By Maria Carmelita V. Torres, 23 January 2014
When the Philippine Transfer Pricing (TP) Guidelines (Revenue Regulations [RR] No. 2-2013) were finally issued in January 2013 (after nearly a decade of waiting), it was generally regarded by many as a welcome addition to the roster of administrative issuances and regulations being implemented by the Bureau of Internal Revenue (BIR), especially by multinational enterprises (MNEs) that deal with numerous related parties (i.e. companies belonging to the same group or common controlled companies) from various jurisdictions around the world.
This is largely because it gives a level of certainty, or at least a starting framework, as to how the BIR would approach transfer pricing issues in the Philippines, and consequently, how Philippine taxpayers/MNEs can better prepare for them.Largely aligned with the provisions of the Organization for Economic Cooperation and Development’s (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines), RR No. 2-2013 (the Philippine TP Guidelines) reiterated the use of the arm’s length principle as the standard to determine transfer prices of controlled transactions (i.e. transactions between two or more associated or related parties). Other concepts adopted by RR No. 2-2013 from the OECD TP Guidelines include Advance Pricing Agreements (APA) and Mutual Agreement Procedures (MAP), among others.
According to RR No. 2-2013, an APA is an arrangement between the taxpayer and the BIR that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. MAPs, on the other hand, serve as a means for tax authorities from different jurisdictions to consult each other in resolving disputes in the application of tax treaties. They serve to eliminate double taxation arising from transfer pricing adjustments. APAs and MAPs generally resolve transfer pricing issues when traditional administrative, judicial, and treaty mechanisms fail or are difficult to apply.
Moreover, APAs may involve not only the specific taxpayer and the BIR (in cases of unilateral APAs), but likewise two or more taxing jurisdictions (in cases of bilateral APAs or multilateral APAs). A unilateral APA is an agreement between a taxpayer and a tax authority on the appropriate transfer pricing methodology to be applied to its transactions with international related parties, while a bilateral APA (BAPA) refers to an agreement between two tax authorities relating to the transfer pricing methodology of transactions between taxpayers in their respective jurisdictions. BAPAs are signed by competent authorities under the relevant tax treaty while unilateral APAs can be signed by an authorized senior official of the tax authority.
Although securing an APA is optional and does not guarantee immunity from tax investigation (unless agreed upon in advance), it can assist taxpayers in reaching greater certainty on their tax liabilities and even resolve transfer pricing issues at its inception. APAs can also facilitate workable solutions to complex transactions that are mutually acceptable to both the taxpayer and tax administrators. Lastly, not only do APAs and MAPs reduce or eliminate the taxpayer’s risk of double taxation, but these can also benefit the BIR/tax authority by reducing costs and transfer pricing examinations or audits.
Most taxpayers engaged in controlled transactions are keen to know how APAs and MAPs can be availed and how soon they may avail of them. Thus, similar to the wait for the Philippine TP Guidelines, taxpayers are hoping that the implementing rules specific to APA and MAP applications will be issued soon.Its issuance would, among others, tackle key areas like the application process, which normally includes the consultation phase (pre-filing), APA submission phase, assessment phase, discussion and negotiation phase; the provision of substantial information and analysis in the pre-filing phase (which is usually termed the “consultation phase”) such that the tax authority can make an informed decision as to whether or not to accept the APA into the program; the contemplation of collateral issues associated with the covered transactions under the APA; the use of forms to submit documents and for annual compliance reporting; as well as, the requirement for a filing fee, if any.
These rules may also cover the implications of the APA/MAP process on any ongoing tax investigations of the taxpayer-applicants, the reglementary period governing APA/MPA, as well as, the designated members or competent authorities within the BIR organization authorized to handle such processes. Adopting APA guidelines of other jurisdictions, the implementing rules may include a proviso on the determination of the “basis of tax” or how to arrive at the actual taxes to be paid by the taxpayer, regardless of the income or loss position of the taxpayer, for the entire period that the APA is applicable or in force and effect.
No one can deny the transformational effect of globalization on international trade. The fluctuating and volatile economies of numerous countries weigh heavily on MNEs to consider and manage their business operations, and consequently the bottom lines of their global network of companies, most efficiently. With varying tax legislations among cross-border jurisdictions, managing tax issues and concerns becomes complex to handle.
Neighboring countries in the Asia Pacific Region, such as Australia, Japan, Singapore, China, Malaysia, India and, most recently, Vietnam, have already issued their APA application guidelines. If the Philippines intends to be competitive in the global race, it must align its policies on related party transactions with international standards. The challenge is for the BIR to finally circularize the implementing rules for APAs and MAPs, which we understand is currently being considered by the Bureau. When the BIR finally releases such regulations, it would become another important milestone in the development of transfer pricing in the Philippines. It is thus greatly hoped that the guidelines for the APA application and MAP process will be issued sooner rather than later.
The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.