With the determination to fulfill its mandate even in the midst of challenges, the Bureau of Internal Revenue (BIR) has come up with a strategic plan that is designed to help the organization achieve its vision to be an institution of service excellence and integrity. This strategic plan will serve as the BIR’s roadmap for the next five years (i.e., 2016-2020) and aims to achieve seven high-level strategic objectives, namely: attain collection targets and sustain collection growth; improve taxpayer satisfaction and compliance; strengthen good governance; improve assistance and enforcement; build and deploy information technology systems, processes and tools; improve integrity, competence, professionalism and satisfaction of human resources; and optimize management resources. These seven overarching objectives shall support the BIR’s goal of improving services to taxpayers to increase voluntary compliance and of enforcing the laws for those who do not comply.
One of the focus points of the BIR Strategic Plan is transfer pricing. Under Revenue Regulations No. 2-2013 (The Philippine Transfer Pricing Guidelines), the term “transfer pricing” is generally defined “as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises.” In the height of ongoing developments in international taxation following the initiative of the Organisation for Economic Co-operation and Development (OECD) in addressing Base Erosion and Profit Shifting (BEPS) within multinational companies, the BIR has been continuously determined to strictly implement transfer pricing rules in the Philippines. Thus, to carry out its 2016-2020 strategic plan, the BIR has laid down its programs on how to establish its approach to transfer pricing so that the Bureau will be able to address BEPS as well as the challenges of the digital economy and global business structures.
These programs include the identification of the required skills and expertise in transfer pricing, reporting requirements, organizational arrangements, Advance Pricing Arrangements (APA), Mutual Agreement Procedure and documentation processes. They also target 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.
In view of these strategically planned objectives, more proactive measures from the BIR could be expected moving forward. In fact, one of the BIR’s priority programs this year is to subscribe to a commercial database for transfer pricing and develop test cases for its Large Taxpayer Services division. It is not clear though how this transfer pricing database will work, its purpose and functions, and whether or not it is the same or usual database independent service providers use for benchmarking purposes. It is also unclear how the BIR will conduct the said test cases; but leveraging on previous experience, the BIR may once again do its own benchmarking based on specific industry classification and send notices to taxpayers who are found to fall outside the computed benchmarked range.
The BIR is also pushing for the crafting and finalization of various transfer pricing related issuances that would supplement the formal transfer pricing regulations issued last 2013. These include the APA regulations, and revenue memorandum orders on transfer pricing documentation and transfer pricing risk assessment, among others.
As regards the OECD’s BEPS initiative, while the BIR has not yet issued an official position on whether the 15 Action Points that provide measures to eradicate transfer pricing flaws will be adopted in local tax and transfer pricing rules, it has done various internal evaluations and consultative talks regarding this matter. Despite the Philippines not being a member of the OECD, the BIR adheres to the rules set by the said organization and thus it is reasonable to anticipate that the BIR would also observe the suggested practices provided in the BEPS action plan.
In addressing the increasing challenges of globalization, the BIR seeks to have a well-established and operational transfer pricing rules in the country. The agency is also looking forward to have international risk and mitigation strategies in place and to undertake compliance activities. Overall, the main result that the BIR wants to see in the area of transfer pricing within the next five years, as discussed in its Strategic Plan, is for multinational enterprises to increasingly comply with the globally-accepted arm’s length principle.
Notwithstanding worldwide advancements in transfer pricing, its legal groundwork still needs to be galvanized domestically. Hence, taxpayers should still begin with the basics. At present, where more comprehensive and sophisticated local transfer pricing rules are not yet formalized and issued, taxpayers are advised to simply follow what is provided in existing tax and transfer pricing regulations. More so now that the BIR has been persistent in looking into transfer pricing issues more extensively since the formal transfer pricing rules were issued.
Thus, for taxpayers engaged in related party transactions, maintaining contemporaneous documentation of their intercompany dealings could be considered as the first step in demonstrating their adherence to the principle of arm’s length transfer pricing.
As the country turns a new leaf in its history with the transition of government leadership, the success of the BIR’s strategic plan including its programs on transfer pricing will depend on the new administration’s willingness to implement and continue spelled-out reforms and priority programs. Having laid down its strategic goals and objectives, the next five years for the BIR calls for more decisive steps to concretize efficient service, plug tax leakages and achieve tax collection targets.
The views or opinions expressed 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 the article.
Iris Kristine D. Lacebal is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
iris.kristine.d.lacebal@ph.pwc.com
source: Businessworld
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