Working from home, fiscal incentives, and transferring from PEZA to the BoI
At the onset of the COVID 19-pandemic, working from home (WFH) was a temporary solution for businesses trying to survive. This setup was not widely used in the Philippines prior to the crisis, and many business entities grappled with how to continue operations with the whole world on lockdown. At the height of the lockdowns, the government, for safety reasons, allowed companies to adopt WFH, while still enjoying the tax incentives that they had been granted on the condition that they operate within economic zones.
While WFH raised various issues like the blurring of boundaries between work and home, this arrangement has apparently become the norm. People are starting to get the hang of WFH. Remaining unresolved is whether WFH can be permanently adopted by Information Technology (IT) companies that are registered business enterprises (RBEs) regulated by the Philippine Economic Zone Authority (PEZA).
Per MC No. 2021-049, in relation to Fiscal Incentives Review Board (FIRB) Resolution No. 19-2021, PEZA initially allowed IT RBEs to operate outside the economic zone on the condition that only up to 90% of the employees work from home between Sept. 13, 2021 and Dec. 31, 2021. This ratio fell to 75% between Jan. 1 and March 31. PEZA subsequently asked the FIRB to exempt its RBEs from the 90% WFH cap. The FIRB rejected this request in Resolution No. 23-21, noting the need for expanded onsite work in conformity with the government’s plan to gradually and safely open the economy.
On March 10, PEZA issued MC No. 2022-018 informing all IT RBEs that the FIRB denied the request to extend the work-from-home arrangement beyond March 31. MC No. 2022-018 cited Section 309 of the National Internal Revenue Code (NIRC) as amended by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, which it deems to be in force as of April 1. Section 309 essentially provides that a qualified registered project or activity under an Investment Promotion Agency (IPA) administering an economic zone or freeport must be conducted within that zone to avail of incentives.
Once again, IT RBEs grappled to comply, weighing the penalties for violating the conditions laid down in the MCs. Many investors worried about getting to 100% onsite work. Feedback from the business community indicates that many employees prefer the convenience of WFH. Executives at IT RBEs started to weigh the advantages and disadvantages of maintaining RBE status vis-à-vis the risk of losing employees to companies with permanent WFH arrangements.
Subsequently, on April 6, PEZA issued Board Resolution (BR) No. 22-052, allowing all kinds of RBEs to adopt WFH arrangements for up to 30% of their workforce. Thereafter, the FIRB issued Resolution No. 17-2022 recognizing the contribution of the IT-BPM (Business Process Management) sector as a key employment generator, and that the adoption of WFH in that industry has contributed to the creation and preservation of jobs during the pandemic. In the same Resolution, the FIRB said that as a temporary measure under Rule 23 of the CREATE Act IRR, RBEs of the IT-BPM industry are allowed to continue implementing WFH arrangements without adversely affecting their fiscal incentives under the CREATE Act between April 1 and Sept. 12. Per FIRB Advisory 007-2022, the 30% WFH cap was provisionally extended.
And yet, many IT RBEs are still considering the possibility of deregistering from PEZA. The possible transfer of certain IT RBEs from PEZA to the Board of Investments (BoI) has been explored for some time. The BoI is an incentive-granting IPA but is not restricted by a particular zone or geographical boundaries. Hence, when investors explore setting up companies, the BoI option has opened up as a possibility. On the other hand, PEZA IT RBEs are considering the transfer to the BoI even in the absence of guidelines on how to execute such a transfer without adversely affecting incentives.
Recently, Finance Secretary Benjamin E. Diokno announced that with the FIRB seeking a more permanent solution to the WFH dispute, IT-BPM enterprises will be allowed to continue availing of fiscal incentives without violating Section 309 of the NIRC as amended. Many will certainly be expecting the FIRB to formulate clear guidelines to facilitate the smooth transition of IT RBEs which intend to transfer their registration from PEZA to the BoI. Needless to say, clarity in the guidelines will help resolve the concerns of both existing and potential investors in making business decisions that would ultimately affect the Philippine economy.
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.
Gemmalu O. Molleno-Placido is a senior manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.