March 2022 Articles - Suits the C-Suite | SGV & Co. | EY

28 March 2022

Cecille S. Visto

Corporate dissolution made easy

The Philippines, it’s often easier to incorporate a new entity than to dissolve an existing corporation. Investors face the tedious and long process of closing their businesses, which requires the cancellation of various registrations with regulators, including the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). The difficulties of dissolution — and eventual liquidation — are one of the factors that affected the country’s ranking in the World Bank’s ease of doing business report in recent years. To address the challenges of corporations contemplating dissolving and eventually, liquidating, the SEC recently issued the guidelines on corporate dissolution consistent with the provisions of Republic Act 11232 or the Revised Corporation Code (RCC).DIFFERENT TYPES OF CORPORATE DISSOLUTION SEC Memorandum Circular No. 5, Series of 2022 prescribes the procedures and requirements for the different types of corporate dissolution, namely voluntary dissolution with or without creditors affected under Secs. 134 and 135 of the RCC, respectively; involuntary dissolution pursuant to Sec. 138; and dissolution by shortening of corporate term provided in Sec. 136. Of the three types, dissolution by corporate life shortening is by far the most common, with a corporation determining at the outset the end of its existence. This is done through the filing of an application for amendment of the Articles of Incorporation (AoI) with the SEC indicating the shortened term or the last day that it operates as a juridical entity. An entity can propose an expiration date of less than one year from the SEC approval or one year or more from such approval. The chosen timing also has a significant impact on the corporation. If the dissolution period is less than a year, the applicant has to submit, among others, a tax clearance certificate from the BIR. On the other hand, if the shortened term is a date that is more than one year from the Commission’s green light, the BIR tax clearance will not be required. While the procedure and process are essentially the same for both options — with the same applications lodged with the same government agencies — the difference is in the sequencing. Under the first option, the company will file and process the application for BIR tax clearance and undergo a rigorous tax audit process prior to filing an application for AoI amendment. The second option allows for the filing and processing by the SEC of the application for shortening of the corporate term without waiting for the BIR tax clearance. After the SEC approves the application, the company continues to operate as a juridical entity until the expiration of the corporate term. The corporation is not yet dissolved until after the last day of its shortened term. Until the release of SEC MC 5, these options were not officially provided in any SEC rulebook, although they were applied in practice. Numerous registered companies have taken advantage of the alternate route, effectively steering clear of the need to first secure the BIR tax clearance prior to the processing of the dissolution application. However, getting the clearance is still required for a corporation to officially close its business operations in the Philippines. In this regard, the BIR will still conduct the mandatory closure audit, which is a condition precedent to the grant of the tax clearance. Under the old rules, the SEC may approve the dissolution provided the end of the corporate term must be at least one year from the filing of the application. In the recently promulgated issuance, it is clear that the end of the corporate existence must be at least one year from the actual approval of the SEC. SEC MC 5 specifically provides that the application must contemplate a future date, and not a date that had already lapsed at the time of the filing of the application.TIMELINE AND COSTS A regular BIR tax audit covering a fiscal or taxable year may take at least one year to close, or longer depending on the complexity of the issues raised by the examiners. In a mandatory closure investigation that will cover the last two to three taxable years, the audit may be completed in approximately two years. Given that the completion of the BIR tax audit may be difficult to estimate, the timeline for the dissolution under option 1 is indefinite and will largely depend on the pace and workload of the assigned BIR examiners. Meanwhile, the timeline under option 2 is definite as to when the corporation is deemed legally dissolved. Upon the expiration of the shortened term, as stated in the approved amended AoI, the corporation is considered dissolved for SEC purposes without any further proceedings. Thus, dissolution automatically takes effect on the day following the last day of the corporate term, without the need for the SEC to issue a certificate of dissolution. The costs for both options are relatively the same, including the filing fees, regulatory fees, and deficiency taxes that may be assessed and paid at the close of the BIR tax audit. However, the simplified dissolution process will result in lower overall costs and time as there is no need to comply with certain requirements, such as filing of audited financial statements, which will save the corporation on professional fees. There will also be fewer personnel expected to be retained on the payroll, particularly those who will be in charge of the BIR tax audit and the related liquidation process. Likewise, the corporation is not required to maintain the office lease. Under Sec. 139 of the RCC, a dissolved corporation will continue to exist for three years after the effective date of dissolution to generally wind up its affairs, including the disposal of its properties and distribution of its assets. Notably, given the expected time lag between the SEC approval and the BIR tax clearance, corporations in the process of liquidation often opt to maintain a bank account for the settlement of any deficiency tax assessment by the BIR. As the SEC has clarified the two available options in the shortening of the corporate term, registered entities have the opportunity to carefully weigh the method that will better address their needs, taking into consideration the processing period, available administrative resources, and the targeted timeline for the dissolution. 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 EY or SGV & Co.CECILLE S. VISTO is a tax senior director and lead manager for the Entity Compliance and Governance Services of SGV & Co

21 March 2022

Christiene R. Matic

New VAT zero-rating rules and requirements under CREATE

Upon the effectivity of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on April 11, 2021, a new requirement to support the VAT zero-rating of local purchases of registered business enterprises was introduced.CREATE required registered business enterprises to prove that their local purchases of goods and services are directly and exclusively used in their registered activities to be accorded 0% VAT rating. Several issuances were subsequently published, which placed many taxpayers in limbo because of the seemingly conflicting provisions related to the VAT zero-rating of local purchases.Almost a month before the anniversary of CREATE, the Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 24-2022, which intends to harmonize and clarify the new VAT zero-rating rules and requirements under CREATE.CROSS-BORDER DOCTRINE NOW ‘INEFFECTUAL AND INOPERATIVE’Before CREATE, Ecozones and Freeport zones were regarded as foreign territories (by way of legal fiction) under RMC No. 74-99 and RMC No. 7-2007. Under the cross-border doctrine, sales to registered business enterprises located within these Ecozones and Freeport zones could be treated as constructive exports subject to 0% VAT.However, following the effectivity of CREATE, the cross-border doctrine is no longer applicable. This is because CREATE expressly requires registered export-oriented enterprises to prove the direct and exclusive use of their purchases of goods and services in its registered activities, a departure from the old rule which generally anchored zero-rating of purchases on being economic zone locators.To add, the availment of VAT zero-rating for registered export-oriented enterprises becomes subject to certain parameters regardless of location (i.e., time-bound as it becomes subject to the conditions and period of availment in Sections 295 and 296 of CREATE) under Section 294(E) and Section 295(D) of the Tax Code, as amended by CREATE.It now provides that the effective VAT zero-rating will only apply to the sale of goods and services rendered to persons or entities which have direct and indirect tax exemptions pursuant to special laws or international agreements to which the Philippines is a signatory.Based on these developments under CREATE, investors may now consider reassessing incentives that were previously location-based.CHANGES TO VAT ZERO-RATINGSince the effectivity of CREATE, the VAT exemption on imports and VAT zero-rating of newly registered and existing registered business enterprises (RBEs) only applied to goods and services that are directly and exclusively used in the registered project or activity of registered export enterprises. The phrase “directly and exclusively used in the registered project or activity of registered export enterprises” was explained under Q&A No. 13 of RMC No. 24-2022 as those raw materials, inventories, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, maintenance, repair and overhaul of equipment, and other expenditures that are directly attributable to the registered project or activity, without which the registered project or activity cannot be carried out.In the case of common expenses, taxpayers were directed to adopt a method to best allocate goods or services purchased (e.g., the use of separate water and power meters among activities). Otherwise, if the proper allocation could not be determined, then the purchase of such goods will be subject to 12% VAT. The RMC also made it clear that services for administrative purposes, such as legal, accounting and other similar services, are not considered directly attributable to and exclusively used in the registered project or activity.Previously, a VAT zero-rating certificate was the only document that must be provided by a registered export enterprise to their local suppliers. However, RMC No. 24-2022 introduced additional requirements on top of the VAT zero-rating certificate, such as a photocopy of the export enterprise’s BIR Certificate of Registration, a sworn declaration stating that the goods or services being purchased are to be used directly and exclusively in the registered project, and other documents to corroborate entitlement to the VAT zero-rating.These documents include but are not limited to duly certified copies of the purchase order, job order or service agreement, sales invoices and/or official receipts, delivery receipts. Registered export enterprises should also expect some changes in the VAT zero-rating certificate that will be issued by its Investment Promotion Agency (IPA), which would now include the applicable goods and services meeting the direct and exclusive use criteria.Registered export enterprises must strictly observe the abovementioned criteria and documentation in order to prove the VAT zero-rating of its local purchases of goods and services. This means that registered export enterprises may need to factor in additional compliance requirements to avail of the VAT zero-rating and be able to sustain a claim of VAT zero-rating if eventually audited by tax authorities.The role of tax managers, compliance officers, custodians of records, and the like may have to be expanded as well to ensure that the necessary documentary requirements are secured in a timely manner, compliant with the existing requirements under our tax rules, and would still be available in the event of a tax audit.EXPORTER TAX TREATMENT BEFORE CREATEQ&A No. 23 of the same RMC clarified that registered export enterprises existing prior to CREATE continue to enjoy VAT zero-rating on their local purchases until the expiration of their incentives, as specified in the Implementing Rules and Regulations of CREATE. However, the direct and exclusive use criteria must still be met. Otherwise, sellers of goods and services will be required to pass on the 12% VAT to their registered export enterprise customers within the Ecozone.The RMC further explained that any input VAT passed on for purchases of goods and services not directly and exclusively used in the registered project or activity may no longer be used to apply for a VAT refund. Instead, the RMC presented three options that a registered export enterprise may avail of:• A VAT-registered taxpayer enjoying an income tax holiday (ITH) may claim the passed-on input VAT as credit against future output VAT liabilities; or• Accumulate the input VAT credits and claim for VAT refund upon expiration of its VAT registration (i.e., end of ITH and 5% SCIT incentive commences); or• Charge to cost or expense account if non-VAT registeredSimilarly, existing export enterprises which are already under the 5% gross income tax (GIT) and special corporate income tax (SCIT) were required to change their registration status from a VAT-registered entity to non-VAT within two months from the effectivity of RMC No. 24-2022.It must be noted, however, that the input VAT charged to cost or expense account may not qualify as a “direct cost” for an export enterprise that is already availing of the 5% GIT or 5% SCIT. In which case, there would be no tax benefit on any input VAT passed on by its local suppliers.ACTION PLAN MOVING FORWARDWith the effectivity of RMC No. 24-2022, registered export enterprises and their domestic sellers of goods and services must familiarize themselves with the new principles and additional requirements of VAT zero-rating on local purchases.Given the strict “direct use” requirements, registered export enterprises may consider performing a careful review of their local purchases of goods and services to identify whether or not they meet the criteria. Export enterprises with a more complex business structure (i.e., those with multiple registered activities) and those which incur significant amounts in common expenses may revisit their allocation method among registered and non-registered activities.Otherwise, without diligent study, a registered export enterprise may face a significant amount of input VAT that it may not be able to recover. 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.Christiene R. Matic is a director from the Global Compliance and Reporting service line of SGV & Co.

14 March 2022

Rossana A. Fajardo

Opportunities for tech companies to seize in 2022 (Second Part)

(Second of two parts)As the digitalization of the world economy further accelerates, the technology sector will likely continue to grow, especially now that vaccines and proactive health and safety measures are helping manage the pandemic. In line with this, EY ranks the top 10 opportunities from its annual report that technology companies should seize for growth while navigating volatility and risks in 2022.In the first part of this article, we discussed the first five opportunities: attracting and retaining more motivated people in a hybrid workplace, strengthening growth profile with M&A, securing business continuity by de-risking supply chains, embedding security in new activity designs, and leading in ESG to strengthen stakeholder relations.In the second part of this article, we continue by discussing the remaining five: transforming the business for consumption-based sales, realigning tax organizations with digital business models, streamlining operations and increasing agility, cultivating customer trust to drive digital engagement and anticipating the transition to 5G technology.TRANSFORM BUSINESS FOR CONSUMPTION-BASED SALESDuring the pandemic, consumption-based business models offered a higher valuation from investors and better protection against economic volatility compared to traditional one-off payments. With more and more customers preferring the flexibility of cloud-based services and software, subscription payments are expected to rapidly replace traditional license payments over the next five years.In order to enable this shift, companies need to change their pricing tools, transform their sales organizations, adopt new incentive schemes, realign their major business processes and track different performance indicators. Though the transition will be challenging, companies will be rewarded with more time to build customer relations, recurring revenues, and the opportunity to generate higher revenues from each user through upselling and cross-selling.REALIGN TAX ORGANIZATIONS WITH DIGITAL BUSINESS MODELSTaxation and legislation changes are targeting the technology sector worldwide, with governments looking to shift the taxation base to capture more value from the growing economic contributions made by digital services. Sudden changes are caused by trade disputes and governments who are looking to protect or strengthen their key industries, and this often includes technology segments.Tech companies need a robust approach to global trade and taxation with regard to their large international footprints as well as their large base of assets, both material and immaterial. This approach has to be built on early planning, real-time insights and an agile operating model. STREAMLINE OPERATIONS AND INCREASE AGILITYWith the current unprecedented economic uncertainty and volatility, customer preferences are shifting overnight and causing large swings in demand. This is especially true in the technology sector. The risk profiles in the sector have also changed due to supply chains getting stretched and geopolitical factors influencing trade. This further increased the need for organizations to transform.To remain competitive, tech companies need to match operational agility with the future levels of volatility in their business. This can be achieved by leveraging data analytics, cloud capabilities and automation tools, streamlining business processes, and identifying ways to simplify the organization.CULTIVATE CUSTOMER TRUST TO DRIVE DIGITAL ENGAGEMENTDigital companies rely on trust to keep driving customers to visit, interact and share the necessary data to create a business and drive growth. Because alternatives are a click or two away, a lack of trust can instantly send customers to competitors.EY research has found that the main drivers of trust and distrust include transparency, ethics, security, regulatory compliance and content. To gain the trust of customers, companies must prioritize protecting customer data and maintain clear policies on dealing with issues that include fake content, discrimination and online abuse. A digital trust strategy that incorporates all the elements of trust has to be established.PREPARE FOR 5G ADOPTIONThe tech industry is gearing up for large-scale implementation with the rollout of 5G driving revenue across the entire technology stack. According to Reimagining industry futures, an EY survey of attitudes across multiple enterprises worldwide, a little over half of enterprises at 52% are more interested in 5G now compared to before the pandemic. This shows that 5G is not just a new connectivity standard, it is also expected to change how objects and devices interact as well as how machine learning and data analytics can be used to improve logistics, identify supply chain bottlenecks and reshape customer interaction.As many as three out of four enterprises in the survey believe that 5G will be integrated into their business processes over the next five years, but for this to happen, tech companies need to prepare adoption roadmaps and use cases to stay ahead.EMBRACING OPPORTUNITIES FROM VOLATILITY AND RISKAlthough the world is still experiencing uncertainty from geopolitical issues and the pandemic, these risks reshape the opportunities that can help tech companies develop new markets and increase their competitiveness. Regrouping organizations around security and trust to increase stakeholder commitment as well as organizational transformation and the adoption of new business models can help drive market relevance and agility. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

07 March 2022

Rossana A. Fajardo

Opportunities for tech companies to seize in 2022 (First Part)

(First of two parts)With the world now able to control the ongoing pandemic better thanks to vaccines and other health and safety measures, the technology sector will more likely continue to grow as the digitalization of the economy further accelerates. In line with this, EY shares its annual report, Value Realized, ranking the top ten opportunities that technology companies should seize this year. Companies who act on these may find opportunities for growth while navigating volatility and risks in 2022.In the first part of this article, we discuss the first five opportunities: attracting and retaining more motivated people in a hybrid workplace, strengthening your growth profile with M&A, securing business continuity by de-risking supply chains, embedding security in new activity designs, and leading in environmental, social, and governance (ESG) to strengthen stakeholder relations.ATTRACT, RETAIN MORE MOTIVATED PEOPLE IN A HYBRID WORKPLACEAlthough finding capable talent has always been a challenge and major concern in the tech sector, the pandemic only increased the urgency in addressing this issue. Companies who are investing in growth will need more salespeople to strengthen their salesforce and more engineers in their research centers.Most tech companies are discussing a partial and staged return to the physical office while trying to balance the preferences and needs of a modern workforce and manage the costs involved. A recent EY survey also cites that nine out of 10 employees demand flexibility in when and where they work and are prepared to resign if this demand isn’t met.However, although employees have mastered working from home, the hybrid model will pose new challenges related to motivating employees and work culture. Companies will need to be able to optimize flexibility, rewards and experience to present a package that can attract the best talent as well as retain them.STRENGTHEN GROWTH PROFILE WITH M&AA little over half of the technology executives surveyed in the 23rd EY Global Capital Confidence Barometer acknowledge that organic growth can be difficult in the near term, with 51% saying that they intend to pursue mergers and acquisitions (M&A) in 2022 to sustain growth. The deal market is expected to stay healthy despite increased financial uncertainty and regulatory scrutiny.Acquisitions will be able to reignite growth through the addition of technologies, distribution channels, business solutions and end markets to a company portfolio. Moreover, divestments can help companies veer away from solutions that require different capabilities from what the company possesses, as well as from market segments with slower growth. The right M&A strategy will result in a better growth profile, while divesting of non-core businesses will help reshape portfolios out of declining businesses. SECURE BUSINESS CONTINUITY BY DE-RISKING SUPPLY CHAINSSupply chains came under massive pressure from geopolitical events and market volatility, with tech companies dealing with two major bottlenecks in the past months: the availability of components and logistics. Though it can be argued that these issues are temporary and have also hit the entire industry, some have managed them better than others.Tech companies will need to carefully assess and de-risk their supply chains, all the way from the vendors of their vendors down to the customers of their customers. There is no one size solution for this; different risk profiles in the supply chain will require different policies surrounding sourcing contracts and inventories. Issues in logistics can also lead to changes in preferred manufacturing and distribution footprints, but real-time visibility can help identify bottlenecks at an early stage. Furthermore, new technologies such as digital twins, which are virtual representations that serve as real-time digital counterparts of physical objects or processes, and 3D printing could also reduce the degree of disruption.EMBED SECURITY IN NEW ACTIVITY DESIGNSData security and integrity have never been more important than during the pandemic, with more flexible ways of working introducing more sources of risk. A large number of companies had to change their IT structures in rapid response to the pandemic but were not able to sufficiently consider cybersecurity in advance. This resulted in more disruptive attacks and led to increased concerns with regulation compliance.In order to turn data integrity into a business driver and avoid major disruptions, tech companies must embed security and privacy in the design of any new activities. This includes the cyber team in the startup phase of new projects, realigning business objectives with data security, and reviewing the necessary talent profiles to do so.LEAD IN ESG TO STRENGTHEN STAKEHOLDER RELATIONSWhile tech companies have traditionally focused on sustainability, stakeholders and consumers want more, with rising expectations to drive positive environmental and social outcomes. Employees want to make a meaningful impact, and investors demand sustainable investments. Moreover, enterprise customers look to the technology sector to implement new technologies that can help drive sustainable outcomes of their own.This is why tech companies should lead by example, drawing up long-term value propositions and communicating them with their stakeholders. This includes ESG commitments supported by transparency, top-down organizational changes, and reporting on relevant key performance indicator (KPIs).In the second part of this article, we discuss the other five opportunities tech companies can seize in 2022: transforming the business for consumption-based sales, realigning tax organizations with digital business models, streamlining operations and increasing agility, cultivating customer trust to drive digital engagement, and preparing for the shift to 5G. 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.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

March 2022

Corporate dissolution made easy

New VAT zero-rating rules and requirements under CREATE

Opportunities for tech companies to seize in 2022 (Second Part)

Opportunities for tech companies to seize in 2022 (First Part)

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