Can BPOs sustain a work from home model?

Joel Roy Navarro Tax Partner, PwC Philippines 13 Aug 2020

Two years ago, I wrote about telecommuting, now commonly known as “work from home, (WFH)” focusing on its benefits to employees due to the worsening traffic situation in Metro Manila. At that time, I felt that this was a more viable option compared to building new roads, which is more costly and takes long to complete. Also, WFH allows work-life balance by removing some work stressors. Now trapped in this pandemic, I would never have thought that WFH acceptance would come sooner than expected.

Admittedly, there are a few challenges in implementing WFH, such as weak internet connectivity and time management issues. However, these concerns can be realistically resolved.

Flexible work arrangements in BPOs

Under the community quarantine rules, industries with employees confined at home were allowed to utilize alternative work arrangements. These industries include Business Process Outsourcing (BPO) companies, which were required to adopt WFH arrangements for their employees during the lockdown. Some of the challenges encountered by BPOs in shifting to WFH were transporting company assets (like desktops), setting up internet/WIFI devices in their employees’ homes, as well as tightening their data security protocols for all their remote workstations.

Given the measures adopted by BPOs, does work performed outside an economic zone under a WFH scheme violate tax incentive rules?

To put things in context, BPO entities which are export-service companies are predominantly registered with the Philippine Economic Zone Authority (PEZA). They enjoy tax incentives such as Income Tax Holidays and a 5% gross income tax (in lieu of all national and local taxes). Under the PEZA Law, these tax incentives can only be availed of if the revenue-generating activity is performed within the ecozone. Thus, if the PEZA law were to be strictly construed, the WFH activities of BPOs should be disqualified from tax incentives for having been performed outside the ecozone.

PEZA rules on quarantined enterprises

Acting swiftly, PEZA issued Memorandum Circular (MC) No. 11-2020 in March, in response to a request from PEZA enterprises to allow flexible work arrangements for their employees during the quarantine. The circular was issued preemptively to ensure the health and safety of employees and the continued delivery of services to BPO clients.    

The MC effectively allowed BPOs to immediately implement alternative work arrangements to deal with the state of emergency without the need to secure a Letter of Authority (LoA) from PEZA prior to implementation. Thus, in the interim, employees were allowed to WFH, subject to the BPO’s submission of the required information to PEZA (e.g. the number of employees under the WFH arrangement, the list of assets that will be brought out of the Ecozone, etc.).  Based on the documents submitted by the company, PEZA will then issue an LoA.

While the MC was a provisional measure initially valid until 31 July, PEZA released MC No. 40-2020 extending the validity until 31 August.  Under the new MC, PEZA also allows BPOs to engage in WFH operations to the extent of 90% of their total revenue until 31 December. Given the temporary nature of the MC, WFH arrangements would seem to apply only while the MC is still effective. Therefore, it is uncertain if BPOs can continue to enjoy tax incentives while adopting a WFH scheme after 2020.

Nonetheless, even before the pandemic, PEZA permitted some BPOs to adopt a WFH arrangement within a limited capacity.  PEZA also imposed some preconditions (among others) before BPOs could implement a WFH scheme, such as:

  • The arrangement should be limited to employees providing the core BPO services (e.g. software development, call center activities);
  • Revenues from WFH operations should not exceed 30% of annual revenue (which is way lower than the 90% threshold under the new MC);
  • Separate books of account for such operations should be maintained; and
  • There should be monitoring of the movement of IT machinery and equipment that will be used by WFH employees.

Weighing in on the WFH scheme

It is not surprising that some BPOs are keen on implementing the WFH scheme given the benefits it can offer, both tangible and intangible. For instance, the remote workplace will help reduce operating expenses in the form of office leases and utility costs. Tardiness, absences, and low productivity can also be curbed, as external factors such as inclement weather, travel time to work, etc., are avoided. Further, the safety of employees on the graveyard shift is ensured, as they no longer have to travel during the wee hours of the day.

While it is true that WFH may have its downsides, overall, its benefits far outweigh the disadvantages. Time will tell if PEZA relaxes the rules and allows tax incentives for WFH schemes permanently. For now, there seems to be no reason not to consider WFH for the long haul as long as quality service is being delivered while employee wellbeing is safeguarded.

While the pandemic has disrupted routines and practices, it has also challenged people to adapt, innovate, and move forward. Though unsettling at first, change is good if embraced with the right mindset and attitude. Perhaps it’s high time to discard the traditional office work paradigm and consider WFH arrangements as the new workplace model post-quarantine. Let’s keep our fingers crossed.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

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Joel Roy  Navarro

Joel Roy Navarro

Tax Partner, PwC Philippines

Tel: +63 (2) 8845 2728

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