Written by Carlos T. Carado II, 14 September 2007
One year after the Bureau of Internal Revenue (BIR) had finalised the proposed Transfer Pricing (TP) Regulations, the Department of Finance has now finished its review and sent back the draft proposed regulations for further enhancements and fine-tuning.
Since it is already almost the end of the 3rd quarter of 2007, taxpayers may expect the draft TP Regulations to be issued anytime before the year ends as the BIR might find it more practical for both the government and taxpayers to make the Regulations effective January 2008.
The provisions of the proposed TP Regulations are patterned after the guidelines issued by the Organisation for Economic Cooperation and Development and various issuances of the United States and New Zealand Treasury Departments and thus, are comprehensive in scope and seek to reinforce the existing general transfer pricing rules issued by the BIR.
Meanwhile, the BIR is seem to be preparing for the eventual implementation of the TP Regulations. Various training programs on TP have been conducted by the BIR. The benchmarking concept has likewise been rolled-out in which the Large Taxpayers Service has conducted initial analysis of certain industries for profiling. Thus, recently, taxpayers have been receiving notices from the BIR requiring them to reconcile the apparent disparity in their financial results and tax performance as against the BIR’s benchmark.
In terms of enforcement, while there are yet no coordinated and comprehensive audits on TP, the BIR has already started to take note of certain TP issues in their regular tax examinations, specifically related party transactions such as transfer of goods, inter-company services and loan arrangements.
The BIR adopts various approaches in imposing sanctions for alleged TP violations which include imputation of additional income or sales and issuance of assessment for deficiency withholding tax.
Interestingly, the BIR’s level of awareness on TP issues seems to be gradually increasing even among revenue examiners from several BIR offices outside of Metro Manila.
As these recent developments would seem to indicate that TP is among the BIR’s priority area of focus, taxpayers should start looking at their interrelated party transactions to ensure that they comply with the arm’s length standards and are properly documented. Thus, the key element is preparation.
For example in the case of pricing, the proposed TP Regulations provides that proof of compliance with the arm’s length standard should be based on information reasonably available at the time of the taxpayer’s pricing determination. This assumes that prices of goods and services were determined on the basis of pricing studies properly conducted and documented by the taxpayer.
Thus, proper documentation of related party transactions is important not only because it is a requirement under the proposed TP Regulations but also because it puts the taxpayer in a better position to defend its pricing practices and at the same time prevents any unnecessary adjustments during a tax audit.
Pending the final approval and issuance of the proposed TP Regulations, it remains to be seen how intense will the BIR pursue its TP audits. Nonetheless, in light of the BIR’s recent paradigm shift in the collection of revenue, it is certain that TP will be a key area in the BIR’s collection efforts. Whether this will be done through special audits or at all levels of the RDO, affected taxpayers, i.e., taxpayers with interrelated transactions, should be prepared for this eventuality and ensure that their transactions have the proper documentation.
