All Souls’ Day is the day we remember and pray for the souls of loved ones who have departed.
Businesses, especially multinational companies that have significant transactions with their related parties, can draw a parallel to the importance of remembering transfer pricing regulations. Just as we pay our respects to those who have passed, companies must adhere to the rules set forth by the Bureau of Internal Revenue (BIR) to ensure fair and transparent transactions.
THE ORIGINS OF TRANSFER PRICING
Transfer pricing regulations have deep roots. These rules were established to prevent profit shifting and ensure that multinational companies pay their fair share of taxes in each jurisdiction they operate. By adhering to these regulations, businesses honor the principles of fairness and equity in the global tax landscape. The origins of transfer pricing can be traced back to the need for a standardized approach to pricing transactions between related entities, ensuring that profits are appropriately allocated and taxed where economic activities occur. This measure was enshrined in Section 50 of the Tax Code, as amended, where the Commissioner of Internal Revenue (CIR) is given the authority to review, allocate, and distribute the income and deductions of the related party transactions (cross-border and domestic), including intra-firm transactions between related parties, to determine the appropriate revenue and taxable income.
In 2008, the BIR made a pronouncement that, as a matter of policy, it subscribes to the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD) and that until the regulations are issued, any and all transfer pricing concerns shall be resolved in accordance with the principles laid down by the OECD guidelines. Lo and behold, in 2013, the BIR issued its first transfer pricing guidelines in Revenue Regulation (RR) No. 2-2013, which requires businesses to document that their pricing is consistent with the arm’s length principle by preparing adequate and contemporaneous transfer pricing documentation (TPD).
THE SPIRIT OF COMPLIANCE
Taxpayers that meet the conditions and materiality thresholds set forth in RR No. 19-2020 as amended by RR No. 34-2020 are to submit BIR Form No. 1709 (Information Return on Related Party Transactions, or RPT Form) and maintain TPD. This involves keeping detailed records of intercompany transactions, performing industry analysis, functional analysis, and benchmarking studies to justify that prices are set at arm’s length. The spirit of compliance is not just about following rules but also about fostering a culture of transparency and accountability within the organization. By doing so, companies can build trust with tax authorities and stakeholders, ensuring that their operations are seen as fair and just.
THE VIGIL OF DOCUMENTATION
Much like the vigil held on All Souls’ Day, where families keep watch and pray for their departed loved ones, businesses must vigilantly maintain and update their transfer pricing document files, such as their transfer pricing policy, TPD, agreements or contracts, invoices, and receipts, among others.
This continuing effort ensures that businesses are prepared for any scrutiny from tax authorities and can defend their pricing strategies. This involves not only keeping detailed records but also making certain that these records are easily accessible and up-to-date. This requires a systematic approach to data management, where all relevant information is collected, organized, and reviewed regularly. By doing so, companies can demonstrate their commitment to compliance and be ready to respond to any inquiries from tax authorities.
AVOIDING THE GHOSTS OF NON-COMPLIANCE
Failing to comply with transfer pricing regulations can summon the ghosts of non-compliance, including fines, penalties, and reputational damage. Neglecting transfer pricing rules can result in significant financial and operational consequences. Non-compliance can haunt a company for years, leading to prolonged disputes with tax authorities and potential adjustments that can impact financial statements. To avoid these, businesses must be proactive in their compliance efforts, regularly reviewing and updating their transfer pricing policies and documentation. In case of tax assessment, if the BIR finds that the pricing is not at arm’s length, then the BIR may make an adjustment to reflect the arm’s length price. These adjustments arising from a BIR audit would result in businesses being liable for deficiency taxes, interest, and penalties.
THE ETERNAL LIGHT OF APAS
Advance Pricing Arrangements (APAs) can be seen as the eternal light that guides businesses through the complexities of transfer pricing. These agreements provide certainty and clarity. The process of obtaining an APA involves a thorough review of the company’s transfer pricing policies and practices, as well as negotiations with tax authorities to agree on the appropriate pricing methodology. Once in place, an APA provides a level of assurance that can help businesses plan their operations with greater confidence.
HONORING THE FUTURE: UPCOMING DEVELOPMENTS
As we look to the future, BIR has been enhancing its transfer pricing capabilities. The BIR has completed forming its transfer pricing group. Moreover, the BIR has conducted and participated in various training programs covering topics such as transfer pricing principles, audit technique and procedures, and international best practices to enhance their capability in handling transfer pricing issues. The BIR also received significant support from international organizations, including the OECD, to bolster its initiatives.
Meanwhile, the Philippines has joined the OECD/G20 Inclusive Framework on Base-Erosion and Profit Shifting (BEPS) Inclusive Framework on Nov. 8, 2023. This move reconfirms the government’s commitment to upholding tax fairness, protecting the tax base from aggressive tax avoidance schemes, and promoting international tax cooperation. With its membership, the Philippines signals its commitment to ensuring tax fairness and implementing the BEPS Action Plan, which includes measures to prevent tax base erosion and profit shifting. Moreover, the Philippines must align its domestic tax laws with international standards.
TAKEAWAY
By respecting and adhering to transfer pricing regulations, businesses can ensure that their operations remain compliant and transparent, observing the principles of fairness and equity. Just as All Souls’ Day is a time to remember the departed, it is also a reminder for companies to fulfill their obligations and remain compliant. In doing so, they can navigate the complexities of transfer pricing with confidence, ensuring that their practices are aligned with both local and international standards.
While we remember the departed, honoring and paying respects to those living is a noble act. While some taxpayers might believe that transfer pricing is dead since BIR is currently not active in pursuing TP audits, transfer pricing rules in the Philippines are still alive, and will make their presence known again soon enough.
Let’s Talk TP is an offshoot of Let’s Talk Tax, a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Sharmaine Louise P. Sanchez-Jimenez is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.