve their reporting on topics such as waste management to address pressing global concerns; resource management, specifically of materials and water, since unhampered consumption is not sustainable; and the protection and rehabilitation of biodiversity and ecosystems affected by operations to minimize negative environmental impact. Another area which may be improved further is social issues, particularly privacy and data security, after the pandemic rapidly shifted professional communications into the digital space.After the initial year of compliance with the new SEC requirement, PLCs will hopefully realize the significance of non-financial reporting and develop strategies that incorporate global and national development goals. By measuring and addressing their current sustainability impacts, risks and opportunities, they can help create long-term value for stakeholders, and at the same time, ensure a sustainable future for generations to come.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a Partner and Yna Altea D. Antipala is a Senior Associate from the Climate Change and Sustainability Services team of SGV & Co.

22 March 2021

Edison U. Ortiz

Revisiting the Tax Sparing rule

In 1974, legislators recognized the importance of attracting foreign investment and provided a reduced tax rate for dividends received by non-resident foreign corporations (NRFCs) from domestic corporations. Instead of the regular corporate income tax rate of 30%, a 15% rate was imposed on dividends received. This was subject to the condition that the country in which the NRFC is domiciled shall allow credit against the tax due from the NRFC taxes paid in the Philippines. The credit is equivalent to a particular amount representing the difference between the regular corporate income tax rate and the reduced 15% tax rate.This preferential tax rate is still present in the current Tax Code and is popularly known as the “tax sparing rule”. Based on rulings previously issued by the BIR and subject to future changes in their tax laws, foreign tax jurisdictions such as the US, Switzerland, Luxembourg, the Cayman Islands, Cook Islands, and Bermuda were determined to have tax rules that either allow the “deemed paid” tax credit or exempt the dividends from income tax. CURRENT TAX CODE PROVISION AND IMPLEMENTING GUIDELINESThe current Tax Code provides that an NRFC may avail of this reduced tax rate if its country of domicile allows a minimum “deemed paid” tax credit amount equivalent to 15%, representing the difference between the 30% current regular income tax rate and the reduced 15% tax rate. It also means that the exemption from taxes allowed by the NRFC’s country of domicile is sufficient to apply the 15% reduced tax rate.In 2016, the Bureau of Internal Revenue (BIR) issued guidelines on how to avail of this 15% preferential rate through Revenue Memorandum Order (RMO) No. 27-2016. However, RMO No. 27-2016 did not gain any traction and was eventually suspended by Revenue Memorandum Circular (RMC) No. 69-2016. The only viable option for taxpayers then was to request a confirmatory ruling from the BIR’s Law and Legislative Division. Even so, the release of confirmatory rulings took time due to the volume of taxpayer requests filed with the BIR covering issues other than the tax sparing provision. Essentially, the guidelines in the processing of requests for rulings did not provide the rules that would allow domestic corporations to declare and remit the dividends due to NRFCs prior to the release of the confirmatory ruling. Fast forward to late 2020, when the BIR issued RMO No. 46-2020 on Dec. 23, which sought to finally provide clarity to the claim of the 15% tax on intercorporate dividends. According to this RMO, the domestic corporation acting as a withholding agent may remit the dividends outright and apply thereon the reduced rate of 15% upon the submission of a specific BIR form and the required attachments.CONFIRMATION OF ENTITLEMENTSeemingly stemming from the policy of easing doing business in the Philippines, the RMO allows domestic corporations paying the dividends to apply the reduced rate of 15% without first securing a ruling from the BIR. Instead of a confirmatory ruling, the BIR issues a certification verifying the entitlement. In case of a denial, the BIR shall issue a ruling containing the factual and legal bases that led to such denial of the request for confirmation. This denial can eventually be subject to an appeal to the Department of Finance.Should there be an existing tax treaty between the Philippines and the country of domicile of the NRFC, there is an option to apply for either the reduced 15% rate under the Tax Code or the preferential rate under the applicable tax treaty.This RMO also emphasized that holders of Philippine Depositary Receipts (PDRs) may likewise be considered shareholders for the purpose of availing of the reduced 15% tax rate provided that the PDR is coupled with a right to purchase the underlying shares and that the right can be legally exercised without violating any foreign equity ownership restrictions and nationalization laws.THE FUNDAMENTALS AND POSITIVE BUSINESS IMPACTFor NRFCs that have been consistently claiming the 15% reduced rate, it is essential to be acquainted with the list of documentary requirements for submission to the BIR International Tax Affairs Division (ITAD).For prospective foreign investors and NRFCs expecting to receive dividends from domestic corporations, a careful analysis should be made to determine whether to invoke the 15% reduced rate under the Tax Code or to avail of the preferential rate under an existing tax treaty.For domestic corporations acting as withholding tax agents, it shall likewise be prudent to maintain copies of the filed request for confirmation and its attachments for documentation purposes which will be useful during BIR audits.This RMO can aid businesses through the timely repatriation of dividends to foreign investors to address these investors’ cash flows and other cash requirements. The outright claim of the preferential rate shall likewise result in the possible reduction in administrative costs concomitant with the prior rules which necessitated companies to secure confirmatory rulings. Owing to the streamlined processes brought by this RMO, the simplified procedures make it easier for companies to internally integrate the function of compliance oversight. The RMO provides further influential impact by removing uncertainties and promoting a sense of security to foreign investors due to the uniform rules and procedures in availing of the 15% rate.NRFCs should likewise keep an eye on the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE. This measure may lead to a further reduction in the minimum “deemed paid” tax credit to avail of the 15% reduced rate due to the proposed reduction in the regular corporate income tax rate. Moreover, with the intent to repeal the rules on Improperly Accumulated Earnings Tax (IAET), companies will have more flexibility in deciding whether to declare the earnings as dividends, utilize the same for future projects, or simply retain them. This makes the process much easier for those who opt to declare dividends under the tax sparing rule.EASE OF DOING BUSINESSWith the issuance of the RMO, companies may take comfort in the fact that there is consistency and uniformity in the documentary requirements in availing of the 15% preferential rate.At the end of the day, while it has taken decades to finally gain clarity on the proper application of the tax sparing rule, we can see that the government’s focus on enhancing the ease of doing business is well and truly being addressed. It is particularly crucial at this challenging time to ease the burden of compliance with tax law, and for companies to better boost investor confidence in our country’s economic and business landscape.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.Edison U. Ortiz is a Tax Senior Director of SGV & Co.

15 March 2021

Joanne P. Lansangan

VAT refunds during the pandemic

The COVID-19 pandemic has forced businesses to explore new ways to improve their cash flow. One of the ways is to tap the government for VAT refunds. This recourse is available to taxpayers with unutilized input VAT attributable to zero-rated transactions and is governed by a process which was recently streamlined by the Bureau of Internal Revenue (BIR).In the past, we have heard about taxpayers who expressed reluctance to file VAT refund claims in view of the numerous documentary requirements and costs associated with the filing. Those who have actually filed faced difficulties in retrieving documents, whether internally or from outside sources, such as required certifications from various government agencies and foreign jurisdictions.To reduce the burden of the VAT refund process, the BIR issued Revenue Memorandum Order (RMO) No. 47-2020, which took effect on Jan. 19, 2021, in response to the appeal of taxpayer-claimants who, due to the COVID-19 pandemic, faced difficulty complying with the documentary requirements under the old rules, and in compliance with Republic Act (RA) No. 11032, otherwise known as the “Ease of Doing Business and Efficient Government Service Delivery Act of 2018.”The changes introduced by the RMO, coupled with the legal mandate to adopt simplified requirements, are meant to encourage reluctant taxpayers to file VAT refund claims and recover the tax they are rightfully due. If granted a refund, taxpayers can tap into a new cash flow stream that would help them sustain day-to-day operations.NON-SUBMISSION OF PHOTOCOPIES OF SALES INVOICES/RECEIPTSAmong the notable amendments under this RMO is the removal of the requirement to submit photocopies of sales invoices or receipts for both purchases and sales of goods or services, which used to be the bulk of the documents needed upon filing. Instead, the submission of the photocopies was replaced by the submission of the originals for verification, together with corresponding scanned copies stored in a memory device. This change is believed by some to be cost and environment-friendly, and it eliminates the need for the BIR officers to conduct fieldwork at the taxpayer’s place of business, just to stamp each original document with the phrase “VAT Refund Claimed.” With all the geographical considerations and localized lockdowns, the change in the rule effectively considers the health and safety of both the BIR officers and the claimants-in-charge.NON-SUBMISSION OF CONSULARIZED DOCUMENTSThe requirement to submit consularized or apostilled certificates of foreign registration, incorporation or association of non-resident foreign corporations (NRFCs) was likewise removed. This amendment hopes to address the dilemma of taxpayer-claimants whose VAT refund applications are hampered due to the delay in processing and delivery of foreign documents to the Philippines. The revised checklist only requires the submission of an original copy of a certification from the Securities and Exchange Commission (SEC) stating that the NRFC is not registered to do business in the Philippines.In any case, it would still be advisable for taxpayers to secure a consularized or apostilled document in anticipation of a possible appeal in court. Until such time that jurisprudence eliminates such requirements, taxpayer-claimants are not yet fully off the hook in securing consularized or apostilled documents abroad.OTHER RELAXED REQUIREMENTSThe RMO likewise removed other documents from the revised checklist, particularly those which are already accessible to the BIR from its own records (i.e., Annual Registration Fee, Authority to Print, Permit to Use Computerized Accounting System, and schedule of big-ticket purchases classified per supplier). Nevertheless, for big-ticket items, BIR officers are still required to check for authenticity and correctness by accessing the BIR’s Information System.The RMO also compressed four separate sworn statements/declarations (i.e., amount of sales declared; affidavit of non-forum shopping; completeness and authenticity of documents submitted; and Taxpayer’s Profile) into one Taxpayer Attestation.The RMO also removed the documents which were previously required to be certified as true copies by the issuing government agencies. The RMO recognized that certain government-issued documents contain embedded “quick-response” (QR) codes which can be verified electronically or online.FIXED 90-DAY PROCESSING PERIODWhile previous BIR issuances provided that the 90-day period commences from the date of submission of the official receipts or invoices and other documents in support of the application, RMO 47-2020 emphasized that the start of the 90-day period is from the actual filing of the application with complete documents duly received by the processing office.The RMO intends to eliminate the possibility of having the reckoning date moved or adjusted by a BIR handling officer by simply requesting for additional documents outside of the checklist.CLARIFYING THE EXCLUSIVE VENUE FOR DIRECT EXPORTERSWith respect to venue, RMO No. 47-2020 expressly states that only the VAT Credit Audit Division (VCAD) may receive claims of direct exporters, to the exclusion of the Revenue District Office (RDO) or the Large Taxpayers Audit Division (LTAD). This clarifies previous BIR issuances (RMC No. 17-2018 and RMO 47-2019), which may be interpreted by some direct exporters to mean that they have the option of filing the VAT refund application at the RDO or LTAD.Though the pandemic has somehow disrupted the “should be” order of VAT refund filings, it has also given the tax authorities an opportunity to rethink and streamline the VAT refund process. The RMO seeks to address the challenges faced by both BIR officers and taxpayers who find themselves standing as players in a pandemic where claims must still be filed and processed accordingly.This RMO is a welcome development, and its implementation will ultimately redound to the benefit of all involved. As we continue to respond to challenges in this new world of uncertainty, taxpayers must continue to be on the lookout for further enhancements in government processes — including the VAT refunds — and take advantage of the benefits from such changes.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.Joanne P. Lansangan is a Tax Associate Director of SGV & Co.

08 March 2021

Maria Vivian C. Ruiz

A better working world where #SheBelongs

Today, as we celebrate International Women’s Day, we continue to recognize that women’s advancement is an economic imperative for increased prosperity, stronger communities and a key factor in building a better working world. Women all over the globe continue to demonstrate their crucial role in keeping the wheels of society turning, as well as breaking down traditional gender stereotypes.SGV & Co., as a member firm of EY Global, will be initiating a series of activation campaigns and communications that focus on women empowerment and appreciation in line with an EY global campaign that rallies the advancement of women in the workplace. We wholeheartedly support EY’s timely message that gender equality is not a problem that needs to be solved, but a solution to the most complex challenges faced by businesses and society. The key campaign narrative articulates the vital importance of making sure that #SheBelongs across all levels of an organization and is closely involved in decisions, design and execution of value-creation operations.In line with our long-standing value of meritocracy, SGV has always recognized the importance of advancing women and institutionalizing gender equality in the workplace. Not only is this part of our environmental, social, and governance (ESG) agenda, but it is also in alignment with our purpose of inclusively nurturing leaders, regardless of gender. Moreover, it is an integral element of our focus on sustainable development, aligning with the UN Sustainable Development Goals (UN SDGs).EQUAL OPPORTUNITY, REGARDLESS OF GENDERThis parity-based culture has been embedded in the firm since its earliest years. SGV was one of the earliest Philippine companies to admit a woman into the partnership, Linda Villanueva, in 1961 and one of the first to elect a woman chair and managing partner, Gloria Tan-Climaco, in 1992.As of the beginning of FY 2020, women comprised 60% of our people, exhibiting a strong gender diversity across the talent pipeline. It is proof that SGV provides the necessary policies and support to foster a secure working environment where women can thrive as they pursue their careers. As of Jan. 1, 2021, the gender statistics within the firm saw women comprising 47% of the leadership and 49% of the partnership. Our dynamic female partners rose through the ranks on their own merit and deliver valuable contributions to the firm. They possess a deep understanding of the career journey for women in SGV and are in the position to mentor more future women leaders in the organization.As proof of its commitment to close the corporate gender gap and promote diversity and inclusiveness (D&I) in the workplace, SGV was the first EY member firm and the first professional services firm in Southeast Asia to obtain the Economic Dividends for Gender Equality (EDGE) Assess-level certification through the Philippine Business Coalition for Women Empowerment (PBCWE) in 2018. EDGE is the leading global assessment methodology and business certification standard for gender equality. It measures where organizations stand in terms of gender balance across their pipeline, pay equity, effectiveness of policies and practices to ensure equitable career flows, as well as inclusiveness in their culture.ADVANCING WOMEN BEYOND THE FIRMSGV is also an active supporter of various organizations that focus on advancing D&I and gender equality.The firm celebrates women in its programs, such as when Socorro Ramos, the founder and general manager of National Bookstore became the first woman to win the prestigious Entrepreneur of the Year Philippines (EOYP) in 2004. She was followed by Natividad Cheng, chairperson and CEO of Multiflex RNC Philippines, Inc. (Uratex), who won Entrepreneur of the Year Philippines in 2017. The EOYP program also dedicates a category to recognizing outstanding woman entrepreneurs.In addition, EY has the Entrepreneurial Winning Women (EWW) program, which identifies ambitious women entrepreneurs from around the world whose businesses show potential to scale. This customized executive leadership program provides them with the resources they need to achieve their full potential. This includes an elite global network of high-growth companies led by women, where participants can expand their knowledge with the latest executive dialogues and research about business practices and strategies.SGV Senior Adviser, Ambassador Delia D. Albert, is also an exemplary woman leader, with a career that includes being the first female diplomat to serve as Secretary of Foreign Affairs in the Philippines and the ASEAN region. Spurred by her concern for the welfare of the thousands of overseas Filipino women workers, she initiated a resolution to promote and protect these women’s rights at the Geneva Commission on Human Rights in 2004.SGV & Co. is also a founding member of the PBCWE, which was launched in 2017 through a partnership between the Philippine Women’s Economic Network (PhilWEN) and Investing in Women, an initiative of the Australian government. The coalition is made up of influential businesses that are large employers who will take appropriate steps to improve gender equality in their own workplaces and influence other businesses to become better employers of women. SGV alumna-partner Ma. Aurora D. Geotina-Garcia is the chair of PhilWEN and co-chair of PBCWE.ENSURING THAT #SHEBELONGSCelebrating the economic, political and social achievements of women around the world allows us to drive discussion around initiatives that accelerate gender equality and promote inclusion. We cannot wait for years to close the economic gender gap, and every small action taken now can make a difference towards positive and meaningful change.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Maria Vivian C. Ruiz is the Vice Chair and Deputy Managing Partner of SGV & Co.

01 March 2021

Auresana B. Ines

Narrowing the scope for transfer pricing reporting

COVID-19 (coronavirus disease 2019) has taken the world by storm, with the pandemic requiring unprecedented community quarantines, lockdowns, and business disruption.With the objective of reducing costs and tempering negative operating results, taxpayers have been reevaluating discrepancies between forecast and actual operating results and reviewed contractual arrangements and supply chain processes. Particularly for taxpayers engaged in related-party transactions, it was imperative to review the current business model, allocation of risks, and cost reimbursement or sharing arrangements.Because of this, taxpayers who are engaged in related party transactions (RPTs) were taken aback when Revenue Regulations (RR) 19-2020 were issued. RR 19-2020 requires the submission of BIR Form 1709 (or the RPT Form) and supporting documents which include contemporaneous transfer pricing documentation (TPD). Taxpayer concerns include the cost, logistics and manpower required to prepare the RPT Form and supporting documents.However, taxpayers required to file the RPT Form and to prepare TPDs were provided some relief when Revenue Regulations 34-2020 were issued. The RR streamlined the guidelines and procedures for submitting the RPT Form and TPD, helping narrow the scope in determining the taxpayers who are mandated to prepare the RPT Form and TPD.TAXPAYERS REQUIRED TO PREPARE AND SUBMIT THE RPT FORMAs opposed to previous regulations, the new regulations limited the requirement for preparing and submitting the RPT Form only to selected taxpayers. These include: (a) large taxpayers, or those who have been officially classified and notified to be as such by the BIR; (b) taxpayers enjoying tax incentives, such as an income tax holiday and a preferential income tax rate; (c) taxpayers incurring net operating losses for three consecutive years, including the current year; and (d) taxpayers who are engaged in RPTs with taxpayers falling under the first three classifications.Earlier regulations have stated that the RPT Form aims to effectively implement Philippine Accounting Standards 24 on the disclosure of RPTs. Given this objective, all RPTs, regardless of amount and volume, were required to be disclosed in the RPT Form.However, the new regulations now exclude payments of compensation and benefits to key management personnel (KMP) among the RPTs to be reported. Dividends and branch profit remittances have also been excluded from the reportable RPTs. Moreover, KMPs are no longer required to submit the RPT Form.The new 1709 Form requires taxpayers to confirm if they prepared TPD in the format prescribed under the TP regulations.MATERIALITY THRESHOLDS FOR SUBMITTING TPDSThe previous regulations provide for the simultaneous submission of the RPT Form and TPD. Under the new regulations, only the taxpayers who are required to file the RPT Form and who meet certain materiality thresholds are mandated to prepare TPD. These thresholds include:• Annual gross sales revenue for the subject taxable period in excess of P150,000,000.00 and the total amount of RPTs with foreign and domestic related parties in excess of P90,000,000.00. In this particular instance, both thresholds must have been breached;• RPT involving sale of tangible goods in the aggregate amount exceeding P60,000,000.00 within the taxable year; and• RPT involving service transaction, payment of interest, utilization of intangible goods or other RPTs in the aggregate amount exceeding P15,000,000.00 within the taxable year.When required to prepare TPD during the immediately preceding taxpayer year for exceeding the given thresholds, a taxpayer shall also be required to prepare a TPD for the current year.Although mandated to prepare a TPD, taxpayers who are covered by the TPD requirement are now required to submit their TPD within 30 calendar days from receiving a request from the BIR Commissioner or his duly authorized representatives, subject to a non-extendible period of 30 calendar days based on meritorious grounds.TAXPAYERS WHO DO NOT MEET THE MATERIALITY THRESHOLDSWhile only a selected group of taxpayers is now required to prepare and file the RPT Form, a question arises on whether there is still a need to prepare a TPD for those who do not meet such thresholds.To answer this question, we have to consider the legal basis of all the TP-related issuances: Section 50 of the Tax Code, granting the Commissioner the power to distribute or allocate income and expenses from intercompany transactions to clearly reflect the income of the related parties.Such power, if exercised by the Commissioner, does not make a distinction on the taxpayers who can be subject to the redistribution of income or reallocation of expenses. Thus, there still appears to be a requirement to ensure that intercompany transactions clearly reflect the income of related parties. This requirement can be satisfied by providing a justification, whether in the form of a TPD or any alternative documentation, that RPTs have been entered on an arm’s length basis.We also have to consider that financial reporting standards have evolved through the years. Under current accounting standards, all taxpayers are required to disclose in their financial statements, their assumptions and estimates in determining uncertain tax treatment. With respect to RPTs, it is still prudent to have a contemporaneous TPD or any alternative documentation which supports the basis for intercompany pricing policies. Maintaining a contemporaneous TPD or any alternative documentation therefore minimizes, if not eliminates, uncertain tax positions that have to be disclosed in the financial statements.Thus, taxpayers who do not meet the materiality thresholds and are therefore not required to prepare and submit a TPD should still ensure that there is some justification, whether through a TPD or otherwise, that their transfer pricing practices are conducted on an arm’s length basis.Without such justification, a taxpayer faces the possibility that the basis of its pricing policies for its RPTs may be questioned by the BIR during an audit. A possible TP adjustment may be issued, resulting in a deficiency tax assessment against the taxpayer.In addition, the lack of justification may lead regulators to question the reasonableness of the company’s tax position as reflected in its financial statements due to the uncertain tax position of its pricing practices with its related parties.NEXT STEPS FOR TAXPAYERS NOT MANDATED TO PREPARE TPDConcerned taxpayers should immediately focus on complying with the minimum requirements of preparing and submitting their RPT Form on time. It should be emphasized that no further extension on the submission of the RPT Form has been provided in RR 34-2020.After submitting their RPT Forms, taxpayers should proceed to collate copies of the agreements and other proof of transactions, proof of withholding and remittance of consequent taxes as well as TPD.Since tax examination usually begins with the BIR’s review of tax returns and financial statements, taxpayers should ensure the consistency of figures disclosed in the financial statements and RPT Form. The nature, transaction and outstanding balances should be updated to align with supporting documents. If the taxpayer is not mandated to submit Form 1709 and prepare a TPD, such must also be disclosed in the financial statements.It is hoped that narrowing transfer pricing reporting to select taxpayers will further encourage compliance. This is particularly key since the taxable year 2020 is the first compliance period, and the objective of the requirement to submit the RPT Form is to improve and strengthen the BIR’s transfer pricing risk assessment and audit.By this time, taxpayers should hav already been discussing the appropriate disclosures in their financial statements, finalizing the details to be disclosed in the RPT Form, and preparing the supporting documents, including the TPD.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.Auresana B. Ines is a Tax Senior Manager of SGV & Co.

22 February 2021

Carlo Kristle G. Dimarucut

Why boards of private businesses must prioritize cybersecurity

Imagine getting a frantic call from your head of IT. Your accounting personnel have reported that they have not been able to access your accounting system, and that they have been working on the issue for several days now. You have been the target of a cyberattack, resulting in the loss of many records.This situation is not uncommon. Over the past year, we have seen a significant rise in similar attacks that have been targeting private, and generally smaller organizations. These attacks, while less sophisticated than the well-publicized bank heists and the government-backed intrusions into key infrastructure, make up a large portion of the cybersecurity issues that threaten organizations. They need to be managed.INCREASINGLY MOBILE WORKFORCEThe current pandemic has changed the way people work almost literally overnight. Businesses temporarily closed their doors, and in-office employees instantly became a virtual workforce. This change has boosted online interaction, opening up companies to increased risk. In some cases, employees have taken matters into their own hands because of the perceived inflexibility of in-house IT organizations. Many have turned to cloud-based, usually consumer-grade digital solutions that they have grown accustomed to in their personal lives. In-place cybersecurity controls and protocols are being tested like never before, while threat actors are exploiting this new work environment and intensifying their activities.Dealing with cybersecurity in smaller organizations is oftentimes not easy. There usually isn’t a technical solution that would fix all issues and keep attackers out. More often than not, the solution is a painful process of educating users of what and what not to do, or upgrading an old system so that it can be appropriately supported by current vendors. However, these protocols and reminders are usually things that most board members and employees alike have grown tired of hearing about.A recent EY survey (conducted prior to the pandemic) of over 1,100 private company leaders, revealed that only 17% of those polled had made or planned on making significant investments in technology to reduce risk, including cyber risks. Additionally, 50% feared the reputational or operational disruptions caused by cyberattacks even as they began to invest in digital solutions. This is further exacerbated by the mindset of many smaller private organizations that do not pay particular attention to cybersecurity concerns until it’s too late.Since embedding a culture of cybersecurity in an organization needs to flow from the top, boards need to be more vigilant with their oversight of cybersecurity risks in today’s new work reality. They should consider the following questions:• With increased remote access, how is the company’s overall cybersecurity posture being optimized, and is the company evaluating whether additional technology and operations are secure?• Has management reviewed and tested all security features (e.g., point-to-point encryption, data protection) associated with the company’s videoconferencing tools, including patching, and are vulnerabilities mitigated if patches are not available?• What changes have been made to security monitoring procedures given the increase in remote workers? Are changes to user accounts with administrative or privileged access being more vigorously monitored?• Are security personnel effective while working remotely? What physical (in-person) security requirements are not being performed?• What are the contingency plans if key IT or security personnel require time off?• How is management maintaining an effective incident response and recovery function considering the need for additional remote access technology and operations?• Are there additional needs for software, technology, personnel or other resources to augment existing controls?• Are system updates and patching current?• Are employees reminded of security awareness protocols because of the increased risk of COVID-19 phishing e-mails or similar tactics?• Is management communicating with critical suppliers to determine if they are evaluating additional steps to assess and protect their networks?• Are incremental insider threats being evaluated, including revising print-from-home capabilities?• What security risks might there be that are related to employee layoffs and furloughs? Are the human resources and IT security teams aligned so that user-access privileges are immediately removed?• How is the IT security function affected if furloughs or budget cuts are executed or contemplated?• Should the company’s security personnel review or update board members and C-suite home networks for appropriate security?Cybersecurity in this unprecedented new work environment is an enterprise-wide concern that critically requires board mandate, support and oversight. The board needs to set the tone and the urgency of cybersecurity enhancements and preparation. As widespread remote working and increased online interactions become the new business “normal,” companies will need to reimagine and reinvent their business models.A company’s ability to adjust and strengthen its cyber resiliency in response to the dynamics of this health crisis will position the entire organization for a more secure future as new and varied challenges arise.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Carlo Kristle G. Dimarucut is a Consulting Partner of SGV & Co.

15 February 2021

Judy J. Castroverde

Tax relief from net operating losses: Useful or futile?

The prolonged community quarantines during the pandemic have caused a significant reduction in economic activity. Sectors and industries deemed non-essential experienced closures or resorted to reducing their staff, which resulted in low productivity. Various establishments were challenged with low demand for their products and services, ultimately leading to a decrease in net operating income — or worse — to net operating losses.From a tax perspective, can businesses still recover their net operating losses arising from the effects of the pandemic?To address the impact of COVID-19, the Senate and the House of Representatives enacted Republic Act (RA) No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II) effective Sept. 15, 2020 with an original expiry date of Dec. 19, which has since been extended to mid-2021. Bayanihan II provides for COVID-19 response and recovery interventions and mechanisms to accelerate the recovery and to bolster the resiliency of the economy.The extension of Bayanihan II to June 30 was signed on Dec. 29, in the form of RA 11519.CARRY-OVER OF NET OPERATING LOSSESAmong the response and recovery interventions provided under Bayanihan II are the carry-over of net operating losses incurred by the business or enterprise for taxable years 2020 and 2021 as deductions from gross income (for purposes of computing net taxable income subject to regular corporate income tax) over the next five consecutive taxable years immediately following the year of such loss [Section 4 (bbbb) of the Bayanihan II].One of the features of Bayanihan II was a provision that Section 4 (bbbb) would remain in effect even after the expiration of the Act, provided that the deductions are claimed within the next five consecutive taxable years.In the implementing regulations [Revenue Regulations (RR) No. 25-2020 dated Sept. 30] of Bayanihan II, net operating loss is defined as the excess of allowable deductions or expenses (as enumerated in the Tax Code) over the taxable gross income of the business in a taxable year, whether calendar or fiscal year.Recently, the Bureau of Internal Revenue (BIR) clarified, through Revenue Memorandum Circular (RMC) No. 138-2020 dated Dec. 22, that the net operating loss carry-over (NOLCO) may be availed of under RR No. 25-2020 for taxpayers operating on fiscal-year reporting. The RMC enumerated fiscal years ending between July 31 and Nov. 30, 2020 and Jan. 31 to June 30, 2021 as falling within the taxable year 2020. Meanwhile, fiscal years ending between July 31 to Nov. 30, 2021 and Jan. 31 to June 30, 2022 fall within the taxable year 2021. Thus, net losses incurred by businesses or taxpayers during these fiscal years can be carried over as deductions from gross income for the next five consecutive taxable years.It should be noted that generally, under existing rules (Section 34 of the Tax Code and RR No. 14-01), the accumulated net operating loss of a business by individuals engaged in trade or business or practice of profession and domestic and resident foreign corporations can be carried over as a deduction from gross income only for the next three consecutive taxable years.WELCOME RELIEF FOR TAXPAYERSThe benefit granted under the Bayanihan II extending NOLCO for an additional two years is welcome relief for businesses that have been significantly affected by the pandemic and have suffered operating losses in 2020, as well as those still recovering and expecting negative results from operations in 2021.However, while a business may incur a net operating loss and is allowed NOLCO deductions in subsequent years, the corporation is still liable to pay the 2% minimum corporate income tax (MCIT). The MCIT is based on gross income if the same is higher than the 30% regular corporate income tax (RCIT) based on net taxable income. Accordingly, the extended NOLCO deduction may have no impact or relevance if the corporation pays MCIT.MCIT UNDER THE CREATE BILLAnother related development is the reconciled version of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which was ratified by the House of Representatives and the Senate on Feb. 1 and 3, respectively. It covers package 2 of the tax reform program, which proposes amendments to the corporate income tax system, among others, and provides for a reduction in the MCIT rate to 1% effective July 1, 2020 until June 30, 2023.However, this reduction in MCIT rate appears to provide temporary tax relief only during the period when businesses may possibly incur net operating losses due to the pandemic. For the enhanced or extended NOLCO to have significant impact during the period when businesses are supposed to have recovered and claimed NOLCO deductions, the effectivity period of the MCIT relief should ideally be consistent with the extended period of the NOLCO.It is hoped that, as legislators move forward with the CREATE Bill, the possibility of extending the period of MCIT relief is considered to better align the bill with NOLCO provisions of Bayanihan II. Otherwise, between 2023 and 2026, when net operating losses from 2020 and 2021 are allowed to be claimed as deductions, businesses may end up paying the 2% MCIT instead of taking full advantage of the extended NOLCO. Harmonizing these areas is believed to allow taxpayers to enjoy full tax relief and support.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.Judy J. Castroverde is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.