Taxing authority and tax law

Tax authority: The Bureau of Internal Revenue (BIR)

Tax law: Under Section 50 of the National Internal Revenue Code of 1997, as amended, the Commissioner of Internal Revenue has the power to allocate income and expenses between or among related parties/taxpayers or make transfer pricing adjustments to reflect the true taxable income of taxpayers.

Relevant regulations and rulings

Revenue Memorandum Circular (RMC) No. 26-08 formally adopted the OECD Transfer Pricing Guidelines as the interim transfer pricing guidelines in the Philippines. The RMC specifically states that the BIR, as a matter of policy, subscribes to the OECD Transfer Pricing Guidelines, and until the draft regulations are issued, any and all concerns on transfer pricing shall be resolved in accordance with said Guidelines.

In July 2009, the BIR issued Revenue Memorandum Order (RMO) No. 23-2009 mandating the National Investigation Division (NID) of the BIR to audit, among others, interrelated companies and conglomerates, including their officers and related individual taxpayers, to ensure that such taxpayers are clearly reflecting income and expenses that are attributable to controlled and inter-related transactions. The RMO further states that various schemes being employed by conglomerates and group of companies to reduce the amount of taxes shall be identified, such as (but not limited to) the use of tax-exempt entities or those with special tax privileges, inter-related company loans and advances, cost sharing, and the supply of goods and services. In the conduct of audit, particular attention shall be given to transfer pricing issues which should be considered in the audit findings of the taxpayers.

This was followed by RMO No. 36-2010 issued in March 2010 which prescribed the rules and procedures governing the conduct of special investigation and enforcement activities of interrelated companies, conglomerates, their affiliates and subsidiaries for taxable year 2009. The RMO amends RMO No. 23-2009 and now directs the Large Taxpayers Service and the Enforcement Service to identify the conglomerates consisting of interrelated companies (parent company, affiliates and subsidiaries) that will be subject for audit under the program. The investigation shall cover all internal revenue taxes for taxable year 2009 and has to be completed no later than six months from the issuance of the letter of authority (LA).

OECD guidelines treatment

The BIR not only adheres to the OECD TP Guidelines but has in fact formally adopted the OCED TP Guidelines as the interim transfer pricing guidelines in the Philippines through RMC No. 26-08 (see above).

Priorities/pricing methods

The methods to determine the arm’s length price under the OECD TP Guidelines such as CUP, Resale Price, Cost Plus, Profit Split and TNMM are accepted in the Philippines.

Transfer pricing penalties

There are no specific rules prescribing for penalties for failure to properly document intercompany transactions. In case of a deficiency assessment due to a transfer pricing adjustment, the general penalties apply such as the 25% surcharge (50% in fraud cases) and 20% interest per annum.

Penalty relief

There is currently no penalty relief regime in place.

Documentation requirements

There are no rules formally requiring specific documentation for related party transactions but since the Philippines has formally adopted the OECD TP Guidelines, there is an implied requirement to have documentation in place that is consistent with the guidelines on documentation under the OECD TP Guidelines.

Under the draft transfer pricing regulations, however, the following information are required or expected by the BIR from a taxpayer to support their intercompany pricing policies:

• General information on the group, such as:
  • Worldwide organizational structure showing the location and ownership linkages among related parties
  • Group’s line of business, industry dynamics, market, regulatory and economic conditions in which the group operates
  • Group’s business models and strategies (past, present and future);
  • Principal business activities and functions of each party in the group; business relationships among related parties; consolidated financial statements of the group for the last three years, including the year the controlled transactions occurred
• Information on each related-party in the Philippines (Philippine entity), such as:
  • General information, such as company registration number, address, etc.
  • Entity’s line of business, industry dynamics, market, regulatory and economic conditions in which the entity operates
  • Entity’s business models and strategies (past, present and future)
  • Entity’s functions, risks and assets employed
  • Financial Statements, including detailed profit and loss statements for the last three years, including the year when the controlled transaction occurred
• Details on transactions between the Philippine entity and all related parties, such as:
  • Detailed information on all transactions with related parties
  • Contracts or agreements (if any) to show the terms of the transactions
  • Segmented financial accounts with respect to the transactions, including explanations on the assumptions (if any) used to derive the segmented information for the last 3 years, including the year when the controlled transactions occurred
• Transfer pricing analysis, which shall include:
  • Choice of the tested party and the reasons supporting the choice
  • Details on comparables and the screening criteria for choosing comparables
  • Comparability analysis of the related party transactions and the comparables
  • Details of (and reasons for) the adjustments deemed necessary to be made to achieve comparability
  • Transfer pricing method chosen and explanation why the method is most appropriate
  • Determination of the arm’s length price/ margin, showing the detailed computation and explanation of any assumption made
  • If an arm’s length range is determined, furnish details/ reasons to support the determination and use of the range
    And
• Other useful information, such as a list of any known comparable companies having transactions similar to the controlled transactions

Documentation deadlines

There is no requirement for contemporaneous submission of documentation when tax returns are filed. However, under the draft transfer pricing regulations, documentation must be submitted to the BIR within 45 days of the BIR request.

Statute of limitations on transfer pricing assessments

The general prescriptive period applies which is three years after the last day prescribed by law for filing of the return, except in cases of fraud with intent to evade tax where the prescriptive period is 10 years from discovery of fraud.

Return disclosures/related-party disclosures

Related-party disclosures are required only in the Notes to the Audited Financial Statements which is required to be filed with the BIR together with the Annual Income Tax Return.

Audit risk/transfer pricing scrutiny

The risk of a TP audit is medium to high as the BIR has started conducting TP audits pursuant to the RMOs mentioned above.

APA opportunity

There is currently no APA procedure in place.

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