2023 Articles - Suits the C-Suite | SGV & Co. | EY

18 December 2023

Margaux A. Advincula and Michelle C. Arias

Sustainability and tax: The future is calling

The journey to sustainability started with the Industrial Revolution, when economic growth was characterized by faster and large-scale manufacturing processes. This came at the expense of a degrading environment, unhealthy labor practices, and aggressive cost-saving mechanisms.Now, sustainability has evolved into a critical key performance metric that drives long-term value for investments and embraces corporate responsibility in the use of natural resources, uplifting of social communities, and upholding accountability for regulatory obligations.As the economy moves towards achieving the UN Sustainable Development Goals (SDGs), taxation plays the role of a catalyst that facilitates an enduring partnership between the government and businesses in building a competitive and resilient nation.This is the eighth and last article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. This article will highlight the role of taxation in a company’s sustainability strategy that aligns with government priorities and contribute to building a better Philippines.SUSTAINABILITY AND ESGOne of the ways businesses build public trust and stakeholder confidence is by having key performance indicators (KPIs) that demonstrate their environmental, social, and governance (ESG) commitments. Businesses that integrate ESG metrics into their sustainability strategies not only create long-term value, but also set a baseline standard for future growth.During the Conversation with the C-Suites panel at the 2nd SGV Tax Symposium, Chief Finance, Risk, and Sustainability Officer of Metro Pacific Investments Corp. (MPIC), June Cheryl Cabal-Revilla, said MPIC’s holistic approach to sustainability embodies a framework for economic, environmental, social, and governance (EESG) measures which are complemented by defined KPIs.“Apart from the usual economic or financial resilience, we put priority on environment and climate resilience, then on social, organizational, and community resilience because that involves all our employees and the communities around us who are also our customers. Lastly, we focus on governance and reputational resilience, which cut across everything that we do. That has been our way of life for three to four years now. It has been embraced by everyone in the company/group,” Ms. Cabal-Revilla said. In addition, they have already incorporated sustainability in planning their capital expenditures.According to Ms. Cabal-Revilla, “there is a desire for governmental entities to gain a more comprehensive understanding of the essence of sustainability. This desire emphasizes EESG principles, their impact, and the ability to echo their critical nature to the greater public.”Although businesses have the influence and tools to create positive outcomes, it takes a whole-of-society approach sustained by long-term government support to meet the challenges of sustainability.TAX AND ENVIRONMENTAL SUSTAINABILITYAlongside regulations, taxation is also a key tool in promoting sustainable development practices and in impeding activities harmful to the environment through targeted fiscal incentives and punitive taxes. According to the Organisation for Economic Cooperation and Development (OECD), environmentally related taxes “provide incentives for further efficiency gains, green investment and innovation and shifts in consumption patterns.”In the Philippines, businesses can be partners of the government in its green campaign by aligning their investments and projects with the priority sectors of the Philippine Economic Zone Authority (PEZA) and Board of Investments (BoI). Green industries such as renewable energy projects, energy efficiency activities, and eco-industrial park development, among others, are also eligible for incentives. These highlight the administration’s goal to make the Philippines a regional hub for globally competitive, innovative, and sustainability-driven industries.In addition to tax incentives, the government can also potentially explore imposing additional charges for environmental and health damage. Such punitive taxes can stimulate businesses and consumers to seek cleaner solutions that reduce greenhouse gas emissions while simultaneously raising revenue to fund vital government social services.TAX AND SOCIAL RESPONSIBILITYTaxation also contributes to the social externalities of economic activity by creating and/or attracting investments that create employment opportunities in rural and less developed areas, build infrastructure to support trade and industry, and sustain government and private expenditures for education, health, and social welfare activities.TAX AND TRANSPARENCY IN GOVERNANCEProper tax governance in ensuring that businesses pay a fair amount of tax is an issue held highly not only in local tax audit and enforcement programs, but also globally given recent regulatory developments against base erosion and profit shifting (BEPS).The Bureau of Internal Revenue (BIR), under the leadership of Commissioner Romeo Lumagui, Jr., embodies this principle on sustainability with its four pillars: excellent taxpayer service; integrity in the revenue service; audit and enforcement; and digitalization. Guided by these pillars, the BIR aims to protect the interests of the government and its stakeholders, and at the same time foster a business climate that is conducive to growth, diversification and profitability.In alignment with the BIR’s priority programs, companies reinforce their own governance with an oversight mechanism that upholds accountability for tax planning and decisions made around its tax compliance and reporting.SUSTAINABILITY AS COLLABORATIVE EFFORTThe road to sustainability is not just one person’s journey. It requires a collective effort from the government, the private sector, and the taxpaying public who must all work hand-in-hand to achieve the Philippines’ sustainable development goals for a strong and better future.The 2nd SGV Tax Symposium, in relaunching the SGV Tax Vision, articulates on the interdependency among taxpayers, regulators, and tax practitioners who each play a significant and complementary role in enabling businesses and driving socio-economic growth for the whole country.In a sustainable tax ecosystem, taxpayers embody a culture of integrity with their knowledge on tax rules and a better appreciation of their social responsibility and commitment to nation-building by paying the correct taxes.Regulators enable taxpayers to align their expenditures with government priorities and contribute the most in meeting desired outcomes. This is achieved by providing detailed and specific policies and regulations with clear accountability and measurable targets, produced in close collaboration with concerned industries and affected communities.Tax practitioners support taxpayers and regulators alike by being equipped with the necessary skills to competently explain tax rules while upholding the value of integrity. They thereby foster an environment where taxpayers are compliant, government can deliver on its commitments, the public can access job opportunities, businesses can realize their long-term value, and the Philippines becomes a conducive place for investment.While the factors that drive sustainability changes arise from different backgrounds, in the end, consistent and continuous collaboration is vital to attaining effective and long-term sustainable development, growth and resiliency. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Margaux A. Advincula is a tax partner and head of the SGV Clark Office, and Michelle C. Arias is a tax senior director.

11 December 2023

Jules E Riego

Uncomplicating tax compliance

The Bureau of Internal Revenue’s (BIR) 2022 Annual Report reflected a total of 47.4 million registered taxpayers in the Philippines from various segments. Of those, 58% are individual taxpayers who paid their taxes through the withholding tax of the compensation system, or through voluntary filing and payment of their tax returns for sole proprietors and individuals engaged in professional practices.Through the voluntary filing and payment system, corporate and individual taxpayers contributed 98.12% of the BIR’s total tax collection for the year. For 2023, the taxpaying public will further support the Marcos Administration’s P5.268 trillion National Budget, which focuses on further mitigating the effects of the pandemic, improving transportation, and empowering Local Government Units (LGUs). Clearly, responsible taxpayers are the backbone of our country.This is the seventh article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. This article will discuss the Ease of Paying Tax (EoPT) Bill and how it aims to encourage the compliance of taxpayers in tax-related government processes.In September, the reconciled version of the EoPT Bill was approved by the Senate. This measure will provide practical and meaningful relief to all taxpayers and encourage tax compliance.FILE AND PAY ANYWHEREThe best feature of the EoPT Bill allows taxpayers to manually or electronically file and pay their taxes anywhere. This will bring about immeasurable taxpayer convenience as it will do away with the need to line up to file and pay taxes at the particular BIR office where the taxpayer is registered. It offers taxpayers greater flexibility while also promoting sustainability. One of the landmark features of the EoPT bill is that it no longer imposes the burdensome 25% surcharge for filing at the wrong venue; taxpayers will be able to file and pay in any Revenue District Office (RDO) near them or any BIR-Accredited Agent Bank (AAB) in their vicinity. EFPS filers in particular need not worry about hefty surcharges and interest penalties for filing at the wrong venue whenever they experience system downtimes during quarterly and annual tax filing.EXEMPTION FROM OBLIGATION TO WITHHOLDThe EoPT Bill will formally institutionalize taxpayer classification into 1) Micro taxpayers (earning less than P3M annually); 2) Small taxpayers (earning P3M to P20M); 3) Medium taxpayers (earning P20M to P1B); and 4) Large taxpayers (earning P1B and above).The classification is critical for those classified as micro taxpayers since the EoPT Bill exempts them from withholding taxes on their income payments, saving them critical tax compliance costs. Moreover, micro and small taxpayers will benefit from the reduced surcharge of 10% (instead of 25%) for failure to file a tax return or neglecting to file a correct return, a reduced interest penalty from 12% to 6%, and a 50% reduction in compromise penalty for violations of invoicing requirements and printing of invoices.The annual business registration fee payment of P500, a significant amount for micro businesses, is also done away with.SHIFT TO VALUE ADDED TAX (VAT) BASED ON ACCRUAL AND VAT INVOICEOne of the biggest changes from the EoPT Bill affects service occupations like restaurants, hotels and individuals exercising their profession, as the remittance of their output VAT liability will shift from collection (gross receipts) basis to accrual basis. The bill, however, provides leeway to deduct the output tax paid from uncollected accounts come the succeeding quarter’s VAT return filing, should the billed amounts remain unpaid after the due date for their payment. The other condition is that output VAT should not have been claimed as a deduction against the taxpayer’s gross income as an expense for income tax purposes.This shift will benefit everyone in terms of when to recognize input VAT, as there will now be a uniform rule that input VAT can be recognized upon receipt of the VAT invoice.Speaking of invoices, the EoPT bill will also do away with the issuance of official receipts. This means that for all transactions, whether for sale of services or sale of goods, taxpayers need only issue BIR-registered invoices, bringing us up to par with international best practices. Invoices are no longer required to indicate business style as well. Common mistakes in complying with some of the invoicing requirements will not necessarily lead to the disallowance of input taxes, provided that the errors do not pertain to amount of sales, amount of VAT, name and TIN of both seller and buyer, date of transaction and description of the goods or services sold.SIMPLIFYING VAT REFUNDSThe EoPT Bill seeks to implement more improvements in the process of VAT refunds by classifying VAT refund applications as low, medium and high-risk claims. This further streamlines the process and requirements for low-risk claims (akin to the “green lane” of the BoC) to ensure that VAT refunds are granted within 90 days or less, saving costs and litigation for claimants.Under the EoPT bill, taxpayers will be given the option to elevate their claims to the Court of Tax Appeals (CTA) within 30 days if it takes the BIR more than 90 days to issue a decision on a refund claim.TAX COMPLIANCE MADE MORE CONVENIENTThe EoPT Bill was endorsed for the President’s signature on Dec. 6, 2023. It will lapse into law after 30 days, unless sooner signed by the President, which means there may still be changes to it. While the EoPT Bill is not a revenue-raising measure, it is instead intended to lower tax compliance costs while enhancing tax compliance efficiency. Through these changes, the bill aims to enhance the trust and confidence of Filipino taxpayers in tax-related government processes.Through these measures, we can see how the government is taking steps to demonstrate that tax compliance, while still an obligation, does not have to be an onerous one. 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. or EY.Jules E. Riego is the ASEAN business Tax Services leader of Ernst & Young (EY) and the Private Tax Head of SGV & Co.

04 December 2023

Jonald R. Vergara and Donelle Jay A. Quilates

Public-private partnerships reboot

Infrastructure development continues to be a key focus of the government to sustain economic growth — and rightfully so as it enhances market access, attracts investments, and creates jobs. But with significant capital needed for infrastructure projects, the government by itself may not be able to fund the required expenditures.Public-Private Partnership (PPP) with companies addresses this key challenge. In addition to private-sector funding, PPP arrangements share the risks involved and reduce cost to the government.While the Philippines is regarded as the first Asian country to institutionalize the participation of the private sector in its infrastructure development projects, according to a publication by Asian Development Bank (ADB), a number of challenges abound in the implementation of PPP projects. These include a clear legal and regulatory framework, the efficient resolution of land acquisition and right-of-way issues in public transport projects, and time constraints in participating in unsolicited proposals.This is the sixth article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. This article will discuss the PPP landscape in the Philippines and ongoing government initiatives to improve it. THE PPP LANDSCAPEIn the 2nd SGV Tax Symposium held on Oct. 25, the PPP Center speaker presented its policy initiatives to support PPPs which are sustainable and climate resilient. PPP Governing Board Resolution No. 2018-12-02 aims to facilitate the review process of the implementing agencies in PPP projects prescribing safeguards under prevailing laws. The Resolution aids the implementing agency in identifying requirements and ensuring safeguards are accounted for in a project’s feasibility study, ensuring the approved terms in the PPP contract consider the safeguards and measures to mitigate identified concerns, and prescribing monitoring, evaluation and feedback for the safeguards embedded in the PPP contract as described in Section 2.2 under the PPP Governing Board Resolution.The speaker also discussed the Resilience Roadmaps and Investment Portfolios for Risk Resilience (IPRR) developed by the PPP Center together with ADB and the Urban Climate Change Resiliency Trust Fund. The IPRRs include PPP projects in localities which are susceptible to climate change impacts. As the infrastructure is expected to be long term, PPP projects should be resilient because these will essentially provide key basic social services.ONGOING GOVERNMENT INITIATIVESIn June 2023, President Ferdinand R. Marcos, Jr. issued Executive Order (EO) 30, which changed the composition of the Public-Private Partnership Governing Board (PPPGB) to include a member from the private sector. The PPPGB is the overall policy making body on all PPP related matters, sets the strategic direction of the PPP Program, and creates an enabling policy and institutional environment for PPP. This addition seeks to empower the private sector to actively participate and help provide insights to the policy formulation and implementation by the PPPGB moving forward.More recently, both the Senate and House ratified the Bicameral Conference Committee Report covering the PPP Code of the Philippines which reconciled House Bill 6527 and Senate Bill 2233. The proposed bill, which is awaiting the signature of the President, consolidates existing legal and regulatory framework governing PPP projects.Among the highlights of the proposed PPP Code include:• Allowing unsolicited proposals in the list of PPP projects without requiring new concept or technology, subject to reimbursement of the government’s development costs.• Updating project approval thresholds for Build-Operate-Transfer (BOT) projects (previously fixed 29 years ago) and giving authority to the NEDA Investment Coordination Committee to review, evaluate, and update these threshold amounts.• Upholding local autonomy while providing mechanisms to ensure harmonized investment programming between local government units and the National Government.• Establishing a clear pathway for the issuance of franchise exacting toll fees, fares, rentals and other charges and allowing the private contractor to recover any shortfall consistent with the agreed PPP contract and prevailing laws, rules and regulations.• Restricting provisional injunctive reliefs issued by lower courts subject to limited exceptions to ensure continuity in project evaluation and implementation. • Strengthening the enabling institutions for PPPs particularly the PPP Center, which is granted additional powers and functions towards a more efficient and effective performance of its mandate.PPPs AS A MEANS TO MANAGE INFRASTRUCTURE PROJECTSASEAN countries have shown increasing interest in PPPs as a way to fund and manage infrastructure projects. Studies show a direct correlation between infrastructure and gross domestic product (GDP) growth. According to a study by the World Bank, higher infrastructure growth generally equates to higher GDP growth, especially in developing countries.The ADB projects that Asia will need to invest $26 trillion from 2016 to 2030 if it is to “maintain its growth momentum, eradicate poverty, and respond to climate change.” Comprehensively, it is important to meet the funding demand for infrastructure projects in the succeeding years to augment or stimulate the country’s production and protract its GDP growth trajectory.The PPP Center has identified 106 PPP projects in the pipeline with total estimate project cost of P2.5 trillion from solicited and unsolicited proposals covering both local and national projects. Some of the notable ones include key infrastructure projects such as the NAIA PPP covering the rehabilitation, operation, optimization, and maintenance of NAIA airport, the Metro Manila Subway PPP covering operation and maintenance (O&M), North-South Commuter Railway O&M PPP, the Mindanao Railway project, the MRT 7 Project, and the Laguna Lake Rehabilitation and Development project. It is also promising to see proposed projects involving local government units covering bulk water supply and septage, waste to energy, subway and expressway, as well as reclamation and development.The importance of PPP projects is emphasized by the fact that existing laws and regulations such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, as implemented by the Strategic Investments Priorities Plan, grant tax incentives to qualified PPP projects. These incentives include income tax holidays with a maximum of seven years, enhanced deductions from gross income, enhanced net operating loss carryover, as well as duty and tax exemption on imports of capital equipment.IMPROVING ECONOMIC GROWTH THROUGH PPPWhile the Philippines is trying to catch up with its neighbors in infrastructure development, ongoing initiatives of the government spearheaded by the PPP Center, legislation from Congress, and the support of both foreign and local institutions are set to help reel in funding from the private sector and drive future PPP projects. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Jonald R. Vergara is a tax principal of SGV & Co., and Donelle Jay A. Quilates is a tax senior director of SGV & Co.

27 November 2023

Maria Margarita D Mallari–Acaban and Mira Ramirez-Uy

Philippines bets on BEPS

On Nov. 8, the Philippines officially accepted the Organisation for Economic Co-operation and Development’s invitation to join the Inclusive Framework (IF) on base erosion and profit shifting (BEPS). The announcement is timely, as other countries, including our Asian neighbors, have expressed their intention to join or have started drafting their own BEPS legislation earlier this year.In 2021, 136 member jurisdictions of the IF forged a new global tax deal — the Two-Pillar solution—with the aim of curbing tax avoidance by Multinational Enterprises (MNEs). The Two-Pillar solution was years in the making and represents the most significant tax reform in decades. The Global Anti-Base Erosion (GloBE) Rules, a core component of BEPS 2.0 Pillar Two, seek to limit unhealthy tax competition — the so-called “race to the bottom” for corporate tax rates — among jurisdictions by introducing a 15% global minimum tax rate.This is the fifth article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. This article will discuss how BEPS 2.0 Pillar will impact the Philippine tax landscape.WHAT IS THE BEPS 2.0 PILLAR 2 ARCHITECTURE?Applies only to large MNEs. Under the GloBE rules, the 15% global minimum tax rate applies only to large MNEs — particularly those with annual consolidated revenues of 750 million euros (or equivalent) in two of the last four years. Essentially, purely domestic firms or MNEs falling below the 750 million euro revenue threshold are excluded from the coverage of Pillar 2.GloBE Effective Tax Rate (ETR) is below 15%. Once an MNE is considered in-scope, the group determines the ETR of the entities per jurisdiction and compares this with the 15% global minimum tax rate. If the ETR of an entity is lower than the 15% minimum rate (deemed as a low-taxed entity), an additional tax called the ‘top-up tax’ becomes due.When computing the ETR, the GloBE Rules apply to all low-tax outcomes as a wholesale policy. Therefore, it does not provide any exceptions or preferences for reduced tax rates intended to encourage specific sustainability efforts (e.g., investments in renewable energy), or those granted for specific industries or activities.New charging and collection mechanism. Through an ordered system of top-up taxes, the GloBE Rules recognize a new set of taxing rights, allowing various jurisdictions to collect the top-up tax irrespective of the low-taxed entity’s physical location or tax residency. The Pillar 2 system effectively deviates from the tax system where income is typically collected by the source jurisdiction or the immediate parent’s jurisdiction. By design, the GloBE rules allow not only the domestic jurisdiction (where the low-taxed income is earned) to collect the top-up tax via the Qualified Domestic Top Up Tax (QDMTT), but also the ultimate or intermediate parent jurisdiction via the Income Inclusion Rule (IIR) or another related entity within the Group via the Undertaxed Payments Rule (UTPR).Common approach. Adopting the GloBE rules is not mandatory for all countries. However, to ensure uniform implementation, the rules provide a common approach to be adopted by the implementing jurisdictions. To date, a few countries have enacted their own Pillar 2 legislation, such as Japan, South Korea, and the UK. Additionally, more than 40 countries — including the Philippines — have signified their intention to adopt the GloBE Rules or are in the process of passing local legislation, with anticipated implementation by 2024 to 2025.THE PHILIPPINES IN THE BEPS 2.0 WORLDWith the Philippines joining the IF, our adoption of the Pillar 2 rules will become a critical piece of local legislation. It will determine the top-up tax mechanism to be applied to low-taxed entities of Philippine and Foreign MNEs, and the alternative incentives we need to complement it.For developing countries like the Philippines, incentives have been traditionally used as a stimulus mechanism to boost employment, foster technology transfer, encourage capital inflow and foreign currency, and promote overall growth. As an investment hub, the country is home to many enterprises in the manufacturing, business process outsourcing, and renewable energy space, which benefit from income tax holidays or special income tax rates. As such, entities enjoying these incentives will likely have a jurisdictional ETR of below 15%, for which a top-up tax will be due.Local enterprises that benefit from these incentives will be the most affected in case we adopt the QDMTT since the Philippines will now have the primary taxing right over these low-taxed entities. For Philippine-headquartered conglomerates with operations in other low-tax jurisdictions, the country will likewise have the right to collect the top-up tax through the IIR or UTPR.IS THIS THE END FOR TAX INCENTIVES? NOT NECESSARILY.Certain incentives that are grounded on substance (e.g., payroll, tangible assets), are expenditure-based (e.g., accelerated depreciation), or are not income tax-related, appear to work better in a Pillar 2 environment. Our neighbors in ASEAN are similarly re-assessing the design of their tax incentives. For instance, as part of their Pillar 2 implementation, Malaysia and Vietnam are exploring cash grants and qualified refundable tax credits. Other alternatives being considered include non-income tax incentives, interest-free loans, and relaxation of ownership rules. The Philippines could explore similar approaches that can be localized to align with the government’s investment policy.In the long term, however, as designing incentives becomes more complex and challenging in a Pillar 2 environment, we may eventually need to shift our focus toward non-tax investment drivers, such as general operating conditions, infrastructure, human capital, access to talent, and ease of doing business, to remain competitive in the market. These measures have been viewed to deliver more sustainable, long-term value to investors.STRIKING A BALANCE IN A PILLAR 2 ENVIRONMENTThe BEPS Project is arguably the most ambitious and comprehensive tax initiative we have seen. As more countries enact their own Pillar 2 legislation, we can anticipate significant changes in the tax landscape. For affected MNEs, an impact assessment, incentives review, group-wide BEPS compliance, and Pillar 2 planning should now take precedence in their tax and finance agendas. Engaging with the regulators is also a must to ensure a smooth transition to a Pillar 2 environment.This entire process will likewise involve a delicate balancing act by the government. Surely, this will require more than just adopting a top-up tax legislation. A major policy reform should go along with it to address the long-term impact of top-up taxes to existing and future investors. A comprehensive solution should definitely be on the table, otherwise, the intended benefits of our Pillar 2 adoption may well be short-lived. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Maria Margarita D Mallari–Acaban is a tax principal of SGV & Co., and Mira Ramirez-Uy is a tax senior director of SGV & Co.

20 November 2023

Cheryl Edeline C. Ong and Anne E. Momongan-Lim

Innovating for green and sustainable growth

With the Philippines undergoing rapid urbanization, industrialization, and environmental degradation, the government is taking the initiative to steer the country towards green growth and sustainable development. To be globally competitive, the government and businesses alike must prioritize innovative approaches, fostering technological advancement, and implement incentive mechanisms that promote environmental protection while driving long-term economic growth.As such, the government has been actively ramping up efforts to encourage new and current investors to support this green and innovative drive through government-led incentive programs such as the Strategic Investment Priority Plan (SIPP) and the incentives under the Renewable Energy Act.For business owners and investors, the SIPP is a crucial policy that serves as a roadmap and guide to identifying priority sectors and industries that play a pivotal role in achieving the country’s development goals, including the creation of employment opportunities and export growth.This is the fourth article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors. In one of the discussions by the Board of Investments, the speaker presented the SIPP goals for nation building briefly covered below.THE LABOR-INTENSIVE ECONOMYAccording to the Department of Finance (DoF), the unemployment rate in the first eight months of 2023 improved to 4.6% compared to the 5.3% rate from a year earlier. This is a positive development in a labor-intensive country. It is recognized that the workforce plays a vital role in growth and development. With a population of over 118 million in 2023, the Philippines presents a unique opportunity for labor-intensive industries to flourish. Noteworthy though is that being labor-intensive may also be the reverse of technological advancement; thus, it is a challenge to strike a balance between technological innovation and human involvement.GLOBALLY COMPETITIVE INFRASTRUCTUREThrough the SIPP, the current administration acknowledges the need to hasten the transformation into a modern and efficient economy with highly developed infrastructure, such as efficient transportation systems, roads, bridges, and airports.The National Economic and Development Authority (NEDA) in March announced that the administration approved high-impact infrastructure flagship projects worth P9 trillion, in line with the “Build Better More” infrastructure program.Investors may want to delve into projects that will provide adequate infrastructure to promote and support the movement of goods and services across the country, thus reducing transportation costs and improving overall efficiency. Globally competitive infrastructure is also going to manifest in improved healthcare facilities, the availability of affordable housing, and enhanced education.TECHNOLOGYOne of the focus areas of the SIPP is technology advancement and innovation. By embracing technology advancement, the Philippines seeks to develop a competitive edge, attract digital investment, foster entrepreneurship, and build a strong digital economy. The Department of Trade and Industry (DTI) is likewise pushing for the acceleration and growth of innovation.As technology will depend on favorable factors, the focus areas for improvement ought to include lowering the cost of power and stabilizing the supply of energy, regardless of location in the Philippines.CLIMATE CHANGEWith its goal of fostering green growth, the Philippines aims to position itself as a regional hub for carbon-reducing activities. The growth of the renewable energy sector and the transition to cleaner and more sustainable energy sources can be further promoted by making investors and stakeholders alike more aware of the fiscal and non-fiscal incentives on offer for those who invest in energy efficiency projects. During the 2nd Tax Symposium, the DTI speaker discussed the energy efficiency projects (EEP) under the 2022 SIPP. In relation, BoI Memorandum Circular 2023-006 was issued as an amendment to the Specific Guidelines on Registration of Energy Efficiency Projects covered by Republic Act No. 11285.Under the circular, for the self-financed, the EEP shall only be entitled to the Income Tax Holiday (ITH) incentive and duty exemption on imports of capital equipment, raw materials, spare parts and accessories. The ITH incentive is limited to the prescribed ITH entitlement period under the CREATE Act or until the recovery of 50% of its capital investment, excluding cost of land and working capital of the registered EEP, whichever comes first.STRATEGIC INVESTMENT PRIORITY PLAN INCENTIVESIt can be inferred from the SIPP that these objectives for nation building are aligned with the global shift towards a sustainable and green economy through innovation and technological advancement. Businesses can be partners of government and align their investments and projects with the administration’s goal for the Philippines to be a regional hub for globally competitive, innovation- and sustainability-driven industries. Amplifying one’s knowledge of priority sectors vis-à-vis incentives can lead to opportunity and to expansive industries — these include electric vehicles, smart/high-tech light manufacturing, high-tech agriculture, renewable energy, and data centers.To highlight these attractive incentives, PEZA presented during the symposium that the incentives granted to industries identified by the SIPP include the enjoyment of a four to seven-year ITH. The incentives will depend on the location, the industry, and whether the company is a domestic or export-oriented enterprise as provided under the CREATE law.After the period of enjoyment, export enterprises can avail of a special corporate income tax of 5% or enhanced deductions. On the other hand, domestic enterprises are entitled to the latter after the ITH period. These deductions are in addition to the allowable ordinary and necessary deductions under the Tax Code, as amended. In addition, companies eligible are entitled to duty and VAT exemption for imports of capital equipment, raw materials, spare parts, and accessories directly and exclusively used in the registered activity. Local purchases directly and exclusively used in the registered activity are also entitled to VAT zero rating.OTHER GREEN INCENTIVES AVAILABLEAside from the SIPP, the Philippines has placed a spotlight on the incentives under the Renewable Energy Act. As an overview, industries eligible under this act are entitled to an ITH of seven years from the start of commercial operations. The maximum period that can be availed of is 21 years, inclusive of the initial seven years. Further, after the ITH period, a 10% corporate tax on net taxable income may be availed of, provided that the savings must be passed on to end-users in the form of lower power rates.When evaluating the incentives offered in the Philippines, businesses contemplating investment may need to carefully assess the available options to determine which are the most advantageous for their specific needs. Each company will have to consider the various applicable incentives and determine which can provide them with greater benefits.The Philippines, being rich in natural resources including renewable sources, and having a pool of talented workers, is making strides towards sustainable development by leveraging innovative solutions and incentivizing green practices. By harnessing these incentives and supporting ongoing innovation, the Philippines is poised to become a regional leader in green growth and a model for other countries seeking sustainable development. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. Cheryl Edeline C. Ong is a tax partner and Anne E. Momongan-Lim is a tax senior manager of SGV & Co.

06 November 2023

Noel P. Rabaja

Strategizing for sustainable development

Public policies attempt to fulfill one or more of the following objectives: efficiency, equity, and stability. Efficiency and stability are necessary conditions for sustainable growth while equity helps make development inclusive.This is the second article in our series following the 2nd SGV Tax Symposium, which focused on how a sustainable and effective tax ecosystem can advance the sustainability agenda for both the public and private sectors.In this article, we will discuss the Philippine strategy for sustainable development.GROWTH THROUGH TRADE AND INVESTMENTThe Philippine Development Plan (PDP) 2023-2028 aims for a deep economic and social transformation to reinvigorate job creation and accelerate poverty reduction by steering the economy back to a high-growth path. In this regard, two main performance indicators are identified and will be monitored by the National Government.The first is for the country to graduate into upper middle-income class status within the term of the current administration. For this, the economy must grow its per capita income above the threshold set by the World Bank, which means a gross national income (GNI) per capita of at least $4,466. In 2022, the Philippines achieved a GNI per capita of $3,950.The second is to lower the poverty level from 18.1% in 2021 to single digits by 2028 — the end of the term of the current administration. Both indicators require high growth rates. For the next year through 2028, the government pencils the growth rate between 6.5% and 8%.Growth is expected to be investment-led with the implementation of structural changes such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which lowered the corporate income tax rate, and the amendments to the Public Service Act (PSA), Foreign Investment Act (FIA), and Retail Trade Liberalization Act (RTLA), which further liberalized the economy. The new legislation is expected to attract more local and foreign investment, especially in the liberalized sectors. For the energy sector in particular, amendments to the PSA are envisioned to help raise the capital needed to speed up the energy transition of the country to renewables.In addition, the Regional Comprehensive Economic Partnership (RCEP), a trading bloc that encompasses the ten members of the Association of Southeast Asian Nations (ASEAN) and the ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand, is already in force for the Philippines, helping ease market access through trade and investment rules and supporting global and regional supply chains. The Philippines can potentially position itself as a regional manufacturing hub if the right incentives and policy measures are put in place to encourage local and foreign investors to participate. Together, trade and investment are expected to play an important role in attaining economic transformation, the second goal of the PDP.HUMAN CAPITAL AND INFRASTRUCTUREThe ability of people to take advantage of market opportunities arising from investment rests on human capital. To this end, the first goal of the PDP is social transformation which includes, among others, sustained expenditure on social services, mainly education, health, and social protection.The first two goals of the PDP help attain the developmental objectives of efficiency and equity, which rest on the pillars of sustainability and resilience. The third fosters societal resilience: an enabling environment encompassing institutions, macroeconomic stability, and the physical and natural environment.Institutions are vital to economic acceleration, which is why the government’s steps to enhance the ease of doing business are most welcome. Infrastructure development also enables an economy to sustain higher levels of growth, which, in turn, catalyzes yet more investment. The Public-Private Partnership (PPP) Act is up for the signature of President Marcos and, if approved, is expected to further enhance the business atmosphere in mobilizing private resources for infrastructure development.The government aims to sustain its infrastructure program at 5-6% of GDP through 2028 amid a six-year medium-term fiscal framework. This plan gradually narrows the deficit to 3% of GDP by 2028, down from 7.3% in 2022, such that the debt-to-GDP ratio is reduced from nearly 61% in 2022 to a more sustainable level of at most 53% by 2028.DEBT MANAGEMENTThe National Government’s debt was less than 40% before the pandemic struck. It expended much of its fiscal space combatting the pandemic, incurring debt and large budget deficits. While the current 61% debt-to-GDP ratio may be manageable for an emerging economy like the Philippines for some time, the country may not have the fiscal space to respond to another potential domestic or external shock. If the debt continues to rise more than the economy, risks will increase, and the government may “crowd out” private investment as it competes with the private sector for funds to service its debt.The planned fiscal consolidation entails harmonizing the revenue needs with the promotion of investment through the structure and administration of the reformed incentive system. The National Government plans to raise more revenue to finance the country’s socio-economic needs, largely through a progressive and simplified tax system, more efficient and effective tax collection measures through digitalization and, to some extent, from policy measures such as value-added tax on digital service providers and excise tax on sweetened beverages and junk food.Achieving fiscal stability presupposes the sustainability of fiscal policy, and fiscal stability helps “crowd in” private investment.PRICE STABILITY AND INFLATIONIn his second State of the Nation Address (SONA), President Ferdinand Marcos, Jr. singled out inflation as the country’s most pressing problem. In the first nine months of 2023, inflation averaged 6.6% — far above the upper end of the target range of 2-4% set by the BSP. If left unchecked, inflation could undermine growth. Not only does this increase costs to organizations, but it also sets in motion second-round effects as workers start demanding higher wages, consequently increasing business costs and discouraging investments.Inflation is partly driven by supply-side issues and the government is allocating more resources to the agriculture sector to boost production. Mr. Marcos also mentioned that the National Government had distributed 28,000 new tools and machinery to farmers. An additional 600 km of farm-to-market roads were laid down to support the 14 million hectares of farmland, enhancing farmer access to markets. In addition, he signed Executive Order No. 28 in May, forming the Inter-Agency Committee on Inflation and Market Outlook, which is tasked to keep inflation within government targets and boost the economy.ENHANCING CLIMATE RESILIENCEWhile price stability and fiscal sustainability are important macroeconomic issues, environmental sustainability is increasingly gaining importance. Climate change uncertainties and challenges need to be managed and both the Philippine government and the private sector are hard-pressed to deliver their commitments to addressing them. Despite climate change risks, the Philippines has the opportunity to position itself as a prime destination of foreign investments against climate change or environmental, social, and governance (ESG) investments.The government calls for embedding resilience, sustainability, and nature-based solutions in infrastructure planning and investment to enhance climate resilience. Likewise, investments in renewable energy are expected not only to enhance energy security but also reduce greenhouse gas (GHG) emissions.From an economic vantage point, GHG emissions are economic “bads” and are a cause of inefficiency as they get over-produced. Their effects, however, go beyond national borders, and while the Philippines contributes minimally to global GHG emissions, the World Risk Index 2022 report identifies the Philippines as the most disaster-prone country in the world.The government envisions that by 2028: (1) Climate and disaster risk resilience of communities and institutions will increase (2) Ecosystem resilience will be enhanced, and (3) A low-carbon economy transition is enabled.To ensure that these are realized, the government is set to safeguard cross-sectoral convergence and implement a comprehensive risk management approach to address the adverse consequences posed by climate change. It will also promote a green and blue economy coupled with improved governance to guarantee long-term climate and disaster resilience.BUILDING RESILIENCE THROUGH SUSTAINABLE DEVELOPMENTComing off from the pandemic and with the current global economic climate, it is opportune for the government to proactively drive for actionable policies and programs that focus on building the resiliency of the economy through sustainable development with greater emphasis given to addressing climate change.Navigating external and domestic economic headwinds will not be an easy feat for the administration, but the private sector will be an important catalyst for sustainable development. With the private sector sharing industry knowledge, resources and potentially even leading certain socio-economic programs and projects of the National Government, it is to be hoped that AmBisyon Natin 2040 of long and healthy lives for Filipinos that are strongly rooted, comfortable, and secure will be achieved.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.Noel P. Rabaja the Strategy and Transactions (SaT) service leader of SGV & Co.

30 October 2023

Fabian K. Delos Santos

Tax conversations with C-Suites

In a world that has to address the risks posed by climate change, social inequity, financial instability and other disruptions, companies are becoming increasingly conscious about the importance of corporate responsibility, with a particular focus on the sustainability agenda. Companies have recognized the need to take urgent social and environmental action and have started laying down a long-term sustainability strategy interwoven with building long-term value.Investors are now looking at the sustainability policies of target companies when deciding where to invest. Regulators have become more critical, intending to encourage businesses to genuinely green their operations. Consumers are beginning to consider the sustainability-related activities of companies when flexing their purchasing power, actively choosing more sustainable options despite higher price points.Sustainability is defined as the balance between the economy, environment, and equity and is usually referred to as the ability to maintain or support a process continuously over time. The UN World Commission on Environment and Development defines sustainable development as progress that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” In today’s business world and in the process of being sustainable, companies ought to make use of scarce resources responsibly.This is why sustainability, and how a sustainable and effective tax ecosystem can advance it, was a key focus for the recently held 2nd SGV Tax Symposium. We see that Tax and Sustainability are critically connected in achieving our Tax Vision, where we foster transparency, inclusivity, and responsible tax practices, working with the regulators to create a level playing field that benefits businesses, individuals, and our communities.With a strong and efficient tax system, governments and regulators have the resources to promote incentives, policies and regulations that strengthen the country’s sustainability programs. In turn, when the country moves along a more sustainable and efficient socio-economic path, it creates more opportunity for increased tax revenue and compliance from responsible private and corporate citizens.We can already see this in some jurisdictions where governments are encouraging citizens and businesses to make the necessary changes in lifestyle, manufacturing, packaging, and purchasing decisions that help meet sustainability targets. At the same time, governments have been leveraging indirect tax policies to help achieve sustainability targets. It is not uncommon for governments to use both the policy stick (i.e., carbon levies, plastic packaging, excise taxes, waste management fees) — and carrot (i.e., incentives) for sustainable development.During the Conversation with C-Suites panel at the 2nd SGV Tax Symposium, executives from the real estate, investment management, and mining sectors emphasized how their respective industries promote sustainability.Robinsons Land Corp. (RLC) Chief Financial, Risk, and Compliance Officer, Kerwin Tan, discussed how the real estate business spearheads sustainable solutions in its operations. In RLC, this includes integrating solar and other renewable energy across all Robinsons malls, transitioning to LED lights, revolutionizing workspaces, and embracing digital transformation by developing mobile applications and portals that will provide easy access to Robinsons’ products and services. Their stakeholders, which include customers, tenants, and employees, are at the forefront of providing these strategic, sustainable solutions. To measure the positive impact of these projects, RLC has a data management system that allows it to effectively record the changes in its energy consumption.Meanwhile, President and Chief Executive Officer of Global Ferronickel Holdings, Inc. Dante Bravo said that the mining sector, on a macro level, is currently focused on sustainability. Mr. Bravo said Global Ferronickel has embedded environmental management solutions in its mining operations, from the clearing of vegetation, stripping of topsoil, mining, truck loading and hauling, and stockpiling, among others. He added that the company continues to adhere to global environmental standards (e.g., ISO certifications) and continues to develop and support host and neighboring communities with health assistance, educational and livelihood programs, and employee welfare, among others.While the panelists appreciate and recognize the current actions of the government in promoting sustainability, they also felt that more can be done to promote sustainability goals in various sections of the economy. The panelists agreed that the government should consider granting even more incentives, in addition to the current benefits already granted by current law, to encourage more businesses to invest in sustainable projects. It was further emphasized that this initiative should be viewed as a long-term investment that will make the country more competitive, attracting more investment, which in turn will translate to revenue via compliance and payment of taxes.The sustainability journey itself may be challenging, but the required results must be delivered sooner rather than later. Many have taken the first steps to design tax frameworks and risk management methodologies to accelerate the transition. Organizations should adjust their strategies, stay abreast of policy uncertainty, and ensure that they drive corporate sustainability to create long-term value. 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. or EY.Fabian K. Delos Santos is the head of Tax of SGV & Co.

23 October 2023

Joseph Ian M. Canlas

Accelerating sustainability with green IT

Digital technology is crucial to achieving important goals that include fulfilling compliance requirements, meeting the reporting needs of stakeholders, and implementing operational changes within an organization to meet environmental, social, and governance (ESG) and sustainability targets.The global push to achieve the 2050 net-zero target has resulted in an increased awareness of the role of IT in accelerating sustainability. According to the EY Reimagining Industry Futures Study 2023, which was based on an online survey of 5G perceptions among 1,325 enterprises worldwide, 54% of businesses believe that emerging technologies can play a vital role in this effort.The Exponential Roadmap 1.5.1, developed by the Exponential Roadmap Initiative, an accredited partner of the United Nations’ Race to Zero campaign, outlines a path to reach net zero emissions from businesses by 2030 through natural climate solutions. The information and communications technology (ICT) sector has the potential to reduce global carbon emissions by 15% and 35% directly and indirectly by 2030.While the use of digital technology is crucial for sustainability, it is equally important to prevent it from becoming a major contributor to global emissions. The adoption of new technologies could lead to increased energy consumption, hindering progress towards emission reduction targets.THE NEED FOR GREEN ITGreen IT refers to IT products and services that help organizations reduce their environmental impact, such as the issue of IT energy consumption. For example, the International Energy Agency says that data centers and data transmission networks were responsible for nearly 1% of energy-related GHG emissions in 2020. Green software, which incorporates low-carbon principles in software development and utilization, is also an important green IT practice. While the software itself does not emit carbon, it influences energy consumption.E-waste already poses environmental risks due to hazardous substances that include mercury, lead, and cadmium, which are capable of contaminating air, water, and soil. E-waste disposal adds to the ICT sector’s greenhouse gas emissions. In 2019, there were 53.6 million tons of e-waste, which could rise to 74.7 million tons by 2030, according to Statista. In addition, the mining and extraction of these materials further contribute to soil erosion and deforestation, emphasizing the need for effective material reuse and waste processing.The ICT sector can innovate green IT and maintain a net positive impact by implementing sustainable practices throughout its value chain, covering energy efficiency and sustainable supply chains.Furthermore, organizations can drive the positive impact of green IT and software by fostering an ecosystem of collaboration among stakeholders in the value chain, involving the following key players in the mix: technology providers, technology buyers, governments and other regulatory authorities.TECHNOLOGY PROVIDERSTechnology companies, ranging from global leaders to startups, are actively increasing their focus on green IT innovation and offerings to meet the growing demand and expectations in the market. As they do so, they have the responsibility to manage and disclose their carbon footprints to comply with regulatory requirements and standards, encompassing scope 1 to scope 3 emissions that result from the production and use of their technologies.Industry groups consisting of technology providers are in a favorable position to establish standards and best practices within the sector, like prioritizing energy-efficient hardware, e-waste management, and the sustainable procurement of IT equipment. Additionally, they can proactively collaborate with governments to develop policies that promote the adoption of green IT.In the Philippines, a related law is the Renewable Energy Act of 2008, which encourages the adoption of energy-efficient technologies across various sectors. There is a need for more local green-IT-specific laws or policies. Accordingly, the country would benefit from formal studies identifying green IT-related gaps and opportunities. Technology providers can incorporate green IT principles into their product and service designs to reshape the future of the IT landscape, positively impacting society and the environment.TECHNOLOGY BUYERSAs sustainability becomes a central part of an organization’s core strategies, companies are actively seeking suitable technologies, digital platforms, and applications to support their sustainability and ESG goals. While their main focus is on selecting technologies that meet sustainability requirements and tackle sustainability challenges, it is crucial for them to also consider the potential environmental impact of implementing these technologies on a larger scale.Forward-thinking and innovative companies that prioritize sustainability in their business strategies include green IT implementation in their roadmap for sustainability transformation. They must integrate green IT principles into a robust and sustainable sourcing and procurement framework while carefully choosing technology providers from the request for proposal process onwards. They may even take the extra step of adopting an internal carbon pricing mechanism to ensure that strategic decisions align with their climate ambitions. By generating market demand for green IT, these companies can drive innovation in future green IT landscapes.GOVERNMENTS AND OTHER REGULATORY AUTHORITIESGovernment and regulatory authorities also play a crucial role in driving the adoption of green IT to accelerate the transition to a sustainable future, keeping in mind the following priorities:• Provide detailed action plans with clear accountability.• Improve the design and implementation of green initiatives.• Incentivize the market and implement mandatory changes.• Increase funding to promote innovation.• Serve as a role model for other sectors of the economy.• Promote a people-centered approach involving the whole of society.Governments that have mature regulations and standards for sustainability can take the lead in implementing strategies within their organizations and departments. For instance, the United Nations, through its specialized agency, the International Telecommunication Union (ITU), establishes standards, guidance, and criteria for ICT organizations on setting net zero targets and strategies.THE SIGNIFICANCE OF GREEN ITThe adoption of green IT and software by both organizations and societies will have a significant bearing on global sustainability ambitions. By nurturing a collaborative system of stakeholders within the value chain, organizations can benefit greatly from green IT and software. 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.Joseph Ian M. Canlas is a consulting partner and part of the Climate Change and Sustainability Services team of SGV & Co.

16 October 2023

Lester Jeff D. Pawid and Mary Andrea T. Bacani

How RCEP impacts ASEAN supply chains

The Regional Comprehensive Economic Partnership (RCEP) came into force for the Philippines in June. The RCEP is a trading bloc comprising the members of the Association of Southeast Asian Nations (ASEAN) and ASEAN Plus One Free Trade Agreement (FTA) partners Japan, China, South Korea, Australia, and New Zealand. According to the RCEP text, one of the agreement’s objectives is to “establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment and contribute to global economic growth and development…”This is the fourth article in a supply chain series that looks at reimagining the integrated supply chain. This article will discuss how the RCEP may impact supply chains in the ASEAN.RCEP’S VALUERCEP builds on and updates the existing ASEAN Plus One FTAs and considers important trade realities, such as competition and the interdependency of value chains. It covers areas not previously included in the individual ASEAN Plus One FTAs, such as intellectual property, e-commerce, competition, small- and medium-sized enterprises (SMEs), and government procurement.RCEP also recognizes the diversity of its members in terms of development level and provides technical cooperation and capacity building to support the implementation of the Agreement, with the intent to make it more beneficial for all entities involved. In addition, RCEP is seen as a high-quality agreement as it eases market access through trade and investment rules and supports global and regional supply chains.RCEP AND SUPPLY CHAINSRCEP has the potential to support and ease regional and global value chains. The updated trade deal further lowered tariff rates or accelerated the reduction thereof. Furthermore, it commits the members to a single set of Rules of Origin (ROO), the criteria to determine the national source of a product. ROOs determine whether products are eligible for preferential treatment under trade agreements, much like a passport indicates the nationality of a visitor and, therefore, whether the holder is eligible to enter a country visa-free by treaty rules.A significant provision is cumulation, which allows an RCEP firm to count inputs or goods from other RCEP partners as local content to meet ROO requirements. The regional value content (RVC) is closely related to ROOs because it helps determine the minimum percentage of regional value a product must have to qualify for preferential trade treatment. For example, if the RVC is set at 40% of the free-on-board price, an RCEP firm can include inputs from other RCEP partners to fulfill this requirement. Meeting the requirement allows the firm to enjoy preferential tariff rates when exporting to other RCEP countries. Otherwise, higher most-favored-nation (MFN) rates will apply.BUSINESS OPPORTUNITIESAccording to figures from the Philippine Statistics Authority, the Philippines sources about 70% of its imports from and ships half of its exports to the rest of the RCEP membership. This suggests that the new trading bloc is both a source of materials and a market for produce at the same time.Accounting for nearly a third of the global population and output, the new trading bloc is now the largest in the world. Furthermore, RCEP is also the first FTA that jointly covers China, Japan, and South Korea. For firms along regional supply chains, savings come in the form of zero or substantially lower tariff rates when importing inputs from and exporting produce to the RCEP.Firms intending to benefit from RCEP’s preferential tariff rates should consult issuances of various national customs bodies. Some ancillary documents may be required, covering direct consignment, third-country invoicing, and back-to-back certificates of origin. Firms should consider the administrative costs of compliance and compare them with the incremental benefits arising from the difference between MFN and preferential rates.RCEP IN THE PHILIPPINESOverall, RCEP could have developmental implications for the Philippines. When large exporting firms partner with SMEs at the enterprise level, the latter are also effectively participating in and benefiting from regional supply chains.At the macroeconomic level, RCEP can help stimulate growth. RCEP’s effectivity coincides with significant structural reforms like the Corporate Recovery and Tax Incentives for Enterprises, which lowered the corporate income tax rate, and the amendments to the Public Service Act, Foreign Investment Act, and Retail Trade Liberalization Act, which further liberalized the economy. The government is also pursuing an infrastructure program that amounts to 5-6% of GDP. These bode well for investment-led growth.Continuous infrastructure investment and development can strengthen the Philippine link to regional and global supply chains. In the 2023 edition of the World Bank’s Logistics Performance Index, the Philippines scored 3.3 out of 5, up from 2.9 in 2018. This improvement may be attributed to the increase in the infrastructure score from 2.73 in 2018 to 3.2 in 2023.Altogether, structural reforms, infrastructure programs, and improved regional market access provided by RCEP can help the country bid for more export-driven 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 opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Lester Jeff D. Pawid is a Strategy and Transactions (SaT) Senior Manager and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) Senior Manager of SGV & Co.

09 October 2023

Benjamin N. Villacorte and Mary Andrea T. Bacani

How green supply chains create long-term value

Historically, sustainability was a “nice-to-have” item for executive boards. However, in recent years, environmental, social, and governance (ESG) considerations have gained considerable momentum. ESG is now far from being mere boxes to check for compliance purposes, with topics like sustainability becoming ever prominent and essential agenda items in boardroom discussions.A focus on ESG is imperative for organizations as it enables them to effectively manage risk, meet stakeholder expectations, drive cost savings and efficiency, and gain a competitive advantage. By integrating ESG practices into their supply chains, business leaders can navigate risk and disruption, future-proof their organizations, and create a positive impact on the environment.Most of a company’s carbon emissions commonly stem from its supply chain, primarily through manufacturing and logistics operations. As a result, this crucial aspect of business faces mounting pressure to meet progressively ambitious sustainability goals.This is the third article in a supply chain series that previously looked at reimagining the integrated supply chain. This article will discuss how green supply chains can help create long-term value.ESG AND GREEN SUPPLY CHAINSGreen supply chains refer to the implementation of sustainable and environmentally responsible practices throughout the supply chain process. The process involves integrating eco-friendly initiatives into various stages — including sourcing raw materials, manufacturing, packaging, and distribution. “Green” here pertains to the environmental considerations of the supply chain, and “sustainable” covers the social and economic perspective of the business.ESG and green concepts in the product design up to end-of-life management should also be incorporated to enhance environmental sustainability. By integrating ESG principles, companies prioritize environmental impact, social responsibility, and strong governance throughout their operations.ESG and green supply chains are closely related, with ESG considerations forming the base of developing and implementing sustainable practices within supply chain operations. Although a green supply chain addresses only the environmental side of ESG, a sustainable supply chain encompasses the environmental, social, and governance principles of ESG. Green supply chains embody the practical implementation of ESG principles by reducing carbon emissions, minimizing waste, and adopting sustainable technologies and practices.A key part of ESG performance is to commit and take action toward a sustainable supply chain. This starts with ensuring interconnectedness and transparency in the whole of operations as well as collaboration with suppliers in adhering to green and ethical standards. Greening the supply chain brings value not just by reducing environmental pollution and waste but also by enhancing operational performance through improved production costs and asset utilization. This also builds positive brand awareness and reputation as consumer behavior shows a preference for companies or products that value their impact on the environment and society.The relationship between ESG and green supply chains is symbiotic. ESG provides the framework and guiding principles, and green supply chains concretize those principles within the supply chain to drive sustainable and responsible outcomes.SUSTAINABILITY POLICIESSince the Philippine SEC mandated sustainability reporting, companies that identify supply chains as one of their material topics are required to disclose their ESG initiatives in compliance with their reporting framework/standards used. This promotes transparency and accountability, empowering employees, customers, suppliers, investors, business partners, local communities, legislators, regulators, policymakers, and other stakeholders to make informed decisions as well as contribute to the management of companies’ economic, environmental and social impacts.In addition, Republic Act No. 11898, also known as the Extended Producer Responsibility (EPR) Act of 2022, requires obliged enterprises to establish their own EPR programs. Obliged enterprises have been given the responsibility of managing their products throughout their lifecycles, starting with plastic packaging covered in the Act, with a potential expansion of coverage in the future. The EPR Act was covered more extensively in a previous C-Suites article titled “Understanding the implications of the EPR Law.”The Philippines also has the Green Jobs Act of 2016, which promotes the creation of “green jobs” or employment that contributes to environmental preservation. Under RR No. 05-2019, businesses that offer green jobs are granted an additional deduction equal to 50% of the total expenses for skills training and research development. Moreover, the law provides that capital equipment that is directly and exclusively used in the promotion of green jobs may be imported free of taxes.Treating ESG as secondary can deter organizations from meeting their strategic objectives, including the potential loss of business opportunities and investment capital. Companies can improve their operational processes and drive cost reductions by enhancing environmental sustainability and overall ESG performance across the supply chain.KEY ESG INITIATIVESCreating a green supply chain is a manifold process. First, assessing the materiality of sustainability issues at the outset is essential, focusing on the most pressing concerns. This systemic approach allows for a targeted way to address these issues. Second, organizations should establish their strategic objectives — aligning resources, structures, and processes to sustainability imperatives identified in the initial assessment.Leadership buy-in and board oversight are crucial for consistent direction and support throughout the business. Management and suppliers should receive training in market practices, expanding sustainability goals beyond direct operations to encompass all levels of the supply chain.Deploying technology can enhance accountability and transparency, allowing for better monitoring and reporting. Moreover, leveraging buying power and influence can facilitate supply chain sustainability.Finally, organizations should consider disclosing supply chain information beyond siloed sustainability reporting mechanisms, promoting transparency, and encouraging industry-wide progress.THE FUTURE OF SUSTAINABLE SUPPLY CHAINSGreen supply chains have emerged as a critical driver of long-term value for organizations. Companies can reap a snowball effect of benefits by prioritizing sustainability and integrating environmentally responsible practices and technologies into their supply chain operations. Internal ethical leadership and support, as well as considerations of different external drivers such as customers, suppliers, and social and regulatory requirements are vital factors in integrating sustainability in an end-to-end supply chain.Not only do green supply chains help address disruption, mitigate risk, and enhance reputation, but they also drive operational efficiency, cost savings, and access to capital. Integrating a social and economic perspective to transition to a sustainable supply chain also contributes significantly to the competitiveness, long-term profitability, innovation, differentiation, and societal impact of companies.By taking this holistic approach to sustainable supply chains, organizations can pave the way toward a greener, more resilient future.The next article in this series will discuss how the Regional Comprehensive Economic Partnership (RCEP) may impact supply chains in ASEAN. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a climate change and sustainability services partner and Mary Andrea T. Bacani is a Supply Chain and Operations (SCO) senior manager of SGV & Co.

2023