WITH the gradual reopening of the economy underway, the government is loosening previously imposed Covid-19 restrictions. Students have finally returned to in-person classes and workers are being mandated to report to offices.

As a temporary measure during the pandemic and under Rule 23 of the Create Law's implementing rules and regulations, the Fiscal Incentives Review Board (FIRB) allowed registered information technology and business process management enterprises (IT-BPM RBEs) to continue implementing work-from-home (WFH) arrangements without adversely affecting their fiscal incentives until March 31, 2022 as per Resolution 19-21, which was extended to Sept. 12, 2022 in Resolution 017-22.

To adhere to the FIRB resolution, the number of employees working remotely should not exceed 30 percent of the registered enterprise's total workforce. The remaining 70 percent should render work within the geographical boundaries of the freeport being administered by the investment promotions agency with which the project/activity is registered. Total workforce refers to the total employees directly or indirectly engaged in the registered project/activity and excludes third-party contractors.

It must be noted that Section 309 of the Tax Code explicitly provides that the registered activity be exclusively conducted within the ecozone to be entitled to incentives. Any enterprise that does not meet the FIRB's conditions will not be entitled to fiscal and non-fiscal incentives.

Revenue Memorandum Circular (RMC) 120-2022, issued by the Bureau of Internal Revenue (BIR), sets guidelines on penalties relative to noncompliance. A registered enterprise that is noncompliant for at least one day will have its income tax incentives suspended for the entire month when the violation took place.

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The penalty should be paid using BIR Form 0605, choosing "Others" under "Voluntary Payment" and indicating in the field provided the phrase "Penalty pursuant to FIRB Res. 017-22." The tax type code is "IT" and the ATC is "MC 200."

IT-BPM RBEs with violations should continue to file and pay quarterly income tax returns following their usual procedure of computation as if no violation was committed. A separate computation for the WFH penalty should be provided in an additional schedule attached to BIR Form 0605.

The IT-BPM RBE will be liable for payment of regular income tax, either 25 percent or 20 percent, for the said month. In the case of an enterprise enjoying an income tax holiday (ITH), the cost of sales and allowable statutory deductions will be deducted from its sales to arrive at the taxable income, which will then be subjected to the 25-/20-percent income tax rate to arrive at the income tax penalty.

The same manner of computation of taxable income and income tax penalty will be used for an IT-BPM RBE enjoying the 5 percent gross income tax (GIT). The penalty computed, however, will be reduced by the amount of income tax paid for the current quarter divided proportionally by the number of months with the violation.

Note that the figures used in the computation to arrive at the taxable income and income tax penalty under ITH and GIT are the average amounts per month for the quarter allocated to the number of months with violations. In addition, violations committed beyond Sept. 13, 2022 may subject the RBEs to applicable taxes.

For annual income tax returns (AITRs), IT-BPM RBEs should continue to file using BIR Form 1702-EX for those with the ITH incentive and BIR Form 1702-MX for those enjoying GIT or those with mixed transactions. They are mandatorily required to complete the required information pertaining to allowable deductions pursuant to existing tax laws and regulations (i.e., Part VI-Schedule I for BIR Form 1702-EX and Part IV-Schedule 5 for BIR Form 1702-MX).

Net operating loss carry over will not be part of the computation for penalty and will not be deducted from total taxable income.

If the violation happened during the last quarter of the fiscal year, e.g., that ending November 2022, the penalty will be computed based on the manner prescribed in RMC 39-2022. Likewise, for violation of the provisions of FIRB Resolution 19-21, the same manner of computation, filing and payment applies.

Filing and payment of the penalty should be made on or before the due date prescribed for the quarterly income tax, subject to adjustment upon the filing of the AITR. For the fiscal quarter with month/s subject to penalty already ended and returns filed, IT-BPM RBEs should file and/or pay the penalty within 10 days after the Aug. 18, 2022 issuance of RMC 120-2022. Administrative penalties will be imposed beyond this.

Applicable procedures prescribed in Item IV of RMC 23-2022 should be followed for the deployment of the list of RBEs with violations to the concerned Revenue District Office/division in the Large Taxpayer Service.

Operating a business within an ecozone or freeport zone has its tax perks but these are not given outright. An RBE should first ensure compliance with the conditions prescribed before it can enjoy the incentives. Otherwise, it will be meted with the suspension of the income tax incentive on the revenue corresponding to the months of noncompliance.

The author is a senior associate with the Tax and Corporate Services division of Deloitte Philippines (Navarro Amper & Co.), a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected] Deloitte Asia Pacific Ltd. is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd.