Tax Articles

How Does Work-From-Home Arrangements Affect
Tax Incentives of Registered Business Enterprises?

By: Atty. Jomel N. Manaig

Are you one of the companies registered with an investment promotion agency (IPA) and enjoying certain tax incentives? If so, you must be aware that there are certain terms and conditions stated in the Certificate of Registration or in your Registration Agreement with the concerned IPA attached to the registration. Compliance to these terms is necessary for the continuous enjoyment of the approved tax and non-tax incentives.

Registration Agreements usually specify the areas where the registered project or activities shall be conducted. The specification of the area is not without any purpose. Conducting business outside the specified area could be considered as a violation of the agreement. As this is beyond the coverage of the registered activity, there is a possibility that incentives may be denied and other sanctions imposed resulting from the violation of the registration.

This rule is more pronounced with the introduction by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of the new Section 309 of the Tax Code and reiterated in Rule 19 of the Implementing Rules and Regulations of Title XIII of the said Code. The rule strictly requires that a qualified registered project or activity under an IPA administering an economic zone or freeport shall be exclusively conducted or operated within the geographical boundaries of the zone or freeport being administered by the IPA in which the project or activity is registered. The registered business enterprise may conduct or operate more than one qualified registered project or activity within the same zone or freeport under the same IPA. But any project or activity conducted or performed outside the geographical boundaries of the zone or freeport shall not be entitled to the incentives, unless such project or activity is conducted or operated under another IPA.

Clearly, registered projects or activities must be conducted within the area administered by the IPA to which the enterprise is registered. Business activities done outside the area will be denied the supposed incentives.

What is the repercussion of this requirement in relation to the constraints brought by the present pandemic? This pandemic has forced employers, including business enterprises registered with IPAs and enjoying incentives, to allow their employees to work-from-home (WFH). Certainly, work conducted at home is work conducted beyond the boundaries of economic zones or freeports. Will the transactions related to the work done at home by these employees be denied the supposed incentives simply because they are conducted outside the economic zones?

The Implementing Rules of the tax incentives under CREATE recognizes the possible implementation of temporary measures due to exceptional circumstances to support the recovery of registered business enterprises, subject to the approval by the Fiscal Incentives Review Board (FIRB). The temporary measure will, without diminution of incentives, cover all registered business enterprises affected by such exceptional circumstances. The measure will cover a specific time period and only be limited to the duly approved incentives.

As a temporary measure, the FIRB recently issued Resolution No. 19-21 allowing the Information Technology – Business Process Management (IT-BPM) sector to continue implementing WFH arrangements until March 31, 2022, without affecting their incentives. There are, however, certain conditions that must be satisfied by these RBEs. For the number of employees allowed under a WFH arrangement, it should not exceed 90% of the total workforce of the concerned enterprise. This shall be reduced to 75% beginning January 1, 2022, unless the state of calamity is extended beyond this date, in which case the 90% ceiling will be maintained. Aside from the allowed number of employees, the number of equipment, such as laptops, brought outside the ecozone should not exceed the number of employees working from home. In fact, bonds are also required to answer for the taxes and duties brought outside the ecozone in case equipment is not returned to the site of the RBE after the WFH arrangement.

Other conditions include compliance with certain reportorial requirements by the RBE. RBEs need to submit to their concerned IPAs on or before September 30, 2021 the following:

• list of equipment brought outside of the ecozone
• total number of employees
• number of employees under WFH arrangement
• a certification that the export requirement and number of employees will be maintained.

This will be followed by a report after the end of each month as to the additional equipment brought outside of the ecozone, the total number of employees and the number of employees under a WFH arrangement.

With the relaxation of the rules, enterprises under the IT-BPM sector are expected to comply with the conditions, including the submission of reportorial requirements. Compliance is necessary; otherwise, this may lead to the suspension, withdrawal or cancellation of the incentives.

Tax incentives are granted not without conditions. These conditions include the place or area where registered projects or activities must be conducted. For IT-BPM, this is temporarily relaxed because of the current pandemic situation. Nonetheless, there are still limitations and conditions, including reportorial requirements, that must be observed and RBEs should comply with these to continuously enjoy the tax incentives.