Balancing WFH compliance and tax incentives for PEZA IT-BPM entities

By LEULA DIANNE CANTOS-KING, BusinessWorld, 26 Oct 2021

Amid new government issuances and pandemic constraints, flexible work arrangements, especially remote work or “work-from-home” (WFH) setups as we call them, continue to be implemented by businesses. Government orders allowing only essential businesses to keep their physical locations open forced unprepared employers to adopt flexible work options on the fly.

Despite the challenges that the business sector faces today, it is refreshing to see that the information technology-business process outsourcing (IT-BPO) industry is showing growth. IT-BPO firms are generally registered with the Philippine Economic Zone Authority (PEZA), and given the realities on the ground, the Fiscal Incentives Review Board (FIRB), under Resolution No. 19-21, approved the extension of WFH arrangements for enterprises registered with the Information Technology-Business Process Management (IT-BPM) until March 31, 2022.

The resolution was reproduced in PEZA Memorandum Circular (MC) No. 2021-049. In the resolution, instead of the previous revenue threshold, the threshold for WFH arrangement shall now apply to the total workforce under the following conditions:

From Sept. 13, 2021 to Dec. 31, 2021, the total number of employees in WFH arrangements may not exceed 90%. For PEZA-registered IT enterprises, this is to be on a per-site basis;

Reduction to 75% of the total workforce between Jan. 1, 2022 and March 31, 2022, except in cases where the government declares a state of calamity, in which case the sector will revert to the 90% cap;
[The government has declared that the country will be under a state of calamity until Sept. 12, 2022.]

The number of laptops/other equipment of the RBE outside the ecozone should not exceed the number of its employees who are under WFH arrangements;

Bonds are to be posted for all equipment deployed by the RBE to ensure payment of taxes and duties if any such equipment is not returned to the site of the registered business enterprise after the WFH arrangement; and

Revenue from exports will be maintained with no reduction of workforce even with a majority of employees under WFH arrangements.

For PEZA IT-BPM entities, the above conditions mean that they will be required to maintain at least 10% of their workforce onsite while complying with the reportorial, inspection, and bond requirements corresponding to employees who are under WFH arrangements. This is different from the previous situation in which PEZA IT-BPM entities are allowed to operate 100% under WFH arrangements, although only 90% of the total revenue of their registered activity is subject to incentives.

All PEZA IT-BPM entities are expected to strictly comply, as any violation of the above conditions may result in suspension, withdrawal, or cancellation of their tax incentives. Thus, what are at stake here include the following tax incentives:

Income Tax Holiday (ITH) and/or Special Income Tax rate of 5% of gross income, as applicable;
A special tax rate of 5% of gross income after ITH, in lieu of all national and local taxes, except real property taxes;

Tax-free and duty-free importation of machinery, raw materials, and equipment that are directly and actually needed and will be exclusively used for the registered operations;

VAT zero-rating of local purchases of goods and services, under certain conditions;

Exemption from wharfage dues on import shipments of equipment; and

Exemption from expanded withholding tax.

The management of a PEZA IT-BPM entity thus faces the need to balance the health and safety of its personnel while remaining eligible for the tax incentives. Without the incentives, the income generated by IT-BPM entities will be subjected to the 25% regular corporate income tax which could amount to millions in taxes.

According to recent news reports, PEZA IT-BPM entities and PEZA itself are still trying to appeal to the FIRB to adopt their proposal to use the revenue threshold instead of the threshold based on number of workers.

It is thought that the revenue-based threshold affords more protection to employees, as it places more importance on their health and safety. Further, with the existing threat of being infected with the COVID-19 virus, employees will be reluctant to report onsite. In addition, the implementation of the new threshold will entail major adjustments to PEZA IT-BPM entities in terms of retrofitting and/or renovation works in their offices.

On the other side of the argument, it is also thought that the return to the revenue-based threshold is not consistent with the economic strategy of the government to gradually and safely reopen the economy.

In conclusion, it appears that a balance is needed between compliance with government rules and eligibility for incentives on the one hand, and the various practical innovations the private sector has adopted to deal with the pandemic. While the IT-BPO industry is currently growing, the government should continue to work hand in hand with stakeholders to ensure that concerns regarding WFH compliance and tax-incentive eligibility are fully addressed.