Threading through recovery: Health or wealth?

Business World | August 24, 2020

Suits The C-Suite By Alma Angeli D. Placido

On Aug. 2, the Philippines hit the 100,000 mark for COVID-19 cases, with 50,000 new cases recorded in July. Some would associate this increase with the gradual reopening of the economy and the transition to what we now call the “new normal.” As of Aug. 20, the Philippines ranked 22nd out of 188 countries in terms of COVID-19 cases, just behind two other populous Asian countries: Bangladesh and India.

On the same day that the country breached its 100,000 COVID-19 cases, the President heeded the call of the medical community for a stricter enhanced community quarantine as the number of cases continued to increase nationwide. He announced a modified enhanced community quarantine (MECQ) over Metro Manila, Bulacan, Laguna, Cavite and Rizal between Aug. 4 and 18.

As these designated areas reverted to MECQ, a slower economic recovery was anticipated, leaving businesses to navigate further uncertainties.

Subsequently, on Aug. 17, the President declared the lifting of MECQ in Metro Manila and four other provinces into a less stringent General Community Quarantine (GCQ) by Aug. 19.

IMPACT ON THE PHILIPPINE ECONOMY
Based on the Oxford COVID-19 government stringency index, the Philippines implemented the most rigorous social distancing policies and health protocols in the ASEAN region to prevent the rapid spread of COVID-19. However, it may be worthy to note that Singapore, Indonesia and Malaysia implemented social distancing measures ahead of the Philippines.

The Greater Capital Region (GCR), which includes the National Capital Region (NCR), Central Luzon (Region III), and CALABARZON (Region IV-A), accounts for 61.6% of the Philippines’ Gross Domestic Product (GDP). Because Metro Manila and several other areas within GCR have been under quarantine since March 16, the economy took a huge hit, resulting in a recession with several major industries heavily impacted.

The Philippines recorded a 16.5% GDP contraction in the second quarter. Leading the GDP retreat were the manufacturing, construction, and transportation and storage sectors, with double-digit drops of -21.3%, -33.5% and -59.2% respectively.

The Philippines’ sharp GDP decline is the second-worst in ASEAN, after Malaysia’s -17.1%. Most countries in ASEAN posted GDP contractions in the second quarter, with the exception of Vietnam, which managed to grow 0.4%.

Cash remittances from Overseas Filipinos Workers (OFWs) came in at $14.0 billion in the six months to June, down 4.2% from a year earlier. In addition, 300,000 OFWs displaced by the COVID-19 pandemic are expected to return to the country within the next three months, according to Vivencio Dizon, National Policy Against COVID-19 deputy chief implementer. This will further jeopardize future cash remittances.

As of July 28, the Development Budget Coordination Committee (DBCC) revised its initial projection of the Philippines’ 2020 GDP growth rate to -5.5% from the previous -2.0 to -3.4%. This is after considering updated indicators on the impact of the pandemic on tourism, trade and remittances for the year.

THE GOVERNMENT’S ECONOMIC RECOVERY PLAN
In the fifth State of the Nation Address (SONA) by President Rodrigo Duterte in July, he announced a list of government priority programs to address the adverse economic impact of the pandemic. These include the strict implementation of the Ease of Doing Business and Efficient Government Service Delivery Act; the enhancement of the Build, Build, Build Program; the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which reduces corporate income tax rate and rationalizes certain tax incentives; and the Bayanihan to Recover as One Act (Bayanihan II), which represents the government’s response to the economic impact of the pandemic.

The huge slump in second-quarter GDP growth prompted the National Economic and Development Authority (NEDA) to reconsider its original recovery plan (Philippine Program for Recovery with Equity and Solidarity or PH Progreso). The NEDA created the Recharge PH program to ease the negative impact of the pandemic and lead the Philippine economy towards recovery. It is set to be implemented this year and into 2021 and will likewise be incorporated in the updated Philippine Development Plan 2017-2020.

RESHAPING STRATEGIES
Considering the effects of the community quarantine felt in the second quarter, it is likely that similar or worse consequences will hit the country as varying levels of quarantine continue to be maintained in various localities. As confirmed COVID-19 cases continue to rise daily, businesses will experience further losses from changes in consumer spending and constantly changing restrictions on business operations. Additional business costs are also anticipated as stricter health protocols are implemented. Businesses will be keen to manage short-term cash flows to ensure that operations stay afloat as the economy stagnates. More businesses are expected to shift to digital platforms and reinvent themselves to address uncertainties through value chain transformation.

As the global health community grapples for a cure for COVID-19, businesses must do their part to ensure the safety of their people by establishing effective health guidelines. Businesses will have to devise strategies built around safeguarding the well-being of employees and customers. Digital transformation enhances their ability to deal with the changes in market requirements, without compromising the safety of employees.

For businesses to successfully navigate this particular moment, they must identify and address sources of uncertainty to preserve organizational stability and build resilience. Addressing underperformance is a challenge as businesses work through numerous constraints. It is critical for businesses to revisit their strategies to build a sustainable competitive advantage even during periods of disruption.

This period has driven the government to prioritize developing a strong digital economy. Balancing regional economic development is one of the government’s pillar programs, and one way to get there is to focus on developing competitiveness in information and communications technology (ICT).

To address the need for physical distancing and reduced face-to-face interaction, the government must expand the coverage of its National Single Window (NSW) program. The program is meant to allow parties involved in trade and transport to lodge standardized information in a secure, electronic single-entry point to complete all import, export and transit-related regulatory requirements with respect to each transaction. In this way, trade can continue without compromising the health of the workers both in the public and private sectors.

The government and private sector must work together to strike a balance between public health vis-à-vis the economy. Lockdowns are proven to be effective in curbing the spread of the virus, yet are also detrimental to the health of the economy. Recovery need not be a choice between health or wealth, but a carefully plotted path that strategically achieves both goals.

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.

Transforming tax and finance functions

Business World | August 31, 2020

Suits The C-Suite By Fatma Aleah A. Datukon

As we continue to navigate the disruption brought about by the COVID-19 pandemic, companies are reshaping their operations in the new normal to focus on business continuity and to prepare for recovery once the economy bounces back. Part of this transformation strategy is to revisit and reimagine the tax and finance function.

The 2020 Tax and Finance Operate (TFO) survey sponsored by EY and conducted by Euromoney Thought Leadership Consulting with over 1,000 executives representing 42 jurisdictions (including the Philippines), 17 industries and 178 publicly listed organizations, demonstrated that the tax and finance function in organizations is generally struggling to cope with digital advances and rapidly evolving global and local conditions.

While the survey was conducted before the pandemic, nearly all respondents (99%) indicated that they are taking steps to transform their tax and finance operating models due to deficiencies in their current target operating model. Meanwhile, 73% are looking to co-source critical activities in the next two years as a solution to relieve growing pressures. This also aims to aid in successfully adapting to the constantly evolving tax environment and rapidly transforming digital landscape, which have been amplified by the unforeseen business and human impact of COVID-19.

DEFICITS IN DATA AND TECHNOLOGY TRANSFORMATION
Based on the survey, 65% of respondents cited the lack of a sustainable plan for data and technology as their biggest barrier to delivering the tax function’s long-term purpose and vision. In fact, 73% of the respondents said that their organizations do not have a formal tax technology strategy in place.

The unprecedented operational disruption due to the pandemic — where organizations struggle to manage business continuity amidst the abrupt need to shift to telecommuting and develop digital workspaces — only highlighted the deficit in the technological capabilities of most organizations.

This has brought the urgent need for digital readiness in organizations to the forefront. Contributing to the urgency are the growing demands for tax and finance functions to quickly and effectively respond to the dynamic tax landscape, due in part to the Philippine government’s tax reform programs and the implementation of the digital transformation roadmap, which is a priority program of the Philippine Bureau of Internal Revenue (BIR).

Organizations that are not pushing to operate in new ways or investing in data and technology adoption (e.g., automation, cloud storage and data governance, data analytics and reporting) may eventually find themselves at a competitive disadvantage. This is in comparison to others that have fast-tracked their digital transformation and have integrated digital technologies into their tax and finance functions to manage tax risks and provide greater focus on value generation.

EVOLVING TALENT NEEDS
Under their current tax operating models, 62% of the survey respondents spend majority of their tax function time on routine compliance activities. Examples of these include data collection and processing, workpaper preparation, tax returns and reconciliations — as opposed to higher value/higher risk activities — with nearly half (45%) of the organizations struggling to provide new responsibilities and career advancement opportunities for their tax and finance personnel.

With the move towards digitally transforming the tax and finance function, a corresponding reimagination of the tax and finance workforce would necessarily follow. This will, however, pose a challenge for organizations to search for and retain the appropriate talent in today’s evolving tax and finance function. In fact, 83% of the survey respondents believe that the core technical competencies of their tax and finance personnel will shift from traditional technical skills to data, process and technology skills over the next three years. However, 61% admit that they are unable to attract and retain talent with the skills required for the tax and finance function of the future.

As talent demands continue to evolve, organizations will have to revisit, reskill and/or upskill their tax and finance workforce. This can be achieved by either providing their current employees with the necessary learning and skills development (e.g., digital fluency, data analytics proficiency) to cope with the evolving tax and finance function, or by considering an entirely different strategy to bridge the talent and skills gap (e.g., establishing new tax operating models, co-sourcing) to improve the financial operational effectiveness and efficiency of their tax departments in the new and next normal operations.

TAX AND FINANCE OPERATE (TFO) SOLUTIONS
Organizations need to use the right mix of people, process and technology to maximize the value of their tax and finance functions and meet the evolving organizational goals now and in the future. One way to do this in the shorter term is by engaging an experienced external TFO solutions provider who can deliver a customized and flexible technology-driven tax service delivery model that can help business leaders reimagine their tax and finance functions. With the right TFO provider, organizations can achieve a sustainable corporate tax function that can support their strategic efforts and bring new innovation and transformation to their tax function.

ACCELERATED TRANSFORMATION
In today’s highly dynamic tax and regulatory environment, which has been further complicated by the COVID-19 pandemic, sustaining a strong and stable tax and finance function with the right technological and talent capabilities may be one of the most difficult challenges of an organization.

In order to more effectively navigate through these changes, organizations should consider accelerating the transformation of their tax and finance functions into agile and cost-effective tax operating models. This will allow businesses to prioritize long-term value creation and risk management as well as redirect valuable internal tax and finance resources to more strategic activities and efforts. A focused effort will manage and boost business continuity and resilience, achieving operational optimization for the now, next and beyond.

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.

Fatma Aleah A. Datukon is a Senior Director of SGV & Co.

Tax holds Transfer Pricing webinar with Mactan locators

SGV’s Tax Team, together with the Mactan Export Processing Zone Chamber of Exporters and Manufacturers (MEPZCEM) and the Association of MEPZ Controllers and Accountants (AMCA), organized a tax webinar on the submission of the Information Return on Related Party Transactions form (BIR Form No. 1709) last 27 August. Over 60 representatives from member-companies of the MEPZCEM and AMCA attended the event.

Tax Partner Deonah Marco-Go (DMG) discussed Revenue Regulations No. 19-2020, its requirements and how taxpayers and stakeholders can comply with the new regulations. The new reportorial requirement is intended to effectively implement Philippine Accounting Standards (PAS) 24, Related Party Disclosures, to ensure that related party transactions are properly disclosed and conducted at arm’s length.

The webinar concluded with remarks from AMCA President Jane Abangan who expressed her appreciation for the Firm’s continued support for the MEPZCEM and AMCA. SGV Tax Partners Cheryl Ong and Saha Bulagsak led the event’s organizing team with Tax Managers Edmond Emperio, Anne Margaret Momongan and Maxine Manuel, and Senior Associates Gensbergh Rago and Lloyd Amaya.

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SGV Partners lead GPCCI webinar

SGV Consulting Partner Kathrina S. Macaisa (KSM) and Strategy and Transactions Partner Marie Stephanie Tan-Hamed (MTH) conducted a webinar titled Positioning for Recovery through Enterprise Resiliency on 18 August. Hosted by the German-Philippine Chamber of Commerce and Industry, Inc. (GPCCI), the webinar discussed how companies can build enterprise resiliency during the pandemic.

The speakers provided an overview of the Philippine economy and discussed possible pandemic recovery scenarios and their social and economic impacts. They explained the stages of a business’s COVID-19 recovery response and presented examples of practical approaches and action steps on how leaders can protect the wellbeing of their customers, support critical operations and restore market confidence.

They also discussed the EY COVID-19 Enterprise Resiliency Framework across three horizons — now, next and beyond. They provided tips on how companies can strengthen their operations and increase their resilience to prepare for what’s next. They also shared how companies can build long-term value by reframing their future and transforming their business to adapt to the business landscape after the pandemic.

The webinar concluded with an interactive open forum. Over 50 GPCCI members attended the webinar. The event’s organizing team included SGV Assurance Leader Martin Guantes and Market Group 3 Leader and Tax Partner Henry Tan.

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CCO leads tax discussion

SGV Tax Partner Cheryl C. Ong (CCO) led a webinar titled Business Talk: CREATE-ing Opportunities on 28 August. SGV Tax Leader Fame Delos Santos welcomed over 400 participants from different sectors to the webinar.

CCO discussed the salient features of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill, and the proposed adjustments in corporate income tax and fiscal incentives. She also provided insights on the next steps participants can consider to maximize the incentives under the CREATE bill. The webinar concluded with an open forum led by CCO who was assisted by Tax Partner Thyrza F. Marbas (TFM).

The webinar’s organizing team included Tax Managers Karen Mae Calam and Aiza Giltendez, and Senior Associates Wennonah Marie Garces and Kyle Almero.

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Cebu teams with JCCI-CI

SGV Cebu’s Tax Team held a webinar on the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill and the BIR requirements on related party transactions for members of the Japanese Chamber of Commerce and Industry of Cebu Inc. (JCCI-CI) last 26 August. Conducted mostly in Japanese, the webinar was led by Japan Business Services and Tax Associate Directors Hiroshi Nakagawa and Yohko Tsuge with SGV Cebu Partner-in-Charge and Tax Partner Cheryl C. Ong (CCO).

Hiro discussed the salient features of the CREATE bill, particularly the proposed adjustments in corporate tax and rationalization of fiscal incentives. He also explained the new BIR requirement for the submission of an Information Return on Related Party Transactions form (BIR Form No. 1709) and the salient features of Revenue Memorandum Circular No. 76-2020. The webinar culminated with an open forum led by CCO and Yohko.

Japanese executives and tax professionals from member companies of JCCI-CI attended the webinar. The event’s organizing team included Tax Managers Melissa To, Aiza Giltendez and Krizfer Jane Gella.

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CCO speaks at ANZCHAM forum

SGV Tax Partner Cheryl C. Ong (CCO) facilitated a webinar on the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill hosted by the Australian-New Zealand Chamber of Commerce Philippines (ANZCHAM) on 19 August.

CCO discussed the salient features of the bill, business strategies companies can explore to maximize the bill’s incentives, selected areas in the proposed provisions and updates on the bill’s progress. She also provided insights on how to help businesses prepare for the proposed tax reforms.

Over 60 participants attended the webinar, including SGV Alumnus Partner Gerard Sanvictores, and presidents, CFOs and other finance professionals of various companies. The event’s organizing team included Tax Senior Manager Donna Frances Ylade-Torres and Senior Associate Maria Crisanta Esgana.

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WPT joins PICPA-ACPAPP summit

SGV Chairman and Country Managing Partner Wilson P. Tan (WPT) was one of the panelists at the Joint Sectoral Summit for Public Practice on 21 August. The Philippine Institute of Certified Public Accountants (PICPA) and Association of Certified Public Accountants in Public Practice (ACPAPP) hosted the summit, which brought together over 450 participants.

WPT was part of a panel discussion titled Auditing the Auditors where he presented suggestions on improving audit quality in the Philippines. His recommendations included suggestions on categorizing quality review findings and supporting small- and medium-sized practitioners in building their capacity to improve audit quality and comply with regulatory requirements. Emphasizing that audit quality is part of a large and intricate system where all members play an essential role, he also explained the importance of a properly functioning corporate governance system. He also encouraged the use of technology-based methods in conducting audit-related work to increase productivity.

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Aiding recovery: VAT exemptions on imported medicine

Business World | September 14, 2020

Suits The C-Suites By Joanne Macainag-Cobacha

Health is wealth, particularly during the COVID-19 pandemic. It would seem that the government concurs when it passed Republic Act (RA) No. 9502, otherwise known as the “Universally Accessible Cheaper and Quality Medicines Act of 2008.” The RA empowers the Department of Health (DoH) to keep medicine affordable and accessible to promote the health and well-being of Filipinos.

In light of this, the House and Senate included in RA No. 10963 (the TRAIN Law) a value-added tax (VAT) exemption on the sale of drugs prescribed for diabetes, high cholesterol and hypertension beginning Jan. 1, 2019.

Revenue Memorandum Circular (RMC) No. 2-2018 clarified that the sale by manufacturers, distributors, wholesalers and retailers of drugs prescribed for the treatment of diabetes, high cholesterol and hypertension in its final form shall be exempt from VAT while the importation are subject to VAT.

Evidently, the TRAIN Law and RMC No. 2-2018 were issued to address the objectives of RA No. 9502. However, apparently not taken into consideration when the law was passed was the effect on the pharmaceutical industry (manufacturers, importers, distributors, wholesalers and retailers) of imports not covered by the VAT exemption.

VAT-EXEMPT SALES
Prior to the passage of TRAIN Law, sales of drugs and medicines prescribed for diabetes, high cholesterol and hypertension were subject to 12% VAT. In turn, input VAT passed on to pharmaceutical companies from imports and local purchases of goods and services could be claimed against the output VAT. Due to the TRAIN Law and under Revenue Regulations (RR) No. 16-05, as amended, the input tax attributable to VAT-exempt sales was not allowed to be credited against output tax but should be treated as an expense.

This finds support in Bureau of Internal Revenue (BIR) Ruling [DA-646-06] and BIR Ruling [DA-234-04] where the BIR held that the input taxes directly attributable or allocable to exempt transactions become part of the cost of capital goods purchased or of operating expenses. In other words, the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense.

Input VAT from the following purchases which are directly attributable to VAT-exempt sales should be treated as follows:

Purchases of goods for sale — should form part of the cost of the inventory

Purchases of capital goods — should form part of the capitalized cost subject to depreciation

Purchases of services/consumable goods — should form part of the operating expenses

Since the VAT paid on imports is being paid and passed on to the pharmaceutical companies and forms part of the cost or expense, these companies are unable to significantly reduce the selling price to the public, which was not the intention of the legislators when the TRAIN Law was passed.

INPUT TAX ON IMPORTED GOODS
Pursuant to Section 110 (A) (2) of the 1997 Tax Code, as amended, input tax on imported goods or property by a VAT-registered person is creditable to the importer upon payment of the VAT prior to the release from the custody of the Bureau of Customs (BoC).

To address this issue, the BIR issued RMC No. 34-2019 which provides that considering that input tax attributable to VAT-exempt sale cannot be passed on to the buyer, the inventory list as of Dec. 31, 2018 of drugs and medicine which became VAT-exempt beginning Jan. 1, 2019 is required from all manufacturers, wholesalers, distributors and retailers regardless of whether or not there is an existing excess input tax. As the sale of VAT-exempt drugs and medicines are made, the input tax corresponding to the sale shall be closed to cost or expense.

It appears that the BIR, in issuing RMC No. 34-2019, has given credence to the Tax Code provision that input taxes attributable to VAT-exempt sales cannot be claimed as input tax credits but should be expensed out.

Under the RMC, if the input VAT was already claimed in the 2018 VAT returns when VAT was paid on imports prior to release from the BoC’s custody, the RMC resolved to reverse the input taxes previously claimed at the time the related inventories were sold.

This had a negative impact on the industry since the pharmaceutical companies were not able to recover fully the VAT paid on the importation of these VAT-exempt medicines.

NEW HOPE FOR RECOVERY
RA No. 11467 was signed and approved on Jan. 22, 2020. This law amended the VAT-exempt provision to now cover imports of these medicines beginning Jan. 1 2020 and to include the sale or importation of prescription drugs for cancer, mental illness, tuberculosis, and kidney diseases beginning Jan. 1, 2023.

Another positive development for the industry is the issuance of RR No. 18-2020. In its transitory provisions, the RR specified that the VAT on imports of DoH-approved prescription drugs for diabetes, high cholesterol and hypertension from the effectivity of RA No. 11467 on Jan. 27, 2020 until the effectivity of RR No. 18-2020, shall be refunded in accordance with the existing procedures for refund of VAT on imports, provided that the input tax on the imported items has not been reported and claimed as input tax credit in the monthly and/or quarterly VAT declarations/returns.

This is certainly good news for pharmaceutical companies, as including the imports as VAT-exempt transactions and allowing companies to claim refunds will surely help ease the strain on them during these trying times.

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 Macainag-Cobacha is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

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AWO speaks at PICPA Faculty Development Committee webinar

Consulting Partner Allan W. Ocho (AWO) facilitated a webinar on BS Accounting Information System (BSAIS) topics and international certifications hosted by the Philippine Institute of Certified Public Accountants (PICPA) Faculty Development Committee last 28 August.

AWO oriented participants on Information Technology (IT) Risk Management, one of the topics included in the BSAIS curriculum. He discussed risk and control concepts, control frameworks and standards, and the importance of managing IT risks. He emphasized IT governance and management concepts and how they add value to organizations and help achieve business objectives. He also discussed the Certified Information Systems Auditor (CISA) certification and the ways it can enhance one’s capabilities in teaching BSAIS courses to accounting students.

AWO with members of the Project iTeach team and the PICPA webinar organizing team

The webinar is part of a series of sessions organized by the PICPA Faculty Development Committee to provide accounting teachers with supplemental discussions on the new courses of the BSAIS curriculum. It also introduces the international certifications that accounting teachers and students can pursue to build and expand their credentials, competencies and skills.

Over 200 accounting teachers attended the webinar. PICPA National President Lope Bato, Jr., PICPA Metro Manila Region President Vicente Gudani, and PICPA Faculty Development Committee Chairman and Dean of the UST-Alfredo M. Velayo College of Accountancy Patricia Empleo also participated in the session.

The webinar was supported by the Project iTeach team whose members include Consulting Associate Director Kristian Reyes, Senior Associate Marigin Fidel, and Associates Ralph Roxas, Mydi Macatiag, Jannie Mendoza and Lorenzo Dipad. The Project iTeach team is a volunteer group from SGV Consulting and was recognized as a regional winner in the 2019 Better Begins With You (BBWY) awards program for their initiatives in helping accounting teachers build and enhance their IT competencies and skills.

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Clark conducts tax webinar with SBFCC

SGV Clark, together with the Subic Bay Freeport Chamber of Commerce (SBFCC), organized a webinar on the Tax Reform II Bill: Corporate Recovery and Tax Incentives for Enterprises (CREATE) on 7 September. SBFCC Executive Director Donna May Tamayo welcomed over 150 representatives from SBFCC member companies to the webinar.

LLL and MAA presenting at the webinar

Tax Partners Hentje Leo L. Leaño (LLL) and Margaux A. Advincula (MAA) discussed the salient provisions of the CREATE bill, its proposed adjustments in corporate tax and rationalization of fiscal incentives. Emphasizing the bill’s salient provisions and possible impact on Subic Bay Metropolitan Authority (SBMA) locators, they shared insights on how businesses can prepare for and maximize the incentives of the proposed tax reforms.

The webinar concluded with an open forum led by LLL and MAA with SBFCC President Danny Piano and SBMA Chairman & Administrator Atty. Wilma Eisma. Assurance Partner Peps Zabat also participated in the webinar and Tax Director Maria Michaela Ledesma moderated the session.

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JMC joins AGIA Forum on Crisis Management

SGV Business Consulting Partner and EY ASEAN Consulting Quality Leader Joseph Ian M. Canlas (JMC) was one of the speakers during the 6th Forum for Heads of Internal Audit Service/Office in the Public Sector held by the Association of Government Internal Auditors (AGIA) last 28 August. With the theme Protocols in Crisis Management: An Internal Control Challenge, the session provided an overview of the pandemic’s impact on various organizations in the government and public sector. Over 80 internal auditors and executives from different government agencies attended the forum.

JMC led a session on remote auditing where he discussed internal auditing during the new normal. He explained the impact of COVID-19 on the private and public sectors and the emerging risks. He spoke on the initiatives of internal auditors aimed at managing the challenges caused by the pandemic. He emphasized the importance of assessing the feasibility of remote auditing and discussed critical issues that need to be addressed before its implementation, such as confidentiality, security and data protection. He encouraged participants to consider factors such as the readiness of their organization, the availability of resources, and adequate technology and equipment. He also shared practices that leaders can implement in their organizations to successfully manage and mitigate the pandemic’s impact on their internal audit activities.

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Kudos to our new CSRSs!

Climate Change and Sustainability Services (CCaSS) Partner Benjamin N. Villacorte (BNV) and CCaSS Senior Associate Yna Antipala recently completed the professional certification process for Certified Sustainability Reporting Specialists (CSRSs). They now hold a CSRS designation as certified by the Institute of Certified Sustainability Practitioners (ICSP). The certification process includes completing training on Global Reporting Initiative standards and an online assignment and examination on sustainability reporting.

BNV and Yna

The ICSP is a professional association composed of sustainability practitioners established to educate professionals in preserving natural and social capital resources by using principle-based professional guidelines. The association promotes leading approaches in sustainability practice, research and reporting.

Congratulations, BNV and Yna!

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Simplifying share valuation

Business World | September 21, 2020

Suits The C-Suite By Jonald Vergara and Betheena Dizon

The COVID-19 pandemic may have unwittingly triggered acquisition activity as private equity investors demonstrate an increased appetite for Philippine companies. Despite the expected economic slowdown, investors continue to look for opportunities, with many entities needing sufficient capital to sustain their businesses.

Whether it be due to corporate restructuring or a simple divestment, the sale or transfer of shares of stock in a domestic corporation remains a routine commercial transaction.

Under the Tax Code, the sale, barter, exchange or transfer of shares in a domestic corporation, not traded on the stock exchange, is subject to capital gains tax and documentary stamp tax. Donor’s tax may also be imposed if the consideration for the transfer of the shares is below fair market value, though amendments to the Tax Code by the TRAIN Law emphasizes that the sale, transfer, or exchange of property made in the ordinary course of business will be considered as made for an adequate and full consideration.

As such, the Department of Finance (DoF), on the recommendation of the Bureau of Internal Revenue (BIR), recently issued Revenue Regulations (RR) No. 20-2020 effective Sept. 3, which simplified the process of determining the fair market value (FMV) of shares of stock for sale, exchange, or transfer.

RR No. 20-2020
Under RR No. 20-2020, the FMV of common shares is prima facie equivalent to the book value based on the latest audited financial statement (AFS) prior to the sale, but not earlier than the immediately preceding taxable year. For preferred shares, the FMV is set at the liquidation value equivalent to the redemption price as of the balance sheet nearest the transaction date, including any cumulative and preferred dividends in arrears.

If the investee corporation has both common and preferred shares, the book value of the common shares will be derived by deducting the liquidation value of the preferred shares from the equity and dividing the result by the number of the issued and outstanding common shares. Thus, RR No. 20-2020 underscores the difference in the valuation for common and preferred shares, given the nature and rights of each class of shares.

This clarity on the valuation of preferred shares is a welcome development since, for the longest time, previous rules did not provide details in determining the FMV of preferred shares.

NET BOOK VALUE ADJUSTMENT
Prior to the effectivity of RR No. 20-2020, FMV was determined following the provisions of RR No. 6-2013. The 2013 regulations prescribed that to determine the FMV of shares of stock, the book value of the shares, based on the investee corporation’s (corporation selling shares) latest AFS, must be adjusted to take into account the actual FMV of the real properties owned, if any, by the investee corporation.

This net book value (NBV) adjustment requires, among others, the actual valuation of the real property by an accredited appraiser and the tax declaration of the real property as issued by the City or Provincial Assessor. The highest FMV of the real property (among the appraisal report, the tax declaration, or the BIR’s zonal value) will be used to adjust the book value of the shares for FMV purposes. Consequently, the independent appraisal report and the tax declaration must be submitted to the BIR during the processing of the Certificate Authorizing Registration (CAR) covering the transfer of the shares of stock. Without the CAR, the transfer of the shares from the buyer to the seller cannot be recorded in the investee corporation’s books.

Such requirements have complicated the processes of transferring shares, depriving the government of revenue from the taxes on such transactions. The preparation of an appraisal report may take some time, depending on the properties of the investee corporations to be assessed, and entails additional costs since the appraisal report must be prepared by an independent appraiser.

STREAMLINING TAX PROCEDURES FOR COMPLIANCE
RR No. 20-2020 also appears to be consistent with the government’s objectives to streamline tax procedures. It can be recalled that RR No. 12-2018 (or the consolidated regulations to Donor’s and Estate Taxes incorporating the TRAIN Law amendments), expressly exempted the valuation of shares of stock of a decedent for Estate Tax purposes from the provisions of RR No. 6-2013 in requiring the valuation report. Both RRs give credence to the government’s intent to streamline procedures.

We can expect the simplified requirements under RR No. 20-2020 to lead to an increase in tax compliance. Without the need for a costly and complicated appraisal report, more parties may be encouraged to transfer shares. Establishing the FMV will also be easier and will minimize disputes among parties since the latest AFS should be able to provide the FMV that will serve as the base consideration.

RR No. 20-2020 can also be expected to expedite the process of securing the CAR since the independent appraisal report and the tax declaration are no longer necessary, taxpayers will need to submit fewer documents to process and secure the CAR.

Implicit in RR No. 20-2020 is the need for the investee corporation to maintain its AFS, which must also be submitted to the BIR and the Securities and Exchange Commission. Since the RR now requires that book value be based on the latest AFS not earlier than the immediately preceding taxable year, it is now imperative for corporations to always have the AFS of the immediately preceding taxable year prepared.

POTENTIAL IMPACT ON OTHER REGULATIONS
However, RR No. 20-2020 may also have an impact on other regulations that refer to RR No. 6-2013. For instance, Revenue Memorandum Order (RMO) No. 17-2016 requires that shares to be transferred from an absorbed corporation to the surviving corporation in a merger should also be valued following the guidelines under RR No. 6-2013. Now that RR No. 6-2013 has been superseded by RR No. 20-2020, it remains to be seen how the BIR will interpret the requirement in RMO No. 17-2016 on the adjustment of the FMV of shares to be transferred in a merger, as well as whether it will also adopt RR No. 20-2020 for such valuation purposes.

RR No. 20-2020 is a welcome respite for taxpayers. With greater facility of transactions comes a potential increase in compliance. In turn, improved compliance can lead to an increase in the Government’s tax revenues, which could go a long way to support Government efforts in these challenging times.

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 authors and do not necessarily reflect the views of SGV, the global EY organization or its member firms.

Partner Jonald Vergara and Senior Manager Betheena Dizon are from the Tax Service Line of SGV & Co.

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Computerizing accounting systems: COVID-19 spurs move to digitize

Business World | September 28, 2020

Suits The C-Suite By Zorayda H. Panumpang and June Catherine G. Tañedo

The Philippines remains under various levels of community quarantine due to the COVID-19 pandemic. Government and private offices are temporarily closed or maintain limited operations with alternative work schemes such work-from-home. These measures have naturally affected business operations and processes. There has also been a noted increase in the use of online selling platforms as companies and entrepreneurs try to continue or augment operations during the quarantine.

The transition to digital platforms has not been without compliance challenges. Businesses have experienced difficulties in issuing duly authorized invoices or receipts because of the expiration of the Authority to Print, the inaccessibility of invoices and receipts, or the near impossibility of mailing or sending them during the enhanced community quarantine (ECQ) from March 16 to May 31. This greatly limited sales and collection since these documents are vital for claiming deductions and input VAT.

To address this, the Bureau of Internal Revenue (BIR) allowed businesses to adopt work-around procedures such as electronically sending invoices and receipts during the ECQ, subject to certain guidelines and procedures in Revenue Memorandum Circular (RMC) No. 47-2020.

These circumstances and experiences highlight the importance of digitizing business operations and processes. It is certainly high time for businesses to adopt a computerized accounting system (CAS). For those with an existing CAS, this may be the opportunity to modify or enhance it to update bookkeeping, invoicing and accounting processes. One challenge though is that the BIR requires prior authorization or permit to use a CAS, computerized books of account (CBA) and/or its components.

Revenue Memorandum Order (RMO) No. 21-2000, issued on July 17, as amended by RMO No. 29-2002, issued on Sept. 16, required all taxpayers with a CAS or their components, to apply for a Permit to Use (PTU). The RMO also required taxpayers to apply for a new PTU for any system enhancement that will result in changes to the system’s release and/or version number.

PROCEDURE UNDER RMO NO. 21-2000, AS AMENDED
Under the RMO, all applications for CAS are to be generally filed by a company’s head office at the Large Taxpayers Office (LTO) or Revenue District Office (RDO) having jurisdiction over the head office.

The application will only be processed if the RMO requirements are complete. These include documentation on the functions and features of the application, system flow, process flow, back-up procedure, disaster and recovery plan, proof of ownership, reports, correspondences, receipts and invoices that can be generated from the system with a sample layout.

The application will then be evaluated and approved by a Computerized System Evaluation Team (CSET) at the BIR national or regional office. The evaluation will include a system demonstration showing actual use of the CAS.

Under the RMO, as amended, the PTU should be issued within 10 to 40 days, depending on certain conditions. In the experience of some taxpayers, however, the evaluation takes longer. The delay is usually due to the difficulty in scheduling the system demonstration and addressing issues identified by the CSET during the demonstration.

CENTRALIZATION OF CAS APPLICATIONS
In 2015, the BIR issued RMC No. 68-2015, creating the National Accreditation Board (NAB) composed of BIR officers from various divisions in the BIR National Office. The RMC directed that accreditation of cash register machines (CRM), point-of-sale systems (POS), and other sales machines/receipting software were to be processed at the BIR National Office level only through the NAB.

While RMC No. 68-2015 specifically covered the accreditation of CRM, POS, etc., the NAB also took on the responsibility of evaluating CAS applications of taxpayers registered under the RDOs.

Some would say that, as a result of the centralization, the scheduling of system demonstrations and evaluation of the applications took much longer because the national body was alone in handling all CAS applications of taxpayers under the RDOs. Others believe that this has contributed to a backlog of pending applications.

SUSPENSION OF REQUIREMENT FOR A PTU
Early this year, the BIR issued RMC No. 10-2020, suspending the requirements for a PTU. This was carried out to promote ease of doing business and more efficient government service delivery. The RMC also reverted the processing of CAS applications to the RDOs as well as simplified documentary requirements.

Specifically, all taxpayers with pending PTU applications (including those that had undergone system demonstrations) will be allowed to use a CAS, CBA, and/or their components, without the PTU, provided the relevant requirements are submitted to the Technical Working Group (TWG) Secretariat of the RDO or Large Taxpayer Office (LTO) where they are registered. These requirements include a duly accomplished and notarized Sworn Statement and various attachments (i.e., Summary of System Description, Commercial invoice/receipts/document description, and special power of attorney, among others); sample printouts of system-generated principal and supplementary receipts or invoices; and sample printouts of system-generated Books of Account.

Instead of the PTU, an Acknowledgment Certificate (AC) with a Control Number will be issued by the TWG Secretariat — within three working days from receiving the requirements. The Control Number should then be indicated on the system-generated principal and/or supplementary receipts/invoices. Taxpayers should be aware that a post-approval evaluation may be conducted to check compliance with revenue issuances. This can take place during a BIR audit or investigation.

For any system enhancement, modification and/or upgrade that results in a change of version number and/or systems release, the taxpayer is now only required to inform the TWG Secretariat where it is registered. This is done in writing accompanied by a matrix showing the comparative changes in the current and upgraded system.

The RMC specifically referred to taxpayers with pending PTU applications with the BIR. It is not clear if this simplified procedure is the same for new applications filed after its effectivity. Moreover, the RMC provides that the BIR release separate revenue issuances on the detailed procedures implementing the RMC and the post-approval evaluation check. Pending more succinct implementation guidelines, the RDOs and LTOs may interpret the RMC differently.

The issuance of RMC No. 10-2020 is one of the many steps taken by the BIR to achieve its plans for a more digitized tax environment, encouraging compliance from taxpayers by allowing them, in the meantime, to use their existing CAS without a PTU. This also gives them the opportunity to start preparing for the upcoming implementation of the mandatory e-invoicing and electronic sales-reporting requirement under the TRAIN Act in 2023.

RMC No. 10-2020 is certainly a welcome development for taxpayers particularly at this time when businesses may need to digitize to adapt and thrive during the pandemic. In the meantime, taxpayers eagerly await the immediate issuance of the implementing procedures to allow for greater clarity and a more uniform and effective application of the RMC. This would, once and for all, streamline the procedures for using CAS.

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.

Zorayda H. Panumpang and June Catherine G. Tañedo are Senior Directors from the Tax Division of SGV & Co.

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COIN Team holds ASEAN Tax webcast

SGV’s China Overseas Investment Network (COIN) team, led by Tax Partners Fidela Francisca I. Reyes (FIR) and Maricris U. See (MUS) and Assurance Senior Manager Jonathan Bino, facilitated a webinar titled Going Global Webinar Series 2: Investing in Malaysia and the Philippines last 18 September. The webinar was conducted in Mandarin and hosted by EY China. Other speakers included members of the EY Malaysia COIN Team.

FIR, MUS and Jonathan with other members of the EY ASEAN COIN Team

The speakers discussed the tax considerations in setting up manufacturing facilities in or transferring supply chain operations to the Philippines. They presented local policies and regulations that may impact existing and new investors, such as COVID-19-related stimulus plans and tax incentives intended to mitigate the impact of the pandemic. The webinar was well-received by participants composed of executives and representatives from Chinese companies.

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CCO speaks at PAMPI meeting

On 23 September, SGV Tax Partner Cheryl C. Ong (CCO) was also a guest speaker at the General Membership Meeting of the Philippine Association of Meat Processors Inc. (PAMPI). Over 60 participants composed of representatives from manufacturers of processed meats and suppliers attended the meeting.

CCO with participants at the PAMPI meeting

She discussed tax updates on recent BIR issuances, the Bayanihan 2 Law, and pending legislation before Congress. She also discussed newly issued regulations such as the submission of BIR Form No. 1709 and related attachments on related-party transactions, the Voluntary Assessment and Payment Program for Taxable Year 2018 (RR No. 21-2020), the CREATE bill, and the extension of the period to avail of estate tax amnesty (House Bill No. 7068).

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Cebu holds CREATE webinar

SGV Cebu organized a webinar on the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill for members of the Mactan Export Processing Zone Chamber of Exporters and Manufacturers (MEPZCEM) and the Association of MEPZ Controllers and Accountants (AMCA) last 18 September. Tax Manager Anne Momongan moderated the session.

CCO presenting at the CREATE webinar

SGV Tax Partner and SGV Cebu Partner-in-Charge Cheryl C. Ong (CCO) discussed updates on the bill’s progress, its salient provisions and proposed tax incentives. She explained business strategies companies can explore to maximize the bill’s incentives, creating better opportunities for their businesses. She also provided insights on how companies can prepare for the proposed tax reforms. The webinar’s organizing team included Tax Managers Karen Mae Calam-Ibanez, Edmond Emperio and Senior Associate Wennonah Marie Garces.

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CCO joins EY ASEAN Tax webcast

SGV Tax Partner Cheryl C. Ong (CCO) was one of the speakers at the EY ASEAN Tax webcast last 17 September. The webinar covered how ASEAN companies and potential investors can optimize their investments in Malaysia, the Philippines and Myanmar. The presenters discussed how businesses can benefit from a global investment strategy on relocation and expansion, maximizing the benefits of COVID-19-related incentives in the three countries.

CCO presenting at the EY ASEAN Tax webcast

CCO discussed key points and relevant issues in investing in the Philippines and provided an overview of Philippine tax incentives, emphasizing the recent proposed tax reforms and items under the 2017 Investment Priorities Plan (IPP). She also discussed local COVID-19-related incentives under Republic Act No. 11469 or the Bayanihan to Heal as One Act.

Other speakers included EY ASEAN Tax Leader Amarjeet Singh; EY Global Incentives, Innovation and Location Services Leader Brian R. Smith; and EY Myanmar Tax Director Phyo May Thaw.

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Tax Partners lead CREATE webinar with CILA

SGV Clark and Tax Partners Hentje Leo L. Leaño (LLL) and Margaux A. Advincula (MAA) led a webinar titled Tax Reform II Bill: Corporate Recovery and Tax Incentives for Enterprises (CREATE) last 16 September. Co-hosted by the Clark Investors and Locators Association (CILA), the webinar provided updates on the CREATE bill and its potential impact on Clark locators. The speakers discussed the salient provisions of the CREATE bill, including its proposed adjustments in corporate tax and rationalization of fiscal incentives. They shared insights on how businesses can prepare for and maximize the incentives of the proposed tax reforms.

LLL, MAA and JEZ presenting at the webinar

CILA Vice Chairman Rene Philip Banzon welcomed nearly 100 participants to the event, including CILA Chairman Dr. Bong Alvaro, Jr. and Clark Development Corporation OIC of the Business Development and Business Enhancement Group Rodem Perez. CILA President Dr. Frankie Villanueva, Jr. shared CILA’s position on the proposed tax reforms. Assurance Partner and CILA Treasurer Jose Pepito E. Zabat (JEZ) delivered the closing remarks and thanked the participants and the webinar’s organizing team. Tax Director Maria Michaela Ledesma moderated the webinar.

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