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In 2020, all of our routines were disrupted, our emotional endurance and strength were tried and our resilience and tenacity to overcome difficulties were put to the test.  Our practices and theories on how to perform work efficiently were not only challenged but were rendered almost impractical by a novel and potent, albeit unseen, adversary. Indeed, the highly transmissible and deadly virus, widely known as COVID-19, rendered our regular day to day onsite office work almost implausible. As COVID-19’s threats became more real than apparent with the World Health Organization’s declaration of a COVID-19 pandemic, the Philippine government ensured to enact measures to encourage remote work arrangements in the hopes of limiting the transmission of this disease while continuing business operations to soften the adverse economic impact of the pandemic. The Philippine Economic Zone Authority (PEZA) is no exception as it has been making praiseworthy efforts to ensure that its investors as well as their employees are protected from this virus while staying true to their mandate to protect investments and grant incentives to qualified investors.

Work from Home (WFH) Arrangement for PEZA-registered Information Technology (IT) Enterprises

Below are the issuances released by PEZA on this matter:

  • PEZA Memorandum Circular (MC) No. 2020-011 dated 5 March 2020 was released which allows PEZA-registered IT enterprises to immediately implement WFH arrangements and reassignment of workplace of employees without the need for a PEZA letter of authority (LOA) prior to implementation until 31 July 2020.
  • The implementation of WFH without prior LOA was extended until 31 August 2020 by PEZA MC No. 2020-040 (dated 31 July 2020). The same issuance allowed WFH of up to 90% of PEZA IT enterprises’ total revenues until 31 December 2020.
  • Subsequently, PEZA issued PEZA MC No. 2020-049 dated 22 October 2020 which extends the applicability of the 90% WFH threshold until 12 September 2021 which is the end of the period of the State of National Calamity due to the COVID-19 Pandemic under Proclamation No. 1021 of the Office of the President. The same issuance also provides that PEZA MC No. 2020-011 and the implementation of WFH arrangements and reassignment of workplace of employees without the need for a PEZA LOA prior to implementation is only extended until 31 December 2020.
  • PEZA aims to release the guidelines soon which may include such compliance and reportorial requirements for the proper monitoring of WFH activities possibly including periodic disclosures on the level of revenues earned from WFH operations, among others.

Areas for clarification

While PEZA’s efforts to curb the adverse effects of the pandemic to its investors and their employees are remarkable, it may be good to also consider providing more detailed guidelines on how to implement and operationalize these measures. Common questions on these issuances include the following:

  • It would be helpful if PEZA can consider expressly clarifying how the extension of the provisions of PEZA MC No. 2020-011 until 31 December 2020 can be reconciled with the extension of the applicability of the 90% WFH threshold until 12 September 2021. The 31 December 2020 deadline set by PEZA MC No. 2020-049 for the applicability of the provisions of PEZA MC No. 2020-011 may be interpreted as PEZA’s discontinuance of allowing WFH for its IT enterprises notwithstanding the applicability of the 90% WFH threshold until 12 September 2021. Should this be taken to mean that availing PEZA IT enterprises must secure a LOA effective 1 January 2021 to continue operations under the WFH set up, considering that the applicability of the 90% WFH threshold is effective until 12 September 2021?
  • Clarifications may also be raised on when the 90% WFH threshold is applicable. While there is a view that the 90% WFH threshold should begin from March 2020, PEZA may consider expressly clarifying when the increased WFH threshold will apply. There are some who believe that the 90% threshold should apply for the entire calendar year 2020, while a more conservative take of some PEZA IT enterprises would be to only compute for the 90% threshold beginning March 2020 or upon the issuance of PEZA MC No. 2020-011 which relaxes WFH requirements.
  • PEZA and the Bureau of Internal Revenue (BIR) may also consider expressly providing for the consequences of breaching the 90% WFH threshold. Given that the pandemic is still not under control, it would be helpful if PEZA can provide guidance on the impact of going over the 90% WFH threshold especially on the incentives currently being enjoyed by availing IT enterprises. One can argue that going over the 90% allowable WFH threshold would trigger the application of regular corporate income tax on the sales in excess of the allowed WFH threshold. However, we believe that its is better to have these effects codified as a guide not only to the availing IT enterprises but also to PEZA and the BIR.


Additional COVID-19 Deductions for 5% Gross Income Tax (GIT) Purposes

PEZA, with the support of the BIR through a letter from Commissioner Caesar Dulay, has identified several additional COVID-19 related deductions in the computation of the 5% Gross Income Tax (GIT). PEZA released PEZA MC No. 2020-053 dated 24 November 2020 providing for guidelines on these additional deductions which may be considered as direct costs for purposes of computing for the 5% GIT, as follows:

  • Costs for temporary accommodations for operations and maintenance personnel of a PEZA-registered enterprise during the time of quarantine as their work can directly be attributable to the PEZA-registered services;
  •  Costs for providing shuttle services for such operations and maintenance personnel;
  •  Port charges in the Manila International Container Port, the Port of Manila, and the Ninoy Aquino International Airport arising from delays in the release of shipments in these ports immediately after the implementation of the Enhanced Community Quarantine in the National Capital Region; and
  •  Costs for disinfecting and costs of personal protective equipment and sanitation requirements if incurred for operations and maintenance personnel and their work areas since these would fall under costs of “supplies used” in the rendition of the registered services.

The BIR finds that expenses relating to COVID-19 testing are not directly related to the rendition of registered services since the registered activities of a PEZA-enterprise may still be carried out without such costs. Therefore, unless it can be proven that such COVID tests are directly related to the registered service, then BIR is of the position that these must be classified as operating expenses and not direct costs.


Areas for clarification

Given the nearing income tax return deadline in April 2021, it is ideal to have an alignment between the BIR and PEZA on the scope, limits and applicability of these additional deductions. Questions and concerns raised in connection with this issuance are as follows:

  • The effectivity of PEZA MC No. 2020-053 and the definition of “quarantine” per PEZA MC No. 2020-053 may be further clarified since there are several types of quarantine under existing rules implemented at different periods such as the enhanced community quarantine, modified enhanced community quarantine, general community quarantine and the modified general community quarantine.
  • PEZA and BIR may also consider including incidental expenses to WFH availment as additional direct cost since these are directly attributable to the PEZA IT enterprises’ registered activities, albeit performed remotely or offsite. These may include allowances to employees for internet and electricity expenses, subject to substantiation requirements.
  • It would be helpful for PEZA and BIR to also clearly establish what would constitute as sufficient substantiation of COVID-19 related expenses and how to definitively establish its nature to support its deductibility as direct cost for purposes of computing for the 5% GIT.

In addition, PEZA is also inclined to relax the required export threshold for export-oriented manufacturing PEZA enterprises. According to news reports, PEZA is leaning towards allowing local sales of up to 50% of its total sales which is significantly higher than the original 30% limit to local sales. PEZA-registered export-oriented manufacturing enterprises that may benefit from this move will surely appreciate an official issuance and specific guidelines on the matter. 

It is encouraging to see how PEZA stays true to its mandate by devising creative ways on how to properly manage PEZA incentives even in these extraordinarily trying times. After all, it is undeniable that PEZA-registered enterprises significantly help the Philippine economy and the thousands of Filipinos under their employ to survive and weather this pandemic. Hopefully, through clearer guidelines from PEZA and the BIR, PEZA-registered enterprises will be able to maximize the benefits from these incentives as we continue to navigate and find our way through the new normal. 

Maria Myla S. Maralit is a Partner and Kathleen Teresa M. Ramos is a Manager from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.