Tax Implications of PEZA’s 70-30 Work From Home Arrangement – Commentary

Introduction
Background
Tax implications
Comment

Introduction

On August 2, 2021, the Tax Incentives Review Board (FIRB) passed Resolution No. 19-21, a temporary measure to support the recovery of Registered Business Enterprises (RBEs) during the covid-19 pandemic. The resolution allowed all RBEs in the information technology and business process management (IT-BPM) sector to continue to implement work-from-home (WFH) agreements until March 31, 2022 without affect their tax incentives. These provisions are subject to several requirements, such as the requirement that no more than 90% of an RBE’s total workforce can work remotely.

RBEs are companies that are registered with Investment Promotion Agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), and benefit from tax incentives (e.g., tax rates preferential) upon registration with an IPA.

Background

Prior to the March 31, 2022 deadline, PEZA had requested the FIRB to exempt its registered IT-BPM businesses from the conditions imposed by FIRB Resolution No. 19-21. However, the FIRB decided to issue Resolution No. 23-21, which denied PEZA’s request and provided that failure to comply with the terms of FIRB Resolution No. 19-21 would result in the suspension of the tax incentives of the PEZA. RBE applied to income. corresponding to the month(s) of non-compliance. On January 24, 2022, PEZA submitted another application to the FIRB to allow RBEs in the IT-BPM sector to operate under a telework agreement without the 10% on-site requirement until September 12, 2022 The FIRB also rejected this request on February 21, 2022 by Resolution No. 003-22. The BIR subsequently issued Revenue Memorandum Circular No. 23-2022, which provided that non-compliant RBEs had to pay income tax at the regular rate of 25% or 20%, as the case may be, on their income. net taxable during the months of non-compliance. compliance with FIRB Resolution No. 19-21. If non-compliant RBEs fail to make sufficient voluntary payments that follow the normal rate of income tax, they may be audited by the BIR.

On March 31, 2022, despite the FIRB’s denial of PEZA’s request for the on-site work requirement, PEZA issued a notice informing all interested RBEs who wished to benefit from the 70% on-site and 30% arrangement WFH on or after April 1, 2022 to submit a written request to the Office of the Chief Executive Officer no later than April 8, 2022.

Tax implications

Despite the fact that PEZA has allowed a hybrid working mode, RBEs in the IT-BPM sector must still comply with the FIRB’s 100% onsite directive. Tax incentives are interpreted strictly against the taxpayer and in favor of the tax authority; therefore, the taxpayer must prove that he has fulfilled all the conditions necessary to avail himself of the tax incentives granted to him. While PEZA appears to support the adoption of hybrid work arrangements by granting Letters of Authorization (LOAs) that allow registered IT-BPM companies to continue implementing telework arrangements, it remains to be seen whether the BIR will see the RBE’s adoption of hybrid working. arrangement as non-compliance with FIRB Resolutions Nos. 19-21 and 23-21, despite an LOA issued by PEZA.

As mentioned above, while PEZA has asked the FIRB to allow RBEs in the IT-BPM sector to operate under a telework agreement without the 10% on-site requirement until September 12, 2022 , the FIRB rejected PEZA’s request through Resolution No. 003-22.

Comment

While registered IT-BPM companies may need to consider practical and business issues when considering pursuing telecommuting arrangements, applicable laws and regulations require such companies to conduct business exclusively within the geographic boundaries of the areas economic or free port where they are located. to qualify for tax incentives. Affected companies should note that a PEZA LOA must comply with the existing legal framework and cannot change the law governing the granting of tax exemptions and other tax incentives. Given the uncertain validity of PEZA’s position on hybrid working arrangements, IT-BPM companies can avoid incurring tax liabilities by delaying the implementation of any alternative working arrangements and pending amending legislation. or confirmatory allowing them to freely implement these plans without affecting their taxation. incentives.

For further information on this subject, please contact Russel L Rodriguez Where Joanna Marie O Joson at SyCip Salazar Hernandez & Gatmaitan (SyCipLaw) by phone (+632 8982 3500, +632 8982 3600, +632 8982 3700) or by e-mail ([email protected] Where [email protected]). The SyCipLaw website can be accessed at www.syciplaw.com.

Carina C Laforteza, partner and head of the tax department, participated in the preparation of this article.


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