In recent years, advancements in technology and shifting workforce expectations have put work-from-home (WFH) arrangements into the mainstream. The COVID-19 pandemic further accelerated this trend, compelling various companies and industries to adapt to remote work setups. According to the 2021/2022 Integrated Survey on Labor and Employment (ISLE) by the Philippine Statistics Authority, 27% of establishments in the Philippines adopted WFH arrangements, reflecting a significant shift in work practices. Alongside corporate adjustments, the government has introduced initiatives to support and regulate these changes.
Government Initiatives and Regulations
Under Philippine laws, Philippine Economic Zone Authority (PEZA)-registered companies are required to operate within the economic zones to be entitled to tax incentives. Temporary work adjustments had to be made in response to the lockdowns brought about by the pandemic.
Under Memorandum Circular (MC) No. 2021-049, in relation to Fiscal Incentives Review Board (FIRB) Resolution No. 19-2021, PEZA permitted Information Technology-Business Process Management (IT-BPM) Registered Business Enterprises (RBEs) to operate outside their economic zones with up to 90% of their workforce working from home for the period September 13, 2021, to December 31, 2021, without losing their fiscal incentives. The threshold was reduced to 75% from January 1, 2022, to March 31, 2022.
PEZA later sought an exemption from the WFH threshold requirement of its IT-BPM RBEs. However, FIRB emphasized the requirement of IT-BPM RBEs to operate within the economic zone, and hence denied the request through Resolution No. 23-21. In this regard, PEZA issued MC No. 2022-018, notifying that the FIRB had rejected the proposal to extend the WFH arrangement beyond March 31, 2022.
Given the corresponding penalties for violation, a lot of IT-BPM RBEs were concerned about failing to meet the 100% on-site reporting requirement after the said period. Numerous employees have also expressed their preference for WFH and flexible set-ups, due to their convenience and to avoid the risk of COVID-19 exposure. These concerns were perhaps heard as PEZA subsequently issued Board Resolution No. 22-052, which allowed IT-BPM RBEs to implement a WFH arrangement for up to 30% of their total workforce starting April 1, 2022. After several extensions, this lasted until December 31, 2022, under FIRB Resolution No. 026-2022.
As businesses return to pre-pandemic work arrangements, many employees have grown accustomed to the convenience of WFH and flexible setups. Several surveys show that many employees are willing to switch employers for the chance to work from home, driven by considerations of health, convenience, and work-life balance. This shift in preference has led IT-BPM RBEs companies to worry about losing their people due to the 100% on-site reporting. In response, some IT-BPM RBEs have considered canceling their registration with PEZA. To address this concern, under FIRB Resolution No. 026-2022, PEZA IT-BPM RBEs were provided an opportunity to register with the BOI, which allows 100% WFH arrangements without losing their fiscal incentives.
In line with this, the Department of Trade and Industry (DTI) issued MC No. 22-19, detailing the guidelines for the registration of existing IT-BPM RBEs with the BOI. The FIRB and the Bureau of Internal Revenue (BIR) later respectively issued FIRB Advisory 008-2022, and Revenue Memorandum Circular No. 142-2022 to disseminate the guidelines. Further, PEZA released MC No. 2022-067 and MC No. 2022-070, which provided further details supplementing the DTI’s memorandum.
The guidelines apply to IT-BPM RBEs that have remaining tax incentives under Section 311 of the 1997 Tax Code, as amended, or those with approved incentives as of September 14, 2022, under the CREATE Act with the concerned Investment Promotion Agency administering economic or freeport zone. These companies had until December 31, 2022, to complete their registration with the BOI.
Recent Legislative Developments
Just recently, on September 10, 2024, the congressional bicameral conference committee approved the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Bill. This Bill builds upon the CREATE Act and aims to refine, enhance, and expound the fiscal incentives system to better support economic growth, investment, and recovery in the Philippines. A notable provision in the CREATE MORE Bill is allowing RBEs located in economic or freeport zones to implement telecommuting programs, which include WFH arrangements of up to 50% of their total workforce without losing their fiscal incentives.
Could this address the emerging concerns on WFH?
Aside from the shifted preference to flexible work arrangements, enabling WFH might potentially help entities reduce overhead costs such as office space, utilities, and maintenance. Studies show that WFH was found to be a cost-effective strategy—both for employees and employers. Undeniably, this is beneficial to the IT-BPM industry but a threat to the real estate industry. A compromise may have been thought of since the CREATE MORE bill allowed a WFH arrangement at 50%. By capping WFH at 50%, the government may be aiming not to abolish the support for the commercial real estate industry, which relies on occupancy. Moreover, the limit helps ensure that companies retain some on-site presence to facilitate face-to-face meetings, training sessions, and teamwork, which can be essential to a business.
With the WFH arrangement change brought by the CREATE MORE, certain questions arise:
Once the bill is enacted, perhaps some Implementing Rules and Regulations (IRRs) will be issued to address these questions to help the existing businesses transition to the requirements of the CREATE MORE.
For the investors who plan to set up new entity or new projects, perhaps it is worth comparing the advantages and disadvantages of registering with either the PEZA or the BOI. There can be other items to look into, such as ease of registration and requirements, and reportorial compliances to consider before making a decision.
Conclusion
In the recent years, significant changes and developments have been implemented to help Philippine stakeholders adapt to a dynamic business environment. These efforts, such as the Bureau of Internal Revenue’s (BIR) focus on streamlining tax processes, enhancing digitalization, and providing clearer compliance guidelines, aim to support businesses and not add burden to them. The CREATE MORE Bill, which is currently pending approval by the President, proposes to expand fiscal incentives and support flexible work arrangements such as WFH. Certainly, this will bring significant changes to the registration of affected businesses, and hence must thoroughly evaluate their options to make well-informed decisions. Nonetheless, let us hope that these measures will effectively address stakeholders’ needs and achieve their intended goals.
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.
As published in BusinessWorld, dated 17 September 2024
