Is your firm is doing business in The Philippines? Then it is important understand transfer pricing risks in The Philippines.
After reading this article, you understand exactly what transfer pricing requirements there are in The Philippines, what risks there are for your firm, and how you can make sure you stay compliant with the law.
What You Need To Know About Transfer Pricing In The Philippines
Territorial taxation, large inflows of capital from foreign workers and investments in special free zones give the economy of the Philippines some interesting dynamics.
For decades, the way to improve the standard of living in The Philippines was to work abroad and send money home to support family or to invest. Because of this, The Philippines is after India and China the world’s third largest recipient of foreign remittances. The fact that these countries have a population 10 times larger than the Philippines, shows that the per capita inflow here is enormous.
In addition, The Philippines has seen at the receiving end of a second wave of outsourcing. At first, India was popular. But more recently, companies prefer The Philippines because the people speak English, there are good working ethics and less of a cultural barrier. This is highly stimulated by the development of free zones under the Philippine Economic Zone Authority (PEZA).
Because of these dynamics, there has been a focus on transfer pricing issues in the Philippines. Fairly recent regulations by the Bureau of Internal Revenue (BIR) now force the arm’s-length on all internal transactions.
What are your transfer pricing obligations in The Philippines?
The Philippines have transfer pricing documentation requirements. This means that you always have to substantiate exactly how you have calculated the prices you charge for controlled transactions.
The idea of a transfer pricing policy is that it is ongoing. You have to calculate the correct prices for transactions when they happen, and not at the end of the year. This is called contemporaneous.
In the Philippines, documentation should contain the following:
- Organizational structure
- Nature of the business or industry and market conditions
- Controlled transactions
- Assumptions, strategies, policies
- Cost contribution arrangements (CCAs)
- Comparability, functional and risk analysis
- Selection of the transfer pricing method
- Application of the transfer pricing method
- Background documents
- Index to documents
You have to keep your transfer pricing documentation or at least three years after the filing of the annual income tax return. You can keep the books and documentation in English.
When is there a transfer pricing risk in The Philippines?
As often, the tax-man in The Philippines has a focus on the type of transactions that are at risk of “harmful tax practices.” In practice, the type of companies that are a focus of transfer pricing risk, are those multinational companies with local activities like outsourcing companies. However, there is also a focus on companies with activities in the free zones.
The result is a focus on both international AND domestic transfer pricing.
These are some of the triggers for increased attention by the BIR:
- Management fees invoiced from head-offices to The Philippines.
- Service fees invoiced from The Philippines to related parties abroad. Especially those involving high-value-added activities such as Research & Development, technical design or knowledge processing and outsourcing services.
- Income is shifted to a related company with special tax privileges. Examples are Board of Investments incentives and Philippine Economic Zone Authority (PEZA) fiscal incentives.
- Companies showing sharp swings in profits (especially after a tax holiday).
- Companies generating profits below industry standards.
The likelihood of an annual tax audits is high. In case the government audits you, your transfer pricing will likely be reviewed as well. And, if that happens, there is a good chance that they challenge your transfer pricing methodology.
There is no question that when doing business in The Philippines, you need to have a very solid transfer pricing policy.
What penalties do you risk when not complying with the rules?
There are no specific penalties for transfer pricing issues in The Philippines. Therefore, general tax penalties under the NIRC and other relevant laws apply. A 25% (50% in cases of fraud) surtax is generally imposed on tax deficiencies. Interest is imposed on the deficiency tax (but not on the surtax) at 20% per annum. A compromise penalty up to PHP 50.000 may also be imposed.
Compared to other countries in Asia, the percentages are milder. However, because fines are based on a percentage they can be large.
Do you want to be sure about your transfer pricing in The Philippines?
Do you want to be sure that your transfer pricing policy is compliant with regulations in The Philippines? Does your firm have inter-company transactions and do you want to be sure you charge the right prices?
…We are Transfer Pricing Asia, a boutique transfer pricing firm based in Asia. We assist multi-nationals en medium sized businesses with all matters related to transfer pricing.
Relevant regulations on transfer pricing in Philippines
On 23 January 2013, the BIR issued transfer pricing regulations and can see them in Revenue Regulation No. 2-2013 (link).
These regulation apply to both international and domestic transactions between associated enterprises.
The Commissioner of Internal Revenue has the power under § 50 of the Tax Code to allocate income and expenses between or among related parties and taxpayers or make transfer pricing adjustments to reflect the true taxable income of taxpayers.
As you might have guessed, the transfer pricing regulations are largely based on the OECD Guidelines.