The Philippines still has a long way to go in transfer pricing. The much-delayed issuance of the transfer pricing regulations in January 2013 has not done much in creating a robust transfer pricing environment in the Philippines. The regulations do not have real teeth as there are no enforcement mechanisms in place. Even the Philippine tax office – the Bureau of Internal Revenue (BIR) – encounters challenges in implementing the regulations and releasing additional guidelines. One factor to explain this is that with many of its trained personnel having left, the BIR until now is still building capacity in transfer pricing. With this transfer pricing landscape, it is unlikely for the BIR to push in the near future for the adoption of the master file, CbC reporting, and local file requirements of the BEPS Action Plan.
Nevertheless, taxpayers should not disregard transfer pricing or the BEPS initiatives. There have been many cases of BIR teams conducting regular investigations (i.e., non-transfer pricing audits) asking for the documentation for the mere reason of it being required under the regulations. It turns out that the submission of the documentation is considered compliance already and stops any further questions on transfer pricing.
The documentation is also a ready defence for taxpayers that have restructured operations resulting to significantly lower revenues, thereby inviting the BIR's scrutiny.
As more and more countries adopt the BEPS initiatives on master file, CbC reporting, and local file requirements, subsidiaries/affiliates located in the Philippines will have to have to attend to the preparation of their documentation as part of their respective group's compliance. And with the CbC reporting starting to take effect for 2016, the increase in taxpayers within the past 12 months planning to prepare or having prepared their local file is notable.
On the other hand, as the number of Philippine conglomerates investing offshore increases, it is expected that these conglomerates will at a certain point in time be subject to the master file, CbC reporting, and local file requirements. Complying with these requirements will mean a lot of learning and work for these conglomerates, especially if they are imposed on the conglomerates by more than one foreign jurisdiction.
Challenges in the preparation of the local file for the group
Philippine subsidiaries/affiliates tasked by their headquarters to prepare the local file as part of their groups' compliance with BEPS have had a number of challenges. Good coordination will be required between them and their headquarters for the former to understand the importance of the exercise. In particular, this good coordination is needed to determine matters such as but not limited to the following:
1) Timelines that have been set at the headquarters' level for the preparation of the local file and the corresponding audited financial statements – While requirement under the Philippine transfer pricing regulations is that the documentation should be contemporaneous, this requirement is not being enforced by the BIR. The documentation is not required to be submitted to the BIR upon filing of the income tax return. There are no penalties imposed due to the mere absence of a contemporaneous documentation. In fact, the BIR personnel have informally stated that even during a BIR investigation, the taxpayer may just at that late stage prepare the documentation.
2) Presentation of sales and taxable income per business segment, per related parties vis-à-vis third parties, and per related party – Philippine financial reporting requirements do not extend to such detailed breakdown of the sales and costs/expenses. For example, operating expenses could be lumped together regardless of business segments and of the type of customers (whether related party or third party). The absence of readily available financial data could impact the computation of the profit level indicators for the related-party transactions. Losses may actually be with third-party transactions.
3) The point within the arm's-length range acceptable to the group (i.e., whether full range or interquartile range and what percentile) – under the Philippine transfer pricing regulations, any point within the range is acceptable. However, this may not be the case for the headquarters.
4) Need for consistency with the groups' transfer pricing policy and/or description of its business operations.
Good coordination is critical especially for those Philippine subsidiaries/affiliates used to the BIR's lack of monitoring of compliance with transfer pricing regulations. It is an observation, too, that Philippine subsidiaries/affiliates understandably may have a good grasp only of the Philippine operations of the group. This could lead to gaps in the local file's content.
One area where caution is required is the narrative in the local file on the management structure of the Philippine entity. Issues could arise on the existence of a permanent establishment (PE) in the Philippines. While the BIR's current guidelines on PEs are not clear or extensive, this item should be considered carefully. Nevertheless, this item is not required by the Philippine transfer pricing regulations which essentially are based on the pre-BEPS OECD transfer pricing guidelines. But it has been observed that some headquarters do require this item to be included in the local file.
Another area of concern will be on non-interest bearing intercompany advances. In view of a Supreme Court decision, non-interest bearing advances may be acceptable. The Supreme Court has stated that since the payment of interest should be stipulated in writing as provided under the law, the BIR cannot impose a theoretical interest. This has caused issues in the discussions between related parties for proposed financing especially for the Philippine entity getting the advances and insisting that there should be no interest charged.
Challenges for Philippine conglomerates with offshore investments
For Philippine conglomerates with offshore investments and being subjected to the BEPS masterfile, CbC reporting, and local file requirements of foreign jurisdictions, there could be issues on how complying with these requirements (and with the arm's-length principle) will affect the revenues of group and of the headquarters. This is true especially for those Philippine conglomerates that have not yet pursued a coordinated approach in handling their transfer pricing concerns.
Even before such requirements get to be applicable to them, it may make sense for them to have a high-level transfer pricing risk assessment of their related-party transactions around the world. It is possible also that certain related-party arrangements are in place that they are unaware of and may have to account for in the future. Further, as these requirements include the submission of the corresponding contracts/agreements to the foreign tax office, they may have to check if these have already been executed.
|Maria Carmela M. Peralta|
9th Floor, KPMG Centre,
Maria Carmela has 18 years of experience in the tax practice. She was seconded to the transfer pricing team of KPMG in Singapore for one year in 2008. Since her return in 2009, she has been the country service line leader for transfer pricing.
She provides tax services to various multinational and local companies from different industries, including transfer pricing services. She has also been recognised as one of the leading female tax advisers in the Philippines in the first edition of Women in Tax Leaders guide by the International Tax Review in 2015.
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