APAC Tax Matters: 13th edition
At a glance
- Transfer Pricing Regulations introduce guidelines in applying the arm’s length principle for cross-border and domestic transactions between associated enterprises
- Policies, guidelines and procedures prescribed in processing specific requests for information pursuant to the Exchange of Information provision in Philippine tax treaties
- Tax Treaty Relief Applications to be filed on time in respect of payments by domestic corporations to foreign corporations, otherwise the relevant payments will be subject to the regular income tax rates
Transfer Pricing Regulations
The Transfer Pricing Regulations were issued to implement the authority of the Commissioner of Internal Revenue (CIR) under Section 50 of the Tax Code to:
- Review controlled transactions among associated enterprises
- Allocate or distribute their income and deductions in order to determine the appropriate revenues and taxable income involved in controlled transactions
- Require the maintenance and safekeeping of documents proving that efforts were made to determine the arm’s length price or standard in transactions among associated enterprises. These regulations apply to cross-border transactions and domestic transactions
The Bureau of Internal Revenue (BIR) adopts the use of the arm’s length principle as the most appropriate standard to determine the transfer pricing (TP) between related parties. The arm’s length principle requires that the transaction with a related party be made under comparable conditions and circumstances as a transaction with an independent party.
In applying the arm’s length principle, the following 3-step approach may be observed:
- Conduct a comparability analysis
- Identify the tested party and the appropriate TP method
- Determine the arm’s length results
The BIR does not require TP documents to be submitted when tax returns are filed. However, documentation should be retained and submitted to the BIR whenever required. TP documents must be contemporaneous, i.e. the documentation should exist or be brought into existence at the time the associated enterprise develops or implements any arrangement that may raise TP issues or review these arrangements when preparing tax returns.
The provisions of the Tax Code and other applicable laws regarding the imposition of penalties and other appropriate sanctions shall be applied to any person who fails to comply with or violates the provisions and requirements of the TP regulations.
Exchange of Information Guidelines
Exchange of Information (EOI) covers any information that is necessary or foreseeably relevant to the administration or enforcement of the domestic laws of the contracting parties concerning taxes covered by the terms of EOI arrangements, as well as information for cases that involve tax evasion and other criminal offenses. The scope of EOI is not limited to taxpayer-specific information, but also includes information related to tax administration and compliance improvement.
Generally, the obligation to exchange information is mandatory. However, Revenue Memorandum Order No. 2-2013 (“Revenue Order 2-2013”) prescribes the following instances when a request for information can be declined:
- Information that the requesting party would not be able to obtain under similar circumstances
- Information relating to years not covered by double taxation agreements or taxes not covered
- Information, the disclosure of which would be contrary to public policy
- Information relating to the administration or enforcement of a provision of the tax laws, which discriminates against a national of the requested party (i.e., the Philippines) as compared with a national of the applicant party under the same conditions
- Information subject to privilege protected from disclosure under domestic law
Revenue Order 2-2013 further notes that:
- EOI can only take place between competent authorities or their authorized representatives. Bypassing the competent authorities constitutes a breach of tax confidentiality.
- The period for processing requests for information is generally 90 days from the receipt of the request by the tax authority. This period may be extended where difficulties in obtaining and providing information are encountered.
- All taxpayer information obtained through EOI is confidential and may only be disclosed in accordance with Philippine law. This covers not only information received in response to a request, but also information contained in competent authority letters, including the letter requesting information.
Application of preferential tax treaty rates
Recent rulings by the Bureau of Internal Revenue affirmed the importance of filing a tax treaty relief application (TTRA) with the Bureau of Internal Revenue (BIR) – International Tax Affairs Division (ITAD) before the first taxable event.
In the relevant rulings the late filing of the relevant TTRAs caused withholding of 30% to be applied in respect of dividends and royalty payments that would otherwise have enjoyed preferential withholding rates under available treaties. The rulings affirmed the first taxable event as being the date of remittance of the amounts to the foreign corporations.