Published 1 November 2021, The Daily Tribune
Transfer pricing is a tax controversy that arose along with the integration of national economies and technological progress. Economic integration has been marked with the growth of multinational enterprises (MNE), which are subject to different tax jurisdictions with varying degrees of tax rates and administration. While these differing requirements have imposed a burden on regulatory compliance by MNE, this has likewise created an opportunity for MNE to maximize their corporate profits by shifting taxable profits from high-tax countries to low-tax countries.
Taking note of this tax leakage, an increasing number of countries have enacted laws and regulations on transfer pricing, which refers to the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises.
In the Philippines, the rule on transfer pricing is grounded on Section 50 of the Tax Code, which authorizes the Commissioner of Internal Revenue to distribute, apportion or allocate gross income or deductions between or among organization, trade or business (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests. This right to distribute or allocate profits is predicated on a determination by the Commissioner that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect income of any such organization, trade or business. Simply put, the Commissioner has the authority to assess a taxpayer for tax leakage due to shifting of profit to another tax jurisdiction.
In 2013, the Bureau of Internal Revenue (BIR) issued its transfer pricing guidelines in Revenue Regulations (RR) 02-2013. In the said guidelines, the BIR recognized that while most transfer pricing issue occurs in cross-border transactions, it can also occur in domestic transactions, particularly when income is shifted in favor of a related company with special tax privileges, such as the incentives provided by the Board of Investments and Philippine Economic Zone Authority.
To avoid this tax leakage, intra-group transactions are required to be at arm’s length. The arm’s length principle requires that the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. As provided in RR 2-2013, the Philippines, like most countries, adopts the methodologies set out in the Organization for Economic Cooperation and Development Transfer Pricing Guidelines to determine whether a transaction is at arm’s length.
Further, RR 2-2013 requires taxpayers to demonstrate that their transfer prices are consistent with the arm’s length principle through proper documentation. The main purpose of keeping adequate documentation is for taxpayers to be able to (i) defend their transfer pricing analysis, (ii) prevent transfer pricing adjustments arising from tax examinations, and (iii) support their applications for Mutual Agreement Procedure (which refers to the means through which tax administrations consult to resolve disputes regarding the application of double tax conventions). The BIR requires that the transfer pricing documents be contemporaneous, i.e., it should exist or be brought into existence at the time the associated enterprises develop or implement any arrangement that might raise transfer pricing issues or review these arrangements when preparing tax returns.
In the next column, we will discuss the most recent BIR regulations on transfer pricing. (To be continued)
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