The conundrum of the future of work for BPO companies

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The IT Process Outsourcing (IT-BPO) industry expected an extension of authorized work-from-home (WFH) agreements due to the Covid-19 outbreak. However, they were caught off guard when the Philippine Economic Zone Authority (PEZA) and the Fiscal Incentives Review Board issued PEZA Circular 2021-049 and FIRB Resolution 19-21, respectively.

The broadcasts, which extended the WFH’s deal until March 31, 2022, also clarified the conditions for it, one of which is a 90 percent cap on employees allowed to work from home from September 13, 2021. as of December 31, 2021. This will be reduced to 75 percent of the total workforce from January 1, 2022 to March 31, 2022, except in cases where the government declares a state of calamity, in which case the sector will revert to the cap of 90 percent.

All BPO companies are required to comply strictly in order to retain their incentives. Some, however, are not prepared to meet the 90% cap since more than 90% of their current workforce works remotely. Naturally, these companies risk losing their incentives. In general, BPO companies are export oriented companies, mainly registered with PEZA. As a result, businesses benefit from tax incentives such as income tax exemptions and a 5 percent gross income tax instead of all state and local taxes.

All over the world, many businesses are already thriving while respecting remote working arrangements. Others – those from countries that have vaccinated a large part of their population against Covid-19 – have reopened their workplaces. Due to the hard lessons learned from the accelerated transformation of work, organizations are now reinventing work and the terms “fully remote workers” and “flexible remote” are increasingly common.

From a tax perspective, the WFH arrangements have led to several cross-border tax problems, including permanent establishment (PE) exposures generated by people no longer working in their country of employment. Simply put, EP exposure means a risk of dual tax residency when the organization is taxed in its country of registration and in the home country where the teleworker is located. The same problem of dual tax residency affects the teleworker.

Earlier this year, the Organization for Economic Co-operation and Development (OECD) updated its guidelines to reflect realities on the ground, where measures such as strict border controls imposed by governments are expected to outlast originally planned. Basically, a PE problem will not be created in cases where employees are temporarily working from home due to Covid-19 restrictions. Likewise, an agency MOU issue will not be created in a situation where employees enter into home contracts since the “usual” nature will not be satisfied.

It is a different story if an organization moves towards adopting a permanent policy of cross-border (cross-border) teleworking after the pandemic. According to the OECD guidelines, double taxation treaties should be able to help test the tie-breaker rule in cases of dual residence issues.

The cross-border problem arising from remote working arrangements, which occurs globally, is similar to the predicament of the WFH for BPO companies registered with the PEZA. As you may be aware, ecozones under PEZA are considered outside the customs territory (that is, the tax jurisdiction of the Philippines). Under this concept, items such as laptops and other office equipment are not subject to duties and taxes when purchased and used by a PEZA entity in the ecozone. Once these items are sold or taken out of the ecozone, duties and taxes must be paid.

Likewise, services rendered within a PEZA ecozone (such as those of BPOs) benefit from special tax treatment. Once the service is performed outside the ecozone, i.e. under a WFH agreement, the income generated should be subject to the ordinary 25 percent corporate tax. . But due to Covid-19, the government allowed BPO companies to retain their tax incentives, with conditions, while implementing WFH provisions for their workforce.

Some BPO companies find it difficult to comply with the 90% cap because they want to provide maximum flexibility to employees in order to prioritize their security. The immediate concern now is how to balance the risk of losing their tax incentives with the need to protect the health of employees. On the other hand, the companies of the developers / operators of the PEZA ecozone are also affected as they have experienced a decrease in lease renewals due to the WFH agreements.

There is always a way to turn a challenge into an opportunity. The tax reform initiated by the government through the creation law lowered the corporate tax rate to 25 percent from 30 percent and imposed more limitations on tax incentives. As workers around the world push for full remote or hybrid working arrangements, the question in my mind is whether these factors will be enough for BPO companies to consider switching to regular corporate tax registration.

The author is a senior executive in the Tax & Corporate Services division of Navarro Amper & Co., a member of the Deloitte Asia Pacific Network. For comments or questions, send an email [email protected] Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Limited. Members of Deloitte Asia Pacific Limited and their related entities, each separate and independent legal entities, provide services in more than 100 cities in the region including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.


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