2021 Articles - Suits the C-Suite - Page 5 | SGV & Co. | EY

22 March 2021

Edison U. Ortiz

Revisiting the Tax Sparing rule

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

15 March 2021

Joanne P. Lansangan

VAT refunds during the pandemic

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

08 March 2021

Maria Vivian C. Ruiz

A better working world where #SheBelongs

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

01 March 2021

Auresana B. Ines

Narrowing the scope for transfer pricing reporting

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

22 February 2021

Carlo Kristle G. Dimarucut

Why boards of private businesses must prioritize cybersecurity

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

15 February 2021

Judy J. Castroverde

Tax relief from net operating losses: Useful or futile?

The prolonged community quarantines during the pandemic have caused a significant reduction in economic activity. Sectors and industries deemed non-essential experienced closures or resorted to reducing their staff, which resulted in low productivity. Various establishments were challenged with low demand for their products and services, ultimately leading to a decrease in net operating income — or worse — to net operating losses.From a tax perspective, can businesses still recover their net operating losses arising from the effects of the pandemic?To address the impact of COVID-19, the Senate and the House of Representatives enacted Republic Act (RA) No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II) effective Sept. 15, 2020 with an original expiry date of Dec. 19, which has since been extended to mid-2021. Bayanihan II provides for COVID-19 response and recovery interventions and mechanisms to accelerate the recovery and to bolster the resiliency of the economy.The extension of Bayanihan II to June 30 was signed on Dec. 29, in the form of RA 11519.CARRY-OVER OF NET OPERATING LOSSESAmong the response and recovery interventions provided under Bayanihan II are the carry-over of net operating losses incurred by the business or enterprise for taxable years 2020 and 2021 as deductions from gross income (for purposes of computing net taxable income subject to regular corporate income tax) over the next five consecutive taxable years immediately following the year of such loss [Section 4 (bbbb) of the Bayanihan II].One of the features of Bayanihan II was a provision that Section 4 (bbbb) would remain in effect even after the expiration of the Act, provided that the deductions are claimed within the next five consecutive taxable years.In the implementing regulations [Revenue Regulations (RR) No. 25-2020 dated Sept. 30] of Bayanihan II, net operating loss is defined as the excess of allowable deductions or expenses (as enumerated in the Tax Code) over the taxable gross income of the business in a taxable year, whether calendar or fiscal year.Recently, the Bureau of Internal Revenue (BIR) clarified, through Revenue Memorandum Circular (RMC) No. 138-2020 dated Dec. 22, that the net operating loss carry-over (NOLCO) may be availed of under RR No. 25-2020 for taxpayers operating on fiscal-year reporting. The RMC enumerated fiscal years ending between July 31 and Nov. 30, 2020 and Jan. 31 to June 30, 2021 as falling within the taxable year 2020. Meanwhile, fiscal years ending between July 31 to Nov. 30, 2021 and Jan. 31 to June 30, 2022 fall within the taxable year 2021. Thus, net losses incurred by businesses or taxpayers during these fiscal years can be carried over as deductions from gross income for the next five consecutive taxable years.It should be noted that generally, under existing rules (Section 34 of the Tax Code and RR No. 14-01), the accumulated net operating loss of a business by individuals engaged in trade or business or practice of profession and domestic and resident foreign corporations can be carried over as a deduction from gross income only for the next three consecutive taxable years.WELCOME RELIEF FOR TAXPAYERSThe benefit granted under the Bayanihan II extending NOLCO for an additional two years is welcome relief for businesses that have been significantly affected by the pandemic and have suffered operating losses in 2020, as well as those still recovering and expecting negative results from operations in 2021.However, while a business may incur a net operating loss and is allowed NOLCO deductions in subsequent years, the corporation is still liable to pay the 2% minimum corporate income tax (MCIT). The MCIT is based on gross income if the same is higher than the 30% regular corporate income tax (RCIT) based on net taxable income. Accordingly, the extended NOLCO deduction may have no impact or relevance if the corporation pays MCIT.MCIT UNDER THE CREATE BILLAnother related development is the reconciled version of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which was ratified by the House of Representatives and the Senate on Feb. 1 and 3, respectively. It covers package 2 of the tax reform program, which proposes amendments to the corporate income tax system, among others, and provides for a reduction in the MCIT rate to 1% effective July 1, 2020 until June 30, 2023.However, this reduction in MCIT rate appears to provide temporary tax relief only during the period when businesses may possibly incur net operating losses due to the pandemic. For the enhanced or extended NOLCO to have significant impact during the period when businesses are supposed to have recovered and claimed NOLCO deductions, the effectivity period of the MCIT relief should ideally be consistent with the extended period of the NOLCO.It is hoped that, as legislators move forward with the CREATE Bill, the possibility of extending the period of MCIT relief is considered to better align the bill with NOLCO provisions of Bayanihan II. Otherwise, between 2023 and 2026, when net operating losses from 2020 and 2021 are allowed to be claimed as deductions, businesses may end up paying the 2% MCIT instead of taking full advantage of the extended NOLCO. Harmonizing these areas is believed to allow taxpayers to enjoy full tax relief and support.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Judy J. Castroverde is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.

08 February 2021

Clairma T. Mangangey

Decarbonizing for a better working world (Second part)

(Second of two parts)In the first part of this article, we discussed the costs and impact of climate change, the mounting pressures for carbon reduction, and the increasing demand of investors and regulators for greater transparency on nonfinancial performance through sustainability reporting.Climate change and sustainability were among the highlights at the 2021 meeting of the World Economic Forum (WEF), a week-long program at the end of January dedicated to help leaders select innovative solutions to address the pandemic and drive recovery. While climate change was already a dominant theme in the WEF in 2020, this year sees the private sector ready to prioritize a low-carbon future in their evolving business models and strategies.As part of its commitment to sustainability, Ernst & Young Global (EY), of which SGV is the Philippine member firm, recently announced its ambition to be carbon negative by 2021, and net zero in 2025. Becoming carbon negative will result in the reduction of EY’s carbon emissions in line with the 1.5 degrees Celsius Science Based Target (SBT), as well as investing in technologies and nature-based solutions to remove and offset more carbon than EY emits each year. This new ambition builds on the global organization’s achievement of carbon neutrality in December 2020.KEY ELEMENTS OF THE EY CARBON NEGATIVE AMBITIONThere are several key components in the EY ambition to not only become carbon negative, but to also reduce total emissions by 40% and achieve net zero in 2025.— Reducing business travel emissions. Though many EY services require an element of business travel, air travel provides the most significant negative impact on the environment, accounting for approximately 75% of EY’s global carbon emissions in FY19. These emissions will be reduced by 35% in 2025 using 2019 baseline data by continuing to use remote working technologies that helped EY teams provide uninterrupted client service during the pandemic.— Reducing overall office electricity usage. EY will reduce its office carbon emissions from electricity consumption to zero by FY25 and by switching to 100% renewable energy for remaining EY needs. By FY25, EY aims to be a fully accredited member of the RE100, a group of influential organizations committed to 100% renewable power. From 2020, EY’s global Scope 3 emissions measurements include employees working from home, reflecting the changes resulting from the pandemic, trends in remote working and the organization’s flexible working schedule.— Structuring electricity supply contracts. Along with agreed Virtual Power Purchase Agreements (VPPAs) with several solar and wind farms, EY aims to introduce more electricity than it consumes into national grids. These arrangements will add more than twice the amount of electricity consumed into multiple national electricity grids from 100% renewable energy. This allows EY to reduce its total electricity costs, offset its own office electricity emissions, and play its role in decarbonizing the electricity generation sector.— Providing EY teams with tools to calculate and reduce carbon emitted. EY recognizes that executing client-facing projects results in carbon emissions, and many clients want to work towards reducing them. To this end, EY will provide its teams with tools such as the EY Engagement Carbon Calculator to enable them to assess then reduce the amount of carbon emitted when delivering client work.— Offsetting more carbon than EY emits through nature-based solutions and carbon-reduction technologies. EY launched a collaboration with profit-for-purpose organization South Pole in December 2020, where contributions from EY will contribute to renewable energy projects (including solar, wind and hydro) and help preserve natural environments.— Requiring 75% of EY suppliers to set science-based targets. EY will set a goal for suppliers to have a Science Based Targets initiative (SBTi) approved carbon-reduction target by FY25. This involves collaborating with all suppliers to help them achieve SBTi accreditation and decarbonize their products and services, exponentially increasing the impact of EY’s carbon negative position.— Sustainable solutions for a carbon negative working world. In addition to increasing investments in solutions, EY will continue carrying out activities in various multi-stakeholder sustainability alliances. Such alliances include working on metrics and reporting with the World Economic Forum International Business Council, collaborating with C-suite Sustainability leaders in the S30 group, membership in the Alliance of CEO Climate Leaders, and work with the UN Global Compact and the World Business Council for Sustainable Development.As EY undertakes efforts to become more sustainable, it is also developing a new set of global sustainability solutions for clients to assist them in their own sustainability journey while protecting and creating long-term value for all stakeholders. In addition, EY will continue to transform its business amid the COVID-19 pandemic and invest in its people by equipping them with the knowledge and skills necessary to lead climate action at work and at home.As a member firm of EY Global, SGV & Co. will likewise further strengthen its own carbon reduction efforts and sustainability programs to align with the EY carbon negative ambition. More than merely adopting this initiative, the program falls within SGV’s Purpose to nurture transformative leaders capable of reframing the future and helping create long-term value.The COVID-19 crisis has taught us that providing exceptional client service is still possible despite the challenges it brought. The lessons that we have gained from managing the pandemic will help EY further attain its sustainability ambitions. Many of the practices the EY global firm and SGV have adopted due to COVID-19 will remain relevant to reducing carbon emissions and we will capitalize on these as we define our new normal of doing business.As the world moves towards an increasingly decarbonized future, it is our hope that more organizations will take up the challenge and join hands to help address the daunting risks posed by climate change.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

01 February 2021

Clairma T. Mangangey

Decarbonizing for a better working world (First part)

(First of two parts)Climate change is an urgent issue and taking action is critically necessary to limit and reduce global carbon emissions. Businesses in particular will need to consider their own carbon footprint. With collective technological capabilities, financial resources, innovative capacity and global reach to search for solutions towards a low-carbon future, many businesses worldwide are setting carbon reduction targets, progressing towards net zero. In fact, just last week EY Global Ltd. (of which SGV is a member firm) announced its plans to achieve negative carbon emissions in 2021 and net zero by 2025.Combatting climate change is a unique challenge for each organization, but it is clear that a collective effort is crucial to avert disaster. With the ongoing pandemic reinforcing the drive towards a sustainable future, transitioning to decarbonization is more vital than ever to achieve long-term resilience for organizations as well as to aid economic recovery.THE COSTS AND IMPACT OF CLIMATE CHANGEThe Economist estimates that by 2050, the global economy will be 3% smaller due to a lack of climate resilience, potentially raising the cumulative cost of damages to $8 trillion. Research from the EY Megatrends 2020 report also reveals that many Asian countries face high vulnerability to rapidly rising sea levels, flooding, and heat waves. Without clear action to decarbonize economies, hundreds of millions of people may be victims of coastal flooding by 2050.Domestically, the increasingly worse effects of climate change directly impact the vulnerable agriculture and fishing industries in the Philippines. The Philippine Statistics Authority (PSA) said in a report that the production costs for crops and fish have increased between 2017 and 2019 compared to the period between 2016 and 2018. This alarming trend resulted in much lower income for farmers and fishermen.MOUNTING PRESSURES FOR CARBON REDUCTIONBusinesses are more cognizant of the significance of both decarbonization strategies and climate-related investments in achieving long-term sustainable growth. A rise in new industries to support clean technologies can be expected, while emission caps and carbon pricing could transform taxation and invert cost structures.Certain governments in the Asia-Pacific have recognized the need to mitigate the disruptive risks of climate change. For example, Japan committed to achieve carbon neutrality by 2050, and China, the largest carbon emitter in the world, announced its intent to establish peak emissions by 2030 and reach net zero emissions by 2060.The findings from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey indicate that investors need to look into long-term value by critically assessing company performance through environmental, social and governance (ESG) factors, including climate change.In order to meet investor expectations and appear future-proof, companies need to prioritize means of analyzing the opportunities and risks of climate change. They will also need to prioritize how to improve disclosure of their sustainability performance, or else risk the possibility of losing access to capital markets.The decarbonization of businesses is further accelerated by consumers, particularly Generation Z, who are also increasingly aware of how their choices impact climate change. Gen Z is becoming even more influential as stakeholder capitalism continues to rise. They believe in the essential role business plays in addressing climate change and prioritize businesses that protect the environment and utilize sustainable supply chains.SEC REQUIREMENT FOR SUSTAINABILITY REPORTINGIn a 2019 article, Sustainability reports: fad or for good? SGV Partner Benjamin N. Villacorte had articulated that companies are encouraged not to wait for sustainability reporting standards or a regulatory requirement to be mandatory.Recall that in 2019, the Securities and Exchange Commission (SEC) required publicly listed companies (PLCs) to submit their Sustainability Report with their 2019 Annual Report in 2020. The issued memorandum detailed that the guidelines will be adopted on a “comply or explain” approach for the first three years upon implementation. By 2023, PLCs are required to comply with Sustainability Reporting Guidelines specified in the memo, or else be penalized for an Incomplete Annual Report (under SEC Memorandum Circular No. 6, Series of 2005).This pronouncement reiterates the need for structured sustainability reporting and for companies to manage their non-financial performance towards achieving the universal target of improved sustainability. For it to be effective and useful, companies should not only view sustainability as an exercise in compliance, but as their responsibility to earn their social license to operate.BUILDING A DECARBONIZED FUTUREGiven the foreseeable impact of climate change alongside the mounting pressure from investors, employers, leaders, consumers and policymakers to address it, organizations are encouraged to embrace the decarbonization imperative. Adopting a decarbonization strategy will bring about the goodwill of investors, employees and consumers, and also build long-term, sustainable value.In the second part of this article, we will discuss how EY, as part of its commitment to sustainability, will tackle the challenge of becoming carbon negative by 2021.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Clairma T. Mangangey is the Climate Change and Sustainability Services Leader of SGV & Co.

25 January 2021

Allenierey Allan V. Exclamador

The Tax Reform Package 2: CREATE-ing opportunities for business

The Department of Finance (DoF) originally designed its tax reform package 2 to be revenue-neutral, gradually lowering the corporate income tax (CIT) rate while modernizing incentives and making them “performance-based, targeted, time-bound, and transparent” for companies. However, the COVID-19 pandemic brought about unforeseen hardships and challenges to businesses. The DoF has refocused package 2 (now known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE) to make it more “responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.” SENATE BILL NO. 1357 — CREATE According to the DoF, the changes make the proposed bill the first-ever revenue-eroding tax reform package and the largest fiscal stimulus program for enterprises in the country’s history. In this light, the Senate approved in November Senate Bill (SB) No. 1357, known as CREATE, after which the bill was forwarded to the House of Representatives in December. The provisions in the bill will still be reconciled with the House of Representatives’ version, through a bicameral conference (bicam) and may still be subject to change. The bill aims to improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages, as well as developing a more responsive and globally competitive tax incentive regime that is performance-based, targeted, time-bound, and transparent. It also aims to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic and strengthen the nation’s capability for similar circumstances in the future. In addition, it seeks to create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs and opportunities across the entire country and ensure access and ease in the granting of these incentives, especially for applicants in the least developed areas. CREATE seeks to lower the CIT rate from 30% to 25% effective July 1, 2020. But domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated, shall be taxed at 20%. While this reduction in the CIT rate will significantly cut into government revenue, the DoF said all firms, especially micro, small and medium enterprises (MSMEs), can use the tax savings to fund their operations and retain employees. The DoF also adds that foregone revenue from the reduction of the CIR rate constitute an unprecedented investment that shows the government’s resolve to vigorously fight the effects of COVID-19 on the economy and get businesses back on their feet as quickly as possible. Currently, when the minimum corporate income tax (MCIT) of 2% on gross income is greater than the regular income tax of 30% on net taxable income, such MCIT of 2% is imposed on the corporation. Under CREATE, effective July 1, 2020 until June 30, 2023, the MCIT rate shall be one percent (1%). FOREIGN-SOURCED DIVIDENDS Another notable change covers foreign-sourced dividends received by a domestic corporation. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax. However, foreign-sourced dividends received by a domestic corporation from investments abroad are subject to income tax. Under CREATE, these foreign-sourced dividends received by a domestic corporation shall not be subject to income tax provided that 1) the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received; 2) the dividends shall be limited to funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and 3) the domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shares for a minimum of two years at the time of the dividend distribution. This will encourage domestic corporations with substantial investments abroad to repatriate profits to the Philippines and use the funds to reinvest locally, helping to drive economic growth. NON-PROFIT ORGANIZATIONS Proprietary educational institutions and hospitals which are non-profit shall be imposed a tax rate of 1% on their taxable income from July 1, 2020 until June 30, 2023, instead of 10%. “Proprietary” is defined as a private hospital or any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. It is widely known that educational institutions and hospitals are among the entities badly affected by the pandemic. This reduction in tax rate for a limited time aims to help these hospitals and educational institutions cope with the crisis and retain employees. ADDITIONAL CHANGES PROPOSED IN CREATE Other salient changes proposed in the CREATE bill include the removal of exemption of offshore banking units (OBUs) and the repeal of the imposition of improperly accumulated earnings tax (IAET). In addition, the Regional Operating Headquarters (ROHQs) of multinational companies shall pay a tax of 10% of their taxable income, except that effective Dec. 31, 2021, ROHQs will be subject to the prevailing regular corporate income tax. The sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases shall be exempt from value-added tax (VAT) beginning on Jan. 1, 2021 instead of Jan. 1, 2023. The sale or importation of equipment, raw materials and other items necessary for COVID-19 prevention, such as PPE, medication and FDA-approved vaccines, will also be exempt from VAT beginning Jan. 1, 2021 to Dec. 31, 2023. FISCAL TAX INCENTIVES Under CREATE, tax incentives may generally be available to certain enterprises provided their activities qualify under the Strategic Investment Priorities Plan (SIPP) to be issued every three years. The incentives can include, among others, income tax holiday (ITH) and special corporate income tax (SCIT) in lieu of all taxes-both local and national. The duration of the ITH can range from four to 17 years depending on the location and industry of the registered project or activity, and other relevant factors as may be defined in the SIPP. In CREATE, the period for availing of the ITH will be followed by the Special Corporate Income Tax (SCIT) rate, equivalent to 5% effective July 1, 2020, based on the gross income earned, in lieu of all taxes, both national and local. The period for availing of SCIT after the ITH incentive is 10 years across all categories. Furthermore, registered enterprises are exempt from customs duty on imports of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity. Registered enterprises are also exempt from VAT on imports and are entitled to VAT zero-rating on domestic purchases of goods and services directly and exclusively used in their registered project or activity located inside an ecozone or freeport. Investments registered before the effectivity of CREATE will be governed by the following rules: 1) registered enterprises whose projects or activities were granted only an ITH prior to the effectivity of the CREATE will be allowed to continue availing of the ITH for the remaining period of the ITH as specified in the terms and conditions of their registration; 2) those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of CREATE may use the ITH for the period specified in the terms and conditions of their registration; and 3) registered enterprises whose projects or activities were granted an ITH prior to the effectivity of CREATE and are entitled to the 5% tax on gross income earned incentive after the ITH will be allowed to avail of the 5% gross income earned incentive for 10 years. Registered enterprises currently availing of the 5% tax on gross income earned granted prior to the effectivity of the CREATE will be allowed to continue availing of the 5% tax incentive for 10 years. Given the devastating impact of the pandemic, passing the CREATE bill into law now appears even more urgent. It is hoped that its implementation and execution will play a key role towards economic recovery and eventual national economic resurgence. 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. Allenierey Allan V. Exclamador is a Tax Partner of SGV & Co.

18 January 2021

Maria Margarita D. Mallari-Acaban

The dawning potential of digital banking

Owing to the significant role of digital platforms especially during the pandemic, the Bangko Sentral ng Pilipinas (BSP) recently recognized “digital banks” as a separate and distinct bank category with the issuance by the Monetary Board of the Digital Banking Framework on Nov. 26, followed by the issuance of the Guidelines on establishment of digital banks (BSP Circular 1105) on Dec. 2. BSP Governor Benjamin E. Diokno has also acknowledged the role of these banks “as additional partners in further promoting market efficiencies and expanding access of Filipinos to a broad range of financial services” consistent with the BSP’s financial inclusiveness agenda. WHAT IS A DIGITAL BANK? Does merely having an online banking platform, app or website (which most banks currently have) make a bank a digital bank? Not necessarily. An online banking facility merely supplements the operations of traditional banks by allowing alternative ways to transfer money, check account balances or pay bills. A digital bank, on the other hand, is essentially an online-only bank. Under the amended Manual of Regulations for Banks (MORB), a “digital bank” refers to an entity that offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch, sub-branch or branch-lite unit offering financial products and services. This essentially requires the entire banking and service delivery process to be digitized — not just parts of it. While a physical branch is not required, regulations still mandate that digital banks maintain a principal or head office in the Philippines. This houses the offices of management and serves as the main point of contact for stakeholders that include the BSP, other regulators and customers. HOW DOES A DIGITAL BANK OPERATE? Under the BSP Circular 1105, digital banks essentially operate and are regulated the same way as bricks and mortar banks. It has a similar license to grant loans, accept savings, time deposits, and foreign currency deposits, as well as invest in readily marketable bonds and other debt securities, commercial paper and accounts receivable, drafts, and bills of exchange. It can also act as a correspondent for other financial institutions, issue money products and credit cards, buy and sell foreign exchange, and present, market, sell and service microinsurance products. However, digital banks are quite different in many ways from their traditional counterparts and in many cases, offer more convenient banking solutions. A MORE CONVENIENT BANKING EXPERIENCE Without the requirement of going to a physical branch, digital banks will allow clients to save time and effort in all transactions such as account opening, Know Your Customer (KYC) procedures and depositing cash or checks. Digital banks invest significantly in technology to allow facial recognition in conducting KYC and Anti-Money Laundering (AML) procedures or the use of fingerprint or digital signatures (instead of the traditional wet signatures) to transact — all by simply using a mobile phone or laptop. This is especially useful during the pandemic as it practically eliminates the need to physically go to a bank branch for face-to-face contact with bank personnel. This platform also benefits the banks as they are able to save time and resources due, in large part, to the reduction in manpower costs, supplies (no need for deposit slips and other forms) and rent among others. Theoretically, the savings from these expenses would allow them to invest and constantly upgrade their IT infrastructure to ensure a safe and secure banking experience for its clients. Moreover, these savings on overhead costs may allow them to offer higher interest rates and possibly remove minimum maintaining balance requirements or service fees. Digital banks may also offer true 24-hour/7 days a week accessibility on all banking transactions. While the online banking services of current bricks and mortar banks allow round-the-clock access to bank accounts for money transfers and billing payments, access to loan applications or certain financial products will still require clients to visit the bank. WHO MAY APPLY FOR A DIGITAL BANKING LICENSE? Because of the obvious advantage digital banks can offer, numerous banks have been showing interest in applying for a digital license. But what does it take to secure a digital bank license? According to the BSP Circular 1105, the qualifications in terms of stockholdings cite that (1) foreign individuals or foreign non-bank corporations may own or control up to a combined 40% of the voting stock of the digital bank; and (2) Filipino individuals or domestic non-bank corporations may each own up to 40% of the voting stock of a digital bank. Qualified foreign banks may also own or control up to 100% of voting stock. An applicant must submit a detailed review and assessment of the supporting IT systems and infrastructure vis-à-vis the digital banking model, and the applicable requirements in offering Electronic Payments and Financial Services (EPFS) under Section 701 of the BSP Circular. In addition, at least one member of the Board of Directors (BoD) and one senior management office should have a minimum of three years of experience and knowledge in operating a business in the field of technology or e-commerce. Existing bricks-and-mortar banks are also allowed to convert to digital banks under certain conditions. The Circular specifically requires the bank to meet the minimum P1-billion capital requirement and transition plan (including the divestment or closure of branches or branch-lite units) within three years from approval of conversion. Once approved for conversion, however, the bank may no longer engage or renew transactions not associated with those allowed for a digital bank and within six months, shall phase out all inherent powers and activities under special authorities not normally associated with a digital bank. Given these requirements under the BSP Circular 1105, it appears that existing banks that are commonly known or marketed as “digital banks” or meet all the qualifications of a digital bank but have not converted must secure a digital bank license from the BSP before they can officially operate as a digital bank. THE TIMELY RISE OF DIGITAL BANKS What remains to be seen, however, is whether bricks-and-mortar banks will immediately choose to convert to a full digital bank or retain their current license with some digital bank or online platform features to offer the best of both worlds to their clients. While digital banks may make the banking experience more convenient, the absence of a physical branch may not necessarily be ideal for some as it often translates to lack of physical and personal connection. Admittedly, many long-time banking clients still prefer a personal relationship with their banks and in the banking world, an established relationship between a bank and its client clearly goes a long way for both parties. Regardless, it is safe to say that digital banking in the Philippines is finally online and here to stay. While our progress in the digital banking space has not been that swift, it is hoped that the financial inclusiveness agenda of the BSP will accelerate the expansion of digital banks to reach the unbanked and unserved population. At the end of the day, it is always better to have inclusive choices available for everyone to encourage financial literacy and security. For as long as the market is assured of the integrity of the bank’s IT infrastructure and full compliance with the BSP Circular 1105 as well as strict adherence to BSP Corporate Governance Guidelines, digital banks can serve as a true alternative to traditional banks. With the New Normal likely to remain in the foreseeable future, remote and virtual access to banks will not only be convenient to all but also essential for public health and safety. 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. Maria Margarita D. Mallari-Acaban is a Tax Partner of SGV & Co.

2021