2019 Articles - Suits the C-Suite - Page 3 | SGV & Co. | EY

01 July 2019

Joyce A. Francisco

SEC finalizes rules on material RPT for listed firms

In line with efforts to better protect minority investors and improve corporate governance, the Securities and Exchange Commission (SEC) now requires Publicly-Listed Companies (PLCs) to disclose dealings with their related parties. SEC Memorandum Circular No. 10 provides the rules on reporting material related party transactions (RPT) and the minimum requirements in drafting the RPT policies of PLCs. All PLCs are mandated to comply with the rules when they enter into material RPTs, which are transactions with related parties amounting to 10% or more of the company’s total assets based on its latest audited financial statements. Related parties cover “the reporting PLC’s directors, officers, substantial shareholders and their spouses and relatives within the fourth civil degree of consanguinity or affinity, legitimate or common-law” having control and significant influence over the PLC. It also may pertain to “the reporting PLC’s parent, subsidiary, fellow subsidiary, associate, affiliate, joint venture or an entity that is controlled, jointly controlled or significantly influenced or managed by a person who is a related party.” The Circular defines RPTs as “transfer of resources, services or obligations between a reporting PLC and a related party, regardless of whether a price is charged.” The term also includes outstanding transactions entered with an unrelated party that subsequently becomes a related party. The SEC also requires PLCs to adopt and submit a group-wide Material RPT Policy within six months from the effectivity of the Circular (which was on April 27, 2019) for existing PLCs and within six months from listing date for those listed after the effectivity. The Material RPT Policy will, at a minimum, include guidelines on the identification of related parties, coverage of material RPT policy, materiality thresholds, identification and prevention or management of potential or actual conflicts of interest which may arise out of or in connection with material RPTs, ensuring arm’s length terms, approval of material RPTs, self-assessment and periodic review of policy, disclosure requirement of material RPTs, whistleblowing mechanisms, and remedies for abusive material RPTs. Moving forward, PLCs must also file an Advisement Report on any material RPT within three calendar days after the transaction. At a minimum, such disclosures should include the complete name of the related party, relationship of the parties, execution date, the financial or non-financial interest of the related parties, type and nature of transaction as well as description of assets involved, total assets, amount or contract price, percentage of the contract price to the total assets of the reporting PLC, carrying amount of collateral (if any), terms and conditions, rationale for entering into the transaction, and the approval obtained. Further, a summary of material RPTs entered into during the reporting year should be disclosed in the company’s Integrated Annual Corporate Governance Report (I-ACGR). The board of directors is responsible for ensuring that transactions with related parties are handled in a sound and prudent manner, with integrity and in compliance with applicable laws and regulations to protect the interest of the company’s shareholders and other stakeholders. Hence, a director or officer of a corporation shall be disqualified from serving as such in another corporation if he or she is found to have facilitated abusive material RPTs based on a final judgment by a court. To clarify, abusive material RPTs are those that are not entered at arm’s length and unduly favor a related party. To prevent this, the PLC’s Material RPT Policy shall have clear guidelines in ensuring the arm’s length nature of the transaction. The Board of Directors shall appoint an external independent party to evaluate the fairness of the terms of the material RPT before its execution. The policy shall also include guidance for an effective price discovery mechanism to ensure that transactions are engaged into at terms that promote the best interest of the company and its shareholders. The Circular also provides penalties for other violations of these rules. Non/late filing of or incomplete/incorrect signatures in the Material RPT Policy will result in the imposition of a basic penalty amounting to P10,000 and a monthly penalty of P1,000 which will accrue until the policy is submitted to the SEC. The SEC also imposes fines of up to P40,000, in addition to a daily penalty of up to P400, for non/late filing of Advisement Reports and a fine up to P20,000, in addition to a daily penalty of up to P400, for incomplete/incorrect Report. This is a serious requirement that should be addressed as early as possible, because a fourth offense for the same violation will constitute grounds for suspension or revocation of the company’s registration or secondary license. Questions now arise on the scope of the transactions covered by the rules. It should be noted that the Bureau of Internal Revenue (BIR) also issued transfer pricing (TP) regulations, which provide guidelines in determining the appropriate revenues and taxable income of parties involved in related party transactions by prescribing the “arm’s length principle” as the standard to determine transfer prices of related parties. Hence, only those related party transactions with an impact on revenues and taxable income are covered by the BIR TP rules. The SEC Circular, however, seems to be broader when regarding the nature of the covered transactions given that it encompasses all transfers of resources, services or obligations between a reporting PLC and a related party. But when talking about the value of the transaction, the SEC Circular limits the coverage to transactions with related parties amounting to 10% or higher of the company’s total assets, while there is no such threshold under the BIR TP rules. The SEC also has yet to clarify the standards to determine the arm’s length nature of the material RPTs. While the Circular requires that the material RPT policy shall have clear guidelines in ensuring the arm’s length terms, there is no established definition for what is considered arm’s length. It would seem that the SEC equates the same to “fairness” as the Circular also requires the appointment of an external independent party to evaluate the fairness of the terms of the material RPT. We note again that the BIR TP regulations prescribe the methods for determining arm’s length price for related party transactions. The regulations, which apply to both cross-border and domestic transactions of associated enterprises, are largely based on the arm’s length methodologies set under the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. It thus remains to be seen whether BIR methodologies may be adopted in determining the arm’s length nature of the material RPTs to comply with SEC rules. There are also concerns on the disclosures required in the Advisement Report. Although the Circular provides the minimum information that must be included in the report, issues on the completeness and correctness of the information contained therein may still arise. Thus, PLCs should be circumspect in preparing the Advisement Report as even an incomplete or incorrect report warrants a penalty. It behooves the SEC to provide more guidance on the rules given the penalties that may be imposed on PLCs for noncompliance. While some may feel that these new guidelines add more onerous reporting requirements, we should understand the underlying intent to protect the corporate sector, the securities, the capital market participants, the securities and investment instruments market, and the investing public from transactions detrimental to and practices inconsistent with business development. Despite much work still needed to be done to improve our country’s ranking, the SEC is optimistic that the new rules will help improve the Philippines’ performance in the World Bank Group’s Ease of Doing Business survey, especially in the indicator for Protecting Minority Investors. The Philippines improved to 132nd out of 190 economies in terms of protecting minority investors in the Doing Business 2019 report from 146th in the preceding report, even as its overall rank dropped 11 spots to 124th from 113th between years. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Joyce A. Francisco is a Tax Senior Director of SGV & Co.

25 June 2019

Wilson P. Tan

Digital transformation for SMEs

Established in 2015, the ASEAN Economic Community promotes the significant growth and potential of the region’s emerging economies. Key drivers of emerging economies are small and medium enterprises (SMEs). However, with rapid digitalization occurring across almost all business sectors, ASEAN SMEs are increasingly looking to transform their enterprises. SMEs are considering tapping into digital trends to further grow and strengthen their competitive edge as well as making use of emerging technologies to maintain their profitability. This article focuses on selected insights from EY’s latest survey, Redesigning for the digital economy, which covers SMEs from the six largest ASEAN markets of Indonesia, Malaysia, Singapore, Thailand and the Philippines. Respondents are from 370 ASEAN mid-market organizations with annual global revenues of between $20 million to $500 million. These collective insights help us understand their strategic priorities, approaches to digital transformation, and application of transformative technologies. In general, the survey reports that transformative technology is increasingly viable, facilitating SMEs to adopt a digital-first mindset. Investments in technologies such as artificial intelligence, machine learning, and robotic process automation present attractive benefits that can help manage costs, reduce risks, deliver personalized customer service, and create next-generation products and services that are more focused on the digital age. However, digitalization also presents a challenge. It is as much a game changer as it is a massive undertaking, since SMEs will need to take a long-term view of their resource investments, and may find the need to depart from traditional models to reboot themselves. DRIVERS OF TRANSFORMATION Many SMEs are determined to forge ahead with digital transformation strategies to gain an edge over their competition, and the EY survey identifies four of the forces that spur on digital investments to ensure they stay ahead. Service quality. Customers today have higher service expectations, especially with younger, digitally adept accustomed to 24/7 availability. These customers expect service to be rendered faster than ever, pushing companies to elevate their ability to deliver. Applying digital technology would help organizations achieve near real-time fulfillment, provide contextual personalization, and enable increasingly problem-free user experiences. One current method to provide real-time fulfillment is through AI in the form of chatbots. This developing tool automates repetitive individual queries, increasing the chances of conversion. Build connectivity and leverage off ecosystem partners. Regardless of size or industry, SMEs will gain an advantage from collaborating with participants within their broader ecosystem. This provides them with connectivity into the digital network of other businesses, with the added opportunities of co-creating new products, capitalizing on external expertise and collective innovation, and pursuing new markets or customers. Managing operating costs. Meeting high customer expectations requires SMEs to accelerate the digitalization of their business processes. These include labor-intensive back-office processes to reduce paperwork, raise automation, quicken turnaround times and manage front-office expenses critical to reducing the cost to serve or deliver more services and solutions via digital, self-serve channels. For example, as a response to escalating salaries, robotic process automation (RPA) is emerging as a new class of digital labor that can eliminate manual, repetitive processes. Its benefits include cost-saving opportunities from continued enhancements to processes and advancements in robotic tools, higher dependability, and transactions that are more accurate, documentable, and auditable with process automation. Keep pace with competitors. SMEs are facing competitive threats from new companies created in this digital age that can utilize nimbler data instead of slower physical infrastructure. A possible competitor may come in the form of micro enterprises that can negatively impact profitability without needing to be of comparable scale, or new companies that achieve significant scale by leveraging disruptive technologies and posing a challenge within a short amount of time. Another example is small e-retailers with minimal operating overheads that can choose what product segments to sell, severely undercutting the pricing of SME retail companies. To maintain relevance, SMEs need to deliver on new business propositions by stepping up their technological pace. A possible solution is through improved payment applications, with payment technologies enabled by e-commerce and e-wallets that are especially driven in an emerging country like the Philippines with low credit card penetration. Digitalization will impact almost every facet of SMEs. It alters the competitive landscape and performance across industries, creating an urgent imperative for SMEs to transform for growth and competitiveness. High-level steps must be undertaken for SMEs to transform their digital vision into reality, some of which are presented in the survey. STEPS TO DIGITAL SUCCESS The EY Survey further discusses that while digital disruptions in businesses are well-documented, many organizations have achieved limited, genuine successes with digital transformations. Transformation begins with a committed executive-level sponsorship, laying a firm foundation for digital success. Oversight of digital technologies, and the foresight to prioritize these to champion change, paves the way for SMEs to move quickly. The survey notes that 74.2% of respondents felt that, in developing a culture of agile innovation, having supportive senior stakeholders is a prerogative. To begin, a current-state assessment of the organization’s innovation maturity should be made to serve as a benchmark for execution, while a realistic outlook about what the future-state model must be adopted. Nearly 61% of respondents highlight that technical limitations from legacy architectures hinder their digital strategies, requiring a balance between both. Some SMEs might opt for major overhauls, but many could simply decommission applications they find redundant, then recondition remaining systems to reduce complexity and enable them to process quickly when necessary. Cost savings from IT legacy modernizations such as cloud technologies, open APIs, and microservices applications can then be invested to fund a continuous digital strategy. SMEs should not just concentrate efforts within specific areas, and instead focus on end-to-end initiatives. This means extending beyond customer-facing processes and including digital solutions for mid and back-office functions. Further cohesiveness could be improved by horizontally integrating between front, mid and back-offices. It should be noted that while surveyed SMEs intend to focus more on adopting emerging solutions than business-as-usual technologies by FY22, they should also be cautious against pursuing disruptive technology simply for the sake of doing so. Not every component needs to be digitalized, and not every initiative may deliver a satisfactory RoI. To reduce risk, SMEs can incubate digital solutions through prototyping, testing and validating initiatives through experimentation on a smaller scale and keenly monitoring feedback. SMEs are also treading a fine line between balancing digital initiatives and managing data protection and customer privacy safeguards, ensuring that the intent to mitigate new digital risks do not impede innovation. Security risks from cyber threats and vulnerabilities are also challenges that merit attention as breaches can not only result in significant reputational and financial impact, they could also damage consumer confidence in the company. This calls for SMEs to develop integrated risk management, compliance and security protocols as part of an initial digital design phase. ASEAN SMEs are vital contributors to the region’s economy, but their continued economic support depends on their ability to leverage digital solutions to expand efficiently. While transforming into digital powerhouses cannot be expected overnight, the digital environment is rapidly evolving, and SMEs cannot risk being left behind. Digital initiatives that are well-crafted and executed can help SMES today progress in a competitive landscape, further finding potential to become tomorrow’s multinationals. Clearly, while the challenges in transforming digitally are great, the rewards to be reaped are far greater. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Wilson P. Tan is the Vice Chairman and Deputy Managing Partner of SGV & Co.

17 June 2019

Karen Mae Calam-Ibañez

VAT refund claims under the TRAIN Law

Taxpayers are sometimes reluctant to file VAT refund claims because it triggers a mandatory VAT audit, not to mention the need to submit voluminous of documents and the uncertainty of when the processing will be completed. Any delay in the processing of a VAT refund claim may cause cash flow problems to the claimant because the input VAT remains unutilized when it could have been invested or used as working capital. The recently enacted TRAIN Law, which aims to make the Philippines a more competitive investment destination, shortened the period within which the BIR is supposed to process VAT refund claims. To implement the amendments introduced by the TRAIN Law, the BIR issued Revenue Memorandum Circular (RMC) No. 47-2019, providing revised guidelines and requirements for VAT refund claims within a 90-day period. The introduction of the 90-day period for applications lodged after the TRAIN Law took effect on Jan. 1, 2019, effectively removing the “deemed denied” provision under RMC No. 54-2014, which clarified the issues on the application for VAT refund under Section 112 of the Tax Code. The standing rule is that the BIR must decide on the claim within 90 days from the filing of the application. If the 90 days lapse without a decision, the review shall continue and will not invalidate the belatedly issued report and findings of the BIR. However, the BIR examiner may be subject to administrative penalties, if warranted. Nevertheless, however noble the intention of the legislature, one cannot discount the possibility that the imposition of sanctions is a two-edged sword. While it may in fact hasten the processing of VAT claims, BIR examiners may also be constrained to just deny the claim in order to comply with the 90-day deadline. Notably, this is not the first issuance of the BIR that seeks to implement the 90-day processing of VAT refund claims. The BIR previously issued RMC No. 17-2018, effectively amending the provisions of RMC Nos. 89-2017 and 54-2014 on the processing of claims for the issuance of a tax refund/tax credit certificate, except for claims processed under the jurisdiction of the Legal Service. CONSULARIZED DOCUMENTS RMC No. 17-2018 has provided the list of requirements to prove the VAT zero-rating of sales of services to non-resident foreign corporations (NRFCs) covered under Sec. 108 (B) (2). The key is to prove that the NRFC-buyer of the services is not doing business in the Philippines, as certified by an authorized official of the NRFC. These requirements were reiterated in RMC No. 47-2019 and are as follows: – Original copy of the certification from the SEC that the NRFC buyer is not a registered corporation in the Philippines; and, – Consularized copy of the certificate of foreign registration/incorporation/association of the NRFC. The BIR acknowledged the inherent difficulty in securing consularized documents. As such, the taxpayer-claimants are required to submit the original copies of the consularized documents on the first claim. The documents will be kept by the processing office on a separate file, a copy of which shall be attached to the docket of succeeding claims with a duly-signed notation by the head of the processing office that the documents are faithful reproductions of the original documents on file. However, this RMC (issued on April 16, 2019) may have been effectively amended by the Apostille Convention, an international treaty drafted by the Hague Conference on Private International Law. The Apostille Convention abolishes the requirement of double verification of foreign public documents by both the originating and receiving country, and simplifies the procedure of authentication. Starting May 14, 2019, public documents executed in 117 Apostille-contracting countries and territories (except for Austria, Finland, Germany and Greece) no longer have to be authenticated by the Philippine Embassy or Consulate General once Apostilled for them to be used in the Philippines. For countries and territories that are not Apostille-contracting parties, the previous process of authentication applies. Since this is a relatively new development, the BIR has yet to issue a clarification on the possible suspension of the consularization requirement for Apostille-contracting parties. OTHER VAT REFUND CLAIM REQUIREMENTS As to the verification requirement of the BIR, RMC No. 16-2019 clarified that the inter-office Request for Certification on Outstanding Tax Liability of Taxpayer and Certification on the Status of Cases Pending Legal or Judicial Resolution, for the specific purpose of satisfying the requirements of claims for VAT refund, shall now be valid for six months. As it is, all concerned revenue offices are ordered to indicate clearly in the Certification to be issued that the Certification validity is six months from the date of issuance. It is a long-standing rule that tax refunds, like tax exemptions, are construed strictly against taxpayer-claimants. Thus, taxpayers should ensure the completeness and authenticity of the documentary requirements upon filing of the application for VAT refund. Failure to submit the complete documents in support of the claim shall result in non-acceptance of the application. Moreover, due to the very limited time for processing the VAT refunds, the BIR clarified under RMC No. 47-2019 that no additional documents shall be subsequently requested from the taxpayer-claimant. Any unsupported claim shall be disallowed outright, in full or in part as the case may be. While there is certainly still much room for improvement in the processing of VAT refund claims, this is a good first step taken by government to help exporters ease their cash flow issues caused by input VAT accumulation. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Karen Mae Calam-Ibañez is a Director of Business Tax Services of SGV & Co.

10 June 2019

Aldwin Aris C. Gregorio

Transforming the HR function through technology

With the fast-paced development of technology, the fourth industrial revolution is reshaping nearly every aspect of business. We often read about how technology and disruption are transforming critical business functions, and one such function that needs to keep up is human resources or HR. More and more, the HR function needs to explore how new solutions, trends and technologies (such as automation) can have a direct impact on productivity. According to proprietary research by CareerBuilder, a global human capital solutions company, HR manager respondents who do not fully automate say that they lose 14 hours a week from manually completing tasks. HR managers are optimistic about the impact of automation and artificial intelligence (AI) on HR strategies. This is also corroborated in a survey by CareerBuilder, where 72% of respondents said that they “expect that some roles within talent acquisition and human capital management will become completely automated in the next 10 years.” HR automation is, indeed, on the rise with the top three automated functions: employee messaging (57%), employee benefits (53%), and payroll (47%). It is only a matter of time before automation drastically impacts on HR operations and becomes a catalyst of employee engagement. USING TECHNOLOGY TO IMPROVE THE PERFORMANCE OF HR FUNCTIONS Let us consider some examples of how aligning with current technological trends can help successfully initiate and implement HR strategies. Take recruitment and talent management for instance. With the increased interest among today’s workforce to shift towards mobile technology and social media, organizations are transitioning from posting on job search websites into social media. Data shows that 79% of job seekers are likely to use job search portals, while talent acquisition leaders also consider online professional networks as an effective branding tool. HR managers are also increasingly aligning with this trend, where 72% of recruiters use LinkedIn to hire employees and 55% of organizations strategically use Facebook and Twitter for various HR purposes. Aside from the impact of social media, organizations are also leveraging data analytics and cloud-based solutions to deliver improved HR services and gain better insights on trends affecting their employees. Small-scale organizations are beginning to adopt cloud technology for certain functions such as talent management, human resource management systems, workforce management, and payroll. Organizations are also investing resources for social media tools and HR technology integration. In fact, two in five organizations say that their HR technology spending is on the rise. However, investment in HR technology is not always top of mind for some business leaders because of their intangible impact on the organization’s bottom line and employee productivity. Despite the digital disruptions transforming business today, many organizations have yet to adopt technologies for their core business or for support functions that include HR. ROBOTICS AND THE FUTURE OF THE WORKFORCE Other technologies expected to have a huge impact on HR are robotics and AI. With the advent of automated solutions that can handle clerical or repetitive work, there is need to plan ahead, look into possible job displacement, and manage employee transitions to new roles. The onset of the machine economy is set to displace parts of the workforce, with two-thirds of all jobs susceptible to being rendered obsolete by automation. This, however, varies depending on the rate of adoption of technology in specific countries. According to research and advisory firm Forrester, automation could lead to a net job loss of 9.8 million or 7% jobs in the US alone by 2027. As a result, a new wave of jobs will develop and require a completely new skillset (e.g., data analyst, information security specialist). Employees consider this to be one of the biggest risks of automation, but are also optimistic about their perceived benefits in their everyday work. In fact, 9 out 10 workers seek to automate mundane tasks at the workplace. Organizations must also be able to strike a balance for complementary working systems between technology and people. The key to achieving this balance is not to displace human workers by utilizing RPA, but to make them more effective in performing more strategic activities. There is also a need to build analytic capabilities into HR that will in turn support talent strategies in boosting organizational performance and productivity. THE GIG ECONOMY AND REMOTE WORKING ARE RESHAPING THE WORKING WORLD As traditional business processes evolve, we are seeing an increase in the freelance or gig economy and remote working, which have become acceptable practices. According to Upwork’s Future Workforce Report, nearly half of respondent companies utilize flexible workers. Surprisingly, 90% of hiring managers say that they are more satisfied with the skills of freelancers than their recent full-time workers. Companies are more likely to hire freelancers based on quality over cost. The US, the Netherlands and the UK lead the pack in embracing the gig economy, as these countries have a high share of self-employed individuals. A favorable policy environment was one factor perceived to have fueled the growth of the gig economy in these countries. Remote work in the Philippines has recently been institutionalized with the passing of the New Telecommuting Act (Republic Act No. 11165) in early 2019. The law recognizes telecommuting, which allows employees to work in alternative locations via enabling technologies (e.g., internet, cellular phone, computer). Many multinational organizations and business process outsourcing companies have long adopted telecommuting due to the need to communicate regularly and deliver work across time zones. Employers and employees both directly benefit from telecommuting arrangements by gaining more flexibility in office space utilization and lessening time and money spent traveling to and from the workplace. As technology advances further, telecommuting could become the new norm. Already, some organizations are shifting corporate spending from office space and utilities to subsidizing connectivity expenses of employees who work offsite. Ultimately, this will necessitate the review and updating of company people polices and local labor laws to make telecommuting more aligned with the future of work. Situations such as road congestion and a shortage of or high costs for work space, and insufficient facilities (e.g. parking) mean that working from home can reduce costs for companies. Focus then can be given to managing employee discipline and maximizing productivity remotely, to ensure quality output that is comparable to the work produced in a traditional workplace. Given the rapid adoption of technology, automation and new workforce behaviors, HR functions are pressed to catch up and leverage these new trends to adequately meet the needs of tomorrow’s global workforce, and to maintain their competitiveness through effective, strategic and technology-enabled HR processes. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Aldwin Aris C. Gregorio is an Associate Principal of SGV & Co.

03 June 2019

Gabriel Eroy

Automatic exchange of information: What’s in it for the Philippines?

In February, President Rodrigo R. Duterte signed into law Republic Act No. 11213, “An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2017 and Prior Years with Respect to Estate Tax, Other Internal Revenue Taxes, and Tax on Delinquencies.” However, it was signed with certain line item vetoes including the grant of a general tax amnesty which was vetoed in its entirety. The President indicated that a general tax amnesty, at this point would be overly generous and unregulated. He has requested Congress to pass another general tax amnesty bill that includes the lifting of bank secrecy for fraud cases, the automatic exchange of information (AEOI) and safeguards to ensure truthful declarations. Evident in the President’s message is the intention for the country to participate in an exchange of information regime that has been gaining ground in the international community. AEOI WORLDWIDE AEOI was conceptualized to promote tax transparency and curb tax evasion. As economies worldwide increasingly become interconnected, cross-country investments and financial products are more accessible to anyone, regardless of residence or location. Initiated and developed by the Organisation for Economic Co-operation and Development (OECD) with the G20 countries, the Standard for AEOI represents the international consensus on automatic exchange of financial account information for tax purposes, on a reciprocal basis. It provides for the exchange of financial account information with the tax authorities in the account holders’ country of residence. Participating jurisdictions that implement AEOI send and receive pre-agreed information each year, without having to send a specific request. The most prevalent standards that require exchange of information on an annual and automatic basis, effective as of date, are: (1) United States Foreign Account Tax Compliance Act (US FATCA); and (2) the Common Reporting Standards (CRS). FATCA started the push for greater tax transparency by requiring financial institutions outside of the US to report tax information (i.e., income earned and assets owned) of US citizens and/or residents to the US Internal Revenue Service (IRS). As of date, there one hundred thirteen (113) jurisdictions that have signed an intergovernmental agreement (IGA) with the US government to facilitate FATCA compliance of financial institutions operating in non-US jurisdictions and the annual exchange of information which started in 2015. The Philippines signed its IGA with the US in July 2015 but with no significant progress recently. CRS, on the other hand, involves several participating jurisdictions’ exchanging, on a bilateral or multilateral basis, financial account information submitted by reporting financial institutions. CRS went live in January 2016 and the first CRS exchange transpired in September 2017. According to the latest list dated November 2018, there were 108 participating jurisdictions with definite date of first reporting by 2020. On several occasions in the past, the Philippine government has signified, albeit informally, its intent to participate in the CRS regime. Like FATCA, there is no recent progress and there is no date for the Philippines’ first reporting and exchange. Notwithstanding these delays, the Philippine government is still encouraged to participate and enter into bilateral or multilateral agreements on exchange of information with other jurisdictions. However, concurrence by at least two-thirds of the Members of the Senate is required before a treaty or international agreement is effective, as provided under Article VII Section 21 of the 1987 Philippine Constitution. To bolster its participation, the Philippines may need to amend bank secrecy and data privacy laws to legalize the sharing of information with other jurisdictions. BENEFITS TO THE PHILIPPINES Countries with strict bank secrecy and data privacy laws may be perceived as breeding grounds for tax evaders. On one hand, foreigners may prefer to invest their money in these countries since the government and financial institutions operating therein are generally not required to share information with the tax authorities of the jurisdiction/s where these investors are tax residents. On the other hand, tax residents of countries with such laws, especially high net worth ones, may simply invest their money in countries without personal income tax (tax haven jurisdictions) to maximize income while not paying the related tax along with the minimal risk of detection. In a report from the G20 Argentina: The Buenos Aires Summit held in late 2018, it was noted that prior to the start of the AEOI, countries were able to collect 93 billion euros in additional tax revenue due to voluntary disclosure programs and offshore investigations. It is generally expected that AEOI may yield the same, or even greater results, due to its wider coverage and practical approach. AEOI may help Philippine tax authorities detect non-compliance/non-reporting of income and taxes arising from investments of Philippine tax citizens/residents in participating jurisdictions, especially where tax administrations have had no previous indications of non-compliance due to limited disclosure or intentional non-disclosure. Consequently, AEOI may encourage voluntary compliance by compelling taxpayers to report all relevant information or face sanctions as tax evaders. With the foregoing, AEOI may, to a certain extent, deter future tax evasion through offshore investment schemes and financial accounts. It is hoped that the current Administration’s intention to relax bank secrecy and data privacy laws will further its tax transparency agenda for the Philippines that align with ASEAN and global standards and practice. It is likewise hoped that the Philippines’ participation in the global AEOI regime may aid in the implementation of tax laws more effectively due to expected increase in visibility and wider reach to gather relevant tax information. To some extent, there may be expected additional tax revenues from detecting cases of tax evasion and/or voluntary disclosure/compliance. Additional fiscal revenue will then translate to more funds to support the development plans, ultimately spurring economic growth. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Gabriel Eroy is a Tax Manager from the Financial Services Organization of SGV & Co.

20 May 2019

Carlo Kristle G. Dimarucut

Risk and cybersecurity for critical infrastructure

When we talk about cybersecurity, we usually think of information technology systems that manage and access data. But there’s another side of technology that is often overlooked by enterprise security processes — the industrial control systems that handle physical processes through monitoring or direct control, such as valves, pumps and similar systems that have a physical “switching” function. The reason for this is that most of these systems have traditionally been isolated from corporate information networks, operated separately as they have functions outside of processing data — such as regulating power or water flow for utilities companies, the control network of a train system, or medical scanning equipment in a health care entity. However, as business operations and processes become more complex and data-driven, there has been an increasing need to connect industrial control systems to corporate information networks in order to provide access to vital or relevant information. One example is how power companies are transitioning to digital metering to promote more accurate power quality monitoring and reporting. These systems will need to be connected to the power company’s data systems to link to customer data and information. Because of this growing interdependency between IT systems and industrial control systems, businesses will need to revisit how they understand cybersecurity within these types of operational technologies. The government has recognized this growing problem and in 2017, through a Department of Information and Communications Technology memo, introduced guidance on how to secure “critical infrastructure” i.e. banking and finance, power and utilities, transportation, health care, telecommunications, and similar industries that are vital to public health, safety or well-being. Considering that these systems are linked to real physical systems, organizations will need to find ways to seamlessly integrate these systems while ensuring physical and logical security. INTERCONNECTION CHALLENGES The rapid deployment of digital technologies and web-enabled devices brings many advantages, but also increases cybersecurity risks. Because industrial control systems are increasingly being linked to broader IT systems, cyber attacks have more potential to breach customer and employee privacy and incur regulatory action. This can even disrupt critical infrastructure operations and put lives at risk. Every new device connected is one more device that can be compromised by a potential attacker. In 2017, WannaCry ransomware became a wakeup call when it hit critical infrastructure, impacting over 10,000 organizations in over 150 countries, including those in the health care industry like the UK’s National Health Service. Although there is no evidence that any patients died directly from the attack, thousands of hospital computers were made unavailable, forcing doctors to physically transport lab results by hand and cancel at least 20,000 patient appointments. In the same year, the NotPetya ransomware attack struck at numerous companies including Maersk and Mondelez, which cost them an estimated $300 million and $100 million, respectively. Overall, the attack did an estimated $10 billion in total damage. Attacks can also come from unexpected directions, such as the instance when US retailer chain Target was hacked through its heating, ventilation, and air-conditioning (HVAC) systems. Companies that are interconnecting industrial control systems need to understand and manage these threats as not just a significant risk, but potentially a public safety concern. Industrial control systems will now need to be integrated into overall corporate IT and risk management, instead of being managed in silos. In this broader risk landscape, companies need to consider that: – A successful attack is inevitable — it is just a matter of when and how much. Organizations get lulled into thinking that they can deploy enough solutions or spend enough money to protect themselves. Organizations will have to live with managing the risk, and not trying to fully eliminate it. Knowing how to react and having the resilience to withstand a cyber attack is the best strategy. – Interconnection will happen whether organizations like it or not. Vendors recognize that interconnectivity for industrial systems is a wave they have to ride and features for such are already being embedded in the systems that organizations are purchasing. It must be recognized that these features are present and have to be addressed from a policy level. WHAT ENTERPRISES CAN DO TO HELP PREEMPT CYBER ATTACKS There are some actions that companies can take to help manage their risks in the face of today’s emerging cybersecurity threats. In the short term, companies should ensure that their security monitoring programs cover everything that it needs to cover. Most security monitoring purchases are limited to corporate information systems. Boards should ask their security departments whether their companies’ current attack detection capabilities extend to industrial control systems. Since interconnectivity is inevitable, organizations have to extend cybersecurity practices and adopt them more diligently when it comes to industrial control systems. Such practices include implementing standard security baselines, supported by effective incident response plans. LOOKING AHEAD Enterprises identified as part of the country’s critical infrastructure need to take steps to “future-proof” their business. This includes developing more agile and resilient responses to the disruptions being brought about by technology, evolving regulations and compliance challenges across their industry. Organizations within the scope of critical infrastructure need to accept that regulation over cybersecurity controls and breach reporting will become part of their businesses. Investing in cybersecurity systems needs to be considered as part of the cost of doing business. On the other side of the coin, investment in cybersecurity is an expense that most organizations will not be able to recover directly through traditional return-on-investment models. This is why governments should consider awarding tangible incentives to encourage cybersecurity spending and not just award beyond mere seal of approval from government agencies. However, given the significant risks and threats posed by cyber attacks, can any company actually afford not to invest in cybersecurity? This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co. Carlo Kristle G. Dimarucut is an Advisory Senior Director of SGV & Co.

14 May 2019

Lee Celso R. Vivas

Tomorrow’s tax professionals

The global business environment continues to evolve at a rapid pace, with factors such as globalization and technology disrupting traditional roles, processes and operations. One of these areas is in the tax landscape, where the changes are fundamentally and permanently changing how tax professionals operate. A recent article published in Ernst & Young’s Spotlight on Business magazine, “Three trends shaping taxation for business,” identifies some significant traits that are redefining the tax function, as well as the role of tax practitioners all over the world. These trends include: MORE COMPLEXITY With recent collaboration among global tax administrations, such as with the Base Erosion and Profit Shifting (BEPS) project implemented by the Organization for Economic Co-operation and Development, signatory countries now have minimum standards to adopt in order to review bilateral tax treaties and enable better tax compliance, close taxation gaps and review business structures, supply chains and operations. With increased data submissions (like Country-by-Country Reporting) and automatic exchange of information being adopted by more countries to facilitate tax transparency, companies will need to consider more complex standards in their tax compliance strategies. MORE DIGITAL CHALLENGES Because of the speed at which digitalization is spreading, traditional tax rules are often hard pressed to keep up, creating uncertainty. However, there is still no clear guidance or consensus for tax administrations on how to address the challenges of the digital economy. This lack of clarity means that each country may choose to find its own solution to address the taxation of the digital economy. This may pose more challenges in the future in trying to create a consistent body of digital taxation standards on a global level. MORE POWERFUL TAX ADMINISTRATIONS Digital technology is changing how tax administrations interact with taxpayers and other tax authorities. With direct access to taxpayer data, tax administrations are increasingly relying on data analytics to help them step up tax collection and target tax audits. Some countries are even initiating real-time data collection from taxpayers with machine-based tax assessments and collection. Empowered by digital and technology, tax administrations are expected to have more tools and processes to ensure tax compliance. With these three emerging trends, how can future tax professionals evolve to meet the demands of tomorrow’s tax practice? TECHNOLOGY ENABLEMENT Traditionally, tax professionals and IT consultants are widely different personalities with entirely different skill sets (e.g., the highly specialized tax professional versus the highly specialized technology or IT professional). However, as we move further into the digital age, the gap between the tax professional and the IT professional will continue to narrow. While the tax professional of the future does not necessarily have to also be an IT professional, they will still need to acquire a modicum of technology proficiencies to complement their tax technical skills. At the minimum, the future tax professional must be able to understand and appreciate emerging technologies and how they affect the tax function and the tax environment. COLLABORATION AND MULTI-SKILLED TEAMS Traditionally, the world of tax compliance was a simple relationship between the tax preparer/reviewer, the tax return and the local tax authority. As the tax environment becomes more and more digital, the number of elements involved and the interrelationships among these parties will become increasingly complex — these include (among others) the taxable event/transaction (data source), the accounting/recording process, the accounting system, the tax preparer, the digitally empowered tax administration, and multi-jurisdictional reporting – each with its own tools and technology enablers. Different elements and technologies will require different skill sets to address. Working in such a dynamic tax environment therefore requires a flexible, multi-skilled service team, in some cases even capable of working across multiple tax jurisdictions. And given the pace at which the tax environment is evolving digitally, “mixed teams” of people who are either tax or technology proficient will ultimately evolve into “blended” teams with blended skill sets (e.g., tax people who understand tech, tech people who understand tax). SHIFTING FOCUS TOWARDS ANALYSIS AND SOLUTIONS As digitalization and automation become more and more widespread, the fear of the traditional tax professional is that he may eventually become obsolete. Tax return preparation will eventually become automated, and there are already many tools in the market that can help to sift, process and analyze high volumes of digital tax data (or tax Big Data). Traditional tax compliance skills (i.e., tax return preparation, filing, reconciling books vs. returns, etc.) may soon lose value. Tax professionals, as tax “advisors,” must therefore be able to elevate their roles from “preparers and processors” to “reviewers and analysts.” In recent tax audit case, for example, a BIR examiner had asked the taxpayer to check the completeness of the sales reported in the taxpayer’s VAT returns by reviewing and matching transactional level sales data – data that consisted of hundreds of thousands of transactions, each with dozens of fields of information, resulting in millions of data points that needed to be analyzed. If we were to apply traditional worksheet/spreadsheet skills, it would have taken months to perform such a task — if it was even possible to process the big data through traditional means in the first place. With various big data tools available, reconciliations and exception reporting may soon be “automated,” performed in minutes, and ultimately rendering these traditionally man-hour based tasks obsolete. In order to stay relevant, tax professionals must be able to elevate their roles by understanding the complex tax environments in which they operate and being able to provide answers to questions such as “What went wrong?” “Why did it go wrong?” and “What can we do about it?” Moreover, as submission of tax digital data to tax authorities moves towards real time or near real-time, traditionally sought-after corrective or remedial tax advice might likewise soon become irrelevant. Traditionally, the practice of tax required highly specialized understanding of tax rules and regulations, which may be something that has defined the persona of tax practitioners. However, given the trends shaping taxation in the future, tax professionals may have to learn to be more adaptable and transformative, both personally and professionally, to stay relevant to tomorrow’s tax expectations. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Lee Celso R. Vivas is a Tax Partner of SGV & Co.

07 May 2019

Armando N. Cajayon, Jr.

Banks and fintech: the next step

In recent years, the Philippine banking ecosystem has undergone rapid digital transformation driven by sweeping technological advances. The Philippine Banking Almanac states that the Philippine banking industry started as a government venture to provide deposit services and fund production in the agricultural and commercial industries. That was 160 years ago and since then, the industry has evolved to include various aspects of financing, up to the ubiquitous digital systems that are now used all over the world. This is no surprise since the banking industry has always been characterized by continuous, customer-driven innovation. RISE OF E-BANKING E-banking first revolutionized the Philippine banking industry in the 1980s with the introduction of automated teller machines (ATMs). These machines eliminated several geographic and time constraints as they allowed customers in urban areas to conduct cash withdrawals and deposits on an everyday basis. In 1999, the invention of smartphones, coupled with developments in the telecommunications industry, paved the way for early versions of mobile banking. Customers could now conduct basic banking transactions such as balance inquiry and fund transfers to accounts within the bank using a short messaging service (SMS). This was followed by internet banking in 2000 which allowed customers to accomplish transactions through computers and the Internet. It was at this point that banks started to veer away from their traditional bricks and mortar operations, integrating both online and offline operations into their physical presence. FINTECH SOLUTIONS AND OPPORTUNITIES As technology continued to improve alongside the increase in mobile ownership and Internet subscriptions, the next few years saw a rise in the adoption of financial technologies (FinTech). Financial services became further digitized with the invention of mobile wallets, payment gateways and virtual currencies. These services are now more accessible and convenient than ever as Filipinos can conduct transactions, pay bills, and purchase goods and services using applications on their personal computers or smartphones. However, most of these innovations are not actions of banks but initiatives of FinTech companies that envision providing enhanced financial services at a reduced cost. FinTech solutions present many opportunities for the Philippines that can be summarized in three main points. First, it reduces the country’s dependence on a paper-based payment system. A 2015 case study by the Better Than Cash Alliance (BTCA) titled Leaving money on the table: The corporate and SME experiences of digitizing business payments in the Philippines found that digital payments could save Philippine banks about $1.52 per transaction. Also, a digital payment system reduces the risk of graft and corruption because records are automatically created as money passes between accounts. Second, FinTech can spur greater financial inclusion. The 2017 Global Findex report by the World Bank revealed that majority of Filipinos remain unbanked with only 34.5% of adult Filipinos holding formal financial accounts. Access to financial services remains a challenge because it is difficult for banks to establish physical branches across the more than 7,000 islands that comprise the Philippines. However, FinTech services transcend geographical barriers by granting accessibility through technological platforms. Third, it provides SMEs with alternative financing opportunities. According to a 2019 study by the Milken Institute, FinTech in the Philippines: Assessing the State of Play, SME lending only made up 2.5% of the total lending portfolio of commercial banks. Sources of capital are a pressing issue for small business owners who are unable to fulfill the loan requirements set by banks. FinTech start-ups have developed an alternative credit-scoring system that can assess the repayment capacity of potential borrowers, allowing Filipinos without a formal credit history to apply for loans. COLLABORATION AND INNOVATION Today, FinTech has become a major industry composed of start-ups that are creating solutions for payments, consumer lending, financing for SMEs, remittances, logistics and transportation, and investments. The 2017 EY FinTech Adoption Index emphasized the recent rise in the percentage of digitally active FinTech consumers. The survey conducted across 20 selected markets revealed that 50% of consumers use FinTech money transfer and payment services. Furthermore, 64% of consumers prefer using digital channels to manage several aspects of their lives. The study revealed that global FinTech adoption could increase to an average of 52%. The expansion of the FinTech industry is also due to the efforts of the Bangko Sentral ng Pilipinas (BSP) to continually update and reform much of their regulatory framework in response to the recent financial services trends. As the industry continues to gain momentum, it also gains capital from investors. In fact, over P5 billion was invested in the Philippine FinTech sector in 2018. These companies have been steadily gaining customers, expanding their market share, and competing with the banking industry. However, partnership and collaboration — not competition — between banks and FinTech companies can maximize innovation and unlock the potential of the Philippine banking industry’s digital future. Essentially, banks and FinTech companies share the same goal: to deliver better financial services, improve regulatory compliance and reduce long-term costs. FinTech companies offer a wide range of products such as robotic process automation, data analytics and artificial intelligence that can greatly enhance the business operations of banks. They are also more flexible in integrating and working with cryptocurrencies, rewards and loyalties in the form of tokens, and becoming the cash in and cash out alternatives. In addition, some FinTechs are capable of giving their partners and clients revenue in the form of rebates or commissions through services such as mobile e-loading and financial transactions. Meanwhile, banks are adept at handling the common challenges faced by FinTechs such as the significant costs incurred due to customer acquisition and the barriers encountered in cross-border business. Banks are also experienced in handling costly compliance matters such as Anti-Money Laundering Act (AMLA) and Know-Your-Customer (KYC) regulations. The anonymity that online financial services provide poses risks to AMLA and KYC regulations as cybercriminals and money launderers may see FinTechs as instruments for financial crimes. To better protect financial institutions from money laundering and other financial cybercrimes, BSP issued Circular no. 950 which contains additional requirements for AMLA and KYC compliance. Complying with these regulations is expensive and can greatly impact the finances of FinTech startups, but these costs are bearable for large financial institutions such as banks. Thus, FinTechs can benefit from the banks’ compliance and regulatory competencies, especially if they are already reaching their marketing saturation points. With the relative advantages of each side, it is clear that strong collaboration between banks and FinTech companies have great potential and opportunities that can result in relevant and sustainable solutions for their customers. In order for banks to form successful strategic relationships with FinTechs, they need to clearly define their digital solutions goals. Then, they must work together to design a FinTech framework that best suits their business needs, size, culture and operations as well as their customers’ banking needs and expectations. Banks should also encourage innovation initiatives that promote their long-term growth strategies. FUTURE OF THE FINANCIAL SERVICES INDUSTRY The change-driven history of financial institutions demonstrates that adopting emerging technologies unlocks many opportunities. Today’s digitally competitive business landscape requires leaders of financial institutions to embrace sustainable technological transformation and pioneer innovation. In turn, these efforts will lead to financial services that deliver prime transformational value to Filipinos, ultimately boosting their financial well-being and strengthening the economy. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Armando N. Cajayon, Jr. is a Principal in the Advisory Services of SGV & Co.

29 April 2019

Mae Grace June C. Nillama

The Tax Amnesty Act of 2019: Welcome news for delinquent taxpayers

On Feb. 14, the President signed into law Republic Act No. 11213 or the Tax Amnesty Act of 2019 (RA 11213). The law provides for estate tax amnesty and tax amnesty on delinquencies. In this article, we will zoom in on the tax amnesty on delinquencies. The grant of a tax amnesty on delinquencies (TAD) is a novelty. Under the previous tax amnesty law (RA 9480), tax cases that are the subject of final and executory judgments by the courts were specifically excluded from the coverage. Perhaps aware of the delinquencies pending in the books of the Bureau of Internal Revenue (BIR) and the resources needed to actually collect on these delinquent accounts, the proponents of this law deemed it prudent to grant an amnesty for delinquent taxpayers. This will not only give the taxpayers a chance for a fresh start, but will also help clear the dockets of the BIR so that they can focus their attention on more pressing cases. While the law became effective on March 2, its implementation still required the issuance of the implementing rules and regulations to guide taxpayers and implementing agencies alike. On April 5, Secretary of Finance Carlos G. Dominguez III, upon the recommendation of BIR Commissioner Caesar R. Dulay, issued Revenue Regulations (RR) No. 4-2019 providing the guidelines on the processing of tax amnesty applications on tax delinquencies. The regulations took effect on April 24. The RR provides a huge relief for taxpayers and practitioners as it clarified some of the seemingly ambiguous provisions of the law, primarily the coverage of the TAD. Due to the term used, taxpayers may have gotten the impression that only delinquent accounts (as defined in prior BIR regulations and issuances) are covered by the law. RR No. 4-2019 addresses these issues and clarifies that there are only four instances when the TAD may be availed of: Tax assessments that have become final and executory at the BIR level; Tax assessments that have become final and executory at the judicial level; Pending criminal cases filed with the DoJ/Prosecutor’s Office or the courts for tax evasion and other criminal offenses under Chapter II of Title X and Section 275 of the Tax Code; and Withholding agents who withheld taxes but failed to remit the same to the BIR. Evidently, only the first two instances require a final and executory assessment. Moreover, only those that have become delinquent on or before April 24 may avail of the TAD under these instances. Another cause of uncertainty was the inclusion of the withholding taxes in the TAD. In RA 9480, withholding agents with respect to their withholding tax liabilities were specifically excluded. During the deliberations of the law, several stakeholders proposed the inclusion of withholding tax liabilities since it was seen as a prevalent issue in practice. Non-withholding or non-remittance of the required withholding taxes often occurs due to ignorance or the unsophisticated accounting systems used by taxpayers, but without any real intention to evade payment. It was argued that since the amnesty aims to give taxpayers a fresh start, it would not make sense to exclude withholding taxes in the coverage. A distinction was made between withholding taxes that were not withheld at all and withholding taxes that were withheld but not remitted to the BIR. The former are covered by the General Tax Amnesty and the latter are covered by the TAD and subject to a higher rate of 100% of the basic tax. The understanding then was that the withholding taxes withheld, but not remitted to the BIR, would be covered by the TAD even though the same are not technically and necessarily delinquent yet. This is now reflected in the regulations, which state that a tax amnesty rate of 100% shall apply in all cases of non-remittance of withholding taxes, even if the same shall fall under any of the other instances covered by the TAD. Moreover, the regulations state that for withholding agents who withheld taxes but failed to remit the same to the BIR, delinquent or not, and with or without Final Assessment Notice/Final Decision on Disputed Assessment, the Preliminary Assessment Notice/Notice for Informal Conference (PAN/NIC) or equivalent document will be sufficient. Clearly, this gives closure to the question of whether it is necessary that taxpayers are the subject of a final and executory assessment. Finally, the regulations also provide an expanded definition of the tax base, i.e., the basic tax assessed. The law merely provides that the tax base for all the instances covered by the TAD would be the basic tax assessed. However, due to the different natures of the instances covered by TAD, there arose some confusion as to what constituted the basic tax assessed. This is particularly relevant in cases where the delinquent taxes have been the subject of an application for compromise settlement, which requires the payment of the compromise offer. The regulations clarified that the basic tax assessed would be the tax due on the Assessment Notice, net of any basic taxes paid prior to the effectivity of the regulations. This means that any payments previously made, such as the compromise offer or the partial payments, must be deducted from the tax due in the assessment to get to the amnesty tax base. With the issuance of the regulations, taxpayers can now take advantage of a rare opportunity that could potentially provide substantial savings, not just for interest, penalties and surcharges, but also for basic taxes. All they need to do is follow the steps provided in RR No. 4-2019, and then rest easy knowing that they not only have a fresh start as taxpayers, but that they have also contributed to the country’s long-term growth by properly paying the taxes which are the lifeblood 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 opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Mae Grace June C. Nillama is a Tax Director of SGV & Co.

22 April 2019

Shane Dave D. Tanguin

Big data and dark data: Balancing the costs and benefits

Big data is starting to become a cliché among business executives, given that almost everyone is now leveraging big data in decision making. “Big data” was defined in 2012 by Gartner (a global research and advisory firm) as “high-volume, high-velocity and/or high-variety information assets that demand cost-effective, innovative forms of information processing that enable enhanced insight, decision making, and process automation.” The term is often used to refer to predictive analytics or other methods of extracting value from data and information. What is often left out is its twin subset — dark data. Gartner coined the term and defines “dark data” as “the information assets organizations collect, process and store during regular business activities, but generally fail to use for other purposes.” The digital world produces information in unprecedented proportions. Based on a study by Statista in May 2018, about 47 zetta bytes (1 zetta byte is about 1 trillion giga bytes) of data are expected to be generated by 2020. This number grows to 163 zettabytes in 2025 – almost 3.5 times in a span of five years! To put in perspective how exponential the growth of data worldwide is, only 2 zettabytes were generated in 2010. While structured information can be consumed for analysis out of the ocean of big data, portions of unstructured information, the dark data, will remain untapped. The growing breadth of available data and the use of big data in business decisions and applications would mean commensurate growth in the investment needed to make sense out of the ocean of information. Revenue from big data and business analytics worldwide, according to a study conducted by Statista in August 2018, amounted to $149 billion in 2017 and is expected to reach $186 billion in 2019. Revenue from these businesses is expected to grow steadily at 12% year on year to about $260 billion in 2022. Clearly, more and more investment is going to leverage the power of big data and harness the benefits it brings to decision making. Investmenting in the right places also helps in maximizing yields. Let us look into an industry where big data and data analytics have made a massive impact — the restaurant business. Gathering information ranging from customer demographics, behavioral data and shared customer interests, restaurant owners can develop smart and specific marketing activities for targeted customers. Customer profiles and point-of-sale information also help in developing best practices in maintaining on-time delivery, menu enhancement, customer segmentation, streamlining operations and improving customer experience. A lot has been developed in this industry and big data has had a significant influence in effecting these changes. However, where does dark data go? Big data is used in the practical world starting from determining what objective needs to be met — then almost instantaneously, followed by determining the what, why, how, where and when. This is where it gets tricky. One can start defining what they need and then look for it in the big data or start from the big data to see what it offers then see what benefits to explore. In either approach, handling volumes of big data may prove to be costly both on a technological and people resources level leaving no space for investment in harnessing dark data (i.e., emails, printed reports/statistics, hard copy files, CCTV footages among others). Let’s take as an example a small restaurateur who aims to solve the single biggest issue identified by customer survey feedback — long waiting queues before waiters are available to take orders. Structured data were gathered to profile customers from the moment they enter the restaurant until an order is taken — demographics, time of day information, volume of customers, menu listing, number of waiters and ordering time. The restaurateur analyzed all this information and developed a streamlined menu and added waiters on identified shifts where customers are expected to peak. The expectation was to have the ordering time drop significantly and waiters will have a quicker turnaround for taking orders. However, while the changes all made sense, there was no noticeable drop in ordering time. This made the restaurateur go back to the drawing board and prompted a check on how ordering was done in the past. The restaurant’s CCTV footage was reviewed and customer behavior was observed comparing the order-taking sequence in the past and present. The restaurateur noted that in recent footage, an average of three visits were made by waiters before an order was placed — the first was almost immediately after customers were seated, followed by two other visits with longer intervals. In older footage, there were only two visits on an average and with shorter intervals before an order was placed. When the restaurateur investigated the interactions on the first visit and the driver of longer intervals in recent footages, it was found out that the reason had to do with their free WIFI services. Customers would ask for the WIFI passwords in the first visit of the waiter and set their phones up before they turned their attention to the menu and actually started making an order decision. The reason for longer order time had less to do with number of waiters, volume of customers and menu. The restaurateur could have saved time by analyzing the dark data in the form of CCTV footage first rather than going straight to big data that was easily analyzed. The realization of the root causes of the customer behavior made it easier to address the problem. The restaurant now has WIFI password information readily available on all their tables. Investing in big data is an edge and balancing it with investments in converting dark data will make it more effective. Breaking the constraints in analyzing dark data may require more investment but it equally provides the power of the comparative — seeing clearly what was different in the past can make better and more informed decisions. The comfort of having masses of information and the capacity of analyzing it may cause dark data and its potential to be neglected. Swimming into deep open waters just because you can may not be the wisest. But navigating these waters with the knowledge of the past brought by dark data could mean your true edge in the digital world. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co. Shane Dave D. Tanguin is a Partner of SGV & Co.

2019