Last month, the Philippines adopted the 10-Point Policy Agenda on Economic Recovery to accelerate and sustain economic recovery from the COVID-19 pandemic through Executive Order (EO) No. 166. Among the principles laid down by EO No. 166 is the resumption of economic and social activity, removal of age-based restrictions on mobility, and the further expansion of public transport capacity.
Consistent with the objective of further reopening the economy, the Fiscal Incentives Review Board (FIRB), through Memorandum Circular 2022-018, denied a request by the Philippine Economic Zone Authority (PEZA) to extend the government’s authorization of remote work for Information Technology-Business Process Management (IT-BPM) companies.
It must be noted that FIRB Resolution No. 19-21, dated Aug. 2, 2021, allowed registered business enterprises (RBEs) in the IT-BPM sector to continue implementing work-from-home (WFH) arrangements without adversely affecting their fiscal incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law until March 31, 2022. Further, on Oct. 15, 2021, the FIRB issued Resolution No. 23-21, denying the request of PEZA and its enterprises to be exempted from the WFH arrangement under Resolution No. 19-21 which required that the number of employees working remotely must not exceed 90% of the total workforce.
With the denial of an extension, IT-BPM employees were required to return to work in the registered sites starting April 1, 2022. While RBEs are not barred from continuing to implement WFH arrangements past that date, they must however give up the tax incentives they are currently enjoying. The dilemma now for RBEs is which side to take — employee convenience, productivity, and morale, or revocation of tax incentives such as an income tax holiday or a 5% special corporate income tax in lieu of all taxes, such as the value-added tax (VAT), income tax, and local business tax.
Section 309 of the CREATE Law provides the condition precedent to avail of the tax incentives. It states that a qualified registered project or activity under an Investment Promotion Authority administering an economic zone or freeport must be exclusively conducted or operated within the geographical boundaries of such a zone or freeport. An RBE may also conduct or operate more than one qualified registered project or activity within the same zone or freeport under the same IPA. Any project or activity conducted or performed outside the geographical boundaries of the zone or freeport is not be entitled to the tax incentives unless such a project or activity is conducted or operated under another IPA.
Noncompliance with the conditions prescribed under FIRB Resolution Nos. 19-21 and 23-21 will result in the suspension of the income tax incentives on the revenue corresponding to the months of noncompliance. Recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 39-2022 prescribing the manner of payment of penalties relative to violations incurred by RBEs under the IT-BPM Sector on the conditions prescribed regarding WFH arrangement. The RMC requires RBEs to compute the penalty in the manner illustrated in the circular, and pay the penalty within 30 days after the due date prescribed for the payment of income tax. If the deadline is missed, administrative penalties will be imposed as if the RBE were paying the regular corporate income tax rate of 20% or 25%.
While PEZA may grant applications for hybrid work setups until Sept. 12, 2022, this measure, being temporary, does not really address the problems of the IT-BPM sector. It must be noted that based on current studies, employees prefer WFH to working on-site, so it has become more difficult for the sector to comply with the work on-site directive.
To allow employees to continue with the WFH arrangements, the IT-BPM sector is considering various options. These include (1) deregistration from PEZA, (2) downsizing of PEZA operations, (3) transfer of registration with another IPA, and (4) retaining registration to continue to avail of other incentives.
DEREGISTRATION FROM PEZAThis option is available to IT-BPM companies that see the WFH set-up as a long-term arrangement.
IT-BPM RBEs that opt to deregister with PEZA will lose their tax incentives and will be subject to the regular corporate income tax (RCIT) of 25%, VAT, and local taxes. Other factors to be considered are the need to relocate business operations to non-PEZA locations, payment of import duties and taxes on imports, payment of VAT on local purchases, and registration updates with various government agencies.
The lost tax incentives may be compensated for by reduced lease payments, utilities, and administrative expenses.
Deregistering from PEZA means that the RBE will be considered a regular corporation and will no longer be subject to mandatory administrative, compliance, and reportorial requirements under the PEZA Law.
DOWNSIZING OF PEZA OPERATIONSSome IT-BPM companies have various PEZA-registered sites. To meet the on-site percentage requirement, some RBEs are planning to downsize their PEZA sites by delisting some of their registered activities. RBEs may also consider retaining their PEZA sites where their employees can comply with the work on-site requirement and creating a new entity that will conduct the business operations of the delisted activities.
The remaining PEZA-registered sites will continue enjoying the tax incentives while the new entity will be subjected to regular tax rates.
TRANSFER OF REGISTRATION WITH ANOTHER IPAThe implementing rules and regulations (IRR) of the CREATE Law provides that qualified expansions, entirely new projects, or existing registered projects or activities prior to the effectivity of the CREATE Law, may register and avail of incentives subject to the criteria and conditions set forth in the Strategic Investment Priorities Plan (SIPP) in effect at the time of application, and performance review by the FIRB. The IRR provides that the application for a qualified expansion project or activity must be approved by the FIRB or concerned IPA, based on the level of capital invested.
Some IT-BPM companies are looking at the possibility of transferring and registering their activities from PEZA to another IPA which does not require work to be performed at specific registered sites. With the rationalization of incentives under CREATE, RBEs are now entitled to the same set of incentives. However, IPAs that do not administer ecozones or freeport zones do not require that their registered RBEs operate within a specific site. Thus, the option to transfer of registration to another IPA is available.
RETAINING REGISTRATION TO CONTINUE TO AVAIL OF OTHER INCENTIVESThe penalty for noncompliance with the on-site requirements is equivalent to paying the regular corporate income tax of 20% or 25%.
Although they stand to lose the incentives for income tax, some RBEs are considering retaining their PEZA registration to continue availing of other tax incentives such as VAT zero-rating on their local purchases of goods and services which are directly and exclusively used in the registered activity and importations and exemption from local business tax. Thus, some RBEs are considering retaining their PEZA registration and paying the penalty while availing of the VAT zero-rating incentives.
In summary, IT-BPM companies should consider the various factors involved in choosing which path to take, balancing both recovery from the economic impact of the pandemic and maintaining the welfare of their employees.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Neptali G. Maroto is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.