Waiting again for the BIR

Since the release of the Philippine Transfer Pricing (TP) regulations in early 2013, the Bureau of Internal Revenue (BIR) has repeatedly stated, although informally, that it would be issuing additional guidelines to implement the regulations. The regulations would supposedly cover the preparation of the TP documentation, Advance Pricing Agreements (APAs), and conduct of TP audits. However, to date, the BIR has not yet issued the additional guidelines. This is not new considering that it took years for the BIR to finalise the TP regulations after releasing its draft. This may just be due to the capacity-building measures the BIR is taking. Further, the BIR has not even indicated whether it would work for the enactment of legislation adopting the BEPS initiatives of the OECD.

Nevertheless, TP remains to be on the BIR's radar screen. On February 15 2016, the BIR issued Revenue Memorandum Order (RMO) No. 06-2016, which outlines its Strategic Plan for 2016 to 2020 (the Strategic Plan). The Strategic Plan provides for the five-year overview of the seven high-level strategic objectives of the BIR to attain collection targets and sustain collection growth. One of the objectives is to improve assistance and the enforcement processes of the BIR. Under this objective, the BIR aims among other things to establish the approach to TP to address base erosion and profit shifting and the challenges of the digital economy and global business structures; to identify the required skills and expertise, reporting requirements, organisational arrangements, APA and Mutual Agreement Procedure (MAP) processes, and documentation requirements; to strengthen the focus on international tax risks; and to develop a methodology to identify and audit high risk companies that shift profits offshore or avoid tax obligations.

Aligned to the Strategic Plan is the priority programme for 2016 of the BIR as provided in its Revenue Memorandum Circular No. 14-2016, dated February 15 2016. The priority programme includes TP, specifically the subscription to a commercial database for TP studies, the development or pursuit of what it calls a TP test case for the BIR's Large Taxpayers Service (LTS), and the crafting or finalisation of TP-related issuances.

One cannot gauge whether the BIR may in the near future implement its priority programme for TP. However, the BIR's TP team is known to have been discussing lengthily with a service provider of a TP database used extensively in other tax jurisdictions for regional or Asia-Pacific searches. This could indicate that the BIR may be willing to accept regional/Asia-Pacific searches. This is contrary to the often-mentioned preference of the BIR for local comparables. Nevertheless, it is still advisable to state in the TP documentation sufficient justification for the use of regional comparables.

Moreover, following the previous statement of the BIR on its preference for local comparables, many taxpayers have resorted to local searches. Admittedly, local searches raise questions on the quality and availability of data used for arriving at the set of comparables and for calculating the arm's-length range. But such searches have usually provided low-end arm's-length ranges compared to results from regional searches. As part of their own 'strategic' planning, taxpayers may consider conducting regional searches to check differences in the results between local and regional searches and see how adopting the regional searches impact on their financial results.

As the members of the BIR's informal TP team are also members of its LTS, one should not be surprised about the BIR's pursuit of a TP test case for the LTS. The LTS is the unit of the National Office of the BIR having jurisdiction over taxpayers classified as large taxpayers and notified to be such by the Commissioner of Internal Revenue. The classification is based on certain criteria with respect to amount of tax payments made (whether income tax or other types of taxes), amount of gross sales/receipts, or net worth. The number of candidates for the test case could be higher since under the Strategic Plan, the BIR aims as well to expand progressively the coverage of the large taxpayer base and strategically locate the LTS in key revenue regions. Any taxpayer should annually assess if it is about to meet the criteria to be classified as a large taxpayer and if it does so, it should consider having TP planning or TP documentation. Of course, a taxpayer already classified as such is a likely candidate and should attend to its TP concerns. The TP test case is most likely a long, drawn-out investigation.

The BIR's Strategic Plan and priority programmes are for the BIR to attain collection targets and sustain collection growth. In fact, the first of the seven high-level strategic objectives under the Strategic Plan is to attain collection targets and sustained collection growth. And the BIR admits that this objective is dependent on achieving the other objectives under the Strategic Plan. The goals of the OECD's BEPS initiatives may not even be the focus of the BIR. The BIR may consider itself to be in a catch-up stage with respect to BEPS or even TP in general.

Maria Carmela M. Peralta Partner KPMG in Philippines R.G. Manabat & Co. 9th Floor, KPMG Centre, 6787 Ayala Avenue, Makati City 1226, Philippines Tel: +63 2 885 7000 ext. 320 Fax: +63 2 894 1985 mperalta@kpmg.com Carmela has more than 17 years of experience in the tax practice. She provides tax services to various multinational and local companies from different industries, including transfer pricing services. She was seconded to the transfer pricing team of KPMG Singapore for one year starting in February 2008. Since her return to KPMG Philippines in February 2009, she has been designated as KPMG Philippines' Country Service Line Leader for Transfer Pricing. She has 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.