Tax implications of PEZA's 70-30 work from home arrangement 

July, 2022 - Russel Rodriguez, Joanna Marie Joson, SyCip Salazar Hernandez & Gatmaitan

On 2 August 2021, the Fiscal Incentives Review Board (FIRB) adopted Resolution No. 19-21, a temporary measure to support the recovery of registered business enterprises (RBE) during the covid-19 pandemic. The resolution allowed all RBEs in the information technology-business process management (IT-BPM) sector to continue implementing work from home (WFH) arrangements until 31 March 2022 without affecting their fiscal incentives. Such arrangements are subject to several requirements, such as the condition that no more than 90% of a RBE's total workforce may work remotely.

RBEs are enterprises that are registered with investment promotion agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), and are granted tax incentives (eg, preferential income tax rates) upon registration with an IPA.Background

Prior to the 31 March 2022 cut-off, the PEZA had requested the FIRB to exempt its registered IT-BPM enterprises from the conditions imposed under FIRB Resolution No. 19-21. However, the FIRB decided to issue Resolution No. 23-21, which denied the PEZA's request and provided that non-compliance with the conditions under FIRB Resolution No. 19-21 would result in the suspension of the RBE's income tax incentives applied to revenues corresponding to the month or months of non-compliance. On 24 January 2022, the PEZA submitted another request to the FIRB to allow RBEs in the IT-BPM sector to operate under a WFH arrangement without the 10% onsite requirement until 12 September 2022. The FIRB also denied this request on 21 February 2022 through Resolution No. 003-22. The BIR subsequently issued Revenue Memorandum Circular No. 23-2022, which provided that non-compliant RBEs must pay income tax at the regular rate of 25% or 20%, whichever is applicable, on their taxable net income during the months of non-compliance with FIRB Resolution No. 19-21. If non-compliant RBEs fail to make sufficient voluntary payments that follow the regular income tax rate, they may be audited by the BIR.

On 31 March 2022, despite the FIRB's denial of the PEZA's request regarding the onsite work requirement, the PEZA issued an advisory that informed all interested RBEs that wished to avail of the 70% onsite and 30% WFH arrangement starting 1 April 2022 to submit a written request to the office of the director general no later than 8 April 2022.Tax implications

Despite the fact that the PEZA has permitted a hybrid working arrangement, RBEs in the IT-BPM sector should still comply with the FIRB's 100% onsite directive. Tax incentives are construed strictly against the taxpayer and in favour of the taxing authority; therefore, the taxpayer must prove that it has satisfied all the conditions necessary to avail itself of the tax incentives that have been granted to it. While the PEZA appears to support the adoption of hybrid work arrangements by granting letters of authority (LOA) that allow registered IT-BPM enterprises to continue implementing WFH arrangements, it remains to be seen if the BIR will view the RBE's adoption of the hybrid work arrangement as non-compliance with FIRB Resolution No. 19-21 and 23-21, despite a PEZA-issued LOA.

As mentioned above, while the PEZA requested the FIRB to allow RBEs in the IT-BPM sector to operate under a WFH arrangement without the 10% onsite requirement until 12 September 2022, the FIRB denied the PEZA's request through Resolution No. 003-22.Comment

While registered IT-BPM enterprises may need to consider practical and business-related issues when planning to continue WFH arrangements, current laws and regulations require such enterprises to conduct their activities exclusively within the geographical boundaries of the economic or freeport zones where they are located in order to be entitled to tax incentives. Concerned enterprises must note that an LOA from the PEZA must be consistent with the existing legal framework and cannot amend the law governing the grant of tax exemptions and other fiscal incentives. Given the uncertain validity of the PEZA stance on hybrid work arrangements, IT-BPM enterprises may avoid incurring any tax liabilities by holding off on implementing any alternative work arrangements and waiting for amendatory or confirmatory legislation for them to freely implement such arrangements without affecting their fiscal incentives.

Originally published on the Lexology site


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