Overview of the draft transfer pricing revenue regulations

(First of three parts)

In 2006, the endorsement by the Bureau of Internal Revenue (BIR) to the Secretary of Finance for his approval of the draft revenue regulations (RR) on transfer pricing (TP), was announced to the public. Since then tax practitioners around the world have been expecting the formal issuance of the first Philippine TP rules. Copies of the draft RR have been circulated. 

However, three years after, the Secretary of Finance has not approved the draft RR. Based on informal discussions with the BIR, the draft RR was returned in 2007 by the Secretary of Finance to the BIR.   In 2008, the BIR through Revenue Memorandum Circular (RMC) No. 026-08 stated that it is revising the final draft. Nevertheless, no revised draft has been released by the BIR to the public.  Be that as it may, an overview of the draft RR as initially prepared by the BIR may provide an idea on how the BIR will handle TP concerns in the future.

Reference to OECD TP guidelines

The draft RR is based on the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Cooperation and Development (OECD TP Guidelines). In fact, even in RMC 026-08, the BIR has stated that as a matter of policy, it subscribes to the OECD TP Guidelines and that any and all concerns shall be resolved in accordance with the principles laid down by the OECD TP Guidelines.

Basis for the TP rules and effectivity

The draft RR recognizes that the TP rules will be promulgated to implement the authority given under Section 50 of the National Internal Revenue Code (NIRC) to the Commissioner of Internal Revenue to review controlled transactions among related parties and to allocate/distribute related parties’ income and deductions in order to determine the true taxable income of the related parties involved in the controlled transactions. 

The TP rules will take effect after 15 days following the publication of the RR in the official gazette or a newspaper of general circulation, whichever comes first. Transactions entered into prior to the effectivity of the RR will be governed by the laws and other administrative issuances prevailing at the time the controlled transactions were entered into. How to consider when controlled transactions are entered into may be an issue that the BIR has to address in determining which issuances will apply covering controlled transactions. It is worth mentioning that under the draft RR, a transaction may exist whether or not the terms of such transaction are formally documented.

Who are considered related parties for TP rules to apply

Under the draft RR, two or more enterprises are related if one of the enterprises participates directly or indirectly in the management, control, or capital of the other or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises.

The term “control” refers to any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised. It is the reality of the control that is decisive, not its form or the mode of its exercise. Control is said to exist if one entity holds no less than 30 percent of the outstanding shares entitled to vote of a corporation, in addition to other situations, putting the parties in a controlled environment or relationship. 

TP-related disclosures in the income tax return

The draft RR does not require any disclosure of related-party transactions in the income tax returns of taxpayers.  

However, taxpayers are required to attach to their annual income tax returns their audited financial statements. This could be a way for the BIR to have information on related-party transactions. Under the Philippine Financial Reporting Standards, significant related-party transactions should be disclosed in the notes to the audited financial statements.

(Maria Carmela M. Peralta is a Principal for Tax & Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of Maria Carmela M. Peralta and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).