WFH or incentive? IT-BPM dilemma

Last month, the Philippine Executive Order (EO) No. 166 adopted a 10-point policy agenda on economic recovery to accelerate and sustain economic recovery from the Kovid-19 epidemic. Economic and social activity, removal of age-based restrictions on movement and further expansion of public transport capacity.

Consistent with the objective of reviving the economy, the Fiscal Incentives Review Board (FIRB), through Memorandum Circular 2022-018, rejected the request of the Philippine Economic Zone Authority (PEZA) to increase the government’s approval for remote work on information technology. -BPM) Company.

It is important to note that FIRB Resolution No. 19-21, dated August 2, 2021, allows registered business enterprises (RBEs) in the IT-BPM sector to continue implementing the WFH system without adversely affecting their financial year. Incentives under the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Act until March 31, 2022. Further, on October 15, 2021, FIRB issued Resolution No. 23-21, denying PEZA and its enterprises a request for exemption from the WFH arrangement under Resolution No. 19-21 which required that the number of remotely employed employees be 90% of the total workforce. It should not be more.

In addition to denying an extension, IT-BPM workers must return to work on the registered sites from April 1, 2022. Although RBEs are not barred from continuing to implement WFH measures after that date, they must waive tax incentives. They are currently enjoying. The dilemma for RBE now is which side to take – employee benefits, productivity and morale, or tax incentives such as withdrawal of income tax leave or 5% special corporate income tax instead of all taxes, such as value added tax (VAT), income tax, and local business tax. .

Section 309 of the Create Act provides preconditions for obtaining tax incentives It says that a qualified registered project or activity under an investment promotion authority operating an economic zone or freeport must be conducted or managed exclusively within the geographical boundaries of such a freeport. An RBE may or may not conduct multiple qualified registered projects or activities in the freeport under the same zone or under the same IPA. Any project or activity conducted or executed outside the geographical boundaries of the zone or freeport shall not be subject to tax incentive unless such project or activity is conducted or managed under another IPA.

Non-compliance with the conditions laid down under FIRB Resolutions 19-21 and 23-21 will result in suspension of income tax incentive on revenue related to months of disagreement. Recently, the Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 39-2022, which sets out the modalities for payment of fines for violations committed by RBEs under the IT-BPM sector on the conditions laid down in the WFH system. For RMC, RBEs are required to calculate the penalty in the manner described in the circular and pay the penalty within 30 days from the due date for payment of income tax. If the deadline is missed, an administrative penalty will be levied for RBE paying a regular corporate income tax rate of 20% or 25%.

Although PEZA may approve an application for a hybrid job setup by September 12, 2022, this measure, being temporary, does not address the problems of the IT-BPM sector. It should be noted that based on current research, employees prefer WFH to work on site, so it has become more difficult for the sector to adhere to on-site work guidelines.

To allow employees to continue the WFH system, the IT-BPM sector is considering various options. These include (1) deregistering PEZA, (2) reducing the size of PEZA operations, (3) transferring registration with other IPAs, and (4) maintaining registration for other incentives.

Deregistration from page
This option is available for IT-BPM companies who see WFH set-up as a long-term solution.

IT-BPM RBEs who choose to deregister with PEZA will lose their tax incentives and will be subject to 25% regular corporate income tax (RCIT), VAT and local taxes. Other factors considered include the need to relocate business activities to non-paya locations, to pay import duties and taxes on imports, to pay VAT on local purchases, and to update registrations with various government agencies.

Lost tax incentives can be offset by reduced lease payments, utility and administrative costs.

Deregistration from PEZA means that RBE will be considered a regular corporation and will no longer be subject to mandatory administrative, compliance and reporting requirements under the PEZA Act.

Downing Operation Page
Some IT-BPM companies have various PEZA-registered sites. To meet the on-site percentage requirement, some RBEs are planning to reduce the size of their PEZA sites by listing some of their registered activities. RBEs may also consider retaining their PEZA sites where their employees can comply with site requirements and create a new entity that will conduct business of listed activities.

The remaining PEZA-registered sites will continue to enjoy tax incentives while new entities will be subject to regular tax rates.

Registration transfer Including other IPAs
The Creative Law Enforcement Rules and Regulations (IRR) provide that eligible extensions, brand new projects, or existing registered projects or activities prior to the enactment of the Create Act may be registered and receive incentives subject to prescribed criteria and conditions. Performance review by Effective Strategic Investment Priority Plan (SIPP) and FIRB at the time of application. The IRR provides that an application for a qualified expansion project or activity must be approved by the FIRB or the relevant 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 without having to work on a specific registered site. With the rationale for incentives under CREATE, RBEs now deserve the same kind of incentives. However, IPAs that do not operate ecozones or freeport zones do not require registered RBEs to operate within a specific site. Thus, there is an option to transfer the registration to another IPA.

Maintain continuous registration for other incentives
Penalties for disagreement with on-site requirements are equivalent to paying 20% ​​or 25% regular corporate income tax.

Although they are losing incentives for income tax, some RBEs are considering retaining their PEZA registration for other tax incentives such as VAT zero-rating on purchases of their local goods and services that are used for direct and exclusively registered activity. And exemption from import and local business taxes. As such, some RBEs are considering retaining their PEZA registrations and paying fines while receiving VAT zero-rating incentives.

In short, the path that IT-BPM companies must take should consider the various factors involved, both in recovering from the economic impact of the epidemic and in balancing the well-being of their employees.

Let’s Talk Tax is a weekly newspaper column by P&A Grant Thornton aimed at informing the public about various tax developments. This article is not intended to be a substitute for appropriate professional advice.

Neptali G., a manager in the tax advisory and compliance department at P&A Grant Thornton, a Philippine member of Grant Thornton International Limited. Maroto.

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