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Peso rebounds on lower oil prices

THE peso strengthened against the greenback on Wednesday as oil prices slipped on worries of oversupply.

The local unit finished trading at P49.47 per dollar, appreciating by seven centavos from its P49.54 close on Tuesday, data from the Bankers Association of the Philippines showed.

The peso opened the session at P49.54 against the dollar. Its weakest was at P49.63 while its intraday best was at P49.46 versus the greenback.

Dollars traded dropped to $760.73 million on Wednesday from the $1.092 billion seen on Tuesday.

The local currency gained on the back of lower oil prices, said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.

“The peso exchange rate closed stronger after the slight decline in global oil prices,” Mr. Ricafort said in a text message.

Reuters reported that pump prices dipped early Wednesday after data showed a buildup in US crude stockpiles bolstered worries on oversupply.

Brent crude futures decreased 10 cents or by 0.2% to $42.98 a barrel by 0417 GMT. Meanwhile, US West Texas Intermediate (WTI) crude futures inched down 12 cents or by 0.3% to $40.50 per barrel.

Meanwhile, a trader said the stronger peso came after remarks from US Federal Reserve officials on the US economy’s recovery.

“The peso strengthened after Fed officials noted that US economic recovery is levelling off as more US states have rolled back their reopening plans,” the trader said in an email.

Reuters reported that Fed officials have expressed worries as the recent surge in infections could take its toll on improving job and consumer spending.

For today, Mr. Ricafort gave a forecast range of P49.35 to P49.55 per dollar while the trader expects the local unit to move within the P49.40 to P49.60 levels. — L.W.T. Noble with Reuters

More than 40,000 inmates freed during 15 weeks of lockdown

THE Philippine government freed more than 40,000 prisoners during a 15-week lockdown amid the threat of a coronavirus outbreak in one of the world’s most cramped prisons.

Data from the Supreme Court showed that 43,171 prisoners had been released from March 17 to July 3.

Courts in Metro Manila ordered the release of 8,909 inmates, followed by Southern Luzon courts with 7,443, and Central Luzon courts with 6,203.

With 215,000 prisoners nationwide, Philippine jails and prisons are overfilled more than five times their official capacity, making it the most overcrowded prison system in the world, according to the World Prison Brief (WPB), a database kept by the Institute for Crime & Justice Policy Research at the University of London.

The high court earlier released guidelines to decongest jails and prisons during the pandemic.

The Office of the Court Administrator also ordered judges to implement the rule allowing the release of prisoners who have served the minimum penalty or have no witnesses against them.

The high court also issued guidelines on the release of indigent inmates through reduced bail. It also allowed the conduct hearings through videoconferencing.

The Department of Justice also approved the rules easing the requirements for parole and executive clemency.

A group of political prisoners, who claimed to be vulnerable to infection asked the high tribunal in May to order their temporary release on humanitarian grounds. The court had yet to act on their plea.

As of 2017, the Philippines had 933 jails — seven national prisons and 926 city, district, municipal and provincial jails, which are not enough to contain inmates, three-quarters of whom are at the pre-trial stage, WPB said on its website.

Many jails in the Philippines fail to meet the minimum United Nations standards given inadequate food, poor nutrition and unsanitary conditions.

New York-based Human Rights Watch had urged the government of President Rodrigo R. Duterte to act fast and release some detainees to prevent a major health catastrophe.

A total of 301 inmates and prison employees at Bureau of Corrections facilities had been infected with the coronavirus as of June 18.

Of the total, 141 inmates and 38 prison staff were from the National Bilibid Prison in Muntinlupa City, while 82 inmates and seven workers were from the Correctional Institute for Women in Mandaluyong City.

Thirty-three workers from the facility’s national headquarters also got the virus. The numbers exclude cases in the country’s jails.

Justice Undersecretary Markk L. Perete earlier said 145 prisoners had recovered, while 16 died.

The local Commission on Human Rights has repeatedly flagged the worsening congestion in the country’s jails, more recently because of the high and sudden influx of arrested suspects in connection with Mr. Duterte’s war on drugs that has killed several thousands.

Also to blame are delays in the issuance of commitment orders, slow disposition of cases or protracted trials, small lock-up cells and the inability of detainees to post bail, it said.

Tens of thousands of inmates are often detained far longer without ever seeing a judge. About 75% of the country’s 215,000 prisoners are in the pretrial stage. — Vann Marlo M. Villegas

Philippines to join various trials for COVID-19 vaccines

THE Philippines will join various clinical trials for coronavirus vaccines worldwide to ensure it will get prioritized for supplies once a vaccine is found.

Participating in the trials would also speed up a drug’s registration with the local Food and Drug Administration, Jaime Montoya, executive director of the Philippine Council for Health Research and Development, told an online news briefing on Wednesday.

He said the Philippines would join the solidarity trials for vaccines led by the World Health Organization (WHO).

“We will join the solidarity trial for vaccines supervised by the WHO,” Mr. Montoya said.

Nina Gloriani, a professor from the University of the Philippines Manila College of Public Health, said the government had approved the collaboration for vaccine trials involving five drugs.

Three of these were being developed by the Chinese Academy of Science Guangzhou Institute of Biomedicine and Health; Sinopharm: Wuhan Institute and Beijing Biologicals Institute; and SINOVAC Biotech Ltd.

The other two were being developed by Adimmune Corp. and Academia Sinica in Taiwan, she said.

Out of about 20 vaccines under clinical trial, eight have better results than others, including the other two from China considered for clinical trial in the country, Ms Gloriani said. More than 100 were in the preclinical evaluation stage, she added.

Meanwhile, DoH (Department of Health) warned hospitals that reject patients showing mild or no coronavirus symptoms.

Health Undersecretary Maria Rosario S. Vergeire said hospitals must treat these patients first before referring them to temporary treatment facilities.

The call was more directed at private hospitals, where some patients had only been admitted because their personal physicians were from these hospitals, she said.

Of the more than 46,000 COVID-19 (coronavirus disease 2019) cases as of July 6, 93.7% or 30,787 were mild, while 5.5% or 1,813 did not show symptoms, according to DoH data. — Vann Marlo M. Villegas

Two more groups ask SC to stop anti-terror law’s enforcement

TWO MORE lawsuits have been filed at the Supreme Court (SC) questioning the legality of an expanded law against terror.

Former government lawyer Government Corporate Counsel Rudolf Philip A. Jurado filed the fifth petition, while the Ateneo de Manila University Human Rights Center filed the sixth suit.

Both asked the high court to stop the government from enforcing the law that President Rodrigo R. Duterte signed last week and void some of its provisions.

Critics have said the Anti-Terrorism Act arms the state to stifle dissent and violate human rights.

Also named respondents in Mr. Jurado’s lawsuit were the Senate and House of Representatives.

He said the House of Representatives did not provide printed copies of the bill to its members three days before its passage. Lawmakers had also failed to observe the rule of having the second and third readings three days apart, he added.

“Its members were ignorant of the bill’s contents (or, at the very least, the legal effects of its provisions that are not easily discernible at first instance), when they voted for its passage,” according to a copy of Mr. Jurado’s pleading.

Mr. Duterte defended the law against critics in a televised public address aired in the early hours of Wednesday, saying people who were not terrorists had nothing to be afraid of.

“Don’t be afraid if you don’t plan to destroy the government or bomb the church and public utilities,” he said in Filipino.

Meanwhile, Mr. Jurado said the House had gravely abused its discretion when it assumed that Mr. Duterte’s certification of the measure was enough to disregard the procedure.

The Ateneo Human Rights Center said the law’s definition of terrorism covered “consitutionally protected rights to free speech, press and assembly.”

“The overly broad definition of terrorism also clearly creates a chilling effect on free speech resulting in prior restraint,” it added.

The court on Tuesday gave the government 10 days to answer the four lawsuits that it had consolidated.

The law considers attacks that cause death or serious injury, extensive damage to property and manufacture, possession, acquisition, transport and supply of weapons or explosives as terrorist acts.

It also created a council made up of Cabinet officials who can perform acts reserved for courts, such as ordering the arrest of suspected terrorists.

The law also allows the government to keep a suspect in jail without an arrest warrant for 14 days from three days now. — Vann Marlo M. Villegas and Gillian M. Cortez

Nationwide round-up

Senate scraps special session, to tackle COVID crisis measure when Congress reopens

THE SENATE will no longer hold special sessions to tackle the measure extending emergency powers granted to President Rodrigo R. Duterte to address the coronavirus crisis, and will just address the bill when Congress reopens on July 27. Senate President Vicente C. Sotto III said conducting a special session would have “no big effect” at this point since Congress will start its second regular session on the 27th. The President’s spokesperson has previously said the executive branch will call for a special session. “Ang mangyayare (What will happen on July 27), we will approve it on third reading and then we will call for a bicam dahil iba ang version ng House (because it is different from the House version),” Mr. Sotto said in an online briefing Wednesday. The amendments proposed by the Department of Finance will be taken up during the bicameral conference, he added. The proposed Bayanihan 2 law sets a P140-billion standby fund for sectors affected by the coronavirus disease 2019. The programs include emergency subsidies to low income households, cash-for-work programs, and capital infusion to government financial institutions, among others. — Charmaine A. Tadalan

Senators say franchise renewal should not be tied to ‘personal issues’ Senators on Wednesday said personal issues of government officials should not be a factor in deciding on the renewal of franchises for private companies. Senate President Vicente C. Sotto III on Wednesday said the government should not meddle in the way a company runs its business, or in content in the case of broadcast media companies. “Ang gobyerno hindi dapat nakikialam sa laman ng editorial (The government should not meddle in the editorial content),” he said in an online briefing. “Hindi lang sa news hindi dapat nakikialam ang gobyerno, (Not only in news but) Government should be out of business. Government should not meddle with business,” he added. The Senate leader’s remarks were made ahead of the House of Representatives’ committee vote on whether or not to renew the ABS-CBN Corp. franchise. Mr. Sotto also said it is unlikely that the “bias” of the media network will be an issue when the Senate tackles the ABS-CBN franchise. Senator Ma. Lourdes Nancy S. Binay, for her part, said the deliberation should focus on matters that would benefit the public more, especially now that the country is battling a pandemic. “I guess kasama ‘yun sa pwedeng talakayin pero para nga sa akin ang masmahalaga sa atin, ‘yung access to information lalo na may pinagdadaanan tayong crisis (I guess that can be considered but for me there are more important things, such as giving access especially now that we’re dealing with a crisis),” she said in a separate briefing. — Charmaine A. Tadalan

DepEd to launch own TV channel for alternative classes

AN EDUCATION channel will be launched by the government as part of the alternative modes of learning for primary and secondary level students as face-to-face sessions in school will be restricted to avoid potential coronavirus transmissions. “We will be able to let DepEd (Department of Education) have its own official channel,” Philippine Communications Operations Office Undersecretary George A. Apacible said on Wednesday during the launch of Oplan Brigada Eskwela. DepEd will also prepare instructional materials that will be delivered through radio and online. Mr. Apacible said DepEd “will look for teachers that will look good and sound good for TV,” and have the skills to create educational videos based on the school curriculum. A Youtube channel will also be set up where the videos will be uploaded. The school year 2020-2021 will open on August 24.— Gillian M. Cortez

Senator Dela Rosa invited to reapply for US visa

SENATOR RONALD M. dela Rosa on Wednesday said the United States Embassy in Manila has invited him to reapply for a visa when it resumes operations amid the coronavirus pandemic. Mr. Dela Rosa said he received the call after President Rodrigo R. Duterte talked with American President Donald J. Trump on April 19. “After nag-usap si President Duterte at President Trump, tinawagan na ako ng US Embassy na asikasuhin ‘yung visa ko (After President Duterte and President Trump talked, the US Embassy called me to work on my visa),” he said in an interview over ABS-CBN News Channel. Mr. Dela Rosa confirmed in January that his US visa was cancelled, which came after the issuance of a US resolution blocking members of the Philippines government linked to the detention of Senator Leila M. De Lima. The visa cancellation triggered Mr. Duterte’s decision to abrogate the Philippines’ visiting forces agreement with the US. In early June, however, the President ordered the suspension of the termination notice. — Charmaine A. Tadalan

July power rates expected to be little changed

ELECTRICITY RATES for Metro Manila households in July are likely to be flat, according to Manila Electric Co. (Meralco).

Electricity charges for almost 7 million customers of the listed distribution utility fell in the previous two months due to its relaxed power supply agreements with generators.

“For now, the indications are that rates will be flattish after two consecutive months of reductions,” Lawrence S. Fernandez, Meralco’s head of utility economics, told BusinessWorld Wednesday.

Recently, the Energy Regulatory Commission (ERC) approved adjustments to the utility’s December 2019 contract rates with power suppliers, the amount of which may be back billed to its customers.

Mr. Fernandez said Meralco is still discussing with partner generation companies how to implement the adjustments, which may affect the power rates in the succeeding months.

Last month, the ERC approved four separate motions of reconsideration filed by Meralco and its partner power generators to alter their supply contracts. Three of these contracts are with power plant companies under San Miguel Corporation (SMC), while the other is with Ayala-led AC Energy Philippines, Inc.

Two of Meralco’s supply agreements with South Premier Power Corp. (SPPC) and one with San Miguel Energy Corp. were revised to adjust the applicable rate, which now considers the plant capacity factor and escalation provision in the computation. The rate in one of the contracts with SPPC was raised to P4.8525 per kilowatt-hour (kWh) from the previous P4.0459/kwh.

Meanwhile, the contract rate for AC Energy, which now takes into account the plant capacity factor, was also increased to P4.9873/kWh from P4.2366/kWh in the previously-approved PSA.

Consumer group Laban Konsyumer on Tuesday warned that Meralco’s supply contracts with the SMC-owned power plants will increase the generation component of electricity bills.

Victorio A. Dimagiba, the group’s president, urged the ERC to “take a direct hand” in monitoring possible back billing by the power generators and to consider the amount to be amortized to reduce its impact on consumers.

“We hope all these rate increases can be looked into, and we hope that they can be prevented for the time being. We cannot afford another pandemic in higher rate increases,” he added.

Meralco invoked the force majeure provision in its supply contracts for May and June, bringing down generation charges, as power demand was low.

A force majeure event is an uncontrollable event that makes it impossible for companies to fulfill their obligations.

In June, the utility billed customers P8.7252/kWh, against the previous month’s P8.7468/kWh. In May, it charged P8.7468/kWh, against April’s P8.9951/kWh rate.

Customers saved P0.2208/kWh last month from the reduced pass-through generation cost of P4.3413/kWh. Since April, total savings from the decreased generation cost hit P1.6 billion.

The July rate is expected to be announced Friday, Mr. Fernandez said.

Meralco is still facing mounting complaints about its computation of bills since the lockdown started. It promised to “double and triple” its efforts in explaining customers’ bills, which are now computed based on their actual consumption.

The power distributor has promised a refund for customers who fully settled their arrears during the quarantine months but who intend to pay them on an installment basis.

Meralco’s controlling stakeholder, Beacon Electric Asset Holdings, Inc., is partly owned by PLDT, Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls. — Adam J. Ang

Gov’t considering new NAIA rehabilitation bids

THE government is assessing proposals submitted for the rehabilitation of Manila’s main international gateway by two other proponents willing to “step into the shoes of the consortium” according to the Department of Finance.

The original consortium that was to have undertaken the rehabilitation of Ninoy Aquino International Airport (NAIA) questioned the viability of its original proposal in the wake of the collapse in air travel due to the pandemic.

In a briefing Wednesday ahead of the President’s State of the Nation Address before Congress, Finance Secretary Carlos G. Dominguez III said that the terms proposed by the two unidentified proponents are similar to those put forward by the proponent of the Clark International Airport expansion project.

Mr. Dominguez said Transportation Secretary Arthur P. Tugade and Vivencio B. Dizon, presidential adviser for flagship infrastructure projects, are currently in talks with the two proponents.

“I understand that the Secretary Tugade as well as Vince Dizon who heads the infrastructure projects are in conversation with two more potential proponents for the NAIA project and apparently, these two other proponents are willing to get into an agreement with the government which is very similar to the terms of the agreement (reached with the) project proponent in Clark Airport,” he said.

“We’re not worried about it… We have two other proponents who are very willing to step into the shoes of the consortium,” he added.

Mr. Dominguez was referring to the statement issued Tuesday by the so-called “super consortium” which cited the government’s unwillingness to accept changes to the group’s proposed P102.12-billion rehabilitation project.

The group said it “can only move forward with the NAIA project under the options (for a revised deal) it had proposed.” The consortium is composed of Aboitiz InfraCapital, Inc; AC Infrastructure Holdings Corp.; Alliance Global Group, Inc.; Asia’s Emerging Dragon Corp.; Filinvest Development Corp.; and JG Summit Holdings, Inc.

However, Mr. Dominguez clarified that the government is not setting aside the consortium’s proposal and is only looking at the proposals submitted by the two unnamed proponents. He said it is Mr. Tugade who should disclose their identities.

“We are not setting aside the consortium, they were the ones that set it aside, It’s them who set (the agreement) aside, not us. But I’m telling you that there are two more who are interested in the project at the terms that we have indicated,” he said.

The consortium said it submitted a letter to the National Economic and Development Authority (NEDA) to consider the revised options. Mr. Dominguez said he also received a copy.

NAIA’s rehabilitation is expected to boost its capacity to 47 million passengers a year in the first two years, further expanding to 65 million after four years. The NEDA Board in November 2019 approved the consortium’s unsolicited proposal to rehabilitate NAIA.

The project is still subject to a Swiss challenge, in which other companies can submit counter proposals, which the original proponent has the right to match.

Early this year, the consortium and the government renegotiated parts of the draft concession agreement.

On other public-private partnership (PPP) funded projects, Mr. Dominguez said: “I understand that some proponents of the PPP projects have problems raising financing under the current situation” because the private sector has also been hit hard by the pandemic.

He said the government will assess all proposals for revised project terms. — Beatrice M. Laforga

Clark airport, New Clark City roads nearing completion

PUBLIC WORKS and Highways Secretary Mark A. Villar said the first phase of the 19.8-kilometer access road to Clark International Airport in Pampanga from New Clark City in Tarlac is now 88% complete.

In a pre-State of the Nation Address virtual briefing Wednesday, Mr. Villar said the first 5.33-kilometer segment of the access road is targeted for completion next month.

“Upon full development of all three phases by 2021, the road will create a direct link from the Clark Main Zone, Clark International Airport to New Clark City and vice versa,” he noted.

He said construction of an access road to New Clark City from the Subic-Clark-Tarlac Expressway (SCTEX) is also ongoing.

“This road has a length of 12 kilometers and has eight lanes, two interchanges, three bridges, bike and pedestrian lanes, roadway lighting, and linear parks,” Mr. Villar said.

He said the road project, which is 80% finished and targeted for completion in October, will cut travel time from SCTEX to Capas, Tarlac to 10 minutes from 40.

The government is working to strengthen the potential of New Clark City as an investment destination and an international training hub for sports, Mr. Villar said.

“New Clark City, which played a key role during the 30th Southeast Asian Games, is now helping the country as a COVID-19 quarantine facility,” he said.

He also mentioned the new passenger terminal building of the Clark International Airport that is expected to be finished by October.

The new Clark airport terminal building will accommodate an additional 8 million passengers, bringing the northern gateway’s overall capacity to 12 million a year.

“Clark International Airport will be able to service the growing catchment area up North, and help ease air traffic congestion at Manila’s international airports,” Mr. Villar said. — Arjay L. Balinbin

Banana exports projected to decline 20% in 2020

BANANA exports in 2020 are expected to decline 20% due to stronger competition, higher tariffs, and declining output and hectarage due to Panama disease, the Pilipino Banana Growers and Exporters Association, Inc. (PBGEA) said.

In a virtual media briefing on Wednesday, PBGEA Chairman Alberto Paterno F. Bacani said banana exports in 2020 will decline to 165 million boxes compared with 195 million boxes in 2019.

“The banana export value in 2020 will be around $1.65 billion, lower than the $1.95 billion in 2019,” Mr. Bacani said.

Mr. Bacani said the market share of Philippine banana exports in various countries has declined, with Japan, China, and South Korea admitting more product from Vietnam, Cambodia, Ecuador, Peru, and Guatemala.

Mr. Bacani said that in 2019, Philippine banana exports held 65.8% of the South Korean market, down from 76.9% 2018, after inroads made by Ecuador and Guatemala.

Mr. Bacani added that bananas from the Philippines are charged higher tariffs.

“If you look at our neighboring countries like Vietnam, their tariff rates for the South Korean market by 2021 will be at 9% while Colombia will be at 0%. Meanwhile, the Philippines is at 30%,” Mr. Bacani said.

“Definitely, it is going to discourage importers from sourcing from the Philippines due to the high tariff rates,” Mr. Bacani said.

Further, Mr. Bacani said that China has overtaken Japan as the number one market for Philippine bananas.

“China became the top banana export market due to friendly and warm relations of the current administration with the Chinese government,” Mr. Bacani said.

However, Mr. Bacani said Vietnam, Cambodia, Laos, and Ecuador will be competing for share in China.

“There is potential for Cambodia and Vietnam to be big banana exporters because they have lots of land that is also well-irrigated,” Mr. Bacani said.

“In particular, our Asian neighbors enjoy a logistical advantage against the Philippines because they are close to China. You just need to transport the fruit to the border. They really save money on freight,” Mr. Bacani said.

In addition, Mr. Bacani said the national government needs to help the banana export industry with research on fighting Panama disease.

“We have been doing our own research on how to combat Panama disease. But we really need the government’s help in solving the problem,” Mr. Bacani said.

Mr. Bacani urged the national government to help the banana export industry to survive, amid better global competition and political hurdles.

“This is no longer an issue of one Philippine banana company competing against another company. It is the Philippines against the world. Our government should take notice,” Mr. Bacani said.

According to the Philippine Statistics Authority, fresh banana exports were the Philippines’ top agricultural export commodity in 2019, valued at $1.93 billion. — Revin Mikhael D. Ochave

DA proposes P284.4-billion budget for 2021

THE Department of Agriculture (DA) proposed a P284.4-billion budget for 2021 to “sustain, reboot and grow” the agriculture and fisheries sector and make it more resilient as the economy recovers.

The proposed budget is 255.95% higher than the department’s actual budget in 2020.

The Department of Budget and Management had provided a tier-1 budget of P61.7 billion to the DA. The DA appealed for an additional P222.6 billion in tier-2 funding to “dramatically raise agricultural productivity and incomes.”

“We hope that the additional budget that we are requesting for rice better bring us to almost 95% sufficiency level,” Agriculture Secretary William D. Dar said Wednesday during the budget hearing with the House Committee on Agriculture and Food.

Mr. Dar said the agri-fishery sector has been the economy’s “sleeping giant” because of neglect and low funding levels, resulting in its “anemic performance.”

The proposed budget envisions “a food-secure and resilient Philippines with prosperous farmers and fisherfolk.”

The budget proposal allocates 37.25% for Luzon, 9.85% for Visayas, and 21.53% for Mindanao. Some 5.99% will fund the bureaus while 25.38% will be allocated to the Office of the Secretary.

The proposal breaks down into 53.89% for capital outlays, 2.61% for personnel services, and 43.50% for Maintenance and Other Operating Expenses. — Patricia S. Gajitos

DBM caps allowances for testing center volunteers at P500/day

THE Department of Budget and Management (DBM) said the allowance for public workers assigned to coronavirus testing facilities will be retroactive but capped at P500 per day.

Budget Secretary Wendel E. Avisado issued Budget Circular No. 2020-3 dated July 7 saying volunteer government workers deployed to swabbing centers and test-processing facilities are entitled to coronavirus disease 2019 (COVID-19) duty allowance of up to P500 per day, plus a one-time incentive equivalent to as much as 25% of monthly basic pay.

According to the circular, the duty allowance will be based on an eight-hour day, to be adjusted for those working beyond eight hours. The one-time duty incentive will be prorated based on total number of days volunteered.

The DBM said funds will be sourced from the budgets of government agencies and government owned- and controlled corporations (GOCCs).

The DBM said workers entitled to the COVID-19 allowance, special risk allowance and hazard pay from the government should only receive one of the three, whichever is highest.

The circular applies to personnel of government agencies and GOCCs that are regular, contractual or casual. It also covers workers hired through contract of service and job orders, as well as uniformed personnel.

“Agencies shall be responsible for the proper implementation of the provisions of this Circular. The responsible officers shall be held liable for any payment not in accordance with the provisions hereof without prejudice to the refund by the employees concerned of any excess or unauthorized payments,” it said.

President Rodrigo R. Duterte issued Administrative Order No. 31 on June 15 allowing government agencies and GOCCs to grant a COVID-19 duty allowance to their volunteer employees and workers assigned to testing centers. — Beatrice M. Laforga

Responding to COVID-19 from a transfer pricing perspective

One of the common tax issues affecting multinational entities (MNE) is transfer pricing. Yet, at present, where the COVID-19 pandemic is seriously affecting economies worldwide, many companies may tend to overlook the transfer pricing consequences of every management decision they are taking in order to deal with more pressing and critical matters impacting the business.

To help manage possible tax challenges that may arise from transfer pricing issues, let me share with you some transfer pricing-related concerns which MNEs may take note of in light of the COVID-19 crisis.

LIQUIDITY AND CASH FLOW
In order to meet current obligations, an MNE heavily affected by the present economic slowdown may resolve to acquire additional funding from its affiliates, particularly from the parent company, on top of any external financing schemes. This may be in the form of working capital advances, additional intercompany loans, discounting of receivables, etc. The MNE may also seek to delay intercompany payments to give priority to third-party commitments.

While these intercompany arrangements should be acceptable from a transfer pricing perspective, MNEs should still be wary of how to structure the transactions so as not to defeat the arm’s-length principle. For instance, any intercompany financing policy should be aligned with the MNE group’s external approach to financial and commercial transactions.

With the anticipation of an increase in related-party financing transactions, close scrutiny of loans and other financial support extended to an MNE member could likewise be expected from tax authorities. It is therefore advisable for MNEs to revisit their intercompany financing arrangements and assess compliance with the Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines as well as each local jurisdiction’s tax and transfer pricing regulations.

OPERATIONS AND VALUE CHAIN
When analyzing the reasonableness of a transfer price, it is important to determine the functional characterization of the parties involved. As economic theory implies, the level of return derived by an entity should be directly correlated to the functions it performs, assets it owns and risks it assumes. Thus, with the significant impact of COVID-19 on every business, it is likely that MNEs would encounter operations-related struggles especially in terms of the supply chain.

As businesses strategize to mitigate the effect of the health crisis, changes in the operations of MNEs may be evident, e.g., a manufacturing entity may not be able to continue to produce products and hence, may need to shift to procuring finished goods instead of manufacturing them. Therefore, in evaluating the business activities of each MNE, it is relevant to consider the accurate delineation of the functions, assets and risks before and after any business remodeling, the business reasons for and expected benefits from any change in functional profile, including the role of possible synergies, and the other options realistically available to the parties involved.

Further, the assessment of an MNE’s functional characterization in this time of crisis would likewise be significant in reviewing if the changes in functions, assets and risks would warrant a change in the transfer pricing policy. This would also help determine if an MNE is earning a return commensurate to its operations. As an example, a low-risk company performing routine functions is expected to generate stable profits considering that usually, it is the parent entity which bears the risks. Hence, any significant losses incurred by the low-risk multinational-member company during an economic downturn may be used to reassess if higher returns are warranted due to higher non-routine risks. Conversely, this could be an opportunity to check if a low-risk MNE may shoulder a portion of the losses of an MNE group firm by reducing its expected profit margin.

CONTRACTUAL ARRANGEMENTS AND INTERCOMPANY AGREEMENTS
As for the potential change and/or reallocation of certain business functions within an MNE group, it is also apparent that contractual arrangements need to be revisited. As it can be anticipated that independent parties would be renegotiating agreements such as the pricing, production volumes, payment terms, etc. given the current economic situation, related parties may follow suit by reevaluating their transfer pricing arrangements.

ROBUST TRANSFER PRICING DOCUMENTATION
Transfer pricing documentation is usually prepared to demonstrate that an associated enterprise has made reasonable efforts to comply with the arm’s-length principle. It is usually written under an implicit assumption of normal operating conditions for businesses. Considering the adverse impact of this COVID-19 epidemic on business, financial stability, workforce, and operating activities, among others, MNEs may want to reexamine if all the conditions outlined under the existing transfer pricing documentation remain reasonable, or if there is a need for realignment to encompass the present circumstances. Updated transfer pricing documentation would likewise support whether or not to maintain the existing transfer price. It would also help document that the sustained losses of a company are caused by unfavorable economic conditions and legitimate business reasons and not by transfer pricing arrangements.

In addition to robust transfer pricing documentation, MNEs should further keep all related e-mail correspondence, records and paper trails that would help establish the commercial and financial effects of the global pandemic. After all, having well-maintained transfer pricing documents could serve as the first line of defense of taxpayers against any potential transfer pricing challenges by the tax authorities.

As every sector of society is trying to cope with the pandemic, it is advisable for business owners to devise action plans holistically. Rather than exposing the company to tax risks resulting from seemingly overlooked transfer pricing issues, it is recommended that transfer pricing implications be given similar attention as other business needs and considerations.

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.

 

Iris Kristine Lacebal is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

 

+63 (2) 8845-2728

iris.kristine.d.lacebal@pwc.com

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