WPT joins Ayala-FINEX Summit

SGV Chairman and Country Managing Partner (CMP) Wilson P. Tan (WPT) was a panelist in the Ayala-FINEX Finance Summit last 9 September. With the theme Reimagining the future. Leading through the unknown, the summit discussed leading practices and business strategies aimed at managing the challenges caused by the pandemic, as well as global megatrends and possible scenarios for businesses in a future beyond the pandemic.

JAZA presenting at the Ayala-FINEX Summit

Ayala Corporation (AC) Chairman and CEO Jaime Augusto Zobel de Ayala (JAZA) shared how AC is reframing the future through innovative and sustainable practices. He emphasized the importance of stakeholder-centric and discovery-driven approaches in optimizing customer reach and experience, designing alternative work arrangements and operating models, and renewing commitment to society. He also presented AC’s digital transformation framework and spoke on the pandemic’s impact on the areas of digital finance, e-commerce and telemedicine, highlighting how it has encouraged them to innovate and redesign their operating models.

WPT presenting at the Ayala-FINEX Summit

WPT commended AC’s people-centric business approach and its commitment to its stakeholders. He also commended AC’s inspiring social corporate responsibility initiatives that strengthen meaningful collaboration across organizations.

Emphasizing the value of digital transformation and innovation strategies, he pointed out that business leaders need to maximize digital platforms to drive long-term value in their organizations, connect with their people, and better serve their clients. WPT shared how SGV has also leveraged on digital platforms to continue delivering exceptional client service during the pandemic.

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Managing the crisis: Three corporate insights from COVID-19

Business World | October 5, 2020

Suits The C-Suite By Aris C. Malantic

Corporates in the COVID-19 world continue to experience the effects of the pandemic. In managing these, CFOs have focused on key areas gathered from deliberations by crisis management teams and boardrooms as well as observed from other companies.

Even as economic and business climates evolve, common challenges across sectors remain relevant. As we move to the last quarter of the calendar year, allow us to highlight lessons learned in three areas: financial reporting; cash and liquidity; and engagement with customers, suppliers and shareholders.

FINANCIAL REPORTING
The pandemic brought about key financial reporting issues that had to be addressed by financial statement preparers.

For example, impairment indicators on assets, including goodwill, may be observed in certain manufacturing, retail, hospitality and real estate concerns which operations have been hampered by the current situation. While these indicators may not necessarily translate to impairment losses, these companies will need to perform more rigorous impairment tests to determine any impairment losses that they will need to recognize in their financial reports.

The deterioration in credit quality of receivable portfolios as a result of the pandemic will have a significant impact on expected credit losses measurement. Given the uncertainties, incorporating the specific effects of the pandemic and government support measures on a reasonable and supportable basis pose challenges in the measurement. When it is not possible to reflect such information in models, post-model overlays or adjustments would need to be considered.

As a result of the pandemic, some companies see significant costs in restructuring their businesses and in reconfiguring workplaces and adopting systems in order to continuously operate even within the constraints of social distancing and remote working. This may reveal potential financial reporting issues when it comes to the timing of recognition of employee expenses and provisions.

New revenue models were developed or accelerated due to COVID-19, such as the use of online platforms. Certain contracts have also been revisited or modified. These will need to be correctly accounted for to ensure they give an accurate picture of a business’s financial health.

These are examples of the financial reporting considerations and the applicability depends on the related facts and circumstances. CFOs are proactively engaging management, Audit Committees, Boards, auditors and advisors as they develop the comprehensive assessments and reflect the impact in financial reports.

CASH AND LIQUIDITY
The slowdown in economic and business activities vis-à-vis cash requirements placed cash and liquidity management at the forefront of the corporate agenda. Finance teams employ several techniques in managing liquidity, including but not limited to cash flows forecasting, more proactive budget review and cash flows management.

Cash flow forecasting and budget reviews, in the near and medium term, incorporate various scenarios supported by economic modelling where possible. These scenarios show different types of recovery (V-shaped, U-Shaped, L-Shaped, etc.) as a single cash flow forecast will not be enough to sufficiently address the uncertainty that prevails in most organizations. Management customizes the responses based on these scenarios.

An agile approach to forecasting is also utilized, such as performing forecasts that are typically between one and three months in length, taking into account the fluid nature of current events. This activity includes a comprehensive review of cash sources and uses such as those from trade debtors and creditors and credit lines.

Cash-flow prioritization includes reducing certain expenditures such as those for advertising and marketing or deferring projects to the extent that these do not adversely affect revenue or cash generation.

A specific area of liquidity risk lies in leases, especially in sectors where businesses commonly have significant long-term lease obligations such as retail. If businesses are unable to reduce these obligations, particularly during this period where their cash flow is diminished, they may be constrained to close certain branches or outlets or even the entire business. Locally, property owners have already offered rent concessions such as deferred payments or rental based on percentage of sales to retailers, among others. Government has also sought to ease the burden of these obligations on lessees and businesses by enjoining property owners to ease lease payments.

ENGAGEMENT WITH SUPPLIERS, CUSTOMERS AND SHAREHOLDERS
Finance and operational teams are working together to actively engage suppliers and customers in negotiating payment terms, accelerating collections and crafting new arrangements. Payment terms can be made a means of providing support, where they are extended for stricken customers or sped up for struggling suppliers.

Companies are taking more than a near-term view with respect to relationships with suppliers and customers. This will help ensure a functioning ecosystem during the recovery period.

Meanwhile, transparent financial reporting reinforces effective communication between businesses and shareholders, with periodic reporting presenting opportunities to build shareholder trust. This is particularly true around sensitive issues such as asset impairment, dividends, and going concern.

It should be noted that the rise in virtual annual general meetings requires finance teams to carefully consider the potential need to provide further updates outside formal reporting timelines.

STRATEGIZING FOR TOMORROW
Managing the impact of the pandemic on financial reporting, liquidity and engagement with various stakeholders are pressing matters that will need to be addressed swiftly. However, companies will also need to take a long-term view by thinking about how the new normal will affect their business models and workplaces. They need to review the organization’s purpose as well as how they generate long-term value to stakeholders.

As a strategic partner, CFOs must be nimble and flexible as they help the companies navigate in unchartered territories.

This article has been adopted from the EY article, “Seven corporate reporting lessons from Asia’s experience of COVID-19” by Peter Wollmert, EY EMIA Assurance Leader.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Aris C. Malantic is the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co. and EY ASEAN FAAS and Market Group 7 Leader of SGV & Co.

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On the REIT track

Business World | October 12, 2020

Suits The C-Suite By Marie Stephanie C. Tan-Hamed and Veronica A. Santos

After the first Real Estate Investment Trust or REIT listing recently, several real estate developers and potential REIT Sponsors are considering converting their portfolio of assets into REITs, and many domestic and foreign investors are eager to participate in future REIT listings. With such significant interest from across the industry, the focus is on larger listings and more successful REIT conversions.

Our REIT law provides an advantageous tax regime to a REIT Company (REITCo) as long as the REITCo complies with the necessary requirements. However, this undertaking is not merely an exercise in applying for and maintaining one tax regime in lieu of another. The REIT journey begins with an assessment of the opportunity with guiding principles grounded on maximizing shareholder value, articulating the value story, preparing the organization for the operational changes as well as the myriad external communications and reporting requirements to the capital markets, all in addition to the tax considerations.

STARTING THE REIT JOURNEY
Considering the complexity of parts, how can an organization embark on such a journey? With the above guiding principles, the organization can start with an evaluation of capital structure and regulatory requirements that will maximize deal value and liquidity.

Tax and capital markets considerations will still drive the overall transaction structure, while the analysis of capital structure will involve an assessment of debt capacity.

A Sponsor can transfer to a REIT real property that is subject to a mortgage by way of a taxable transfer (i.e., an outright sale to a REIT together with the mortgage) or by way of a tax-free transfer under Section 40(C)(2) of the Tax Code. In the case of the latter, however, if the amount of the liabilities assumed by the REITCo plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis in the property transferred, then the excess shall be recognized as a gain on the part of the transferor, which shall be taxed accordingly.

Apart from such incidental transfers of liabilities to a REITCo, the REITCo itself can issue publicly traded debt, or incur bank debt to finance acquisitions of REITable assets. The total borrowings and deferred payments of a REITCo that has a publicly disclosed investment credit grade rating by a duly accredited or internationally recognized rating agency may exceed 35% (which is the default ceiling) but may not exceed 70% of its deposited property.

CONSIDERATIONS TO MAKE
Leverage is one means to maximize returns to shareholders and introducing debt into the REIT structure should be considered early on, since it may bring with it issues on seniority of debt claims, approval of creditors, and costs of refinancing.

Another area to consider would be the regulatory framework. This includes an assessment of the ease in the actual transfer of title, actual sale or transfer of the assets, alternatives to lease renewal, any restrictions that may limit the assets to be transferred, and most importantly, an assessment of the timeliness of securing rulings from the Bureau of Internal Revenue (BIR) confirming tax-free transfers to a REITCo.

Strategic analysis of the asset portfolio and its potential for sustained growth beyond the initial listing are of equal importance in evaluating the benefits of a REIT conversion. Within the pool of assets in a portfolio, the challenge is to identify which of those are REITable assets, including the current tax incentives the property is enjoying versus the tax incentives the REIT offers, as well as those assets that can provide steady streams of income and cash flow. In case a building is decided to be part of the REITable assets, the question of whether a Sponsor-owned land will be transferred as well or will be leased out to the REIT company is another important consideration given its impact on the future valuation, cash flow and calculated distributable income. These considerations will involve heavy modelling and optimization with various scenario analyses.

Analysis of cost structures is just as important. This is because while a REIT Company can operate within a lean infrastructure, standalone costs should be identified and considered in the overall return analysis. Identifying which are centralized costs previously incurred by the Sponsor and which are standalone costs once a REIT is set-up is critical to a REIT operating model. It would be useful to compare pre-REIT and post-REIT scenarios to benchmark the costs and better analyze the value creation potential of a REIT conversion.

Lease analyses are also cornerstones in the benefit analysis of a REIT conversion. A true analysis of the leases is required to ensure that lease agreements are reflected in the financial statements in accordance with the current reporting standards. A review of the lease terms, rates, renewal provisions and remaining economic life of the REIT assets will be critical to ensure that these satisfy not just the tax and accounting requirements but also the commercial implications. Appropriate valuation of the assets and leases is also necessary to validate the REIT status and transaction structuring.

THE REIT STRATEGY
It also goes without saying that, with all the above considerations, the resulting accounting impact must be carefully evaluated to ensure that the correctness of application of the accounting standards and the anticipated outcome in the financial statements is as it should be. The appropriate accounting method for recognition and measurement of the asset transfers, leases, fair value measurement, and revenues for both the Sponsor and the REITCo must be properly applied.

This may be a daunting task for some organizations contemplating a REIT listing. Setting up a framework in the form of a “gating” mechanism to guide the organization will be useful to aid in the analysis of whether to continue with the listing journey or defer to the future when a more opportune time is best for the organization. A simple framework can start with the evaluation of alternatives and selection of a REIT strategy where the organization can conduct a feasibility and readiness assessment, prior to deciding whether to go ahead or not. After which, it can develop a plan to implement the selected REIT strategy and then execute the REIT conversion.

Embarking on and getting your REIT conversion journey on the right track can be challenging, but ultimately, rewarding. However, as with all things, timing will be different for each organization and it will greatly depend on the readiness of the organization, and ideally, the right market conditions.

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.

Marie Stephanie C. Tan-Hamed And Veronica A. Santos are a Strategy and Transactions Partner and a Tax Principal, respectively, of SGV & Co.

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Clark conducts CREATE webinar with AFAB

SGV Clark and Tax Partners Hentje Leo L. Leaño (LLL) and Margaux A. Advincula (MAA) led a tax briefing on the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill for members of the Authority of the Freeport Area of Bataan (AFAB). AFAB Administrator Engr. Emmanuel D. Pineda welcomed over 80 representatives from different companies and organizations to the event.

LLL and MAA presenting at the AFAB webinar

The speakers discussed the latest updates on the CREATE bill, including its salient features and its potential impact on the Bataan locators. They also explained the proposed adjustments in corporate tax and rationalization of fiscal incentives.

Participants included AFAB Registration Division OIC Alejandro Sugatain, Enterprise Services Officer IV Krizzia Katrina Ocampo, Attorney III Reshel Amor Apigo, Atty. Kara Herrera of the Office of Congressman Jose Enrique Garcia, and SGV Clark Partner-In-Charge Peps Zabat. The webinar was moderated by Tax Associate Director Michael Ray Lapasaran.

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Consulting holds Risk Management webinar

SGV’s Consulting team organized a webinar titled Managing Third-Party Risks using Service Organization Controls (SOC) reports – COVID-19 Considerations on 24 September. The webinar provided a high-level overview on how organizations can manage risks in processes outsourced to third-party service providers through SOC reports.

Consulting Partner Allan W. Ocho (AWO) provided an overview of Trust by Design, a methodology that helps businesses build mutual trust between their company and their third-party service providers. He discussed the key drivers, trends, risks and benefits of third-party risk management, emphasizing the third-party risk assessment process and execution.

AWO and RKC with the Consulting webinar organizing team

SGV Business Consulting Leader Ryan K. Chua (RKC) provided an overview of SOC Reporting, its benefits, importance, and relevance to stakeholders. He also presented sample case studies of SOC Reporting in incident management and payroll processing, among others. He then spoke on the challenges that businesses and their third-party service providers encounter during the pandemic, emphasizing changes to systems and controls. He ended the discussion by presenting action steps that participants may implement in their organizations to maximize SOC Reporting and effectively manage third-party risks.

Over 260 chief risk and compliance officers from various industries, such as banking & capital markets and wealth and asset management sectors, attended the event. Consulting Manager Ma. Isabel Herrera moderated the session. The webinar’s organizing team included Consulting Senior Manager Dara Ledda Urbiztondo, Senior Associates Michelle Helena Uy and Joshua Salvador, and Associate Bianca Monalize Pagarigan.

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Tax Partners hold webinar with SEIPI

SGV Tax Partners Cheryl C. Ong (CCO) and Deonah Marco-Go (DMG) were resource speakers at the General Membership Meeting of the Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI) held last 17 September.

CCO led the discussion on the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill and its salient provisions. She also provided insights on how companies can maximize the incentives under the bill and prepare for the proposed tax reforms.

DMG discussed the latest BIR Transfer Pricing issuances, particularly Revenue Regulations No. 19-2020 which prescribes the use of the new BIR Form No. 1709, and Revenue Memorandum Circular Nos. 76-2020 and 98-2020 which clarify certain issues on the filing of BIR Form No. 1709 and its attachments. She discussed the issuances’ salient provisions and how taxpayers can comply with the new requirements.

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Alumni Partners attend virtual Executive Briefing

SGV hosted an executive briefing for its Alumni Partners last 25 September. The briefing focused on the challenges that businesses continue to face during the pandemic. Chairman and Country Managing Partner Wilson Tan delivered the opening remarks and emphasized that organizations should reshape their businesses to prepare for a world beyond the pandemic.

Speakers and participants at the Executive Briefing

SGV Strategy and Transactions Consultant Alex Dacanay began the session with an overview of the Philippine economy. He discussed the pandemic’s impact on businesses and consumer spending. He also provided an overview of the government’s programs and issuances aimed at strengthening health services and supporting low-income communities.

SGV Consulting Leader Rossana A. Fajardo (RAF) discussed the pandemic’s future impact across four domains: the global order, societies and economies, firms and markets, and households and individuals. She explained how the pandemic will affect globalization, urban landscapes, talent management, and individual lifestyles. She also emphasized the value of digital transformation to drive innovation and growth within an organization. RAF also presented principles that business leaders can follow to guide their organization through and beyond the pandemic.

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CCaSS holds virtual signing ceremony with PCEx

SGV’s Climate Change and Sustainability Services (CCaSS) Team, led by CCaSS Partner Benjamin N. Villacorte (BNV), organized a virtual signing ceremony with Plastic Credit Exchange (PCEx). The ceremony formalized the Firm’s engagement with PCEx aimed at upholding transparency and driving long-term growth in the organization.

Nanette Medved-Po and Richard De Guzman presenting at the virtual signing ceremony

PCEx Founder Nanette Medved-Po welcomed participants to the event and thanked SGV for supporting the organization’s core sustainability initiatives that aim to deliver solutions to global environmental issues. PCEx Sustainable Community Development Manager Richard De Guzman moderated the session and provided an overview of the organization’s services and operations. He discussed their plastic offsetting and crediting program and plastic neutral certification process which aim to help businesses reduce plastic waste and achieve plastic neutrality.

CCaSS Senior Associate Yna Antipala then presented an overview of SGV’s CCaSS offerings and solutions, including the EY Sustainability Assurance Methodology. BNV delivered the closing remarks and emphasized the Firm’s commitment towards building a future with economic stability and environmental security.

SGV Partners and staff with Nanette and Richard during the virtual signing ceremony

Participants at the event included SGV Chairman and Country Managing Partner Wilson Tan, Vice Chair and Deputy Managing Partner Vivian Ruiz, Learning and Development Leader and CCaSS Partner Clairma Mangangey, Market Group 7 Leader Aris Malantic, Assurance Senior Partner Itos Cruz, and Tax Partner Sonia Segovia.

PCEx is a non-profit organization that partners with sustainability-conscious businesses around the globe to responsibly offset their plastic footprint and reduce the flow of plastic waste into landfills and oceans.

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MCM inducted as First Member of PRC CPD Council

Market Group 2 Leader Marydith C. Miguel (MCM) was inducted as the First Member of the Professional Regulation Commission Continuing Professional Development (PRC – CPD) Council for Accountancy, representing the Philippine Institute of Certified Public Accountants (PICPA). PRC Chairman Hon. Teofilo S. Pilando, Jr. led the virtual ceremony on 6 October. PRC Board of Accountancy Chairman Hon. Noe G. Quiñanola was also inducted as the Chairman of the Council. Other attendees included PRC Commissioners Hon. Yolanda D. Reyes and Hon. Jose Y. Cueto, Jr.

The CPD Council for Accountancy is responsible for the promotion and implementation of programs aimed at the continuous improvement of knowledge, skills and competencies of professional accountants.

Congratulations, MCM!

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Digital transactions on the rise: Are they taxable?

Business World | October 19, 2020

Suits The C-Suite By Jan Kriezl M. Catipay

(First of two parts)

For many of us, digital transactions have become well-integrated into our daily lives — from online banking, shopping, ordering food to booking flights. This has been especially true during the pandemic, where the convenience of access to basic services and even complex ones like telemedicine within the confines of one’s home, has pretty much become the norm.

With the increase in revenue generated through digital services comes the need to plug in and capture tax leakages arising from these transactions to promote equity and fairness. For instance, the purchase of goods and services, regardless of whether these are from a physical store or online, should be subjected to VAT. However, since there are no existing mechanisms which allow the tax authorities to monitor them nor are there tax rules that detail how online transactions (coursed through various web/mobile-based applications) are subject to VAT, most, if not all, of these digital transactions escape taxation. This gives undue advantage to online sellers and platforms even when the products sold are basically the same.

DIGITAL TRANSACTIONS
With the increasing usage of digital transactions in the past decade, the Bureau of Internal Revenue (BIR) tried to keep pace by issuing Revenue Memorandum Circular (RMC) No. 55-2013. The RMC emphasizes that taxpayers engaged in online business transactions (e.g., online selling/retail, intermediary service, advertisement/classified ads, auctions) should be treated akin to traditional or physical business establishments. It reiterated that existing tax laws and regulations on the tax treatment of sales/purchases of goods/services are to be applied equally without distinction on whether the marketing channel is online or through traditional physical locations.

Additionally, with the subsequent increase of on-demand ride-hailing and sharing apps, the BIR then issued RMC No. 70-2015 to reiterate the tax treatment of persons engaged in the business of land transportation, particularly Transport Network Companies (TNC) and their partners and suppliers. The RMC states that if the TNC is a holder of a valid and current Certificate of Public Convenience, it will be treated as a common carrier and subject to 3% Common Carrier’s Tax. Otherwise, it will be classified as a land transportation service contractor and subject to 12% VAT.

The current global pandemic has further spurred the growth of online sellers. In response, the BIR issued RMC No. 60-2020 to remind persons doing business and engaging in digital transactions to ensure the registration of their businesses and pay their correct taxes. This Circular not only covers sellers but also payment gateways, delivery channels, internet service providers, and other facilitators.

HOUSE BILL NO. 7425 — AN ACT IMPOSING VALUE-ADDED TAX ON DIGITAL TRANSACTIONS
With the country’s struggle to continuously finance its efforts to combat COVID-19, the government sought to increase its revenue collection and at the same time, set a statutory clarification on the “VATability” of services rendered electronically.

House Bill No. 7425 was filed on Aug. 18 as a substitute bill for House Bills No. 4531, 6765, 6944, and House Resolution No. 685.

This bill also seeks to clarify the imposition of 12% VAT on the supply by a resident or non-resident seller of electronic devices, the online sale of services that includes online advertisement services and provision for digital advertising space, digital services in exchange for a regular subscription fee, and the supply of other electronic and online services that can be delivered through the internet. The substitute bill aims to level the playing field between traditional and digital businesses by clarifying the imposition of VAT on digital service providers.

NON-RESIDENT DIGITAL SERVICE PROVIDERS (DSPS)
The bill proposes to add another section in the Tax Code which requires non-resident Digital Service Providers (DSPs) to collect and remit the VAT in transactions that go through its platform. However, these non-resident DSPs are precluded from claiming any creditable input tax.

The new section defines a DSP as a provider of a digital service (defined as any service that is delivered or subscribed over the internet or other electronic network, which cannot be obtained without the use of information technology and where the delivery of the service may be automated) or goods to a buyer through operating an online platform for the purpose of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person.

DSPs may include a third party that acts as a conduit for goods or services offered by a supplier to a buyer and receives commission; a platform provider for the promotion that uses the internet to deliver marketing messages to attract buyers; a host of online auctions conducted through the internet, where the seller sells the product or service to the person who bids the highest price; a supplier of digital services to a buyer in exchange for a regular subscription fee; and a supplier of electronic and online services that can be delivered through the internet.

It also requires non-resident DSPs that engage in the sale or exchange of digital services to register for VAT if the gross sales/receipts for the past year exceeded P3 million or if there are grounds to believe that the gross sales/receipts for the next year will exceed P3 million.

In the second part of this article, we will discuss the following topics: how a VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate transactions; the proposed amended VAT exemption on the sale, importation, printing or publication of books, and the state of our digital tax laws compared with neighboring ASEAN countries.

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.

Jan Kriezl M. Catipay is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

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Digital transactions on the rise: Are they taxable?

Business World | October 26, 2020

Suits The C-Suite By Jan Kriezl M. Catipay

(Second of two parts)

In last week’s article, we discussed the rise of digital transactions, House Bill No. 7425, and how it proposes to add another section in the Tax Code, which requires non-resident Digital Service Providers (DSPs) to collect and remit the VAT in transactions that go through its platform. We also defined DSPs as a provider of a digital service or goods to a buyer through operating an online platform for the purpose of buying and selling of goods or services, or by making transactions for the provision of digital services on behalf of any person.

In the second part of this article, we will discuss how a VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate transactions; the proposed amended VAT exemption on the sale, import, printing or publication of books; and the state of our digital tax laws compared with neighboring ASEAN countries.

ELECTRONIC INVOICING
A VAT-registered non-resident DSP may issue an electronic invoice or receipt to substantiate a transaction. Note that the TRAIN Law requires taxpayers engaged in e-commerce, among others, to issue electronic receipts or sales invoices in lieu of manual receipts or invoices within five years from the effectivity of the TRAIN law (on or before Jan. 1, 2023, subject to the establishment of a reliable system capable of storing and processing the required data). The e-invoicing will effectively create a mechanism for the BIR to properly monitor transactions conducted over the internet and increase the efficiency of tax administration.

The BIR is also required to establish a simplified automated registration system for nonresident DSPs. However, a transitory period of 180 days from the effectivity of the Act is provided to enable the BIR to establish implementation systems before VAT is imposed on the DSPs.

There may be challenges to ensure the proper monitoring and compliance of non-resident DSPs with the required BIR registration and payment of the appropriate tax. A similar challenge also applies to resident suppliers of electronic or online sale of services.

The BIR was given only 180 days to create a simple yet efficient automated registration system for non-resident DSPs. Is this enough time for the BIR?

Without efficient monitoring, it may be very difficult to implement and properly collect taxes. We also note that although most of the amendments are seemingly focused on VAT, it is not the DSPs that are being taxed but the consumers with the DSPs acting as a medium to collect VAT from their buyers.

BOOKS SOLD ELECTRONICALLY OR ONLINE
Another provision that the House Bill seeks to amend is on VAT exempt transactions. Currently, the Tax Code provides VAT exemption on the sale, import, printing or publication of books, newspapers, magazines, reviews or bulletins. RMC No. 75-2012 clarified that to be exempt, these should be materials in hard copy. The VAT exemption does not cover those in digital or electronic format or computerized versions.

However, under the proposed House Bill No. 7425, it amended Section 109 (Exempt Transactions) to include books, newspapers, magazines, journals, reviews and bulletins that are sold electronically or online as VAT exempt.

With schools now conducting online classes as the new normal, both educators and learners will need more convenient access to e-books or other educational materials in digital format. The proposed amendment will greatly support the academe in providing affordable quality education.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)
It is also worth mentioning that over the years, there have been global developments in digital tax. In 2015, the OECD published the Base Erosion and Profits Shifting (BEPS) Action 1 Report which recognized the broader tax challenges of the digital economy, in relation to nexus, data and characterization.

In 2019, the members of the OECD or G20 released a Program of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy which focused on a Two-Pillar Approach. Pillar One covers the allocation of taxing rights and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules, while Pillar Two focuses on the remaining BEPS issues. A final report which will set out the technical details of the consensus-based solution is targeted to be released by the end of 2020. The Philippines may very well follow suit in the near future.

CATCHING UP WITH ASEAN MEMBER COUNTRIES
The additional tax compliance requirements will certainly have an impact on businesses involved in digital services, especially non-residents. These requirements may be daunting and may pose additional burdens to doing business in the Philippines. On the other hand, the proposed bill may be seen as setting the country out on the right track. Our digital tax laws need to catch up with those of our ASEAN neighbors, which have started imposing either VAT or GST on digital transactions.

Indonesia introduced Reg 48/2020 in May which imposes a 10% VAT, effective July 1, 2020, on cross-border digital transactions. Singapore implemented a new Overseas Vendor Registration (OVR) system which requires foreign digital service providers to register and be charged 7% GST starting Jan. 1, 2020.

Malaysia imposed a 6% Digital Service Tax effective Jan. 1, 2020, on its foreign digital service providers. Laos has been implementing a 10% VAT on supplies of goods and services by electronic means since December 2018, upon effectivity of its amended VAT law.

In Thailand, a draft amendment to the Revenue Code has been approved by the cabinet which would require foreign electronic service providers to pay 7% VAT on digital services. The draft has yet to be approved by parliament.

In this evolving digital era where technology constantly transforms and businesses continue to innovate, the tax ecosystem may falter if its laws fail to adapt to the changing times. Modernization and digitization challenge antiquated tax laws. Progress dictates that such laws be revisited for the benefit of national development.

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.

Jan Kriezl M. Catipay is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

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WPT opens MBC webinar session

SGV Chairman and CMP Wilson P. Tan (WPT) was featured in the third session of the MBC webinar series titled Leading in Extraordinary Times on 6 October. The series features top CEOs as they share the challenges that they have faced and the solutions they have developed to respond to the issues caused by the pandemic. MBC Executive Director Coco Alcuaz welcomed MBC members and executives to the session.

WPT presenting at the MBC webinar

WPT delivered the opening remarks and discussed the measures that SGV has implemented to ensure business continuity and resilience. He spoke on the value of digital transformation and encouraged participants to integrate this into their corporate strategies and foster a culture of innovation in their organizations.

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KSM speaks at ANC’s Market Edge

Consulting Markets Co-Leader and ASEAN Finance Fields of Play Leader Kathrina S. Macaisa-Peña (KSM) was a guest speaker on the Market Edge, hosted by ANC Anchor Michelle Ong, last 7 October.

KSM with ANC Anchor Michelle Ong

KSM discussed the state of supply chains (SCs) during the pandemic. She provided an overview of the gaps in local SCs such as the inability of companies to move goods around and meet customer requirements due to strict quarantine measures; the state of local infrastructure and congested roads and ports; and companies’ ability to visualize their end-to-end supply chain model. Emphasizing the pandemic’s impact on operations and investment strategies of local companies, KSM also discussed key trends and steps businesses are implementing to build their resilience.

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WPT assumes MAP and FINEX board positions

SGV Chairman and CMP Wilson P. Tan (WPT) was elected as a Governor of the Management Association of the Philippines (MAP) and Director of the Financial Executives Institute of the Philippines (FINEX) for 2021-2022.

As a longtime member of both organizations, he will continue to support MAP’s vision of promoting management excellence for nation building and FINEX’s mission of promoting the progressive and innovative application of financial knowledge and skills to society.

Congratulations, WPT!

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Luisa brings home the Owl!

The Staff Anniversary program also recognized high-performing staff members who live our Purpose to the fullest.

The SyCip Award, named after our Founder, was presented to Talent Director Luisa Anna Hebron for her dedicated leadership role as head of Talent Consultants who assist Market Groups and Service Lines in all aspects of people management. She was also commended for her valuable contributions to the SGV Crisis Management Team, successfully handling multiple disruptions that demanded immediate action.

Special Awards were given to several teams and individuals for their outstanding contributions during FY20.

The Special Awards for Client Leadership were given to Tax Senior Director Mary Grace Cabalida, Strategy and Transactions Director Erwin Daniel Garcia, Consulting Senior Director Aileen Uy, the B2B Leads to Cash Business Readiness Team, Consumer Health Business Integration Project Team, Green Finance Team, and Project Arrow and Project Wave Team.

The Special Awards for Team Leadership were presented to Assurance Senior Director Marco Rene Barredo, Assurance Senior Associate Rochelle Cruzata, the Digital Audit Core Enablement Team, GCO Team, Global Cybersecurity Managed Services Executive Team, and Team Aloha.

The Special Awards for Personal Leadership were awarded to Consulting Director Jerome Alvarez, Talent Supervising Associate Julia-Anne Deypalan, Consulting Director Meleusipo Fonollera, Financial Services Organization Senior Director Leslie Anne Huang, Assurance Director Marius Cesar Palacios, and Forensics Senior Director Zuzete Ubanan.

The Special Award for Business Leadership was given to the Tax Core Team.

Congratulations to our SyCip and Special awardees!

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SGV recognizes Loyalty

SGV also honored its loyal employees during its 74th Anniversary. Loyalty Awards were presented to longtime staff for their outstanding and dedicated years of service to the Firm.

Loyalty Awards are given to those who have served the Firm for 10, 15, 20, 25 and 30 years.

25- and 30-year Loyalty Awardees

The 25-year loyalty awardees were Assurance Partner Editha Estacio, Tax Partner Reynante Marcelo and Tax Principal Veronica Santos.

The 30-year awardees were Tax Leader Fame Delos Santos, People Advisory Services Senior Director Elena Manuel, Finance Assistant Director Tita Medina, Executive Secretary Ma. Ester Rodriguez, Vice Chair and Deputy Managing Partner Vivian Ruiz, and Business Services Group (BSG) Assistant Director Marilyn Uy.

Kudos to all our loyal partners and staff!

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SGV celebrates 74th Staff Anniversary

SGV Partners and staff held the first-ever virtual Staff Anniversary on 16 October. Celebrating 74 purposeful years, the Firm recognized its outstanding professionals who remain dedicated to delivering exceptional client service despite the latest disruptions.

WPT and RMP Nam Soon Liew

SGV Chairman and Country Managing Partner (CMP) Wilson P. Tan (WPT) delivered the opening remarks and commended everyone for their dedication, solidarity and renewed commitment to professional and personal growth. He discussed the challenges the Firm has faced in the past and emphasized that SGVeans have the strength and resolve to overcome disruptions and emerge better and stronger than ever. He concluded his remarks with a presentation of SGV’s Leadership team, which guides the Firm’s professionals towards fulfilling our Purpose.

EY ASEAN Regional Managing Partner (RMP) Nam Soon Liew then shared a special message encouraging everyone to remain inspired and focused on our collective Purpose of building a better working world. He also highlighted the value of purposeful leadership and recognized the projects and programs led by SGVeans to help communities affected by the pandemic.

The anniversary program then featured the Loyalty, Special and SyCip Awards as well as the promotions of staff to CBS Director, Senior Director and Executive Director. In the days leading to the virtual anniversary event, each Market Group and Business Enablement Services (BES) held their respective promotion ceremonies.

Video tributes followed in honor of retired Assurance Partner Jo Estomo and former Chairman and Managing Partner Itos Cruz. Itos will be retiring by the end of this year. In between segments, brief testimonies of staff members were featured on how our Purpose guides them in their personal and professional journeys.

The program concluded with the formal presentation of the 6 new partners and one principal, namely: Genghis Grospe, Juan Miguel Machuca, Conrad Allan Alviz, Redgienald Radam, Smith Lim, Lady March Diam Trinidad and Joyce Francisco.

Newly Admitted Partners and Principal

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PFRS 9 expected credit losses: How can banks apply pre-pandemic models?

Business World | November 2, 2020

Suits The C-Suite​ By Redgienald G. Radam

The pandemic has created disruptions affecting industries at a global scale. As an offshoot, we have seen unprecedented levels of government relief measures to help curb the pandemic’s economic impact. The pandemic and the subsequent government actions to aid borrowers on their loan payments, have, in turn, affected how banks apply their Expected Credit Loss (ECL) models under PFRS 9 Financial Instruments, which had been developed prior to the pandemic.

The economic disturbances have led to liquidity issues for many entities and individuals, putting into question the credit quality of the financial assets or receivables currently held by banks. Yet events continue to unfold, which means that we have not seen the full extent of COVID-19 impact. This makes the measurement of ECL more challenging as PFRS 9 requires that the calculated ECL capture expectations of future economic conditions that will affect borrowers’ ability to pay.

Under PFRS 9, ECL is a probability-weighted amount determined by a range of possible outcomes (scenarios) and requires the incorporation of reasonable and supportable information about past events, current conditions and forecasts of future economic conditions (i.e., forward-looking information) that are available at the reporting date.

Relating these to the current crisis, banks should be making assumptions in their ECL calculation about the extent of the pandemic’s impact on the collectability of financial assets. As such, it is clear that banks will need to update the ECL models or assumptions previously applied to their reporting as of Dec. 31, 2019 reporting because those would not have foreseen the economic impact of the pandemic.

INSIGHTS IN RELATION TO ECL MODELS

Based on the EY survey results on COVID-19 benchmarking undertaken in March 2020 across selected global banks, we share some insights on how the impact of the COVID-19 pandemic was considered in the surveyed banks’ ECL models.

While there are variations in the approach to quantify the impact of COVID-19, a majority used portfolio level overlays. This involves incorporating the effect of the pandemic to the forward-looking adjustment to be applied to a group of borrowers with similar credit risk characteristics.

A majority of the banks surveyed also defined specific COVID-19 scenarios for their ECL models. Many have revised the probability weightings applied to the economic scenarios used in the ECL measurement.

Some banks have captured staging movements (i.e., assessment of significant increase in credit risk) through management overlays while others are taking a “top down” approach by migrating part or all of the most impacted portfolios from Stage 1 (requiring 12-month ECL) to Stage 2 (requiring Lifetime ECL). Banks are also evaluating enhancements to credit risk monitoring measures (e.g., forbearance, watchlist, etc.) in response to recent regulatory requests for these data.

For the surveyed banks, these approaches may just be short-term solutions for their interim financial reporting. Locally, we note that some banks have also applied the same or similar approaches for their own interim financials.

Cognizant that the massive and lingering effects of the pandemic will continue to impact the measurement of ECL moving forward, it is imperative that banks develop a comprehensive response to the additional complexities to proactively prepare for year-end reporting and beyond. The approach to this response must be agile considering the time left from now until the year-end. It is vital for banks to have risk modelling capabilities to address the limitations of the short-term solutions adopted in the interim while understanding the impact of the model changes under different assumptions in the long term.

URGENT PRIORITIES WHEN UPDATING ECL MODELS

As banks prepare for the year-end and beyond, they will need to consider some urgent priorities in the immediate term when updating their ECL models, including:

Incorporating the impact of government relief measures into the ECL calculation The impact of the relief measures imposed by the government, such as payment holidays or moratoriums, must be assessed to determine how they affect the measurement of ECL. The assessment should consider whether these measures address short-term liquidity issues rather than signal a significant increase in the credit risk of borrowers.

Determining reasonable and supportable macro-economic scenarios These should include the integration of possible pandemic or crisis scenarios (including government relief measures over time) not envisioned previously and how these could have altered the other economic scenarios and their related probability weightings in the ECL measurement. In coming up with the scenarios, banks should also consider the expected duration of the pandemic and the recovery period of the economy. Due care must be exercised so that there is no double counting of the impact of the assumptions on the scenarios and on the other inputs to the ECL measurement.

Consideration of management overlays As there is no consensus on how to forecast future conditions, banks may have to rely on overlays and on their own expert judgment. They will also need to determine the reasonableness of these overlays.

Maintaining strong governance over the ECL process The operational impact of the changes to the ECL models on data, systems and controls must be considered. Increased governance around the significant judgments (including overlays) and assumptions, modelling changes and other changes to the PFRS 9 processes and controls must be in place to ensure the reasonableness of the ECL measurement. Also, they will need to consider the disruptions in operational processes within the bank that may lead to other constraints in running the calculation of ECL.

Disclosures Given the high level of uncertainty and the inherent sensitivity of estimates, it is critical for banks to be transparent in the disclosures of the key assumptions used and judgments made to update the ECL models.

However, as banks work on addressing the urgent priorities above, they must also look at long-term considerations in order to have more robust PFRS 9 ECL models. In addition to being able to model and simulate possible pandemic or crisis-specific data (e.g., default and recovery data) once historical data regarding the pandemic becomes more available, they should also consider approaches to credit management. There must be stronger integration between credit risk management (risk appetite framework, credit approvals, limits, etc.) and the PFRS 9 ECL triggers given current challenges and learnings. The current credit risk assessment process should also be strengthened by incorporating robust sensitivity analysis and stress testing in light of the use of significant judgments and management overlays in the ECL measurement.

OPPORTUNITY IN RESILIENCE

While current conditions are indeed unprecedented, banks should see this not just as a challenge in measuring ECL, but as a unique opportunity to advance their credit risk modelling capabilities. Doing so may help them become more resilient and even gain a competitive advantage in these unpredictable and uncertain 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.

Redgienald G. Radam is a Partner from the Financial Services Organization service line of SGV & Co.

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Firm presents record number of SGV Special Awards!

SGV announced the 20 recipients of Special Awards during the 74th Staff Anniversary event last 16 October. The SGV Special Awards were given to 9 teams and 11 individuals in recognition of their outstanding personal, client, team and business leadership. Many of the awardees were recognized for their resilience and exceptional quality service in the midst of pandemic restrictions.

Special Award for Client Leadership

From top left: Grace, Erwin and Aileen

The Special Awards for Client Leadership were presented to three individuals: Tax Senior Director Mary Grace Cabalida for her significant contributions to Tax Transformation initiatives and support for external and internal clients; Strategy and Transactions Director Erwin Daniel Garcia for his ability to cohesively manage client teams and leverage on the best resources and insights for client engagements; and Consulting Senior Director Aileen Uy for her insightful and positive contributions to client projects.

From top left: The B2B Leads to Cash Business Readiness Team, Green Finance Team, Consumer Health Business Integration Project Team, and Project Arrow and Project Wave Team

The Special Awards for Client Leadership were also given to four teams: the B2B Leads to Cash Business Readiness Team for leveraging on relationships with SGV and EY colleagues to provide significant client support; the Consumer Health Business Integration Project Team for the successful integration of the business across five regional markets; the Green Finance Team for bringing together the Firm’s deep sector knowledge on Power & Utilities and Sustainability in a widescale engagement; and the Project Arrow and Project Wave Team for completing complex cross-border engagements by maintaining efficient channels of collaboration and communication.

Special Award for Team Leadership

Rene and Rochelle

The Special Award for Team Leadership was presented to Assurance Senior Director Marco Rene Barredo for prioritizing the development of his team and his contributions to digital audit initiatives in the Firm. Assurance Senior Associate Rochelle Cruzata also received the award for her remarkable performance in the shared service work of a global client.

From top left: The Digital Audit Core Enablement Team, General Counsel’s Office Team, Global Cybersecurity Managed Services Executive Team and Team Aloha

The Special Award for Team Leadership went to four teams: the Digital Audit Core Enablement Team for their admirable initiatives to push for the digital transformation of SGV’s Assurance practice; the General Counsel’s Office Team for their commitment in developing their skills in research and legal guidance to assist internal clients; the Global Cybersecurity Managed Services Executive Team for empowering the infosec operations of a leading global company to address their strategic long-term transformation initiatives; and Team Aloha for their capability in navigating the complex audit and regulatory requirements of a Real Estate Investment Trust (REIT), leading SGV to be recognized as among the first REIT Advisory service providers in the country.

Special Award for Personal Leadership

From top left: Jerome, Julia, Meleusipo, Leslie, Marius and Zuzete

The Special Awards for Personal Leadership were presented to Consulting Director Jerome Alvarez for his commendable delivery of complex projects while pursuing his passion to be a lifelong learner; Talent Supervising Associate Julia-Anne Deypalan for being an outstanding leader that keeps the Campus Recruitment Team motivated and inspired; Consulting Director Meleusipo Fonollera for his innovative approach to client servicing and team building; Financial Services Organization Senior Director Leslie Anne Huang for being a dependable resource person during difficult and challenging audits and her passion for self-development; Assurance Director Marius Cesar Palacios for consistently demonstrating humility and sincerity in building trust and interpersonal relationships with clients and staff; and Forensics Senior Director Zuzete Ubanan for demonstrating courage and professional integrity during a challenging client engagement.

Special Award for Business Leadership

The Tax Core Team

The Special Award for Business Leadership was presented to the Tax Core Team for their dedicated commitment in assisting clients and regulatory agencies by providing technical expertise to policy makers who needed to craft tax regulations to address the disruptive impact of the pandemic on business and the economy.

Congratulations to all our recipients of the SGV Special Award!

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CCO talks about CREATE-ing Opportunities at PRA meeting

SGV Tax Partner Cheryl C. Ong (CCO) was one of the speakers at the Philippine Retailers Association (PRA) General Membership Meeting last 23 October. The meeting featured discussions on Philippine economic updates, data privacy guidance on contact tracing, tax updates and digital transformation solutions. Keynote speakers included Commissioner Raymund Liboro of the National Privacy Commission and Assistant Secretary Tony Lambino of the Department of Finance.

CCO presenting at the PRA meeting

CCO led a session titled CREATE-ing Opportunities on the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill. She provided an overview of the Tax Reform Package 2 and discussed the salient features of the CREATE bill, emphasizing its proposed adjustments in corporate tax and rationalization of fiscal incentives. She also provided insights on the next steps and strategies companies can consider to maximize the proposed tax incentives.

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