Suits the C-Suite

04 May 2020

Rosalie T. Lapuz

Annual reporting despite business interruptions

“Gradually and then suddenly” was how Ernest Hemingway described going bankrupt in The Sun Also Rises and the description seems to apply to the global response to COVID-19. The Securities and Exchange Commission’s (SEC) response also follows this pattern, making adjustments over a short period to address the effects of the Enhanced Community Quarantine (ECQ) on annual reporting. The SEC originally issued SEC Memorandum Circular No. 2 on Jan. 21, setting the period between April 20 and May 22 as the deadline for companies whose fiscal year ended on Dec. 31 to file their Annual Financial Statements (AFS). Companies whose fiscal year ends on a date other than Dec. 31 have a filing date of 120 calendar days from the end of their fiscal year. General Information Sheets (GISs), on the other hand, should be filed within 30 calendar days from the following dates based on the type of the corporation: a) Stock Corporations: date of actual annual stockholders’ meeting b) Non-Stock Corporations: date of actual annual members’ meeting c) Foreign Corporations: anniversary date of the issuance of the SEC License However, after the President declared a state of public health emergency, the SEC issued on March 12 SEC Memorandum Circular (MC) No. 5, Series of 2020 extending the filing of 2019 Annual Reports (ARs) as well as the applicable Quarterly Reports for 2020 and 2019 AFS. AR AND AFS DEADLINE EXTENSION Invoking its regulatory power under Sec. 5.1(g) of the Securities Regulation Code (SRC) and Sec. 179 (o) of the Revised Corporation Code (RCC), the SEC granted affected companies an extension, without penalty, to submit their ARs and/or AFS for the period ended Dec. 31. a) Companies with domestic operations only: until June 30 b) Companies with domestic and foreign operations: until June 30 or 60 days from the date of lifting of travel restrictions/ban by the authorities (whichever comes later). The extension is subject to the submission of a written request, confirmation and continuous observance of disclosure obligations for affected publicly-listed and non-publicly listed corporations. On March 18, two days following President Duterte’s ECQ declaration, the SEC issued a notice further relaxing the requirements for extension requests by dispensing with documents such as the sworn certification by the company’s President and Treasurer confirming that (1) its financial year-end is Dec. 31; (2) it has significant business operations or significant subsidiaries in areas/countries/territories affected by COVID-19, and (3) the preparation of AFS and timely completion of statutory audit of the company’s FS has been affected by travel restrictions, temporary suspension of business operations and/or measures imposed by the authorities or companies in response to COVID-19. The sworn certification by the company’s external auditor confirming 2 and 3 was also dispensed with. Instead, affected publicly listed corporations now need to submit the following requirements to avail of the extension: a) Upload SEC Form 17-LC (announced on April 8) via PSE Edge not later than five days before the regular filing deadline; b) Continuous observance of disclosure obligations under Republic Act No. 8799 or the Securities Regulation Code, and Philippine Stock Exchange’s Consolidated Listing and Disclosure Rules; and c) Indicative date to convene the Annual Stockholders’ Meeting. AR, AFS AND GIS FILING GUIDELINES Corporations whose preparation of financial statements or completion of statutory audits are not affected by the COVID-19 outbreak must file their ARs and/or AFS for the year ended 31 December 2019 within the periods prescribed under existing rules and regulations. Companies with fiscal years ending Nov. 30 also receive a similar extension. On March 18, the SEC issued SEC MC No. 09-2020, which provided the guidelines for the filing of the GIS during the COVID-19 outbreak and ECQ. a) If a company holds its Election of Directors, Trustees and Officers, the company must submit its GIS within 30 days from the actual meeting to designated channels. Companies are also required to submit printed copies within 30 calendar days from lifting of the ECQ. b) If the Annual Meeting and Election of Directors or Officers is not held due to COVID-19 health and safety reasons and the corporation has no remote communication facilities, the company reports the same to the SEC through a notice within 30 days from the original meeting date. The report should include a new date for election that is 60 days from the originally scheduled date. c) If the Annual Meeting of Election of Directors, Trustees or Officers is not held due to other causes, the company reports the same to the SEC within 30 days from the original meeting date, including a new date for election no later than 60 days from the originally scheduled date. d) If an election initially reported as not held due to COVID-19 precautionary reasons is verified as unrelated to COVID-19 upon application of a stockholder, member, director, or trustee, the same may nevertheless be considered as a non-holding of election due to other causes. e) If a company does not justify the non-holding of an election under the current circumstances, the SEC issues an order directing a notice stating the time and place of the election in accordance with Section 25 of the RCC. f) Companies will submit reports relating to the non-holding of annual meetings due to COVID-19 precautionary reasons and due to other causes to the SEC. g) Companies will report results of the election of directors, trustees, or officers subsequent to the report of non-holding of an election meeting for COVID-19 reasons and other causes, and which is held outside the covered period, to the SEC through a GIS submission within 30 days from the date of the actual election meeting. The GIS submitted pursuant to this paragraph is subject to penalty. In addition, in MC No. 10-2020 issued March 20, the SEC allowed the filing of the AFS, GIS and other general and special forms and letters through e-mail as long as the documents are in PDF format with electronic signatures. These e-mails must be sent as MIME (Multipurpose Internet Mail Extensions) from a valid company e-mail account or address of an authorized representative and include a declaration of authenticity, a commitment to submit physical copies after the ECQ is lifted, and a request for Return Receipt and Delivery Status Notification. The AFS and GIS may not be notarized. E-mails sent between 8 a.m. to 5 p.m. on a regular workday shall be considered filed within the day they were sent. ADAPTING TO UNCERTAIN TIMES After SEC MC No. 09-2020 comes into force, and upon evaluation of ongoing developments relative to COVID-19 and the ECQ, the SEC may further extend the covered period provided as deemed necessary. Given the current challenging business conditions, the SEC has proven its ability to take timely and decisive action to help businesses cope with their reportorial obligations. Companies, organizations and other regulatory groups that wish to survive and quickly recover after the pandemic would do well to also take purposeful steps of their own, not gradually and suddenly but with a sense of urgency and resoluteness. 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. Rosalie T. Lapuz is a Senior Director from the Business Tax Services Service Line of SGV & Co.

27 April 2020

Editha Viray-Estacio

Is your business COVID-19 resilient?

The World Health Organization (WHO) has declared COVID-19 a public health emergency of international scale, impacting governments and businesses alike with unprecedented disruption and risks. Companies continue to feel the business and financial shocks caused by the pandemic. COVID-19 has become a black swan event, unpredictable and with potentially severe consequences. As companies navigate the COVID-19 crisis, there are a number of key issues corporate leaders should be thinking about, as well as steps they can take to reshape their business and plan for recovery. Global companies have to be predictive and proactive in their decision-making to preserve continuity and build resilience. As global companies grapple with an ongoing and evolving situation, we have identified five priorities for them to consider. PRIORITIZE PEOPLE SAFETY AND CONTINUOUS ENGAGEMENT Ensuring the safety and well-being of employees in the workplace is essential. People look to their employer, community and government leaders for guidance. Addressing their concerns in an open and transparent manner will go a long way towards engaging them and reassuring them of business continuity. One of the adjustments companies have to make is to initiate or expand flexible work arrangements and other policies that allow people to work remotely and safely. Depending on the sector, companies will want to reorganize teams and reallocate resources. Additionally, companies will want to produce regular communications that align with current government and health authorities’ policies to help employees remain engaged as they and the organization navigate through the crisis. Finding ways to reimagine a business-as-usual environment that minimizes disruptions for the organization requires a fine balance. Where telecommuting or flexible work arrangements aren’t possible and companies must have workers on site or in direct contact with customers, it is important to provide measures to protect against infection. RESHAPE STRATEGY FOR BUSINESS CONTINUITY As mentioned, almost all businesses are likely to experience significant disruption to their business-as-usual operations and will experience underperformance throughout the duration of the COVID-19 crisis. This is especially true for companies that either operate in or are exposed to countries with significant outbreaks of the coronavirus. These companies will experience disruption to their supply chain and production commitments. To help address these challenges, companies must: Evaluate short-term liquidity. Companies have to instill short-term cash flow monitoring discipline that allows them to predict cash flow pressures and intervene in a timely manner. They will need to maintain strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. Additionally, it will be important to be creative and proactively intervene to lighten the working capital cycle. Assess financial and operational risks and respond quickly. Companies will need to monitor direct cost escalations and their impact on overall product margins, intervening and renegotiating new terms where necessary. Just as companies need to monitor their in-house vulnerabilities, they also will need to monitor the pressures that may be impacting some of their customers, suppliers, contractors or alliance partners. Finally, they need to be aware of covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values, which may impact the health of the overall balance sheet. Consider alternative supply chain options. Companies that source parts or materials from suppliers in areas significantly impacted by COVID-19 must look for alternatives. Such quick moves will create the temporary capacity to meet customer obligations. Companies that have arrangements with agile manufacturing facilities to make spot buying decisions — or have loose contractual arrangements with various service providers and logistics providers — should consider the initial disruption as well as post-crisis scenarios given the potential for demand spikes. Determine how the COVID-19 crisis affects budgets and business plans. Companies will want to stress-test financial plans for multiple scenarios to understand the potential impact on financial performance and assess how long the impact may continue. Based on the outcome of the assessment, companies may need to look at near-term capital raising, debt refinancing or additional credit support from banks or investors, or policy supports from the government. At the same time, companies will need to review overall operating costs and consider either slowing down or curtailing all non-essential expenses. COMMUNICATE WITH RELEVANT STAKEHOLDERS Clear, transparent and timely communications are necessary when creating a platform to reshape the business and secure ongoing support from customers, employees, suppliers, creditors, investors and regulatory authorities. • Customers. Keep customers apprised of the impact on product or service delivery. If contractual obligations cannot be met as a result of supplier or production disruption, it is important to maintain open lines of communication to revisit timelines or invoke “force majeure” or “act of God” clauses. Such proactive action will help to mitigate punitive damages or liabilities associated with disrupted customer obligations. • Employees. Find the balance between cautioning your people and maintaining a business-as-usual mindset when communicating with employees. • Suppliers. Maintain regular contact with suppliers regarding their ability to deliver goods and services and their own recovery plans. This helps enable the company to consider alternative supply chain options in a timely manner. • Creditors and investors. Review terms and conditions on loan contracts to identify and avoid vital technical debt breaches. These reviews will have the added benefit of giving companies a chance to proactively manage the dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing arrangements. • Government and regulators. Consult with legal and risk management teams for advice on potential exposures. MAXIMIZE THE USE OF GOVERNMENT SUPPORT POLICIES Companies should monitor government and organizational opportunities for support and how they may best serve the individual circumstances of their organization. For instance, the Department of Labor and Employment (DoLE) has said that a P1.3-billion financial assistance program will be given for workers affected by the enhanced community quarantine in Luzon. Under the COVID-19 Adjustment Measures Program, each worker will receive P5,000 in cash to be processed through the companies’ payroll system. Companies should monitor the availability of these kinds of programs and use them to mitigate the risks they face. BUILD RESILIENCE IN PREPARATION FOR THE NEW NORMAL Once companies have solidified strategies based on stress tests and communicated any new directions with relevant stakeholders, they will need to execute revised plans while monitoring what continues to be a fluid situation. Senior management should report any material deviation from the plan in a timely manner so that their companies can take additional action to avoid further negative impact. Once the COVID-19 pandemic is controlled, companies will want to review and assess business continuity plans. If there are deficiencies, identify root causes, whether it’s timeliness of action, a lack of infrastructure, labor shortages, or external environment issues. Companies will then want to consider putting new internal guidelines in place based on lessons learned, as well as solid contingency plans to build resilience and better respond to future crises. WHAT COMES NEXT? As a black swan event, the COVID-19 crisis is impossible to predict. However, there are many lessons companies can learn and carry forward once the crisis has passed and a chance is provided to analyze their response. In the meantime, companies should be making decisions and taking action during this crisis with recovery in mind. When the crisis is over, it will be clear which companies have the resilience and agility to reshape their business strategy to thrive in the 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 opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Editha Viray-Estacio is a Partner from the Transaction Advisory Services of SGV & Co.

20 April 2020

Marie Stephanie C. Tan-Hamed

Testing your capital agenda amid COVID-19

We are currently in an unprecedented global crisis, and every country is struggling to deal with outbreaks of COVID-19 in their respective jurisdictions. Luzon is still in the midst of an enhanced community quarantine with other parts of the country rapidly following suit. We are faced with rising COVID-19-positive cases with our frontliners and health care system being pushed to the limits. The pandemic has brought massive disruption to our daily lives and livelihoods; businesses are being shaken all around the world. The pandemic-related disruption presents different and more complex challenges compared to typical business disruptions in the dimensions of scale, velocity, duration, workforce shortage, external coordination and infrastructure availability. As private companies continue to grapple with the evolving situation, they have to be proactive and predictive in their decision-making to preserve continuity and build resilience. It is more imperative now to test the companies’ commitment to their Capital Agenda. Our EY Capital Agenda framework presents COVID-19 considerations for companies to consider in today’s current business predicament. INVESTING — BUY AND INTEGRATE If you are in the middle of an acquisition: a. Consider the impact on the closure process — should you close early or postpone the acquisition? b. Ask for further scenarios that stress test the original assumptions underlying the maintainable earnings, cash flows and cost implications. c. Revisit the robustness of your supply chain set up, working capital and short-term liquidity risks. d. Reconsider the overall synergies and your other exposures. If you are in the middle of a major capital program: a. Revisit the feasibility of the entire project; b. Revisit the revenue, cost estimates, and project timelines; c. Review any delay exposures, liquidity damages and mitigation options. Look for new business models and emerging investment opportunities. DIVESTING — SELL AND SEPARATE If you are in the middle of a divestment: a. Assess the impact on the forecast cash flows, working capital, profitability and balance sheet of the business to be sold. b. Assess the robustness of the supply chain set-up. c. Assess the timing of the sale, the impact on the potential buyers, and pricing expectations. d. Increase the frequency of reporting the overall results, risks and mitigating factors through data and smart analytics to the potential buyers. If you are in the middle of a fund-raising exercise: a. Reconsider the pricing and timing of the transaction, especially if it is through public markets. b. Reconsider the purpose, timing and deal terms. c. Explore alternative options. If the business is significantly impacted, then management will need to assess the company’s short-term liquidity needs and funding options. OPTIMIZING — CORPORATE FINANCE Review the supply chain resilience: a. Consider inventory levels for critical components. b. Anticipate possible supplier disruptions and consider alternatives. c. If multi-sourced, optimize production and logistics locations from impacted cities to alternative locations. Scenario plan for short-term and medium-term recovery cycles. Explore synergies across your business portfolio by leveraging common customers, suppliers and financing sources. Explore restructuring options for the capital base — e.g. share buybacks, debt restructuring. Explore cost/financing mitigation options embedded in existing contracts, insurance arrangements and government incentive programs. PRESERVING — RESHAPING AND RESTRUCTURING Consider employee well-being, communication and continuous engagement. Prepare for multiple scenarios with staged action plans for prolonged employee and customer commitment, and supply chain disruptions. Set up short-term cash flow monitoring; scenario plan for short and medium-term disruptions to the business and assess your cash flow needs. Assess working capital management measures; proactively plan and intervene to prevent inventory build-up and collection challenges for receivables. Immediate implementation of cost savings and profit improvement plans. Review the impairment risk of assets; anticipate any potential breach of financial covenants. Undertake deep supply chain risk assessments. Anticipating, planning and forecasting for business disruptions are already complex and difficult exercises, but companies traditionally have past experience, conventional wisdom and corporate finance tools to guide them. However, in this unprecedented crisis, it may prove impossible to some. Despite the challenges, however, companies need to take stock of their current business models, plan for recovery, and prepare for a new normal once the pandemic has been contained and, eventually beaten. After this crisis is over, those who will emerge are those companies that are resilient and agile enough to reshape their business models as they prepare for a post-COVID 19 world. 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. Marie Stephanie C. Tan-Hamed is a Transaction Advisory Partner of SGV & Co.

13 April 2020

Noel Andro D. Bico

Tax breaks in these trying times

As we discussed in the first part of this article, the tax system in the Philippines has been significantly affected by the strict implementation of the enhanced community quarantine (ECQ) and social distancing measures imposed by the Government to address the COVID-19 crisis. With the extension of deadlines for 2019 annual income tax returns (ITRs) and other tax filings, the Bureau of Internal Revenue (BIR) also relaxed the deadlines for other tax reportorial requirements. The BIR also introduced and implemented new policies to ensure continuous operations and for duties to be fulfilled despite the ECQ and in the spirit of service to the community. More recently, Finance Secretary Carlos G. Dominguez III, with the recommendation of BIR Commissioner Caesar R. Dulay, promulgated Revenue Regulations (RR) No. 7-2020, implementing Section 4 (z) of Republic Act (RA) No. 11469, otherwise known as the Bayanihan to Heal as One Act, particularly on the extension of statutory deadlines and timelines for the filing and submission of any document and the payment of taxes. Note that the deadline extensions mentioned in the first part of this article are consistent with the recently issued RR except for the following: • The required submission of attachments to e-filed annual ITR was moved to June 1 • The provision qualifying the application of the tax filing extensions to certain jurisdiction was not mentioned In the second part of this article, we discuss these additional BIR initiatives during the ECQ. FILING AND SUBMISSION OF TAX ASSESSMENT CORRESPONDENCE: In view of the suspension of offices under the Executive Branch, the BIR issued Revenue Memorandum Circular (RMC) No. 31-2020 on March 23 that gives taxpayers 30 days from the date of the lifting of the ECQ to submit the following documents: • Letter Answer to Notice of Informal Conference (NIC) • Response to the Preliminary Assessment Notice (PAN), Protest Letter to Final Assessment Notice (FAN)/Formal Letter of Demand (FLD) • Submission of relevant supporting documents to support the requirements for re-investigation of audit cases with FAN/FLD • Appeal/Request for Reconsideration to the Commissioner on the Final Decision on Disputed Assessment (FDDA) and other similar letters and correspondences with due dates The extension applies to taxpayers whose response to the revised NIC, PAN, FAN, FLD, FDDA, and other similar notices fall due within the ECQ period. The extension also applies to other jurisdictions where concerned Local Government Units (LGUs) have adopted and implemented the ECQ measures. We should note that the deadline extension is consistent with RR No. 7-2020. However, it does not provide for any qualification on the jurisdictions to which such extension shall apply. Consequently, target collection from covered tax assessments by the concerned jurisdictions may be delayed, potentially adding to the expected shortfall in tax collections from 2019 annual income tax filings. FILING OF CERTIFICATE OF RESIDENCE FOR TAX TREATY RELIEF (CORTT) FORMS: A deadline extension was also given to parties concerned with the filing of the CORTT Form through the issuance of RMC No. 32-2020, dated March 20, and RR No. 7-2020. As a brief background, on March 28, the BIR issued Revenue Memorandum Order (RMO) No. 8-2017 to modify the procedure for availing of tax treaty benefits on the payments of dividends, interest, and royalties to non-residents. It provides that, in lieu of the tax treaty relief application (TTRA) required by RMO No.72-2010, preferential treaty rates for dividends, interests and royalties shall be applied and used outright. Under the procedure, non-residents claiming tax treaty relief shall submit a duly accomplished CORTT Form to the International Tax Division (ITAD) and Revenue District Office (RDO) within 30 days after payment of withholding taxes due on the dividend, interest and royalty income of non-residents based on the applicable tax treaty. Previously, the filing of COURT Forms for final withholding taxes on said income types paid on or before March 10 were to be made on or before April 13. This has been extended to April 30 without penalty. AVAILING TAX AMNESTY ON DELINQUENCY: Also extended is the period to avail of the tax amnesty on delinquency covering the taxable year 2017 and prior years. President Duterte signed Republic Act (RA) No. 11213, which includes the Tax Amnesty on Delinquency. The BIR then issued Revenue Regulations (RR) No. 4-2019 to implement the rules on tax amnesty on delinquency effective April 24, 2019.ÊThe provisions of RR No. 4-2019 were further amended by RR No. 5-2020, particularly on the duration that it may be availed of given current conditions. Most recently, the BIR issued RMC No. 33-2020 dated March 24, extending the deadline on availing of tax amnesty on delinquencies under RR 4-2019, as amended by RR No. 5-2020, to May 23.ÊSuch extension was also consistent with RR No. 7-2020. ACCEPTING TAX RETURNS: The BIR implemented policies in relation to accepting 2019 annual ITR and other tax returns with due dates that fall within the ECQ. On March 23, the BIR issued Bank Bulletin No. 2020-03 to reiterate the relevant responsibilities of authorized agent banks (AABs) in connection with the “file and pay anywhere” rule provided by the BIR under RMC No. 28-2020 to ease the process of filing and paying the 2019 annual ITR. It authorizes all AABs to accept payments of 2019 annual income tax until May 15 without imposing penalties. The same 30-day extension applies to payments of tax returns with due dates that fall within the ECQ, including out-of-district returns. LGU INITIATIVES: Certain LGU offices in the National Capital Region announced the deadline extension for real property taxes and other local business taxes. Hopefully, other LGUs nationwide will follow suit. WHAT TO EXPECT: With the rising number of positive COVID-19 cases in the country, government may become more stringent in implementing ECQ measures. Despite this, the tax authorities are doing their share to help ease the burden on taxpayers. We cannot tell where this pandemic will take us or when it will inevitably end. What we do know is that in the middle of this uncertainty, we are all reminded of one enduring Filipino value — solidarity. Given the very limited options that taxpayers have during the ECQ, one of our best expressions of solidarity would be to comply with our tax obligations that will provide the government with the much-needed resources to overcome this adversity and for the good of the nation. The deadlines and timelines mentioned in this article are pursuant to the Author’s understanding of the existing administrative issuances of the BIR as of the date of writing. These may be subject to change in light of the recently passed RA No. 11469 or the Bayanihan to Heal as One Act, which authorizes the President to move statutory deadlines and timelines for the submission of documents and payment of taxes, fees, and other charges required by law, among others. 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. EYG no. 001665-20Gbl Noel Andro D. Bico is a Senior Associate from the Global Compliance & Reporting Sub-Service Line of SGV & Co.

31 March 2020

Noel Andro D. Bico

Tax breaks in these trying times

The government has announced several measures to contain the spread of COVID-19. President Rodrigo R. Duterte has placed Luzon under enhanced community quarantine and imposed stringent social distancing measures, with the entire country under a state of emergency. With the goal of protecting the health and safety of all taxpayers from the further spread of COVID-19, the Bureau of Internal Revenue (BIR) issued specific guidelines/circulars to be observed during the quarantine period. In Revenue Memorandum Circular (RMC) No. 25-2020 dated March 16, the BIR originally maintained its position that no extension of deadline shall be provided for the filing of 2019 annual income tax return (ITR) despite the quarantine being strictly implemented. However, considering the limitations in preparing the annual ITR and possible errors in determining the income tax due, taxpayers can amend the annual ITR filed, provided the concerned taxable period has not yet been subject to an audit. The additional income tax liability resulting from any amendment is to be paid without penalties if paid on or before June 15. The same circular also encouraged taxpayers, even those not required, to use the electronic filing facilities of the BIR (e.g., the electronic filing and payment system [eFPS] and eBIR Form Facility) to limit taxpayers’ movements and possible exposure to the virus. However, various stakeholders and associations raised concerns that the measures being implemented by the national government will have a significant impact on meeting the existing tax, accounting and auditing requirements. There may be delays in auditing the balances of companies and businesses due to, among others, fieldwork or meetings suspended and the work from home scheme enforced. ITR DEADLINE EXTENSION Fortunately, the BIR issued RMC No. 28-2020 dated March 18, amending RMC No. 25-2020. This amendment extends the filing deadline of the 2019 annual ITR and payment of the tax originally due on April 15 to May 15, without the imposition of penalties. Under this circular, taxpayers may file and pay the corresponding taxes due at any Authorized Agent Banks (AABs) nearest to the location of the taxpayer or to any Revenue Collection Officer (RCO) under the Revenue District Office (RDO). In other words, taxpayers may file and pay at their most convenient location. According to the press release of the Department of Finance (DoF), these emergency measures are offered to provide relief to taxpayers who will not be able to prepare, let alone file, the necessary ITR documents on or before the original annual deadline of April 15 because of minimal-staffing arrangements and enhanced community quarantine rules. In addition, the DoF estimated a shortfall in tax collections of around P145 billion, for which the national government may have to make up for with additional borrowing. Hence, the BIR urges taxpayers who are ready and able to file their ITRs to do so on or before the original deadline. DEADLINE EXTENSION FOR TAX RETURNS AND ATTACHMENTS The BIR likewise provided deadline extensions for other tax filings. On March 19, BIR Commissioner Caesar Dulay issued RMC No. 29-2020, amending RMC No. 26-2020 by extending the deadlines (by approximately one month) for the filing of various returns and payment of taxes due. Consequently, the BIR collection of taxes related to such tax filings may be delayed by approximately one month. The provisions of RMC No. 28-2020 (extension of deadline for filing of annual ITR and payment of the related income tax due) and RMC No. 29-2020 (extension of deadlines for filing of various returns and payment of related taxes due thereon) were further amended and clarified by RMC No. 30-2020 dated March 23. Under this circular, the required attachments for the filing of annual ITR are to be submitted on or before May 15. Moreover, deadlines were extended for other reportorial requirement submissions and one-time transaction (ONETT) payments. In general, a 30-day extension will be granted in case the deadline falls within the quarantine period. RMC No. 30-2020 also provided clarity by addressing inadvertent errors on the due dates in the filing of certain tax returns and payment of the related tax due thereon under RMC No. 29-2020. We should note that the BIR qualifies the application of the circular to Luzon, including the National Capital Region (NCR), which are under enhanced community quarantine and/or similar measures, and to other jurisdictions where Local Government Units have also adopted such measures. VAT REFUND APPLICATION EXTENSION Aside from the deadline extensions of these various tax returns and attachments, the BIR also extended the deadline for the filing of Value Added Tax (VAT) refund applications and the 90-day processing period through the issuance of RMC No. 27-2020 dated March 18. This allows the filing of VAT refund applications covering the quarter ended March 31, 2018 to still be accepted until April 30, 2020. The original deadline was March 31, this year. The 90-day processing period is also suspended for VAT refund claims that are currently being evaluated and those that may be received from March 16 to April 14. The counting of the number of processing days will resume after the enhanced community quarantine is lifted. CONDUCTING FIELD OPERATIONS Similarly affected is the conduct of audit/investigation/other field operations by revenue officials and employees. In relation to this, Deputy Commissioner (Operations Group) Arnel SD. Guballa, issued Operations Memorandum No. 20-2020 dated March 17. Under this memorandum, Revenue Officers will continue to work on their assigned cases, whether prescribing or not, based on the documents previously submitted by the taxpayers to the BIR and other information available to the Bureau. Officers are encouraged to work from home but without sacrificing the security of the data and information being handled. Non-prescribing audit cases which are still lacking documentary evidence were given a 30-day extension for the submission of the report of investigation. In addition, field audit/investigation, any form of business visitation or any field operations have been suspended. Likewise, personal service of electronic Letters of Authority (eLAs), Notice of Informal Conference, Discrepancy Notices or Missions Orders have been temporarily shut down during the quarantine period. Should a taxpayer appear in the BIR office to submit documents, such documents are to be received without delay and without further verbal discussion with the taxpayer in order to limit contact and maintain social distancing. In summary, the extended deadlines are as follows: • ITR filing — May 15 • Tax returns & attachments — May 15 • Additional tax liabilities — 30-day extension • VAT refund applications — April 30 • Non-prescribing audit cases lacking documentary evidence — 30-day extension FACING THE CHALLENGES While the government endeavors to address every Filipino’s need for basic services, health and safety, it is imperative that we as taxpayers likewise fulfill our duties and obligations as citizens. In our current situation, the maxim that taxes are the lifeblood of the country has never been more apt. However, life — and taxes, as the main source of government resources — must go on. Without taxes, government agencies cannot continue to operate. Hence, the need to collect taxes must necessarily be balanced against other interests. The deadlines and timelines mentioned in this article are pursuant to the author’s understanding of the administrative issuances of the BIR as of the date of writing. These may be subject to change in light of the recently passed RA No. 11469 or the “Bayanihan to Heal as One Act,” which authorizes the President to move statutory deadlines and timelines for the submission of documents and payment of taxes, fees, and other charges required by law, among others. 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. EYG no. 001498-20Gbl Noel Andro D. Bico is a Senior Associate from the Global Compliance & Reporting Sub-Service Line of SGV & Co.

25 March 2020

Conrad Allan M. Alviz

Are you ready for the data-driven digital era?

Digital technologies offer new opportunities to create value by leveraging data captured while companies carry out business as usual. However, while most companies embark on data-driven digital transformation, many still struggle to 1) determine the right data strategy that allows them to become a truly data-driven organization and 2) properly manage and govern their data. In fact, data management and governance ranked as the second top IT challenge identified by business tech leaders after IT security and privacy. As data increases in scale and complexity, some organizations remain fragmented and still work in silos to collect, transfer, process, analyze and store their growing data. Many companies cannot adapt to these changes and find themselves stuck in the archaic way of managing data. As companies work to innovate and go digital, management must strike a balance between the need to implement information security mechanisms and effective data management, including but not limited to data quality, data governance and data protection. Based on research, consumers of data spend 80% of their time looking for and cleansing data, and only spend 20% of their time analyzing and transforming data into valuable information to drive sound decision-making. This highlights the need for companies to reassess their data management strategy as well as their governance structure to better manage their data. Initiating data management and governance can seem daunting, considering how these cannot be confined to one corner of an organization. They can only be effectively managed through collaborative efforts between business departments and IT. Companies also need to govern their data environment regardless of the type of data and where it resides. A sound data management and governance program helps an organization achieve its desired targets over time to support its business objectives, while upholding data integrity and consistency accelerates the deployment of business activities and can reduce the cost of owning data. With this, companies should start by looking at their data sources and make sure that there are sound strategies and robust policies in place to protect the integrity of their data. There are many reasons why data management and governance programs fail, or at least, underperform. A company’s data governance strategy and policies may not be established nor well-defined, or data management itself is either viewed as an academic exercise or treated like a finite project. Executives may also isolate data as an “IT issue,” leading to business units and IT not working together to manage data in a structured and repeatable manner. It’s possible that the company’s unique culture is not taken into account, or that company personnel are already overloaded and can no longer handle governance activities. To revisit their data management strategy and governance mechanisms, companies can take the following items into consideration. ALIGNING DATA GOVERNANCE STRATEGY Companies must first define what data management and governance mean to their business. There should be a clear understanding of their business goals, since these will drive the company’s data strategy and scope. The scope is then defined based on priorities and the level of governance that fits the company culture. Establishing data governance will impact the whole organization. Placing strong focus on the company’s change management and communications approach is vital for successfully implementing and sustaining a data governance strategy. Everyone in the organization needs to understand the purpose of treating data as a strategic asset as well as their role in this shift. Lack of ownership can be a very challenging issue, especially during the early stages of implementation. Companies should also formalize their data governance committee and clearly define roles and responsibilities while ensuring that the responsibility does not rest solely on IT. Since data governance requires the collaboration of the entire organization, management support is the most significant component when starting a governance program. ESTABLISHING FORMAL DATA GOVERNANCE POLICIES Policies intend to establish ground rules that must be followed within the organization. They should enable the right people and the right steps to be taken at the right time. Data must be managed as an important asset of every organization. Formal accountability should be put in place while compliance is ensured with the relevant regulations, especially on data privacy and security. Data quality must also be consistently managed across the entire data life cycle. Management should establish a periodic review and approval cycle to ensure that data governance policies stay relevant and responsive to the fast-changing business landscape. Proper key performance indicators (KPIs) must be agreed upon and put in place when the data strategy is implemented. PROFILING YOUR DATA AND COMPLETING A DATA CATALOGUE A company should be aware of what data it has on hand, making it imperative to establish a data catalogue which becomes the heart of the data governance framework. As a living document, the data catalogue is subject to changes to accommodate the organizational (business and technology) landscape. Companies must know where they use their data as well as why it captures, stores and uses the data. A data catalogue should help entities define their data, identify data owners and a data custodian to establish accountability, and define data quality measures to ensure data integrity, confidentiality and availability. This allows management to rely on a single source of truth to support their decision-making. SELECTING THE APPROPRIATE TECHNOLOGY There are several technologies available that can provide visualization of the quality of data that a company decides to master. This can be achieved by utilizing efficient design technology that provides accessibility and the seamless integration of data across all systems. It should also be noted that in selecting a design solution, cybersecurity is a key area of consideration. Establish checks and balances to monitor data quality on a regular basis, the frequency of which depends on the required availability of top critical data elements. One way to achieve this is to implement audits and to monitor KPIs, as well as to continuously evaluate and improve the company’s data governance program. UTILIZING A VALUABLE RESOURCE Companies can no longer ignore data as a resource nor overlook its management to properly maximize its value. As companies continue to become more data-driven, their success will ultimately depend on their ability to manage and utilize a coherent view of their data. Better data — and a clearer view of what that data means — can give valuable insights that ultimately allow companies to make well-informed decisions in the face of change and growth. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Conrad Allan M. Alviz is a Senior Director from the Advisory Service Line of SGV & Co.

16 March 2020

Erickson Errol R. Sabile

Will it be endgame now for 5% GIT?

Once again we wait to see if the Corporate Income Tax and Incentives Rationalization Act or the CITIRA bill (either House Bill No. 4157 or Senate Bill No. 1357) will pass into law this month. The bill is being repackaged for the third time after its predecessor bills were no legislated (TRAIN 2 and TRABAHO). If passed, CITIRA is expected to have a strong impact on Philippine Economic Zone Authority (PEZA)-registered firms. For PEZA-registered firms availing of the 5% Gross Income Tax (GIT) incentive, the withdrawal of the privilege would eventually mean a reassessment of their direct costs and expenses that would qualify as deductions in light of Revenue Regulations (RR) No. 11-05 — Definition of Gross Income Earned. This makes it an ideal time for companies to prepare for the eventual implementation of CITIRA by conducting simulations and evaluations using their most recent balances. DEDUCTIBLE EXPENSES FOR 5% GIT UNDER THE EXISTING PEZA LAW Favorably for PEZA-registered firms under 5% GIT, the Court of Tax Appeals (CTA) in recent years has been consistent with its interpretation that the list of direct costs in RR No. 11-05 is not exclusive but merely enumerates the expenses that are in the nature of direct costs. Thus, PEZA-registered entities may be allowed to deduct expenses which are in the nature of direct costs even if they are not specifically included in the list provided in RR No. 11-05. However, these items must be directly attributable to the entity’s PEZA-registered services/activities. The same position — that the list of expenses provided by RR No. 11-05 is not exclusive but merely instructive — was carried on in the recent CTA En Banc (EB) Case No. 1809-10 dated Nov. 14, 2019 (Moog Controls Corporation-Philippine Branch vs CIR). Moreover, Moog was able to prove that expenses (i.e., repairs and maintenance, data processing expense, building insurance expense and outside services) claimed under 5% GIT were directly related to its registered activities, and hence allowed as deductions under 5% GIT. However, it is worth pointing out that while a number of recent court decisions held by the CTA adopted the non-exclusivity of the list of expenses under the mentioned RR, the CTA has also disallowed the inclusion of certain expenses such as accident/life insurance, equipment and uniforms for on-the-job trainees, employee activities (e.g. holy mass for Sto. Nino Feast, Ping-Pong tournament expenses, treadmills for physical fitness clubs), non-technical training and development, the Department of Energy (DoE) electrification fund, general office expenses, business expenses, taxes and licenses for being unrelated to the rendition of PEZA-registered services. (CTA EB Case No. 1207 dated Feb. 3, 2016, East Asia Utilities Corp. vs. CIR) Needless to say, it is crucial that adequate documents (e.g., journal vouchers, accounts payable voucher, invoices/receipts) are maintained to support that the expenses can be attributed to the rendition of the PEZA-registered activity. (CTA Case No. 8508 dated Sept. 1, 2014, Medtex Corporation vs. CIR) 5% GIT UNDER CITIRA HOUSE AND SENATE BILLS While both CITIRA versions of the House and Senate seek to lower the regular corporate income tax rate and rationalize the tax incentives currently enjoyed by entities with special registration (e.g., PEZA–registered firms), each bill has its own proposed provision on the continuation of incentives granted before it takes effect as a law. HOUSE BILL NO. 4157 In the House version, registered activities granted an Income Tax Holiday (ITH) shall be allowed to continue and the incentive may be availed of for the remaining period of the ITH or for only five more years (whichever comes first). This is allowed provided that the 5% GIT shall commence only after the ITH period has lapsed; and further, that the 5% tax on gross income earned shall be allowed to continue for periods based on a schedule that varies depending on how many years the current tax incentive is being enjoyed (up to a maximum of five more years). After the lapse of the 5% GIT period, the regular corporate income tax rate shall take effect. At the same time, this version grants ITH, a reduced corporate income tax of 18% or enhanced deductions for commercial operations dependent on location. For example, companies in the NCR can enjoy up to three years ITH and up to two years reduced corporate income tax rate. Areas adjacent to Metro Manila get slightly longer periods, while all other areas can get up to six years ITH and four years reduced corporate income tax. The bill also states that the regular corporate income tax rate will be reduced by 1% every two years from 2022 until 2030. SENATE BILL NO. 1357 In the Senate version, registered activities only granted an ITH can continue to enjoy the incentive for the remaining period of the ITH. On the other hand, the 5% tax on the gross income of registered activities granted prior ITH (where the ITH will expire within five years once CITIRA takes effect) shall commence only after the lapse of ITH and shall continue for the remaining period (but not to exceed five years). Further, the 5% tax on gross income earned shall, similar to the House version, be allowed to continue for periods based on a schedule that varies depending on how many years the current tax incentive is being enjoyed, up to a maximum of five more years. Interestingly, the Senate version added a provision extending the sunset period for availing of 5% tax on gross income up to seven years for firms that export 100% of output, employ 10,000 Filipino workers in the incentivized activity, or are engaged in “footloose” manufacturing, which are operations outside of Manila that export manufactured goods and have a designated labor to asset ratios for a period of time before CITIRA. Similar to the House version, the Senate version grants an ITH followed by a special corporate income tax rate (SCIT) or enhanced deduction whose durations are based on the registered enterprise’s location and industry tier, with the caveat that the total period with incentives not last more than 12 years. The Senate version, however, sets the SCIT at 8% of the gross income earned in lieu of all national and local taxes, rising 1% per year until it reaches 10% in 2022 and onwards. Nevertheless, the determination of what constitutes direct costs will remain relevant during the sunset years of existing registered activities under the 5% GIT prior to CITIRA, and likewise under the new SCIT rates proposed by the Senate in this version. We should also note that PEZA-registered activities that qualify for registration under the strategic investments priority plan (SIPP) may opt to be governed by the provisions under both House and Senate versions of CITIRA. In such a case, such enterprises will have to surrender their Certificate of Registration, signifying their intent to waive the incentives they previously enjoyed. WHAT CAN BE DONE IN THE MEANTIME? At this point, knowing that the 5% GIT regime may slowly fade out of the picture once CITIRA takes effect, it would be prudent for PEZA-registered firms to evaluate the law’s impact on their current and future operations by way of a simulation using the most recent account balances. PEZA-registered firms should consider the following scenarios: • The companies continue to avail of their current incentives as PEZA-registered entities. • The companies opt to waive their privilege to avail of the incentives as PEZA-registered entities: 1. Where the registered activities of the companies qualify for registration under the SIPP. 2. Where the registered activities of the companies does not qualify for registration under the SIPP. By carefully conducting this gap analysis, PEZA-registered firms will be better able to evaluate if it is better for them to maintain their current incentives or to deregister from PEZA and instead fall under the new provisions of CITIRA. As with many projection matters, advance knowledge and the results of the simulation are often invaluable in helping companies decide on their way forward. By using real data from the company’s most recent balances, the simulations then become even more accurate and relevant to the company’s actual operations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Erickson Errol R. Sabile is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

10 March 2020

Ma. Theresa M. Abarientos-Amor

How to make digital taxation click

Digital technology has undoubtedly revolutionized the world economy. With the growing popularity of online shopping in particular, businesses can reach consumers without needing a physical location. The increasing digitization of the world economy has not only made the sale of goods and services instantaneous and efficient — it has also provided a convenient way for consumers to purchase goods without having to waste time being stuck in heavy traffic. According to research pioneered by Google, the internet economy in Southeast Asia hit the $100 billion mark in 2019. By 2025, the internet economy is projected to grow to $300 billion. These numbers indicate a significant opportunity for tax authorities to not only regulate appropriately, but to also tap this source for additional government revenue. CROSS-BORDER ONLINE TRANSACTIONS In 2013, the BIR issued Revenue Memorandum Circular (RMC) No. 55-2013 to set the tone for companies operating in the digital market. By reiterating the obligations of parties in online transactions, the Circular sought to enforce our tax laws in the digital economy. However, the Circular has yet to address cross-border online transactions, or how taxes will be imposed on non-residents for online sales to local consumers. One apparent reason for this may be the inadequacy of our present tax laws as basis for taxing this type of transactions. Like most jurisdictions, the Philippines relies on physical presence or locus of activity within the country as a condition for the imposition of taxes. Tax treaties are likewise framed this way. However, cross-border online sales do away with physical presence since most online servers are located outside the country. Sales activities conducted through these portals are deemed to occur outside Philippine territory, as it can be argued that since an online transaction’s server is located outside the Philippines, the business itself isn’t considered to be held within the country. Such transactions can therefore be said to be outside the country’s taxing jurisdiction. Regardless, it is difficult to determine where the locus of the sales activity truly lies, only making it more difficult to enforce tax rules. THE NEED TO INNOVATE PRESENT TAX LAWS Tax authorities will need to come up with innovations to our present tax laws to address tax profits earned by non-residents from consumers here, as well as the enforcement or collection of taxes, the visibility over tax reporting data, and the addressing of the controversy surrounding the issue of capturing lost profits for our country. However, doing so without disrupting how bricks-and-mortar businesses are taxed can be daunting. In this light, perhaps our tax authorities can revisit the recent proposals of the Organization for Economic Cooperation and Development (OECD). Last year, the OECD released the Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitization of the Economy. While the Philippines is not a member of the OECD, the issues tackled by the organization are felt worldwide, and our tax treaties are patterned after the publication. The tax authority has also cited OECD commentaries in several rulings, giving the commentaries a more persuasive effect. The Philippines can benefit from the suggestions raised by the organizations in addressing base erosion issues for tax purposes. The proposals contained in the publication were grouped into two pillars: Pillar One, which focuses on the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules; and Pillar Two, which seeks to develop rules that provide jurisdictions with a right to tax back where other jurisdictions have not exercised their primary taxing right, or where the payment is otherwise subject to low levels of effective taxation. It calls for the development of a coordinated set of rules such as the income inclusion rule, switch-over rule, undertaxed payment rule, and the subject to tax rule. Their development addresses the ongoing risks from structures that allow multinational companies to shift profit to jurisdictions with very low or no taxation. There are three proposals under Pillar One that tackle how taxing income generated from cross-border activities in the digital age could be allocated among countries. These are composed of the “user participation” proposal, the “marketing intangibles” proposal and the “significant economic presence” proposal. All are supposed to allocate more taxing rights to the jurisdiction of the customer and/or user. Of special interest is the “user participation” proposal, which focuses on digitized business models such as search engines, social media platforms and online marketplaces. This proposal suggests that profits should be allocated to market jurisdictions based on the value-creating activities of the active user base. THE DIGITAL ECONOMY AS AN ADDED SOURCE OF REVENUE As a burgeoning digital economy, we may wish to explore how value-creating activities can be a source of taxing rights over income from digital cross-border sales. Granted, tax authorities will need to carefully weigh the nature of digital taxing rights vis-à-vis the importance of negotiations. One only needs to ask about the fate of the digital tax passed by France last year, which had to be postponed amid US retaliatory tariffs. However, once the statutory foundation for a set of tax rules that apply to the digital economy is drafted, bilateral as well as region-wide discussions in matters of implementation will surely follow. The key here is to find the right balance between creating a consistent and globally accepted set of digital tax rules that can benefit tax authorities in all jurisdictions while also being fair and supportive of digital enterprises that face new and rapidly evolving challenges to remain competitive in an increasingly crowded online market. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Ma. Theresa M. Abarientos-Amor is a Senior Manager from the Tax Advisory Services Group of SGV & Co.

02 March 2020

Marlynda I. Masangcay

Foreign nationals and the taxman

Foreign nationals working in the Philippines are governed by at least three sets of rules — those of taxation, immigration and labor. Only by fully complying with each set of rules can foreign nationals ensure a fruitful and worry-free stay in the Philippines. This article focuses on taxation. For regular Filipino employees, taxes due on salaries are withheld by their employers and remitted to the tax authorities during the year. Foreign nationals, however, may be covered by Philippine tax rules but are unaware that they have tax reporting obligations. Certain tax obligations pertain to foreign nationals on home payment arrangements, whether partially or in full, and to those who come to the Philippines as short-term business travelers. There are foreign nationals who work in the Philippines under a split-payroll arrangement, i.e., their salaries are paid both from their home countries and from their Philippine employers. Some foreigners come to the Philippines for a specific business purpose within a short time period with wages usually paid from their home payrolls. Under both circumstances, there are fewer issues to consider if the home country payments are recharged to a Philippine entity as these will eventually be subject to withholding tax. However, in instances when the payroll costs remain with the home country, it is more difficult for the Philippine government to tax the foreign national. This is because no local entity or agency is privy to the amount that they receive from abroad. This is further complicated by existing tax rules governing foreign nationals that relate more to their presence and privilege to work in the country, but not to their tax obligations. The question arises: Are these foreign nationals really subject to Philippine income tax on offshore wage payments? The answer may seem to be a straightforward “no” since the income or part of it is not paid by a Philippine company. However, the reality is not that simple. We will need to take into account the basic principles on situs (or place) of taxation. FOREIGN-SOURCED INCOME As a general rule, the basis for taxation of foreign nationals is on Philippine-sourced income only. The issue may lie in what constitutes foreign-sourced income. Employment income is considered Philippine-sourced if it pertains to services performed in the country. This is regardless of where the income was paid, where the contract was perfected, or where the payor resided. Thus, in determining the extent to which foreign nationals are subject to tax, the basic consideration is where the work for which the income is earned was performed. The paying entity need not be a Philippine company; there does not even have to be a performance agreement between the foreign national and the local office. As long as the work is rendered in the country, the income derived from such work is generally subject to Philippine income tax. We say “generally” as there may be income tax exemptions for foreign nationals who are tax residents of countries with which the Philippines has bilateral agreements on double taxation. TAX ISSUANCES FOCUSING ON FOREIGN NATIONALS Adding to the ambiguity is the absence of other government rules on how foreign nationals are to be taxed. However, in 2019, following the sudden and steady influx of foreign nationals working in the Philippines (not to mention the lost revenue from this working group) the government released four issuances directed towards subjecting foreign nationals to tax. At the forefront is the Joint Memorandum Circular (JMC) No. 001, series of 2019, Rules and Procedures Governing Foreign Nationals Intending to Work in the Philippines. Drafted by nine government agencies, the JMC aims to harmonize the regulations and policy guidelines on the issuance of work permits and work visas to foreign nationals as well as the authority to hire and employ foreign nationals. Such permits are usually issued by various government agencies, including the Department of Labor and Employment (DoLE), Professional Regulation Commission, Bureau of Immigration (BI), and others. The JMC requires foreign nationals and/or the employer/withholding agent to secure a Tax Identification Number (TIN) from the Bureau of Internal Revenue (BIR) as a precondition for permits and visas. A special task force (composed of the DoLE, the BI and the BIR) was also created to conduct joint inspection of establishments employing foreign nationals. Moreover, a database will be created to record all issued work permits and authority to employ and hire foreign nationals. Aside from the JMC, the BIR also issued Revenue Memorandum Order (RMO) 28-2019, which prescribed the registration requirements for foreign individuals not engaged and/or engaged in trade or business or gainful employment in the country. The BI then issued two Operations Orders, both dealing with the TIN as a requirement for work permits and non-immigrant visa applications. CONSIDERATIONS FOR TAX COMPLIANCE To allow strict monitoring of the presence of and tax compliance among foreign nationals, it would be helpful for the government to clarify the definition of “taxable work or services” for foreign nationals. To illustrate, there are short-term business travelers who stay in the Philippines for only a few days or months under a 9a visa and perform activities even without a Special Work Permit (SWP). Securing a 9a business visa does not require a TIN, and these individuals may assume that they do not have tax obligations (either to report any income and pay tax, or to file any applications for tax treaty relief), even if their activities in the country qualify as work or performance of a service. Furthermore, compliance with TIN registration of foreign nationals may be difficult, especially if additional documents are required. For example, foreign nationals married to Filipinos and who apply for a TIN used to be required to submit English-translated and authenticated/consularized marriage certificates with their application. REVISITING TAX OBLIGATIONS FOR FOREIGN NATIONALS Policies should be reviewed to consider the changes that come with the fast-evolving world of workforce mobility, such as with the Emigration Clearance Certificate (ECC). An ECC is required from foreign nationals departing from the Philippines (either temporarily or for good) to ensure they have no pending obligation with the government. Current BI rules on ECC issuance, however, do not mention any need for the foreign national to submit documentary clearance of unfulfilled responsibilities from other government agencies. There appears to be no solid coordination process among government institutions. There is also no database to provide the information necessary to support an ECC application. With the JMC mentioned previously, it may help all concerned agencies to look into the ECC process and develop a method to cover the tax compliance obligations of departing foreign nationals. It would also be worth looking into the best practices of tax jurisdictions like Singapore, the US and Canada on their exit permits and non-residency status upon departure of foreign nationals. While the government is undoubtedly concerned about regulating the activities and rightful tax obligations of foreign nationals, there is much that can be done in terms of efficient implementation. We can hope that, given the number of government agencies involved in legalizing the affairs of foreign nationals, forthcoming guidelines will facilitate compliance. Moreover, with a TIN now a pre-requisite for work permit application, it may be advisable for foreign nationals and their employers to revisit their actual tax obligations arising from locally-sourced income. This is an opportune time to do so, as the April 15 tax filing deadline quickly approaches. Surely, no one wants the additional burden of stiff penalties, a BIR examination, or reputational peril that may be brought about by failure to comply with tax obligations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Marlynda I. Masangcay is a lawyer and Tax Senior Director from the People Advisory Service Line of SGV & Co.

24 February 2020

Rogelanne O. Villarubia

How workable is working from home?

Organizations often claim that their most important assets are their people and studies have indicated this to be true. This is the reason why companies are always looking for ways to motivate their workforce and maintain high job satisfaction. While some consider compensation and benefits as the main drivers when a job seeker decides to accept an offer, we now see other factors that are equally relevant to applicants and recruits. A leading consideration is the flexibility of an employer’s work arrangement policies. In general, employees prefer working hours that allow them to achieve some level of work-life balance. Employees desire the flexibility that provides them the means to meet the demands of their jobs and their personal responsibilities such as attending to family, pursuing further education, or checking items off their bucket lists. This work arrangement is not new; other economies have already adopted it as part of their labor laws and practices. In the Philippines, however, although most employers require a fixed on-site eight-hour work shift, some multinational companies have already introduced flexibility in the workplace, such as allowing their employees to “telecommute” as a work alternative. THE TELECOMMUTING ACT Telecommuting is defined as working from home or an alternative workplace through an electronic link with a central office. While the practice of working at home and interfacing with the office via modem, telephone, or some another electronic device only became commonplace recently, the word “telecommute” has been used since the mid-1970s. Its earliest documented reference can be found in a January 1974 article in The Economist that predicted, “As there is no logical reason why the cost of telecommunication should vary with distance, quite a lot of people by the late 1980s will telecommute daily to their London offices while living on a Pacific island if they want to.” We have seen how this prediction has become a global reality. The Philippines finally passed a law regarding this alternative work arrangement when the President signed into law on Dec. 20, 2018, Republic Act (RA) 11165, known as the Telecommuting Act. The RA codifies the definition of telecommuting and specifies how such a program would work in a company. An employer in the private sector may offer a telecommuting program to its employees on a voluntary basis, including compensable work hours, a minimum number of work hours, overtime, rest days, and entitlement to leave benefits. The law further enumerates a fair treatment clause for employees under the telecommuting program and for those not practicing this alternative work arrangement. Section 5 of the RA provides that the employer will ensure that the telecommuting employees are given the same treatment as that of comparable employees working in the employer’s premises. Further, it listed the rights of telecommuting employees, such as: receiving a rate of pay (including overtime and night shift differential, as well as other similar monetary benefits not lower than those provided in applicable laws); collective bargaining agreements; having the right to rest periods, regular holidays, and special non-working days; having the same or equivalent workload and performance standards; having the same access to training and career development opportunities; and being subject to the same appraisal policies. The RA also features a clause on Data Protection in relation to the Data Privacy Act of 2012 as employees under this work arrangement should still be governed by confidentiality and data security policies in the conduct of their work. PRODUCTIVITY BENEFITS Like in any program or policy, there should be an evaluation of the telecommuting program’s pros and cons. One of its benefits is the flexibility offered to employees to work during the hours that complement their needs, responsibilities and preferences. Research has shown that when employees have work flexibility, they are able to increase their productivity and more effectively meet their deliverables. The company may also consider the potential cost savings to having employees work remotely, such as a reduced need for valuable office space, lower utilities consumption and similar reduced expenses. In addition, telecommuting provides the benefit of less potential business disruption as employees can continue working even if they are physically unable to report to the office. Good examples of this would be the recent events that transpired in the Philippines: the Taal Volcano eruption and the Covid-19 virus outbreak, both of which prompted employers to think about the safety and health of their employees. If a company has a telecommuting program in place, business operations can continue since employees are able to deliver the work from alternative locations. Another benefit of the telecommuting program is that the actual travel from home to office and vice versa will significantly be reduced. This would be beneficial to so many considering the notorious traffic conditions in the Philippines. WHAT TO CONSIDER While telecommuting seems advantageous, there are challenges in implementation. First, telecommuting assumes that the employee would have the necessary resources such as a reliable Internet connection to log on to the employer’s infrastructure. Second, if a company adopts this program, the employer must have well-written guidelines to monitor the work of telecommuting employees to address possible issues of employees not being “active” and potentially missing out on deliverables. Third, and as mentioned earlier, data protection should be addressed because working externally could expose the employee to possible data breaches and security threats, especially with the data handled by the telecommuting employees themselves. Fourth, companies will also need to consider the investment in technology, platforms and resources that will allow employees to remotely access company servers and shared data, particularly in cases where employees function as part of a larger team. CHALLENGING AND DISRUPTIVE It is encouraging to see that the traditional eight-hour desk job in the office has been updated to consider other factors. Employees in the Philippines looking for options to achieve work-life balance now have another consideration when evaluating a job offer. At the end of the day, employers should look carefully at their options to ensure maximum productivity, work efficiency and service delivery quality while taking into account evolving employee needs and job satisfaction measures. Companies may experience transitioning from an existing on-site workforce to a telecommuting team as both challenging and disruptive, but a careful analysis of the pros and cons of the program may help management decide to take the big step of having their employees literally out of the office. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Rogelanne O. Villarubia is a Tax Senior Director from the People Advisory Service Line of SGV & Co.

Annual reporting despite business interruptions

Is your business COVID-19 resilient?

Testing your capital agenda amid COVID-19

Tax breaks in these trying times

Tax breaks in these trying times

Are you ready for the data-driven digital era?

Will it be endgame now for 5% GIT?

How to make digital taxation click

Foreign nationals and the taxman

How workable is working from home?

Other SGV News and Publications

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links

SyCip Gorres Velayo & Co. SGV Main Office

Our Locations Where to find us?

From Our Site Helpful Links