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TP rules in the Philippines: Still at a standstill?

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Transfer pricing is on the radar again in the Philippines, reports Maria Carmela Peralta of KPMG. It’s too early to tell whether the lengthy discussions taking place will bear fruit and the Philippines will have something other to show than its 2013 TP regulations, which the Philippine Bureau of Internal Revenue (BIR) is perceived to have overlooked.

Proposed anti-avoidance measures

After the first package of his tax reforms became effective on January 1 2018, the Philippine President had the second package – House Bill (HB) 7214 – filed with the lower house of Congress early in 2018. While the main focus of HB 7214 appears to be reducing the corporate income tax rate and removing redundant and costly incentives, it also makes reference to transfer pricing (TP). In its explanatory note, HB 7214 recognises that the Philippines' tax laws are outdated and lack adequate provisions to address TP and other tax avoidance practices that have led to an erosion in revenues.

However, the amendments introduced by HB 7214 in this regard are in the form of an anti-avoidance rule. Under the proposed amendments, in cases where a transaction or arrangement that directly or indirectly has tax avoidance as its purpose or effect, and if the tax avoidance purpose or effect is not merely incidental, the commissioner of Internal Revenue is authorised to disregard and consider such a transaction or arrangement as void for income tax purposes.

Moreover, the commissioner of Internal Revenue may adjust the taxable income of a person affected by the arrangement in a way he thinks appropriate in order to counteract a tax advantage obtained by the person from or under the arrangement.

The term 'tax avoidance' includes:

  • Directly or indirectly altering the incidence of any income tax;

  • Directly or indirectly relieving a person from liability to pay income tax or from a potential or prospective liability to future income tax; and

  • Directly or indirectly avoiding, postponing, or reducing any liability to income tax or any potential or prospective liability to future income tax.

Further, under HB 7214, there is deemed to be tax avoidance in the above instances where the transaction or arrangement is motivated by obtaining a tax benefit or advantage with no commercial reality or economic effect, and the use of the provisions of the taxation law on such a transaction or arrangement would not have been the intention of the law.

At the time of writing, Congress has not had any deliberations on the proposed anti-avoidance measure. However, the Philippine government has made pronouncements to have the second package approved by Congress in 2018 and made effective in the first quarter of 2019. In fact, HB 7214 states that it will be effective on January 1 2019.

Note also that the amendment may not be treated as self-executing and may require implementing revenue regulations. Questions will also be raised on the effect of the action by the commissioner of Internal Revenue to consider the transaction or arrangement as void for income tax purposes. Notwithstanding his action, it would seem that the transaction or arrangement is still valid from a legal perspective.

BIR's 2018 priority programme

Once again TP is part of the BIR's priority programme for calendar year 2018. Specifically, in its Revenue Memorandum Circular 6-2018, dated December 18 2017, the BIR included, as one of its priority programmes, intensified audit investigations and collection of right taxes through joint and coordinated examination pertaining to BEPS and TP. This brings to mind the BIR's practice of conducting joint audits of conglomerates. However, the question is, to what extent the joint audits will be conducted. It is likely also that such joint audits will be the regular type of audits. This is because, to date, the BIR has not issued any guidelines for the conducting of TP audits.

Other developments: PFRS 15

Another development that may affect TP is the Philippine Financial Reporting Standards (PFRS) 15, which deals with revenue from contracts with customers. PFRS 15 will be the new revenue recognition standard effective in the Philippines for annual periods beginning on or after January 1 2018. PFRS 15 changes the amount of consideration, and the amount and timing of revenue to be recognised.

However, the BIR has not yet given any indication on how it views PFRS 15 and if PFRS 15 will determine the tax reporting. It is expected, though, that existing tax rules on reporting income and expenses will still prevail. Taxpayers should then have the supporting schedules for the differences in tax reporting.

Hence, for purposes of preparing TP documentation, taxpayers may have to take into account the impact of PFRS 15 in calculating their profit level indicators. They may have to provide write-ups on the calculations in the documentation.


It is advisable for taxpayers to look at the substance of their contractual arrangements and evaluate if their agreements have a bona fide business purpose. The underlying agreements should be executed and readily available for submission to the BIR if requested. In light of the document-driven audits of the BIR, taxpayers should have supporting schedules for their tax reporting.

On the BIR's part, there should be recognition of the taxpayers' need to have clarity or guidance via revenue regulations or other circulars, especially after the approval by Congress of new laws. Implementation of the rules is also crucial. In the absence of such guidance and implementation, the Philippines may lag behind its Asia Pacific neighbours with respect to TP. It may even be at a standstill.

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