Suits the C-Suite

12 February 2024

Aris C. Malantic and Julius Ivan L. Bautista

Transforming bold vision into a successful IPO journey (Second Part)

In this period of economic recovery, entrepreneurs are increasingly looking at initial public offerings (IPOs) as an avenue to raise additional funds. But in the face of economic and geopolitical headwinds, how can CEOs turn their bold vision into a successful IPO? In the first part of this article, we discussed how a company can start its IPO journey and the key factors to consider in order to succeed. However, now that we know what characterizes a successful IPO journey, CEOs need to ask if they are ready to deliver. Here, we discuss how the right IPO strategy and preparation can contribute to a successful IPO. IPO STRATEGYAn IPO strategy starts with an equity story that incorporates a well-built corporate strategy and a fine-tuned business plan. A corporate strategy focuses on the company’s long-term goals, an optimal group structure, and growth objectives, while a business plan defines how the company can compete within the market and seize new opportunities. With a well-polished IPO strategy, IPO aspirants can better evaluate their strategic options by deciding on potential multi-track approaches to listing and the potential listing venues, coordinating with external advisors and identifying the right capital market that will resonate with the company’s business sentiments and growth ambitions. A well-defined IPO strategy should be anchored on a holistic end-to-end view of the key milestones in an entity’s IPO journey — from strategic planning to IPO execution and after-market performance. This strategy is typically supported by a health check to identify any potential gaps within the company’s structures, finance function, environmental, social and governance (ESG) agenda, systems and controls, and investor relations. STRUCTURESOrganizational structures bind the teams working together towards a common goal and demarcate functions between them. Given an IPO’s transformational nature, aspirants should consider revisiting and reshaping their current structures where needed to support the efficient functioning of the organization as a public company. This might also entail re-evaluating the group structure, governance, ownership and corporate structure. IPO aspirants should reevaluate the group structure if the potential issuer or listing vehicle is part of a group. The group should define which company will be the potential issuer or listing vehicle, the country of registration, and its legal form. They must also assess which group structure is best positioned for listing through a transfer pricing analysis of current and future related party transactions. Governance structure reevaluation can start by assessing whether there is a defined set of regulations and documented policies and procedures, and whether these align with governance reporting requirements and provide adequate transparency and accountability to current stakeholders. Since company ownership will be opened to the public, current shareholders should assess the ownership structure, the optimal proportion the public will own, what types of investors they are planning to attract, and the corporate image they want to project since these potential investors can influence the strategy and direction of the company post-IPO. Corporate structure should also be reassessed to let potential investors identify each business unit or department’s level of responsibility and accountability. A well-defined corporate structure separates management and ownership roles. Internally, the structure should also allow CEOs to articulate the business plan to the group organization, how the IPO affects employees, and how business operations will be adjusted prior to and upon realization of the IPO transaction. FINANCIALIPO aspirants must look at the finance organization through the lens of public markets even before they go public. Depending on the listing venue, changes to generally accepted accounting and financial reporting principles currently being applied may be required in preparing the financial statements. Companies need to check if the current finance infrastructure and processes can produce timely financial reports, as these are vital in building investor trust and confidence. As regulations on financial reporting vary across jurisdictions, a well-functioning financial statements close process that is supported by a capable mix of resources with the appropriate skills are necessary in responding to expanded reporting requirements. Potential public and institutional investors will also consider the company’s external auditor. Appointing a credible external auditor will help improve investor confidence in the financial reports of the company. External advisers can provide objective viewpoints that can help in addressing any financial reporting gaps that the company may have overlooked in previous periods to optimize the finance function. ESG AGENDAIn the Philippines, the ESG agenda is emerging as an important element for stakeholders in the IPO stage. Investors have started to consider ESG factors when making investment decisions, along with a company’s financial performance, resilience, and ability to sustain operations during adverse situations. Public companies are required to disclose their sustainability efforts as well as include their plans to further improve performance and achieve their ESG targets. Companies can ensure compliance with sustainability principles by engaging advisers with an ESG background. Regulators also continue to develop and standardize climate disclosures required of public companies, such as the Securities and Exchange Commission’s (SEC) Revised Sustainability Reporting Guidelines and the Sustainability Reporting Form, to keep up with global developments around sustainability reporting. SYSTEMS AND CONTROLSIPO aspirants should revisit their enterprise-wide systems and controls to identify potential weaknesses and opportunities for improvement. Continuous process improvement should be implemented to ensure that the systems and controls are effective in capturing and mitigating potential risks, especially in a growing business operations setting. Entity-level controls, information technology (IT) general controls, and business processes controls should be documented properly to ensure they can support the requirements of a public company. An effective internal audit function should be in place, performing as intended in the organization’s overall control framework. Internal audits can focus on areas such as the effectiveness of the company’s internal controls, corporate governance, and accounting processes. Internal audits also help the company in its continuous process improvement efforts. INVESTOR RELATIONS AND COMPLIANCE FUNCTIONSA company’s investor relations function facilitates two-way communication between the company’s corporate management and its investors. It also enables the integration between finance, communication, marketing and legal functions. Critical information provided by the investor relations function includes press releases, earnings reports, and analyst briefings which contribute to a transparent relationship between the company and its stakeholders. They help ensure that shareholder concerns and interests are also communicated to management and the board. Further, the investor relations function cohesively monitors the company’s stock price, performance, competitive position, and public image. An investor relations officer normally reports to the company’s Chief Financial Officer (CFO) or Treasurer who has the primary responsibility over investor relations. Meanwhile, the compliance function becomes even more relevant due to the additional regulatory requirements for a publicly listed company. These include regular reporting and ad hoc disclosures such as information on mergers and acquisitions, changes in leadership, legal issues, and significant sales or purchases of assets. TIMINGAppropriately timing the market can result in a win-win situation by providing optimal valuation and IPO proceeds for the company, and investment returns for IPO investors. IPO aspirants must be able to communicate a realistic timeline to the entire IPO team and set milestones tracked by a Project Steering Committee and a Project Management Office (PMO). The PMO ensures that the IPO project has enough resources throughout the IPO process, monitoring the strength and buoyancy of capital markets, current economic indicators, and company performance. Some companies decided to postpone or withdraw IPO plans due to market volatility, after-market performance of previous IPOs, and geopolitical uncertainties. In such cases, contingency plans are necessary to achieve the right timing — especially when the market reaches its ideal state for IPO listing. The PMO should be able to assess when to execute these contingency plans and consider the multi-track approach designed during the evaluation of the company’s IPO strategy. IPO TRANSFORMATIONStarting the IPO journey does not mean immediately closing any gaps found during preparation. Instead, it presents the organization with an opportunity to identify them, prioritize which gaps require immediate action, and plan how to close gaps which can affect the company’s valuation before and post-IPO. Our accumulated experience in supporting IPO aspirants tells us that IPO journey must be approached as a structured, managed transformation of the people, processes, systems and culture of an organization. Through careful planning and consideration of these factors, companies will be better equipped to transform their bold vision for growth into a successful IPO. 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. Aris C. Malantic is a partner and the Financial Accounting Advisory Services (FAAS) leader and Julius Ivan L. Bautista is a FAAS associate director of SGV & Co.

05 February 2024

Aris C. Malantic and Jerwin C. Esquibel

Transforming bold vision into a successful IPO journey (First Part)

First of two parts As the economy continues to recover, many entrepreneurs are contemplating how to raise funds through an initial public offering (IPO) and level up their game. Chief executive officers (CEOs) envision growth and set new goals such as investing for innovation, increasing brand awareness, and improving their companies’ credit worthiness. In the face of current economic and geopolitical headwinds, rather than asking whether the markets are ready for IPO aspirants, the key question for CEOs pursuing their bold vision is, “What can we do to achieve a successful IPO journey?” The IPO journey is more than just a financing event — it should be approached as a transformational process. Because this has to be a structured and managed transformation of the people, processes, systems, and culture of an organization, it is crucial for CEOs to perform an IPO readiness assessment and consider the following critical success factors to transform their bold vision into a successful IPO journey. EVALUATING STRATEGIC OPTIONSEven if a company assesses that the current environment is not ideal for fundraising, it can serve as an opportunity to plan and prepare for an IPO or any other strategic transaction. While waiting for significant markets and geopolitical uncertainties to settle, executives can embark upon their IPO journey. Planning for an IPO involves a holistic discussion about the strategic options offered by the capital market. An IPO aspirant needs to design a multi-track approach that covers the options for listing (either direct or dual and secondary listing) as well as other financing methods such as private capital, debt, or a trade sale. Considering an array of exit and funding alternatives in an IPO readiness assessment is critical to achieve flexibility in the timing and pricing of alternatives and to exploit narrow IPO windows. EARLY PREPARATION IS KEYIPO aspirants should begin the IPO readiness process early to allow the pre-listing company to act and operate like a public company at least a year before the IPO. The preparation can start with a comprehensive IPO readiness assessment as a first step, ideally over a 12- to 24-month timeline. The IPO readiness assessment will serve as a diagnostic phase so that CEOs can identify opportunities for the transformation of certain key focus areas. The IPO readiness process also includes building a strong IPO team with members from management, the board, and external advisors, among others. External advisors can be composed of bankers, lawyers, auditors, and investor relations advisors. Assembling a powerful team begins from top management. Institutional investors will look to the CEO, who is mainly responsible for articulating and executing the company’s vision and business strategy, while the chief financial officer (CFO) will likely be focused on investor relations in a public company. A quality management team should also ideally include executives who have experience in IPOs and managing public companies. TAKING ON AN INVESTOR’S PERSPECTIVEA successful IPO can be characterized by a compelling equity story that captures the appetite of institutional investors. Hence, it is vital for CEOs to approach their IPO journey from an institutional investor’s perspective. Institutional investors mainly influence the movement in stock prices and include mutual funds, hedge funds, banks, insurance companies, pension funds, larger corporate issuers and other corporate finance intermediaries. IPO aspirants need to recognize the need for enhanced corporate governance, recruiting qualified non-executive board members, improving internal controls, and forming a qualified audit committee. This also includes the need to fine-tune internal business operations through working capital management, proactively addressing regulatory risks and rationalizing the business structure. Given the increased stakeholder demand for sustainability, IPO candidates must also be able to clearly articulate and demonstrate an embedded environmental, social and governance (ESG) strategy and culture, from climate change mitigation initiatives to promoting board and management diversity. STRONG PERFORMANCE TRACK RECORDInvestors usually base their IPO investment decisions on financial factors, especially debt to equity ratios, revenues, return on equity (RoE), profitability and earnings before interest, taxes, depreciation, and amortization (EBITDA). This also includes the capability of IPO candidates to comply with new financial and sustainability reporting standards and securities regulations. IPO investment decisions may also be based on non-financial factors, including the quality of management, corporate strategy and execution, brand strength and operational efficiency, and corporate governance. IPO candidates should also focus on profitability and cash flows or articulate a clear path to profitability. They must craft a compelling equity story backed by a strong track record of growth that sets their company apart from their peers while maximizing value for their stakeholders. TRANSFORMATIONAL IPO JOURNEYAlthough an IPO is a key turning point in the life of a company, market leaders should not treat an IPO as a one-time financial transaction — they must approach it as one defining step in a complex transformational journey from a private to a public company. While IPO aspirants need to be cautious given the challenging capital market environment, CEOs must focus on preparing an equity story that addresses the concerns of institutional investors. This transformational process begins with IPO readiness and ample internal preparation, aiming towards a successful IPO journey even with the fleeting market window of opportunity. The second part of this article will discuss additional elements that can contribute to the success of an IPO journey. 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. Aris C. Malantic is a partner and the Financial Accounting Advisory Services (FAAS) leader, and Jerwin C. Esquibel is a senior director under FAAS of SGV & Co.

29 January 2024

Anna Maria Rubi B. Diaz and Sheena Dyan C. Suarez

How agile corporate reporting builds confidence

As businesses grow, finance leaders face increasing stakeholder demand for timely and accurate financial and non-financial corporate reporting. Moreover, organizations must consider how they can keep up with current and future demands, and how they can provide accurate stakeholder reports in a timely manner. CORPORATE REPORTING AND STAKEHOLDER DEMANDSCorporate reporting provides a comprehensive picture of an organization’s financial and non-financial information, which can assist stakeholders and other relevant users in their decision-making. Furthermore, finance leaders can use corporate reporting to communicate the value their businesses create for people, society, and the environment. There is also increasing stakeholder demand for non-financial information, such as sustainability reports that highlight a company’s environmental, social, and governance (ESG) commitments. This development continually influences businesses, encouraging more responsible and sustainable practices. Moreover, evolving accounting principles and other regulatory requirements are continually obliging organizations to report more reliable and relevant information about their performances, positions and their level of compliance. The increasing stakeholder demands trigger the need for finance leaders to revisit their transformation agenda on their finance functions. According to the 2023 Global EY DNA of the CFO Report, 16% of finance leaders believe their finance function delivers best-in-class performance, with only 14% of respondents planning to pursue a bold transformation agenda over the next three years. The small number may imply that there is a hesitancy to adopt new and inventive ways of working. COMMON PITFALLSThrough the years, finance leaders have faced the challenge of meeting internal and external stakeholder demands to comply with the financial reporting standards and regulatory guidelines. As such, some corporate reporting policies, processes, and controls have not yet been transformed to align with organizational needs and demands, resulting in a lack of confidence among stakeholders. There are some common pitfalls to watch out for in corporate reporting: Substantial reliance on manual processes. Even though some organizations have Enterprise Resource Planning (ERP) systems, there are still some corporate reporting processes being done manually. In the 2021 EY 7th Global Corporate Reporting Survey, 56% of finance leaders said that “there has been resistance to some of the changes we have had to introduce.” In addition, 51% said “finance team members have sometimes failed to adopt new processes, reverting to traditional ways of doing things.” These entities normally have siloed systems that rely on spreadsheets to reconcile corporate reports from different systems. Spreadsheets are prone to human error, making them unsustainable since processes may become more complex as entities evolve. Policies are not aligned with regulatory reporting requirements and business demands. Policies are vital to corporate reporting controls. If they are not aligned with regulatory requirements and business demands, they can reduce efficiency and effectiveness in decision-making. Recently, there have been significant changes with regulatory reporting requirements, such as financial reporting standards. Despite these changes, some organizations have not yet updated their policies, which may lead to the inappropriate and inconsistent application of procedures and processes. Consequently, this misalignment may result in fines, litigations, or other consequences to an organization if this non-compliance has a material effect on its corporate reporting. Outdated employee skillsets. Due to today’s fast-paced technological innovations, regulatory changes, and consumer demands, some employees may need to upskill. Moreover, limited skill development may lead to poor performance and outdated corporate reports. According to the 2023 EY Global DNA of the CFO survey, 19% of the finance leaders surveyed said that talent together with risk are the least priorities for finance transformation over the next three years. BUILDING CONFIDENCEAddressing these pitfalls can help organizations achieve agile corporate reporting. To do so, finance leaders need to integrate their processes, policies, and people. Additionally, they need to focus on the following areas: Invest in technology to digitalize processes. The 2023 EY Global DNA of the CFO survey shares that 44% and 36% of the finance leaders are now prioritizing technology transformation and advanced analytics, respectively. Finance leaders need to leverage investments in technology and digitalization to standardize and simplify the corporate reporting process. They must also explore new ways of working where data is integral to unlocking the value of business portfolios. They need to implement integrated systems to provide accurate and real-time reports, leveraging automation from technology. These solutions will enable faster and better decision-making, shifting the focus of finance from back-office bookkeeping to being a trusted business advisor within the organization. Align policies with regulatory reporting requirements and business demands. In aligning policies, finance leaders need to ask themselves whether their organizations have all the necessary policies in place. They also need to determine how their policies compare to those of their industry peers, and if their internal users and customers are satisfied with the policies. Lastly, after determining if the policies are user-friendly, they need to identify the key policy gaps related to regulatory requirements and business demands. Once policies are aligned and updated, finance leaders must ensure their organizations also have a “policy on policies.” This overarching guidance will help define when to create, update, or decommission policies, including approval requirements for these changes. Equip next generation leaders with the right skills and tools. Finance leaders can assess the skill gaps of their existing employees, encourage professional development, and reconcile both to align with business requirements. Any updated policies and processes should be cascaded to employees, especially those that require continuous training and education. These steps will help organizations ensure that the talent assigned to their tasks are aligned with current business and stakeholder demands. THE FUTURE OF CORPORATE REPORTINGFinance leaders need to transform their corporate reporting agenda beyond the numbers, starting with a cultural change on their mindset and behavior. This journey can serve as a challenge and an opportunity to create long-term value for the whole enterprise, improve current ways of working and develop next-generation leaders. When finance leaders consider these, they can rebuild confidence and drive value for the organization today and tomorrow. 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. Anna Maria Rubi B. Diaz is an assurance partner under Financial Accounting Advisory Services (FAAS) and Sheena Dyan C. Suarez is a FAAS director of SGV & Co.

22 January 2024

Benjamin N. Villacorte

Strategies to achieve a sustainable future

The government and private market sustainability players fulfill crucial roles in their transition to a sustainable future. Their capacity to identify environmental, social and governance (ESG) material issues, along with their means for innovation, enables them to tackle environmental challenges globally and locally. The key challenge is balancing the protection of the planet, people, and profits as market players conduct their business operations.This is the second article in a two-part series that will discuss insights from COP28. In this part, we underscored the urgent need for a real and meaningful transition. Increased investor demand and regulatory pressure echo this sentiment, amplified by governments’ collective commitment at COP28 for science-based actions. This second part explores how to move profoundly from a lofty ambition — that is, halving emissions by 2030 and achieving net zero down the line — to progressive action.Ernst & Young’s (EY) keynote session at COP28, “Building Confidence in a Sustainable Future,” featured three panel discussions that delved into three concrete strategies for entities to employ in their efforts to arrest climate change and achieve a sustainable future.Strategy #1: Building investor confidence through regulation and sustainable financeRegulations act as a catalyst for broader sustainability transformation, helping economies allocate capital more efficiently. The creation of the International Sustainability Standards Board (ISSB) disclosure standards, for instance, empowers investors to make better economic and investment decisions by incorporating comprehensive sustainability information.Organizations are encouraged to identify, disclose, and later address material information or the most significant sustainability-related risks and opportunities that could influence such decisions. Businesses in carbon intensive sectors are pressed to disclose their decarbonization plans and progress. These companies are among the top contributors of greenhouse gas emissions, the primary cause of climate change. They, including their assets and supply chains, are also the most susceptible to climate impact. In light of the COP28 agreement to put an end to oil, gas, and coal use in energy systems, this group will continue to face mounting pressure from regulators and investors, including financial institutions, to ramp up their adoption of decarbonization strategies.A few other industries identified with the most exposure to transition risk are real estate, mining, agriculture, and telecommunications.Meanwhile, financial institutions (FIs) also play an integral role in advancing ESG outcomes through sustainable financing. However, it must go beyond supporting customers and communities in achieving their goals. Banks and institutional investors are urged to lead by example, engaging with their suppliers and corporate clients at scale to facilitate effective transition plans. Additionally, banks are perceived as pivotal partners for small- and medium-sized businesses, offering not just financial resources but also essential guidance in the latter’s transition towards more sustainable practices.In the Philippines, there is a pressing need for local businesses to further enhance their reporting practices despite noticeable improvements on two metrics: (1) the number of disclosures made per the recommendations by the Task Force on Climate-Related Financial Disclosures or TCFD (coverage); and (2) the extent and detail of each disclosure (quality).Publicly-listed companies (PLCs) in particular should brace themselves for an upgrade. After deferring implementation late last year, the Securities and Exchange Commission (SEC) notified PLCs that the Revised Sustainability Reporting Guidelines and the SEC Sustainability Reporting Form (SuRe Form) are slated for release in 2024.In keeping with developments on international reporting standards, the SEC is looking at mandating compliance for data covering the year 2024, with reporting due the following year (2025). Regarding sustainability reports for 2023 or those due in 2024, PLCs are advised to continue adhering to the provisions set out in SEC Memorandum Circular No. 4, series of 2019, also known as the “Sustainability Reporting Guidelines for Publicly-Listed Companies.”Since the government is aligning to global sustainability standards and frameworks, companies may gradually start transitioning themselves to the expectations and requirements of investors. They can partner with FIs who support sustainable finance and invest in companies who are advancing sustainability in the market.Strategy #2: Building business confidence through data and talentYou can only improve what you can measure. Harnessing in-depth, reliable sustainability data is fundamental for businesses to make informed decisions. This process involves consistently gathering data into a cohesive system and rigorously evaluating sources, quality, and completeness. Accurate and ample data enable companies to analyze and generate insights, and be clear about their sustainability objectives. At the same time, it allows them to acknowledge areas of unfulfilled goals openly. Ultimately, clarity and transparency in managing sustainability data are critical to boosting their credibility.On a related note, the increase in sustainability reporting, highlighted by the fifth EY Climate Risk Barometer, further emphasizes the need for skilled professionals. These experts are instrumental in weaving standardized reporting frameworks into the fabric of business processes, ensuring that sustainability is not just a compliance metric but a core component of corporate strategy. Accountants, for example, provide expertise in managing and interpreting data that directly influences strategic decisions, aligning financial practices with sustainability objectives.Moreover, just as financial statements are audited, enlisting independent assurance over sustainability reporting shouldn’t be an afterthought. Obtaining assurance empowers businesses to achieve external accreditation or support management’s confidence that the necessary processes and controls are in place. This, in turn, improves stakeholder trust and confidence in an organization’s financial and non-financial reporting.Strategy #3: Collaborative action from the public and private sectorsBusinesses are key drivers in climate action and are central to the success of the COP28 agreement. Their role comes with the recognition that real impact requires integrating climate data and its ramifications into the core business strategy at the Board level. This transcends mere compliance; it’s about taking responsibility by embedding climate awareness across operations, human resources, supply chains, and technology.However, holding governments and country leaders accountable is just as important. Business and industry leaders must challenge the government, demand concrete regulation, and steer the policy compass. Collaboration between the public and private sectors is key to supporting a faster and safer transition to more sustainable operations. It can also drive nationwide discussions or negotiations, ensuring inclusive actions from stakeholders involved.Time is running out. Proactive strategies, razor-sharp policies, and targeted investments aimed at slashing emissions by 2030 are non-negotiable. This journey demands relentless scrutiny, unwavering collaboration, and enduring actions that deliver a triple win for society, policy, and business.CHARTING A SUSTAINABLE COURSE FOR ALL BUSINESSESNow is a critical moment for public and private market players to lead the charge toward sustainability. This era calls for a shift from mere regulatory compliance to completely reimagining business strategies and operations.Specifically, Philippine PLCs are tasked with adapting to evolving reporting standards, which involves harnessing precise sustainability data and engaging adept professionals to provide additional confidence. The actions they take today will shape the corporate landscape of tomorrow.Embracing sustainability positions these companies as leaders and innovators in a global economy increasingly focused on responsible business practices. This is a strategic imperative for enduring success, blending economic growth with a commitment to the planet and its people. 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.Benjamin N. Villacorte is a Climate Change and Sustainability Services partner of SGV & Co. and the current chair of the Philippine Sustainability Reporting Committee (PSRC).

15 January 2024

Benjamin N. Villacorte

How climate risk reporting can turn ambition into action

At the 2023 United Nations Climate Change Conference (COP28), countries agreed to take collective action to move away from fossil fuels. This first-ever consensus aims to put an end to oil, gas, and coal use in energy systems and sets ambitious targets to triple renewable energy and double energy efficiency by 2030 — keeping the 1.5°C Paris Agreement goal within reach.COP28’s bold aspirations toward decarbonization highlight the urgent need for the climate disclosure landscape to evolve rapidly. Climate reporting plays a crucial role in helping us understand whether the whole economy and the sectors and companies within it are moving towards true transition.This is the first article in a two-part series that will discuss insights from COP28. In this first part, we will discuss insights from the fifth EY Climate Risk Barometer covering current trends in global climate risk reporting, uneven progress within markets and sectors, the adoption of mandatory climate disclosure requirements, and core elements that will shape the reporting landscape.TRENDS IN CLIMATE RISK REPORTINGThe fifth EY Climate Risk Barometer reveals that companies are making progress in climate-related disclosures but fall short of carbon ambitions. This study analyzed 1,500 companies in 51 countries based on two metrics: the number of disclosures made per the recommendations by the Task Force on Climate-Related Financial Disclosures or TCFD (coverage) and the extent and detail of each disclosure (quality).Climate transparency is clearly on the rise, with the quality score jumping from 44% in 2022 to 50% in 2023. This trend suggests that companies are putting in the time and effort to enhance the information shared with stakeholders. However, the 50% score reflects minimal advances, considering the TCFD has been around for eight years, which some may say has already been ample time for companies to fine-tune their reporting.Alongside the increase in quality, disclosure coverage saw a steep year-on-year increase. Company scores soared from 84% to 90%. Yet, pressing concerns remain, particularly about the granularity and quality of disclosures and the effectiveness of the regulatory environment in driving genuine action beyond reporting.Meanwhile, the average score for governance disclosure quality climbed from 46% to 52%, partly due to regulatory pressure — but this is still low. Transition planning remains patchy, with only half of the companies (53%) presenting clear roadmaps. Furthermore, companies continue to focus more on risk than opportunity analysis (77% vs. 68%) despite a slight improvement in the latter.UNEVEN PROGRESS WITHIN MARKETS AND SECTORSFrom a market perspective, Japan, South Korea, the Americas, and most of Europe are leading in disclosure quality. This is unsurprising as these countries and regions can draw on several years of mandatory TCFD disclosures.On the other hand, while the Middle East and Southeast Asia have made strides in disclosure performance compared to last year, these regions are still lagging. To accelerate progress, governments can adopt mandatory climate disclosure requirements. This can potentially change the currently low scores to a significant extent.Sector-wise, companies with the most exposure to transition risk dominated disclosure scores again. Energy leads in both quality and coverage, but its quality performance is greatly matched by financial institutions (e.g., credit bureaus, exchanges, and financial services providers) with a 46% to 54% year-on-year leap. In fact, this year saw changes in quality across the board, with the biggest ones in information technology (IT), real estate, mining, and agriculture.Companies across all sectors face heightened demand for detailed disclosures of their climate-related risks alongside financial implications. This pressure comes from government regulators, investors, and the public. As such, the shift in scores is linked to stakeholders, putting pressure on businesses heavily reliant on fossil fuels to lay down their decarbonization plans and start making progress. In the case of financial institutions, investors are urging them to reduce their brown lending.This is good pressure, however, as climate risk management strategies must not be separate from corporate reporting. Businesses must view climate disclosures as a comprehensive, forward-looking effort to understand the anticipated financial impact. Therefore, it should be assessed in the context of the company’s value chain and wider market dynamics.IFRS S1 AND S2It is worth noting that many companies are embracing comprehensive sustainability reporting frameworks like the Global Reporting Initiative (GRI) Standards alongside the International Sustainability Standards Board (ISSB) disclosure requirements — the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These standards unveil material climate risks and opportunities, allowing investors, lenders, and creditors to assess companies’ governance, strategy, environmental, and societal impacts.The ISSB offers “transition reliefs” to help companies ease into new sustainability reporting standards. In the first year, companies can prioritize and report only climate-related information and publish disclosures together with their half-year report. They can also hold off disclosing their Scope 3 greenhouse gas emissions, a report that uncovers climate exposure within their value chains.In this country, the Board of Accountancy (BoA) is laying the groundwork for the adoption of the ISSB disclosure standards with Resolution No. 44. The date of adoption is being determined by the BoA, the Securities and Exchange Commission (SEC), and Financial and Sustainability Reporting Standards Council (FSRSC) — previously known as the Financial Reporting Standards Council. To ensure smooth implementation and evaluation, the FSRSC established the Philippine Sustainability Reporting Committee (PSRC), which is set to issue local interpretation and guidance for IFRS S1 and S2.3 ELEMENTS AFFECTING FUTURE CLIMATE DISCLOSURESIn addition to companies’ disclosure performance against TCFD recommendations, this year’s research also included three core elements that will shape the reporting landscape for the next few years. These are:ISSB preparedness. This refers to the readiness to meet IFRS S2 requirements, marked by changes in 1) Governance: adopting the increased ISSB disclosure requirement and disclosing whether organizations have the necessary skills at the board level to oversee climate-related strategies; 2) Strategy: deepening climate disclosures, both by analyzing detailed scenarios for future impacts and setting value chain emission targets alongside overall emission reduction goals; and 3) Metrics and targets: moving towards disclosing businesses’ most significant Scope 3 emissions.Transition planning. This refers to the move to include concrete transition plans — how companies will adapt and grow as the global economy transitions to net zero — in their business strategy and disclose the details to stakeholders.Climate risk reflection in financial statements. This refers to the integration of climate risks into financial statements, quantifying potential losses from stranded assets and valuing assets based on their resilience to climate change.FROM A COMPLIANCE BURDEN TO A STRATEGIC ASSETIt’s time to view climate risk reporting as a strategic resource instead of a compliance burden. Instead of using frameworks solely for disclosure, forward-thinking organizations analyze how climate impacts their business strategy. High-risk businesses, such as those in energy and IT, can evaluate risk management and financial impact using these insights to chart resilient growth strategies and identify key vulnerabilities.By establishing robust data governance structures, they turn climate data into a potent tool that will help them thrive in the face of climate challenges. When companies embrace the spirit of reporting frameworks to drive underlying business changes, they realize financial, customer, employee, societal, and planetary value from the effort.The next article in this series will discuss strategies from the Ernst & Young (EY) keynote session at COP28. Philippine companies should consider these urgently to move from setting ambitious goals to achieving tangible results that will shape the country’s reporting landscape for the next few years. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a climate change and sustainability services partner of SGV & Co. and the chairman of the Philippine Sustainability Reporting Committee.

08 January 2024

Wilson P. Tan

Risk and resilience in 2024

As we start a new year while still grappling with the challenges left behind by the pandemic, organizations are more cognizant of the increasing number of risks in the global market. The range of risks organizations face is broad, intricate, and interconnected, from unpredictable black swan events to more frequent and predictable gray rhino events.Black swan occurrences, which are highly unpredictable, rare, and uncontrollable, could potentially have a catastrophic impact. Gray rhinos, on the other hand, are common, expected, and often have a large visible impact. It is crucial for boards to concentrate on the latter and integrate them more proactively into their overall risk management strategy.Beyond the typical risks related to finance, cybersecurity, reputation, regulation, and competition, firms are increasingly pressured to handle risks associated with climate change, sustainability, supply chains, and geopolitics. This has led to a greater emphasis on governance and increased pressure on boards.The EY Global Board Risk Survey 2023, which polled 500 board directors worldwide from companies earning over $1 billion, revealed that less than a quarter of the respondents are deemed highly resilient.Highly resilient boards are self-assured and handle unexpected high-impact situations more effectively. They display high effectiveness in aligning risk and business strategy. These boards are neither complacent nor unaware of potential gaps in their preparedness and the evolving risk landscape. By concentrating on certain key areas, boards can support their organizations in prioritizing resilience to more effectively navigate the risk landscape.PRIORITIZING FUTURE AND SUBSTANTIAL RISKSInstead of merely bouncing back in recovery, enterprise resilience is more about adapting to risks. This emphasizes the importance of foreseeing substantial and emerging threats, preparing for them, and adjusting accordingly. The board and management need to effectively perceive beyond immediate and apparent threats while allocating ample time to discuss market changes and trends.Employing technologies such as Artificial Intelligence (AI) and advanced analytics to predict the possibility of black swan and gray rhino events can be beneficial. Implementing quantitative analysis in various situations can improve the board and management’s understanding of the company’s total risk exposure. It can also enhance their comprehension of the viability of the current business strategy and model in the face of emerging risks and whether any adjustments are necessary.PERSONNEL AND CORPORATE CULTURECompanies face ongoing challenges, such as talent scarcity, continuous workforce transformation, and managing the diverse needs of a multigenerational workforce. The demand for flexible work arrangements and the growing challenge of aligning culture are becoming increasingly central to the personnel risks that organizations encounter. With rapid technological changes, there is also a need to enable workforces with skills for the future.The board has the responsibility of supporting management to pinpoint and address the organization’s critical talent needs. They should aim to establish an organization that can adapt to fluctuating expectations regarding culture, skillsets, and diversity, equality, and inclusion. By enhancing their knowledge, adaptability, and supervision, the board can assist management in fostering a people-centric culture. It can also prompt management to cultivate leaders who can embody and sustain that culture.ADDRESSING CLIMATE CHANGEThe undeniable link between environmental sustainability and corporate resilience means that companies face increased expectations from various stakeholders, including investors. These stakeholders are eager to learn about the company’s environmental, social, and governance (ESG) performance, as it compares to short-term profits and long-term investments in sustainability. Simultaneously, authorities are pushing for transparency in sustainability disclosures, while new standards like the IFRS S1 and IFRS S2 from the International Sustainability Standards Board are reducing ambiguity in sustainability reports.However, this presents a golden opportunity for companies to showcase their progress in sustainability performance beyond mere compliance. Highly resilient boards are more conscious of significant sustainability issues and feel more at ease discussing them. This usually occurs when responsibility for ESG risks is assigned, either to a leading committee or the entire board.Boards can also earn the trust of investors by monitoring stringent procedures for gathering, managing, and disclosing reliable data to meet regulatory requirements. If discussions don’t lead to tangible action, the board should question management’s plans and dedication. To effectively fulfill their roles, boards need to enhance their knowledge and expertise in sustainability.RISKS ASSOCIATED WITH EMERGING TECHNOLOGIESWith advancements in generative AI, the emergence of the metaverse, and escalating cyber threats, the landscape of digital technology continues to evolve at an accelerated pace.As enterprises increase their investments in digital technology, it is beneficial for boards and management to possess the knowledge required to identify possible technology opportunities and risks. Their responsibility is not to become tech-savvy — but to ensure their organization is balancing the pace of adopting technology with the willingness to take risks and caution. Innovation is necessary and while emerging technologies may be captivating, they alone do not form a robust business plan and must be supported by well-founded business cases — especially in times of economic uncertainty.To achieve this, the board should collaborate more closely with management, staying informed about significant investments in technology, digital transformation, and cybersecurity. The board needs to encourage management to prioritize the education and skills enhancement of their employees regarding digital matters and acknowledging that the management of digital and technological risks is not solely the responsibility of IT. Boards must gain hands-on experience with new technologies, welcoming innovation with purpose and careful understanding.At the same time, innovative technology will not be able to progress organizational growth without proper governance. Organizations will need to be forward-thinking and proactive towards innovation, treading the fine line of being agile while also being ethical.PRIORITIZING RESILIENCE TO FACE RISKSIn response to a complex and interconnected risk landscape, boards need to better support their organizations in prioritizing resilience by focusing on several key areas. They can do so by building resilience, adapting, pivoting and preparing for gray rhino events.In an increasingly complex world, organizations must be better prepared for long-term challenges. The clarity from top-level management is non-negotiable for boards, as viewing things from a distance can offer a much clearer perspective of the bigger picture. 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 country managing partner of SGV & Co.

18 December 2023

Margaux A. Advincula and Michelle C. Arias

Sustainability and tax: The future is calling

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

11 December 2023

Jules E Riego

Uncomplicating tax compliance

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

04 December 2023

Jonald R. Vergara and Donelle Jay A. Quilates

Public-private partnerships reboot

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

27 November 2023

Maria Margarita D Mallari–Acaban and Mira Ramirez-Uy

Philippines bets on BEPS

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