(Second of 2 parts)
Moreover, the implementation phase includes the analysis of the functions, assets and risks (FAR) of the taxpayer, selection of the TP method, and the application of the ALP. The application of the ALP does not produce a specific arm’s length price as a point of comparison. Instead, the BIR will generate a range from a list of several comparable companies representing the taxpayer’s business.
It was said that the BIR will initially use the database of the Securities and Exchange Commission (SEC) for getting comparable companies. However, it must be admitted that most comparable companies could be located abroad. With this, how will the BIR obtain information if foreign entities will be used?
Also, before the BIR arrives at the final set of comparable companies, the BIR will adopt a series of screens. Under RAMO 01-2019, the BIR will reject companies that are owned by another company with more than 25 percent shareholding. Companies with revenues exceeding 10 times higher or lower than the revenue of the company under review will not be accepted as well. This is because BIR wants to eliminate companies which are not operating under the same scale as the company under review. However, if the company under review is a start-up, this screen could be an issue. The BIR will look also at the research and development and intangible asset ratios as well. But it is submitted that these ratios may have to consider the industry of the company under review. All in all, the screens of the BIR might be too strict and might result to lesser comparable companies.
After arriving at the final set of comparable set and generating the range, the BIR will evaluate whether the company under review falls within the range or not. If the taxpayer is within the range, there is no guarantee that the transaction under review will no longer be part of the TP audit. Its inclusion and exclusion in the audit findings of the BIR will depend on the evaluation of the examiner.
In the reporting phase, the BIR will have another discussion with the taxpayer to confirm the facts and to arrive at an agreement against any issues. After that, the BIR will prepare its own TP documentation in relation to the related-party transaction under review. Since RAMO 01-2019 does not expressly specify the criteria for the selection of the related party transaction that will be investigated, it might not be practical for the BIR to subject every related-party transaction to audit. This is especially considering that they will be preparing a comprehensive report that corresponds to their evaluation of these transactions.
Both RR 02-2013 and RAMO 01-2019 mention about the adjustments that will be made to the taxpayer’s books by the examiner. Will the adjustments form part of the audit? Will the BIR order the taxpayer to adjust its revenue in its tax returns moving forward to effect the findings from the TP audit? Will the BIR advice the taxpayer to perform a business restructuring? RR No. 02-2013 also mentions a penalty provision. However, it is not clear which specific section in the Tax Code will apply and how the penalties will be computed.
Lastly, RAMO 01-2019 mentions how to apply the ALP to certain transactions like business restructuring, intra-group services, transactions involving intangible assets, cost contribution agreements, and interest payment transactions. However, given that this issuance is only a RAMO and only aims to provide instructions or guidelines in the implementation of existing regulations, an RR should be issued first to prescribe or define rules and regulations. RR 02-2013 does not make reference to these transactions.
In the meantime, while the BIR is actively conducting TP audits, it makes sense for them to issue clarifications as soon as possible as this will require significant costs and considerable efforts from both the taxpayers and the tax authorities.
On a positive note, we must consider that understanding these imperfections and having continuing developments of the TP rules in the Philippines will eventually go down to the rewards of having a fairer tax system. We might have to wait, but it will surely happen. We just have to look at a different perspective and trust the process. Now, who said that the world is unfair?
Lysa Mae D. Atian is an assistant manager from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.