WFH Arrangement: Embracing the Future of Our Robust Outsourcing Industry

Eric R. Recalde

The Fiscal Incentives Review Board (FIRB) has finally provided a solution. Registered enterprises of the Information Technology and Business Process Management (IT-BPM) sector may now adopt, on a long-term basis, flexible work arrangements with no adverse effects on their existing incentives. Business Process Outsourcing (BPO) companies only need to change their administrator, register with Board of Investments (BoI), and establish their compliance with the terms and conditions of their existing registrations.

Unfortunately, there have been serious doubts raised over the validity of the FIRB’s Sept. 14 Resolution. Indeed, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law vested the FIRB with policy making authority. It also recognized the continuation of registered enterprises’ incentives granted prior to its effectivity. In the case of BPOs, they derived these incentives under the Bases Conversion and Development Authority (BCDA) or Philippine Economic Zone Authority (PEZA) law. The FIRB has been consistent in its view that the activities of the BCDA and the PEZA entities, if they were to enjoy their incentives, should only be performed within the confines of the freeport or economic zone. How can BPOs avail of these incentives when they perform their activities outside such zone? Can they do it on a mere say so of the FIRB? Can BPOs say they may do so because they acted in good faith? Isn’t good faith premised on due inquiry especially for the supposedly well informed and sophisticated industry? If the BPOs migrate as BOI-registered entities, can tax authorities (say, the Bureaus of Internal Revenue and Customs, or concerned local government units) disapply such incentives as they were granted under the BCDA or PEZA law?

All these questions lead to the fundamental issue of the resolution’s legal basis. I say there is. The FIRB may have only failed to clearly articulate it.

The FIRB requires BPOs to register with the BoI. Under CREATE, the BoI may grant exporters the 5% special tax incentive. CREATE empowers the FIRB, or in this case the BoI, to grant incentives on existing registered activities. In particular, “existing registered projects or activities prior to the effectivity of this Act may qualify to register and to avail of the incentives granted under this Act for the prescribed period, subject to the criteria and conditions set forth in the Strategic Investment Priority Plan (SIPP).” It is clear that IT-BPM activities enjoy tier 1 classification under the SIPP. In other words, it is CREATE and not the BCDA or PEZA Law that is the basis of the proposed incentives. BPOs may only enjoy them for roughly seven years as provided in CREATE’s transitory provision.

Some may ask: Is it not that the cited provision refers to a situation where the enterprise will stay with the same incentives administrator? The law does not state this limitation. The FIRB has sufficient leeway on how to apply such a provision. It is even possible for the FIRB to interpret the rule on conduct of activity within the zone’s boundaries as only applying to those who deal with goods. This requirement can be traced from the Free Trade Zone Act and the established concept that a freeport or an ecozone is treated as a separate customs territory. It is evident that the PEZA law’s negative list pertains to goods manufactured inside the zone. There is no concept of “smuggling” for services. Even if the requirement should extend to services, BPOs should be considered compliant as long as their servers or gateway facilities are located and operated inside such a zone.

The Court of Tax Appeals En Banc’s ruling in ACES Philippines Cellular Satellite Corp. Case (2016) supports this theory. BPOs’ services are not geared toward the local market. They invoke the benefits and protection of the LGU having territorial jurisdiction over the zone and not of the various LGUs having jurisdiction over their call agents. This is the antithesis of the Supreme Court’s ruling in Howden & Co. (1965) and of the minimum contact doctrine. The FIRB’s resolution is sound and logical. There should be no more dispute on the continuation of BPOs’ incentive.

The BoI and the concerned zone administrator must expedite the release of the implementing guidelines. The BPO sector is one of the country’s robust industries. It propels our economic growth. BPOs that take advantage of the FIRB solution and comply with the guidelines should have confidence that they will continue to enjoy their incentives without threat of legal challenge from tax authorities. This FIRB approach is a preliminary step in reassuring investors that the country is serious in making our country business friendly.

The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and is not offered as, and does not constitute, legal advice or legal opinion.

Eric R. Recalde is a partner and the head of the Tax Department of the Angara Abello Concepcion Regal Cruz Law Offices.

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