Suits the C-Suite

06 February 2023

Benjamin N. Villacorte and Erica Nicole D. Gomez

Understanding the implications of the EPR Law (First Part)

First of two partsWith the signing of Republic Act No. 11898, also known as the Extended Producer Responsibility (EPR) Act of 2022, obliged enterprises are now engaged in establishing their own EPR programs to meet the deadline for EPR registration on Feb. 13.The Philippines is considered one of the top plastic polluters globally. A 2019 study by the Global Alliance for Incinerator Alternatives shared that Filipinos use a material amount of plastic packaging. Moreover, the National Solid Waste Management Status Report revealed that recyclables make up almost 30% of waste in the Philippines, comprising mostly of plastics and paper. Meanwhile, a WWF Philippines’ study showed that only around 9% of post-industrial and post-consumer plastics are recycled. This is relatively low compared to other countries, but with the Act now being implemented, there is this greater anticipation that the country will see a significant increase in its overall recycling rate. Although the Act only covers plastic packaging in the early years of its implementation, the coverage will be gradually expanded to encompass other materials as well. The Implementing Rules and Regulations (IRR) for the law were issued in January. The IRR provides detailed implementation requirements for the obliged enterprises, waste diverters and verification bodies, among others. Having established the need to implement an EPR program, obliged enterprises should explore what steps to take moving forward to comply.In the first part of this article, we discuss six recovery programs, six reduction strategies and additional steps that obliged enterprises can do as part of their EPR programs.EPR MECHANISMS: WHAT OBLIGED ENTERPRISES SHOULD PREPARE FORAs the country moves towards a more circular economy, obliged enterprises have been given the responsibility of managing their products throughout their lifecycles, starting with plastic packaging covered in the Act, with potential expansion of coverage in the future. By the February EPR registration deadline, obliged enterprises are required to submit their EPR programs with both recovery methods to effectively prevent the leakage of waste into the environment, and strategies to reduce non-environmentally preferable packaging products. The law specifies the recovery targets that obliged enterprises need to meet, beginning with a 20% recovery rate by the end of 2023 until 80% by the end of 2028 and every year thereafter. To do this, the IRR presents six recovery programs that obliged enterprises can do as part of their EPR programs:1. Waste recovery schemes through redemption, buy-back and offsetting with the goal of achieving high retrievability, high recyclability and resource recovery of packaging waste;2. Diversion of recovered waste with the intention of diverting packaging waste into value chains or other value-adding useful products;3. Transportation of recovered waste to proper diversion or disposal sites, ensuring proper tracking for traceability and transparency;4. Involvement in waste clean-up in coastal and public areas, with close coordination with local government and communities;5. Investment in establishing commercial or industrial waste diversion or disposal facilities, backed by a business case or pre-feasibility study to justify the insufficiency of existing facilities in the country; and6. Partnerships with local governments, communities and informal waste sectors for waste recovery-related purposes, ensuring the adequate and proper involvement of key stakeholders in the EPR program implementation.On top of the recovery methods, the Act also requires obliged enterprises to adopt measures to reduce non-environmentally preferable packaging products. While the law does not specify reduction targets unlike for recovery, it still provides six reduction strategies:1. Replacing single-use packaging with reusable ones aimed at improving the packaging’s reusability, recyclability and retrievability;2. Including recycled content or recycled materials in packaging, considering the amount of material effectively recycled and the efficiency of the recycling process including energy used;3. Deploying refilling systems for retailers, basing on the amount of single-use containers avoided as a result of the availability of refilling system;4. Establishing a viable reduction rates plan focused on upstream reduction of used material during the manufacturing of packaging;5. Preparing an information and education campaign during the first year and updating annually; and6. Ensuring appropriate labeling of packaging to facilitate recovery, reuse, recycling and proper disposal, following relevant standards and eco-label processes.TAKING ONE STEP AT A TIMESince the EPR programs are relatively new to most businesses, obliged enterprises may opt to implement their own EPR programs or decide to work with others, i.e., other obliged enterprises or Producer Responsibility Organizations (PROs). A PRO refers to an organization that is either formed or authorized by obliged enterprises with the function of supporting them in the formulation, registration, implementation and audit of their EPR programs.To advance the compliance of obliged enterprises with the provisions of the law, the IRR defines certain incentives. These include tax incentives, consideration of EPR expenses as necessary expenses deductive from gross income, and tax and duty exemptions of donations, legacies, and gifts. However, the law also penalizes non-compliance with fines ranging from P5 to P20 million, with an automatic suspension of a business permit for the third offense.Registering EPR programs with the National Ecology Center (NEC), which works under the oversight function of the National Solid Waste Management Commission, by February is the first official deadline under the law. The NEC is responsible for maintaining an EPR Registry containing all registered EPR programs, and will provide technical expertise, information, training and networking services for the implementation of the law. Registration is imperative for obliged enterprises and failure to do so is the first possible offense.With only a few days left before the deadline, obliged enterprises should also consider that the timely submission of their EPR programs would demonstrate their ability to really implement and operationalize these programs in the long-term. Considering that programs are expected to scale-up and be reported regularly moving forward, obliged enterprises must begin to, if they have not yet, incorporate their EPR programs and targets into their corporate strategies and annual plans.MOVING TOWARDS CIRCULARITYA shift in mindset and action is necessary in accomplishing a more sustainable way of doing business. Companies should start thinking of long-term strategies for implementing their EPR programs in order to reach the target recovery rate of 80% by 2028 onwards. More than compliance and incentives from this Act, the implementation of these EPR programs will also reflect upon the values of the company, as well as its shareholders and stakeholders.The transition to a more circular economy in the Philippines still has a long way to go, but the Act serves as a catalyst to encourage collaborative efforts from the government, companies, communities, and informal sectors to make conscious decisions in reducing the generation of plastic wastes in the country.In the second part of this article, we discuss EPR registration, EPR implementation, and keeping confidence through third-party assurance. 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 partner and Erica Nicole D. Gomez is a senior associate from the Climate Change and Sustainability Services team of SGV & Co.

30 January 2023

Marie Stephanie C. Tan-Hamed

Digital government: Creating real connections (Second Part)

Second of two partsTo better understand how lives are changing in the connected world, EY launched a new research study with over 12,000 respondents of working age called Connected Citizens. This global study looked at what these respondents value, their top concerns, and how they feel about the impact of technology. The study then aimed to examine their expectations of the function of the government, the provision of public services, and the nature of the interaction between those in power and those under it.In the first part of this article, we discussed the impact of technology in a more pervasive role, broader concerns from citizens regarding the impact of technology, and the seven Connected Citizens personas identified in the study.In this second part of the article, we discuss four key areas government can focus on to better engage with the public: agile and innovative policymaking, inclusive digitization, responsible data use, and public engagement and participation.AGILE AND INNOVATIVE POLICYMAKINGGovernments need to better anticipate the needs of the population and prevent crises before they arise. For example, governments can introduce new social safety net programs (like guaranteed minimum income or universal basic income) for low-income, disadvantaged populations.Case in point, in some countries, clearer rules regarding employment status and rights, as well as portable benefits plans that maintain coverage as employees move geographically, change employers, or experience periods of unemployment or self-employment, are some of the new policies being explored to combat income insecurity for those in precarious work, such as the self-employed and gig economy workers.Other initiatives include more flexible and lifelong education and retraining programs that help workers remain relevant and competitive, skills road maps that assist governments in understanding future-forward skills and jobs, personal learning accounts that provide workers with funds to learn new skills, and active labor market policies (ALMPs) to aid the unemployed and low-income workers in finding employment or retraining.INCLUSIVE DIGITALIZATIONDigitalization is necessary to quickly modernize public services and give citizens the same level of service as the private sector. However, governments must accomplish this while leveling society and making sure that no group is left behind.Broadband and 5G networks, among other investments in high-speed digital infrastructure, are required to ensure connection throughout a nation.Governments can also assist in supplying individuals with online-accessible devices and running programs to increase digital literacy, providing people the knowledge and assurance to connect with digital services. However, companies must also make sure that individuals who are not online have access to services in alternate ways. Citizens already comfortable with technology have higher expectations for the quality, expediency, convenience, and cost-effectiveness of service delivery.Governments can take a number of actions to address these citizens’ needs. The digital National ID system is a step in the right direction to help make it simpler for users to access a variety of services. They can also increase the use of smart websites and mobile applications that offer one-stop access to numerous government services and push notifications with timely information; develop integrated digital platforms that allow data sharing between various government systems so that people only have to enter personal information once; fulfill service demands end-to-end digitally; promote AI-powered chat bots to engage with users and conduct transactions; and create a true omnichannel experience enabling users to access services on various platforms and through various devices.Governments will be able to design their services with the aid of design thinking, customer experience laboratories, and data analytics as they progress toward more proactive and even predictive service delivery.RESPONSIBLE DATA USAGEMore data than ever before is being created, stored, and analyzed for the benefit of society, but there is also debate and controversy surrounding the expanding usage of data. New regulatory, legal, and governance structures are required for nations to take advantage of opportunities while also managing possible risks for citizens. Policymakers will need to carefully consider concerns like data privacy, surveillance technology, the equity built into algorithms, and the integrity of the information ecosystem. The recent controversial SIM Registration Law is one example where people are anxious about the access to their personal data.Governments are already tightening the laws governing how personal data is used. Furthermore, most governments already have laws that grant citizens active control over their data as well as the right to know how it is being used, such as the Philippine Data Privacy Act of 2012.Regulators must take into account how businesses use data in their AI systems. The general public is becoming more aware of the issues with algorithmic decision-making, namely in how it can result in discrimination against particular groups or result in poor decision-making. The regulatory setting needs to increase public confidence in these developing new technologies.Governments, public service providers, enterprises, and other organizations will need open governance systems at the institutional level to show how the data rights of people are protected.Organizations could also pledge to be open about the automated decision-making tools they employ and the safeguards they have in place. Governments will also better manage risks, guard against negative consequences, and foster the necessary trust as more organizations adopt these ethical design and governance best practices.PUBLIC ENGAGEMENT AND PARTICIPATIONTop-down governance methods will no longer be regarded as efficient nor legitimate in the future as many citizens demand shared, transparent, and participatory decision-making. Governments can have the opportunity to interact with citizens on problems that matter to them by gathering citizen feedback on a massive scale, thanks to new digital e-participation tools like social media, smartphone apps, and online digital platforms. Vox populi may take on a new digital meaning in the future.However, governments can ensure that citizens are not just consulted but also able to influence important choices. Many people are experimenting with various engagement methods to find, discuss, and decide on a variety of topics. For instance, Australia, Ireland, and other nations have employed deliberative citizen juries to jointly develop answers to difficult social and economic problems.Initiatives for participatory budgeting which give residents a say in how public funds are spent are gaining popularity. More than 180 policy laboratories have been established globally to foster ideas and serve as a testing ground for policies in areas like education, health, and justice. Additionally, government-sponsored hackathons have proven to be a successful tool to get people involved in developing new responses to pandemic-related economic, social, and technological concerns.Most governments and public institutions around the world are starting open data programs and establishing platforms for data exchange, emphasizing making data broadly accessible to third parties, especially citizens, to support the creation of original solutions to challenging issues while enhancing accountability and transparency. These are all crucial projects that can help governments in a networked world better serve all their citizens.TRUE DIGITAL INCLUSION VIA CONNECTED CITIZENSThanks to advancements in data and technology, governments now have a unique chance to better serve their populations. However, as with any revolutionary possibility, there is an inherent risk: that the desire to digitize as much and as rapidly as possible leads to a one-size-fits-all strategy that actually fits only a few citizens, further separating people from government.The Philippine government in particular has acknowledged the global megatrend of disruptive technologies that pivot transformation in various sectors — augmenting economic development and improving citizen well-being.To address economic recovery, the recently published Philippine Development Plan for 2023 to 2028 takes on the underlying theme of transforming the economic and social sectors and institutions for a prosperous, inclusive, and resilient society, with the digitalization of government services in the forefront of its transformation agenda.Included in the priority bills of the 19th Congress is the passage of the Open Access in Data Transmission Act that will improve competition and promote regulatory efficiencies in the digital market, and the Critical Information Infrastructure Protection Act and Cybersecurity Act that will strengthen the security and resilience of the Philippine cyberspace. These legislative national government agendas will pave the way to more and better programs, resulting in better government services delivery.By understanding that different people have different levels of digital maturity and access, governments will be able to better plan digital service delivery mechanisms that meet all of the needs of their citizens. Governments can do this to increase their effectiveness and efficiency, address digital exclusion to reduce social inequality, and contribute to the creation of more equitable social services for all. 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.Marie Stephanie C. Tan-Hamed is a strategy and transactions partner, EY Parthenon partner and PH Government and Public Sector leader of SGV & Co.

23 January 2023

Marie Stephanie C. Tan-Hamed

Digital government: Creating real connections (First Part)

First of two partsAs people increasingly look to the government to defend their lives and means of subsistence during times of crises, most recently under the pandemic, public policy and the provision of services are now under unprecedented pressure. There is widespread demand among citizens for more digitally enabled public services, and many of them want more control over how these services are provided. However, a sizable portion of the populace lacks the ability or resources to use digital services.To better understand how people’s lives are changing in the connected world, EY launched a new research study with over 12,000 working-age respondents called Connected Citizens. This global study looked at what these respondents value, their top concerns, and how they feel about the impact of technology. The study then aimed to examine their expectations of the function of the government, the provision of public services, and the nature of the interaction between those in power and those under it.TECHNOLOGY IN A MORE PERVASIVE ROLEThe increased use of technology in daily life has been one of the most noticeable changes catalyzed by the pandemic. It changed how people work, play, shop, study, and socialize in mere months. According to the study, a majority anticipate using technology even more in the future than they would have otherwise. As much as 64% of the respondents anticipate that the pandemic will result in an increase in the use of technology.Although governments worldwide have sped up the process of digitalizing many public services, many still fall behind private sector offerings like online banking and shopping in terms of anticipated gains in service delivery (although healthcare services are viewed more positively). Over half of the people globally (53%) believe that governments and public services have used digital technology to successfully combat the pandemic. This shows that governments still need to make progress in their digital transformation before they can live up to the expectations of the citizens they serve.We are seeing similar trends in the Philippines, where the government is increasingly focused on implementing and sustaining digital transformation strategies to bring about a true e-government that would strengthen connections with citizens by using digital and technology to achieve economic transformation and more efficient delivery of services to citizens. However, both government and stakeholders alike need to understand the deeper issues around technology in order to truly make the most of it.BROADER CONCERNS REGARDING TECHNOLOGY IMPACTDespite the prevalence of technology, the study found complex attitudes towards it. Most respondents (72%) believe it improves life and will be necessary in the future to help address ever-more complicated challenges. However, there are concerns about its broader effects. Growing socioeconomic inequality.The most disadvantaged people frequently lack the resources to access new technology and the digital literacy skills necessary to use it. Another issue is the use of algorithms for decision-making, which some believe may be biased. Nearly a third of people worldwide (32%) believe that not all segments of society will equally benefit from technology. And 34% believe that people who are already wealthy and powerful gain more influence as a result of technology.Diminished human interaction.Concerns have been raised about how using communication technology can affect social cohesion, with 32% believing that technology will cause people to feel less connected to their community. Some of the most vulnerable groups may experience increased isolation in a more virtualized society where there is less physical interaction.Digital security and personal privacy.The quantity and variety of data produced and the rate at which it is gathered will grow as more people and devices are linked. This creates public anxiety over personal privacy and a lack of choice over how data is used. More than 4 out of 10 people oppose the sharing of data with both the government and the business sector, while 72% oppose government selling their personal information to the private sector.Additionally, governments can do more to explain the advantages of data sharing and reassure the public that it will be used responsibly. The study reveals some support for data use when people are aware of the use case, and if it presents advantages for them personally or for society as a whole. This is especially true when it comes to matters of public health. For instance, 52% of people worldwide favor utilizing personal data to track and prevent disease, while 47% support using it to set priorities for healthcare.Building trust in government institutions will be crucial in increasing the effectiveness and efficiency of government operations as well as utilizing public efforts to help design and provide better services. The study shows that citizens are willing to participate more in the delivery of public services in the future, with more than a third identifying more performance transparency as one of their top priorities to improve public service quality. Additionally, 42% said they would like to have a greater say in how public services are delivered in their community.THE SEVEN CITIZEN PERSONASWith the study showing how complicated global citizen beliefs, values, needs, and behaviors are, understanding these identities can assist governments in forging more reliable ties with their constituents. It identified seven different citizen personas through survey data analysis: Diligent Strivers, Capable Achievers, Privacy Defenders, Aspirational Technophiles, Tech Skeptics, Struggling Providers, and Passive Outsiders.Diligent Strivers are young proactive self-improvers keen to advance in life. They expect seamless digital government services to help them achieve their aims, are comfortable sharing their data with governments, and strongly believe in equal opportunities.Capable Achievers have an older age profile and are independent, successful and satisfied with their life. Pragmatic technophiles who embrace digital innovation, they trust governments to use their data appropriately but worry about it getting into the wrong hands.Privacy Defenders tend to be older, independent and comfortably off. They value technology and the benefits it provides them, but are extremely cautious when it comes to sharing their personal data with governments or private companies.Aspirational Technophiles are younger, well-educated city-dwellers. Motivated by success and new opportunities, they incorporate technology and data into every facet of their lives. They are excited by the potential for new digital innovations to empower people and improve society.Tech Skeptics are older, on lower incomes and relatively dissatisfied with their lives. Distrustful of governments and skeptical about the benefits of technology, they tend to be opposed to data sharing, even with a clear purpose.Struggling Providers are younger and tend to be in low paying, less secure work. They are above-average users of welfare services and are ambivalent toward technology, lacking the access and skills for it to significantly impact their lives.Passive Outsiders have lower levels of income and education. Detached from the connected world around them and generally reluctant to embrace change, they are relatively ambivalent on data sharing but tend to feel the risks outweigh the benefits. The attitudes each persona has toward technology and their level of access and comfort with digital services are significant. Despite being representative of the online population, the survey participants vary in their comfort level while utilizing new technologies on their own. This indicates that governments should shift away from a one-size-fits-all approach towards service delivery and increase the level of personalization to improve public policy design, deliver more efficient and effective public services, and deepen the relationship between government and citizens.For instance, Struggling Providers, who would require the most assistance, would likely be unable to utilize services and miss opportunities if some services can only be accessed through digital channels. This leads to a worsening of the structural inequality they already experience.We have seen this ourselves during the pandemic particularly in the education sector where students were given the option to participate in online classes, yet a significant percentage did not have access to devices or the internet and had to resort to analog options such as printed learning modules. In the second part of this article, we discuss four key areas government can focus on to better engage with the public: inclusive digitization, responsible data use, innovative and agile policymaking, and public participation and engagement. 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.Marie Stephanie C. Tan-Hamed is a strategy and transactions partner, EY Parthenon partner and PH Government and Public Sector leader of SGV & Co.

16 January 2023

Kristopher S. Catalan

How can private boards be future-fit?

In today’s rapidly-evolving and disrupted business environment, private enterprises need to be resilient and responsive to fast-changing business needs. Boards and management alike should widen their agenda, and continually embrace transformation to keep their organizations aligned with the times.The most recent geopolitical, societal and environmental events force companies to rethink their priorities and revisit their current business agenda. Suffice to say, strategies which worked pre-2020 may no longer be effective. That is why private boards must reframe how the future looks like for their organizations.EY has identified six key actions to test the future fitness of boards and their ability to lead the business.1. Gather new perspectives by asking the right questions from stakeholdersThis helps create a robust dialogue around risk, opportunities, and any impacts on long-term purpose, which enables more informed decision-making. Initiating these discussions with management invites the exploration of alternatives that may not have been previously considered. Inputs from external resources such as business advisors or consultants can be beneficial as it provides new perspectives or provides alternatives to the current problems companies face.Conversations with stakeholders can give boards a better view of current or potential problems to provide organizations with much-needed wisdom. The better the questions are, the better the answers to be found.2. Revitalize board dynamicsDiversity and ongoing self-reflection, along with openness to varied inputs, reinvention and adaptation, builds a stronger, more effective board. A reasonable exchange of ideas can provide different frames of reference that are essential to problem-solving. An active board also provokes difficult but necessary questions.As an example, the Securities and Exchange Commission advocated increasing female representation in the boardroom and that boards should be as diverse as possible, gender-wise. In a study by Harvard Business Review, companies with more than two women on the board outperform others with less in their sector. Clearly, increased diversity in the boardroom has direct benefits for organizations.3. Increase focus on the long termWhile current circumstances have many boards centered on short-term survival, flexible and longer-term strategies based on emerging technologies, trends, new intelligence and industry developments, as well as a clear commitment to putting people first, should also be clearly articulated. Companies are no longer just measured on how well they performed for a year – they are assessed on how well they prepare for the future.Information about sustainable practices, including environmental, social, and governance (ESG) programs, are a staple in investor briefings for large companies. In the not-so-distant future, corporate communications will include sustainability practices and measures alongside financial metrics.With the growing significance of sustainability reporting, assurance of non-financial measures is equally important. Private companies may initially look up to their publicly listed counterparts, which are required to report about their sustainability programs (currently under a “comply or explain” basis). Private boards can include ESG matters as a staple boardroom discussion as well.Future-fit boards are focused on identifying megatrends and guiding management to face new challenges and innovate to seize the upside of disruption. Future-fitness is also about creating an environment for management which provides flexibility to develop better, more innovative business models, new collaborations, and new ways of working, drawing on talent, and incubating new ideas.4. Adapt communication, protect reputationTo maintain stakeholder trust, private boards need to align purpose with action. Communication must be timely and the division of roles for external communication clearly understood. Private boards can set the tone for the whole organization to follow. The policies and guidelines they adapt and approve for the organization should trickle down through formal and informal communication channels to the staff so that frontliners are equipped with the right information to make the right call.In the EY Global Integrity Report 2020, only 58% of junior employees, compared to 70% of board members, agree that employees in their organization can report wrongdoing at work without fear of negative consequences for themselves. Management must build the trust of their workforce through the clear communication of values and transparent compliance with the rules, as well as provide secure ways in which employees can voice their concerns.5. Align and monitor cultureIn his book Start with Why, Simon Sinek said that “Cultures are groups of people who come together around a common set of values and beliefs. When we share values and beliefs with others, we form trust.” It is important that boards have a clear vision of the corporate culture, align it with long-term strategies, and monitor said culture using new metrics to view issues from every angle.Purpose is like a journey, the board and management are pilots and stewards, and the passengers are the employees and other stakeholders. The pilot, the crew and the passengers need to have a common understanding of where their destination is and more importantly, trust that everyone will play their roles in order to arrive safely.6. Enhance risk and compliance oversightTaking a pragmatic approach enables boards to gather external insights, deploy monitoring mechanisms, and think more broadly about emerging risks and how to address them.One of the shifts required is to develop new competencies for finance, risk, technology and compliance. Private boards can organize committees similar to what public companies do to enhance oversight functions of their boards. Private boards may wish to rethink their usual agenda to tackle enterprise-wide risks.FUTURE-PROOFING PRIVATE COMPANIESPrivate companies can become future-proof by reimagining the way things are done and private boards are instrumental to setting that tone. A clear purpose acts as a compass in the journey of an organization to reshape and reinvent itself, setting a clear and inspiring direction that future-fit boards can navigate.Furthermore, with the right information and the proper tools, private boards can lead the transformations of their companies to the next level and beyond. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Kristopher S. Catalan is an Assurance Partner and the EY Private Leader of SGV & Co.

09 January 2023

Wilson P. Tan

Revving for growth

As the transition into the new normal continues and the economy looks to rev up, it’s important for leaders to leave the pandemic mindset behind — that of caution and risk aversion — and adopt a bold mindset of optimism and growth. While 2022 was a good year of recovery, companies must place a greater focus on sustaining growth while continuing to prioritize the health and wellness of their people. In the current business landscape, those who will find success will likely be those who act first and do so the fastest. INCLUSIVE GROWTH WITH HUMANS AT THE CENTERIn the face of ongoing change, business leaders need to transform their processes as well as their organizations in order to grow. In a setting where there is tremendous competition for talent and high levels of burnout, successful transitions of any kind must start with people. In line with this, business leaders must take purposeful action to manage people through the transformation journey. Workers across industries are now increasingly evaluating possibilities based on higher income, greater flexibility in when and where they work, and better company culture. According to the 2022 EY Work Reimagined Survey, as much as 43% of employees say that they are likely to leave their workplace in the upcoming year, citing these reasons. Organizations need to reconsider their workforce planning now more than ever if they want to recruit and keep a diversified pool of top talent.For companies to succeed as the talent war heats up, it is crucial that they place more emphasis on purpose, rewards, wellbeing, and belonging. To remain competitive, companies have to thoughtfully respond to evolving employee expectations and incorporate them into future talent programs and strategies. This includes programs relating to mobility and immigration, the challenges of which were intensified by the pandemic. Companies must also reassess their immigration policies and build a strategy that can align with their business goals while managing workforce expectations.With human capital at a premium, the current experience-driven economy necessitates that businesses focus on their people as the key to delivering long-term value for any business. Organizations and their chief human resource officers (CHROs) will also need to rethink their workforce development programs to retain, train and nurture people with the right technical and behavioral skills required to meet the needs of the future. By identifying skills gaps, developing learning programs for reskilling, curating learning experiences and nurturing a culture of curiosity, organizations will be better positioned to make the training investments necessary for continuous learning.However, it should be noted that placing humans at center does not just refer to employees — both employees and customers or clients should be at the core of any business tactics and long-term goals. In strategizing for growth, every choice, use of technology, and creation of a good or service must be seen through the eyes of the customer. Companies have significant opportunities to change the emphasis from an employee value proposition to human value proposition by developing new programs and solutions that prioritize the needs of the people first while still meeting stakeholder expectations. This ultimately paves the way for wholesome profits and a better working world. OPPORTUNITIES IN ESGSustainability and environmental, social and governance (ESG) cannot be excluded from the discussion of transformation and growth. Sustainability is focused on future generations, while ESG concerns are a matter of transparency for all stakeholders. Investors, employers and even the community increasingly hold companies responsible for a balanced ESG strategy capable of supporting strategic vision and corporate purpose. Though it was previously mentioned that 43% of employees surveyed in the above cited Work Reimagined Survey are open to leaving their companies for new roles, that figure drops to 12% if employees believe their company is positively impacting the world. As an example, the EY organization set a target to significantly reduce its carbon emissions and become net zero by 2025. It was one of the first professional service organizations to achieve carbon negativity as of October 2021, which means it is now reducing total emissions and either removing or offsetting more carbon than it is emitting. By achieving the status of carbon negative, EY demonstrates its commitment towards accelerated climate action and sustainability.As businesses start reopening and expanding, they also have to be prepared for additional regulatory compliance in the form of the Philippine Securities and Exchange Commission (SEC) requiring publicly listed companies (PLCs) to submit their annual sustainability report. Focusing on these ESG practices and factors is beneficial to both individual companies and investors, as it promotes the harmonization of management practices and calculates returns and risks to ensure the sustainable financial performance of organizations.For leaders to embed sustainability at the heart of decision-making, they have to prioritize strategic goals while also taking business and sociopolitical contexts into account. They have to set clear targets aligned with a purpose-led strategy, and build a more robust approach in analyzing opportunities and risks from environmental and social changes. Last, they will need to instill discipline in reporting and non-financial performance management as a basis for continued adaptation.FROM RECOVERY TO SUSTAINED GROWTHThe new era of work requires enterprises to embrace greater flexibility and develop their workforces as well as prioritize ESG as the new norm. While economic conditions may seem somewhat despondent currently, we still believe that the global economy is ready to rev for growth, with companies taking the hard-earned lessons of the past few years and transforming them into performance drivers and new business opportunities.While the journey ahead will still be challenging, it is imperative that we keep our eyes on the vision of building and restoring long-term value to our businesses as we continue to move towards a world of sustainable growth beyond the pandemic. Let us look to the rest of 2023 with renewed strength, optimism, and clarity of insight. 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.Wilson P. Tan is the chairman and country managing partner of SGV & Co.

26 December 2022

Benjamin N. Villacorte

What key COP27 outcomes mean for PHL companies

It’s been almost a month since the 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) concluded. In November 2022, stakeholders from the public and private sectors around the world gathered to delineate the next steps and help ensure that the existing goals to tackle the climate crisis are met.At the end of the summit, held in the coastal Egyptian city of Sharm el-Sheikh, parties instituted a landmark deal that would establish and operationalize new funding arrangements for developing countries, including the Philippines. Droughts, rising seas, typhoons, and more affect the communities in these places. The dedicated fund was pegged to provide assistance to those ruined by loss and damage caused by the worst impacts of climate change.While the Philippines stands to benefit from this move, we may have to wait for some time for the details of how this decision will be implemented. The rate at which global temperatures are rising makes climate change not only an environmental issue but also an economic and social concern. We need all the help we can get to reduce greenhouse gas emissions through bolstered technology, finance, and capacity building.BUSINESSES AND DECARBONIZATIONWithin five years, the average global temperature could pass the target limit of 1.5 degrees Celsius set in the Paris Agreement if our collective will to prevent it slackens. COP27 reaffirmed its members’ commitment to avoid this, but countries, businesses, and civil society must collaborate to ascertain a tangible outcome.In particular, private sector organizations are well-positioned to be a force for good on the path to sustainability. In the Philippines, while the government leads COP27 efforts, companies can work hand-in-hand to ensure financial and human resources are channeled toward aligning with global decarbonization targets.Alignment and financing are significant factors in adaptation, which is on the country’s agenda alongside securing financial support from developed nations. Matching current targets and goals is crucial in cutting emissions drastically; exceeding them can have opposite effects we might not be prepared to handle. Funding must also flow in support of building climate resilience. Underfinancing adaptation poses more risk and focusing on mitigation strategies could be more costly.With their influence and levers for change, businesses and institutional investors can tackle the big sustainability challenges by:• Becoming leaders in the decarbonization journey and going beyond what’s legally required (more on this later), such as reducing pollution and other environmental impacts for businesses and supporting green initiatives for investors;• Engaging key decision-makers and clients across many areas like climate security, decarbonization, food security, sustainable finance, and gender equality to increase collaboration and facilitate collective action; and• Fostering innovation that drives change.Climate change innovation and investment can be further strengthened by the government’s formation of local policies and guidance and the promotion of partnerships with the private sector.CLIMATE-RELATED DISCLOSURESWhat’s noteworthy is that more and more companies worldwide are disclosing climate-related financial information: a way for them to communicate with stakeholders, including investors and potential investors.The fourth EY Global Climate Risk Disclosure Barometer reveals that corporate reports scored 84% — climbing from 70% — for their coverage of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. In terms of the quality of disclosures, the average score was 44%, just slightly higher than last year’s 42%. Both figures are up, but there’s clearly a gap between coverage and quality that must be addressed to enable businesses to deliver meaningful disclosures around the challenges they face.Philippine companies should work twice or even thrice as hard to accelerate their efforts. They must improve their disclosures by following the TFCD and increasing the quality of their reports at the same time. And to truly deepen their reporting, it is imperative to address the global climate problem by materializing concrete actions. They would need to re-strategize or embed decarbonization efforts in their corporate policies and long-term plans.This commitment will soon become more than just an option for publicly listed companies (PLCs). In 2019, the Securities and Exchange Commission (SEC) released a memorandum that required PLCs to report on the management of their economic, environmental, social, and governance (EESG) impacts in a “comply or explain” approach. It means PLCs can attach their sustainability reporting template to their Annual Report and provide explanations for items they have no data on — all within the first three years upon implementation. That three-year window is closing as the SEC plans to make sustainability reporting mandatory for all PLCs by 2023.To complement the SEC’s efforts in mainstreaming EESG disclosures among PLCs, the Philippine Financial and Sustainability Reporting Standards Council (FSRSC) recently approved the formation of the Philippine Sustainability Reporting Committee (PSRC). The PSRC, composed of members from accounting firms, regulatory agencies, academic institutions, and industry associations, will provide technical assistance to the FSRSC on the adoption and issuance of sustainability reporting guidelines and standards in the Philippines. To achieve this, the PSRC will leverage the guidelines from the International Sustainability Standards Board, which are expected to be released in 2023.ENERGY INDUSTRY TO TAKE THE LEADImproving climate disclosures for greater transparency and accountability is just one facet of the journey. Companies must develop roadmaps with short-term, medium-term, and long-term goals and design concrete steps to achieve them.Those with the most significant exposure to risk can and should lead the way in managing it. There are two things to focus on: 1) how they adapt their own assets to changing climate conditions and 2) how they handle resources, such as water, to ensure efficiency and avoid harming the resiliency of other industries.In this light, the energy industry has much to gain and to lose. Eliminating greenhouse emissions is the first hurdle to meet, which ties in closely with limiting dependence on fossil fuels. Shifting to renewable energy sources should continue to grow to balance how the sector generates the capacity needed to power our post-industrial world.Meanwhile, innovation and investments in the agriculture, food, and forest products sector should also be directed toward activities that enhance adaptability. On-farm emissions usually come from livestock, soil management, and practices like rice cultivation and crop fertilization. Changing the way we farm — making it greenhouse gas-efficient — involves the use of technologies that can be scaled across regions and production systems.We cannot talk about significant climate action without dealing with the plastic crisis. With 400 million tons of plastic waste produced every year, the sector will continue to rely on fossil fuels (from which the chemicals used in creating plastic are sourced). Funding the shift to plastic substitutes is vital, but just as valuable and urgent is the need to push policies to stop the illegal traffic in plastic waste.COMMITMENT INTO TANGIBLE ACTIONThe climate crisis requires everyone’s concerted effort. It’s an all-hands-on-deck type of situation. We need solutions that aggressively tackle the climate problem. Businesses should begin to feel the urgency of investing time, resources, and leadership efforts into long-term, sustainable performance, which includes funding relevant technology like data and analytics for developing early warning systems; and pursuing innovation in areas like agriculture, applied materials, and biofuels. It is also their duty to provide more sustainable choices to consumers.Our corporate report scorecards show there are still gaps in the communication between companies and stakeholders. Through improved ESG disclosures, businesses can be more transparent and earn long-term investors’ trust. This setting and meeting of expectations can help both sides assess performance and address risks and opportunities that translate to investment and innovation. Such actions would translate to a greater impact than just pure commitments.The race is on to find climate-related solutions that can scale rapidly. Businesses and investors should see it as an investment with a payoff that is worth so much more in the long run: the lives that will be saved and the survival of this planet. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a Partner from the Climate Change and Sustainability Services team of SGV & Co.

19 December 2022

Warren R. Bituin

Cybersecurity as a board priority

Cybersecurity came to the forefront of critical concerns when companies had to shift to remote working at the height of the pandemic. Businesses continued to accelerate their transformation to address disruption, but many did not consider cybersecurity as part of the decision-making process — likely due to business urgency or oversight. As a result, as much as 73% of Asia-Pacific businesses saw an increase in disruptive attacks, according to the EY Global Security Survey 2021 (GISS), with new vulnerabilities entering the rapidly evolving business environment.The industrialization of cyberattacks led to an increase in their volume and severity, but Chief Information Security Officers (CISOs) are faced with challenges that inhibit the cybersecurity function. These include inadequate budgets, which can be seen in the cyber spend of Asia-Pacific businesses totaling only 0.05% of their annual revenue, according to the GISS. This cost-cutting has severe implications, as the GISS reveals that 41% of businesses in the APAC region expect major breaches that could be anticipated and averted with better investment. There is also a lack of preparedness due to the limited visibility of cyber risk within an organization, coupled with outdated or disparate regulations.The GISS further shows that CISOs demonstrate a lack of confidence when faced with threat actors. Cybersecurity strikes a fine balance between usability, security and cost, but it is only possible if the board is proactively testing and challenging the existing status quo.BOARD RESPONSIBILITIES TOWARDS CYBERSECURITYBoard members must review the company organizational structure to ensure that the cyber security function is adequately represented, and should promote systemic resilience and collaboration to account for risks stemming from broader industry connections. They should encourage a continuous analysis of comparative metrics, such that industry-accepted cyber frameworks guide data driven decisions, aligning risk appetite with organizational goals and strategy. It is imperative to understand tomorrow’s cyber threats today by proactively investigating emerging threats.Board directors will have to identify their business-critical systems and data, and how their criticality is assessed. They are responsible for key business risks per local applicable Corporations law requirements. In some jurisdictions such as Oceania, directors are now required to take all reasonable steps to be in a position to “monitor and guide” the company and have information made available to them to exercise their responsibilities.The board must also determine how effective the controls protecting their critical systems and data are, and how often these are tested. In addition, they have to be aware of how their current data privacy and data retention policies align with government and industry regulations, and how third-party suppliers are protecting the company systems and data. Moreover, cyber investments must be focused on mitigating the risk scenarios that the company would be most exposed to. In case of a cyber incident, there has to be an organization-wide response plan capable of addressing it, where employees understand their roles in managing the crisis.It is the responsibility of directors to consider proactive management of the risks associated with critical assets and data to maintain market and consumer trust, as well as adhering to legislative obligations or best practice expectations to secure personal information.Thus, it is important to hear from external sources, not just management, about the potential threats and the independent assessed level of controls currently in place. While management can provide updates on the status of the company’s cybersecurity programs, an independent party can help the board gain assurance that the programs are adequate with respect to the existing cyber threats that the company is facing.CYBERSECURITY INSIGHTS FOR BOARDS TO CONSIDERAccording to the EY Global Risk Survey (2020), boards stay updated through external advisors or industry analysts (40%), interactions with or data on peer companies (32%), and through management briefings (20%). Almost half of the surveyed respondents consider unfavorable economic conditions, cyber incidents and the pace of technology change to be their top risks.In light of this, there are several insights gleaned through director dialogues held through the survey. One is to set the cultural tone — boards must demonstrate that cybersecurity and privacy risk are critical business issues by increasing the board and/or committee’s time and effort spent discussing the topic. They must also stay updated by increasing the frequency of board and/or committee updates on specific actions to address new cybersecurity and privacy issues and threats.Moreover, boards must understand the necessary protocols. They have to obtain a thorough understanding of the cybersecurity incident and breach escalation process and protocols, including a defined communication plan for when the board should be notified. By understanding the processes of management to identify, assess and manage the risk associated with service providers and supply chains, they can better manage third party risk. Boards also have to test response and recovery by enhancing enterprise resilience and having the company’s ability to respond and recover tested through simulations and arranging protocols with third-party professionals before a crisis. Lastly, boards must monitor evolving practices. They should stay attuned to evolving board and committee cybersecurity oversight practices and disclosures, including benchmarking against peer disclosures for the last two to three years.SUCCESSFUL AND SECURE TRANSFORMATIONBoards must have a clear understanding of the company’s cybersecurity program and how they are effectively implemented to address immediate and near-term cyber threats. Fortifying cyber resilience requires boards to act decisively as major pressures threaten the ability of cybersecurity to effectively address potential risks. They must play an active role in bringing cybersecurity to the rest of the business. By taking more time to discuss cybersecurity risks, the board can send a clear message that the cybersecurity function is a strategic business partner, and that the risks involved are critical business issues. Not only will this help the cybersecurity function work more effectively with the business, but it will also help the function execute transformation programs that are successful and cyber secure. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Warren R. Bituin is the Technology Consulting Leader of SGV & Co.

05 December 2022

Margaux A. Advincula and Donna Frances Ylade-Torres

Brace for impact: The future of taxation

In a span of three months, we have published a series of articles based on carefully curated topics from the first-ever SGV Tax Symposium held on Aug. 7. These articles covered pivotal areas and emerging developments in taxation significantly affecting the business landscape in the Philippines.In this last article of the 1st SGV Tax Symposium publication series, we are putting a spotlight on the proposed digital transformation in tax administration so that readers can better brace for the impact of the future of taxation in the Philippines.PROPOSED DIGITAL TRANSFORMATION IN TAX ADMINISTRATIONDigital agility was never more pivotal than during the pandemic. Globally, businesses are finding themselves on the frontlines of rapid digital transformation.Following suit, tax regulators are harnessing digital tools to automate tax invoicing and reporting, simplifying tax policies and compliance for a more seamless taxpayer experience, and automatically integrating taxation processes into taxpayer systems for accelerated tax revenue collection.Regulators are likewise leveraging information from digital analytics tools and data shared by global tax administrations to extract errors and inconsistencies, enabling them to automate checks and audit selection processes. The digitalization of multi-jurisdiction reports filed by companies further enables regulators to access, assess and compare tax loopholes, trends and risks, thus enhancing the efficiency of tax revenue programs.In the Philippines, the Department of Finance (DoF) is adopting a Medium-Term Fiscal Framework (MTFF) as the government’s economic blueprint to enhance the efficiency of the tax system. The Bureau of Internal Revenue, in particular, has been improving its online filing and payment systems, introducing mandatory e-invoicing in pilot programs and deploying an automated tax registration system for selected taxpayers (i.e., Online Registration and Update System).The MTFF is further accelerating priority tax measures to catch up with the digital economy, such as the imposition of VAT on digital service providers and reinforced tax collections from online content creators, which are expected to bring significant additional tax revenue. With efficient tax administration through digitization, the DoF is optimistic that the economy will continue to bounce back to its pre-pandemic high-growth trajectory.FUTURE OF TAX AS A DOUBLE-EDGED SWORDThe future of tax can be a double-edged sword. With the digital revolution already transforming tax administration around the world and rapidly becoming sophisticated and agile, it cannot be ignored that it will also deliver sharp, costly and taxing changes in the way we navigate the tax ecosystem.Critical to businesses is whether they have the right technology, infrastructure and upskilled talent who are fast enough and prepared to ensure that their tax functions are ahead of the regulators, and that they are digitally ready for an advanced level of scrutiny. Without a future-ready tax function, companies may be exposed to new tax risks.Therefore, with the ascendance of technology, the tax function can no longer remain a mere support system in business organizations. The tax function must transform into a key business and strategic partner of operating units. In essence, the value of the tax function to companies has never been as important as it is now.An important assessment that needs to be made in a future-proof tax function is the choice of automation tool such as robotics and artificial intelligence (AI). These solutions can be fast, systematized and less prone to errors, but they can fall short in areas where human insight, experience and judgment are required.Without a doubt, rapid technological change can also play a massive part in identifying shadow economies and curbing any informal activities and interactions among the players, which in turn, will create opportunities for regulators to recover missed tax revenue arising from under-reporting of sources of income or non-registration of businesses. However, with the sudden growth of various business models (e.g., e-commerce, e-banking, e-education, e-health), and the proliferation of shadow economies, it will be no surprise if regulators eventually utilize these digital platforms as extended agents to carry out the tax administration processes within their jurisdictions.However, it is also important for regulators to understand the need to strike a balance between increasing government coffers through greater tax collection efficiency and sustaining local entrepreneurship by strengthening taxpayer morale while also increasing taxpayer confidence in a progressive tax system.PRIORITY SOLUTIONSOrganizations should continuously re-assess their operating model and functions to identify gaps in data, technology and people, as well as to meet the heightened level of tax and regulatory compliance brought about by the pivotal shift towards the future of taxation in the Philippines.To achieve this, companies can prioritize the following solutions to brace for the impact against the future of taxation:1. Meet compliance obligations by upgrading the tax function, either by investing in advanced digital technology for accurate tax reporting, or outsourcing it to expert tax advisers who can leverage high-end technology solutions that may otherwise be too costly for companies to acquire on their own;2. Reshape human resource functions through a well-designed global mobility program with comprehensive employment, tax and immigration solutions ahead of any modern workforce disruption;3. Prepare a well-developed transfer pricing framework that is globally cohesive and aligned with contemporary international tax rules governing cross-border transactions;4. Provide internal tax teams with adequate support from tax advisers who have relevant expertise in dealing with multi-jurisdictional tax controversies; and5. Revisit indirect tax compliance and customs reviews focusing on disruption to globalization and digital trade.With the rapid use of technology to make tax administration more advanced, efficient, seamless and integral to the natural systems of businesses, it is imperative for companies to stay at the forefront of these changes. Those that do not keep up could find themselves left behind and exposed to new tax and reputational risk.Indeed, the future of taxation in the Philippines has begun. Whether it is viewed as positive or negative, it is here to stay. The question to companies now is — are you ready? 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 lawyer, tax partner and the head of the SGV Clark Office and Donna Frances Ylade-Torres is a lawyer and tax senior director.

05 December 2022

Margaux A. Advincula

Clark, ready for takeoff as the Philippines’ city of the future

On Nov. 7, SGV Clark successfully launched the inaugural publication of Doing Business in Clark: 2023 Edition to key officers of Clark-based organizations, such as the Bases Conversion Development Authority (BCDA) and Clark Development Corp. (CDC), representatives of embassies, as well as the Clark business community. The publication is an iteration of SGV’s Doing Business in the Philippines brochure series, which highlights the excellent investment opportunities in the country and in various localities.Clark, which rose from the ashes of the 1991 Mount Pinatubo eruption and became a prime investment destination in the Philippines, is composed of the Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Clark is further subdivided into four main districts: the CFZ, Clark International Airport, Clark Global City, and New Clark City (NCC). Administered by the BCDA and CDC, Clark has registered more than a thousand export and domestic market enterprises in manufacturing, information technology and business process management (IT-BPM), aviation, logistics and tourism sectors, among others. The CDC has disclosed on its website that it is a home to key investors from South Korea, the US, Australia, and Japan.The catchphrase coined by the BCDA and CDC, “Clark: It Works. Like a Dream” sums up what they say Clark stands for: efficiency, processes that actually work, convenience and ease of doing business. While locators continue to face challenges, mainly due to changes in tax rules and the pandemic, they say that Clark remains attractive to investors because of the ease of doing business, tax incentives, a rich talent pool, and infrastructure connectivity, to name a few.To ensure ease of doing business, the CDC operates a one-stop shop that promotes efficiency in the registration process. It is currently working on automating and streamlining processes that promise application approvals in less than three weeks. Unlike in other locations, businesses have to deal with only the CDC to locate in Clark. This removes the need for dealing with a number of government agencies, which can delay permits and licenses.From a tax perspective on fiscal incentives, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act) now allows the CDC to grant an income tax holiday (ITH) for a number of years depending on the project’s classification in the Strategic Investment Priority Plan (SIPP) subject to approval of the Fiscal Incentives Review Board for investments of more than P1 billion. The SIPP supports technological advancement, research, and innovation on top of the current SIPP-eligible activities in Clark. Existing locators continue to enjoy incentives under the 10-year transitory provision of the CREATE Act. Exporters can opt for a 5% special corporate income tax or enhanced deductions after the ITH period. Clark also ensures free flow of goods and grants duty and VAT exemption to qualified imports. To better attract local talent, the BCDA promotes a “Live, Work, Play” lifestyle in Clark that fosters innovation and inspiration. A number of Metro Manila businesses have recently expanded to Clark to cater to talent demand and take advantage of the talent pool in Central Luzon. Clark’s accessibility to nearby cities also makes it an excellent choice for hosting international and local athletic competitions.The BCDA has also lauded Clark’s accessibility with its infrastructure network that promises a strategic international and domestic location for investors. On Sept. 28, President Ferdinand R. Marcos, Jr. formally inaugurated the new world-class and state-of-the-art terminal of the Clark International Airport (CRK). CRK can welcome eight million additional passengers annually and is equipped with the latest technologies to make travel easier. The Philippine National Railways Clark (PNR Clark), the northern section of the North-South Commuter Railway, is also expected to significantly reduce travel time from Clark to Metro Manila to less than an hour.The iconic Sacobia Bridge, the cover photo of Doing Business in Clark: 2023 Edition, connects the present CSEZ to the NCC. The NCC envisions itself as the future smart city in the Philippines. It is currently home to the National Government Administrative Center, Athletes’ Village, Aquatics Center, Athletics Stadium, and the Filinvest Innovation Park. The NCC has announced that it will soon have an integrated luxury mountain resort that will host golf courses, ultra-luxury hotels, premium villas, an international school, and a public park. It will also benefit from the Luzon Bypass Infrastructure Project, which will equip it with digital connectivity comparable to South Korea and Japan.All of these developments support the CDC’s vision for Clark to become a modern sustainable aerotropolis and a premier business destination. As a haven for meetings, incentives, conferences and exhibitions (MICE) and home to major investors in the semiconductor, IT-BPM, and tourism sectors, Clark is developing to be the Philippines’ city of the future.In fact, in September, the BCDA signed a Memorandum of Understanding with Enterprise Singapore to create a framework for affordable housing, estate management, transportation, solid waste management, waste-to-energy technology, smart cities, sustainability, green data centers, urban development and people-centric programs. Businesses in these sectors would benefit from the incentives of a future Clark registration. There are also pending bills in Congress that support Clark’s development as a priority investment destination in the Philippines, and in Asia.The launch of Doing Business in Clark, therefore, supports the government’s efforts to promote Clark as Asia’s investment haven. Borrowing the words of Finance Secretary Benjamin E. Diokno in his message for Doing Business in Clark, “The best time to do business in the Philippines is now.” Indeed, and one of the best places to do this is in Clark.The history of Clark, starting from a US military base and becoming a prime investment hub, demonstrates its resilience and high potential. It is, perhaps, best represented by the Sacobia bridge, which was somewhat whimsically described in one of the BCDA’s 2020 newsletters as connecting not just the old and the new Clark, but also linking the nation’s heritage to promising times ahead.Certainly, setting up new business operations, or moving existing ones, is a complex process. However, investors and businesses who can meet the requirements set out in the CREATE Law and other legislation would do well to consult with trusted business advisors on whether the advantages of doing business in Clark will make it worth their while and present long-term strategic opportunities for their enterprises. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Margaux A. Advincula is a lawyer and Tax Partner of SGV & Co. and the Head of the SGV Clark Office.

28 November 2022

Jules E. Riego

A question of trust: Revocable or irrevocable?

The pandemic introduced a tectonic shift of perspective about wealth planning, changing from “it’s never too late to plan” to “it’s never too early to plan.” As people become more cognizant of their own mortality, they have also become more pragmatic because, as Dr. Susan David, award-winning Harvard Medical School psychologist and named one of the world’s most influential management thinkers, aptly said, “Life’s beauty is inseparable from its fragility.” Given this change in mindset, one favored tool for wealth planning is a Trust — a malleable tool even with the backdrop of the particularly challenging and sometimes complex compulsory heirship rules in the Philippines.A Trust is primarily a fiduciary relationship between a person called a Trustor or Settlor and a Trustee. The Trustor sets up a Trust, i.e., putting assets in a Trust or under the name of a Trustee. The Trustee is a person or entity appointed by the Trustor to take care of the assets placed in the Trust on behalf of or for the benefit of the Beneficiaries named in the Trust. As the Trustor is trusting the Trustee to take care of assets in favor of designated beneficiaries, the Trustee has a fiduciary obligation to the Trustor. Fiduciary obligation here means that the Trustee’s responsibility is not just within the level of a “good father of the family;” the Trustee should handle the Trustor’s and beneficiaries’ interests with the highest meticulous care. They hold a duty to preserve good faith and the trust reposed upon them.A TRUST AS A WEALTH OR ESTATE PLANNING TOOLEmploying a Trust is similar to writing a Last Will and Testament but without the burden of a costly, cumbersome and possibly protracted probate proceeding. Under Philippine rules, a Last Will and Testament has to be probated or have its legal validity recognized before a court. Because a probate proceeding is a judicial process in our jurisdiction, it will require lawyer’s fees and may result in considerable delays in the distribution of the benefit to the heirs.It is in the Trust Deed or Trust Agreement that the Trustor should put all their instructions as regards who should be benefited, when they should be benefited, what they will get (if hard assets), how much (if cash), and what conditions the beneficiaries must fulfill to be entitled to the income and/or principal of the Trust. In all of these, the Trustor must bear in mind the concept of “legitime” or the minimum entitlement under the law of compulsory heirs, which cannot be burdened with any condition.Once the Trustor passes away, the Trustee simply implements the distribution to the heirs/beneficiaries in accordance with the instructions of the Trustor. In most Trust arrangements, the Trustor is free to appoint a Protector or Overseer (usually a close and trusted family friend) who is tasked to see to it that the Trustee will perform all of its fiduciary obligations to the letter.REVOCABLE OR IRREVOCABLE?When deciding whether the Trust should be revocable or irrevocable, the following points should be considered:Generally, the substantial terms and conditions of an Irrevocable Trust (e.g., addition or subtraction of named beneficiaries) can no longer be changed. In a Revocable Trust, the Trustor can change the terms and conditions of the Trust for whatever reason. There is more flexibility for the Trustor in a Revocable Trust in terms of control over the assets in the Trust and in adding or removing beneficiaries.Transfers of assets to an Irrevocable Trust is essentially a donation, attracting a donor’s tax of 6%. This means that assets transferred to an Irrevocable Trust are no longer part of the estate of the Trustor and will no longer be subject to the 6% estate tax upon the passing of the Trustor. Therefore, the decision to set up an Irrevocable Trust is also a choice between paying a 6% donor’s tax at today’s value or paying the 6% estate tax based on the prevailing value later. This is particularly crucial for real property assets to be passed on to the next generation since the appreciation in value of real estate, especially those in prime locations, is unbelievably exponential.On the other hand, assets transferred to a Revocable Trust are still considered assets of the Trustor, such that upon the Trustor’s demise, the assets in a Revocable Trust will still be subject to 6% estate tax as donor’s tax was not paid during the transfer of assets to the Revocable Trust.Assets transferred to an Irrevocable Trust are also protected from creditors of both Trustor and beneficiaries, subject to certain rare exceptions. This also means that assets in an Irrevocable Trust are protected from future in-laws. This is the complete opposite in the case of assets transferred to a Revocable Trust, as future in-laws can potentially acquire assets from the Trustor’s family line due to Philippine compulsory heirship rules or other contingencies like annulment. This is also the reason why an Irrevocable Trust is very useful in wealth planning if the Trustor intends for specific assets not to cross family lines. For example, an Irrevocable Trust can shield shares of stock in a family-owned corporation if it is the family’s policy not to allow in-laws from owning shares in the family corporation to prevent potential complexity to the family dynamics.In an Irrevocable Trust, as long as the title to the assets is in the name of the appointed Trustee, estate tax will not apply even if any of the beneficiaries passes away since none of the latter own any assets in the Trust. This means that several generations of estate tax can be saved for as long as the corpus of the assets remain in the Irrevocable Trust. This benefit is not present in a Revocable Trust arrangement as assets from a Revocable Trust are distributed to beneficiaries upon the death of the Trustor.An Irrevocable Trust can also be used for wealth replenishment or “reforestation” if used in combination with life insurance. The fund of an Irrevocable Trust can be used to insure the life of the beneficiaries, and name the Trustee of the Irrevocable Trust as custodian of the proceeds of the life insurance policy for the benefit of or on behalf of the next generation. As long as the designation of the intended beneficiaries is irrevocable, the beneficiaries of the policy will get the proceeds tax-free. This cycle can be repeated in every generation to replenish the fund in the Trust.This arrangement is also useful when the intended beneficiaries of the life insurance policy are minors, suffering from any physical or mental disabilities and require life-long care, or when the parents believe that the beneficiaries would not be able to handle their own finances. Appointing a Trustee to manage, grow and control the periodic distribution of the funds would be ideal. However, when the named beneficiary of a life insurance policy is the Revocable Trust, the proceeds of the life insurance policy will be subject to estate tax, since a Revocable Trust has no personality distinct and separate from the Trustor.In a blog article, “Are trusts on your radar for succession planning?” Michael Parets, EY EMEIA Private Tax Desk Leader, offered other insights about Trust as wealth planning tool, such as choice of jurisdiction and the presence of laws recognizing Trusts; the domicile and citizenship of intended beneficiaries; the competence and reputation of the Trustee; and of course, the expertise of the tax advisor.FUTURE-PROOFING WITH TRUSTA Trust is not just a planning tool for the wealthy, but a viable wealth management tool for everyone who wishes to future-proof their assets for their heirs. In addition, we should remember that while there is certainly a cost in planning, there is a potentially higher cost in doing nothing – not just in tax, but more importantly, in maintaining peace and harmony within the family.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Jules E. Riego is the Business Tax Services (BTS) Leader of SGV & Co. and the EY Asean BTS Leader.