Overview of the draft transfer pricing revenue regulations

(Second of three parts)

Statute of limitations on TP assessments; penalties

The draft RR does not provide for the statute of limitations for assessments involving TP adjustments. However, since a RR should be consistent with the provisions of the NIRC, any assessments involving TP adjustments should follow the general statute of limitations provided under the NIRC. This will be three years from the last day prescribed for the filing of the return. If the return is filed beyond the prescribed period, the three-year period will be counted from the day the return was filed. In case of a false or fraudulent return with intent to evade tax or failure to file a return, assessments may be made within 10 years after the discovery of the falsity, fraud or omission.

The draft RR also does not contain penalties specific to assessments involving TP adjustments. It states that the provisions of the NIRC and other applicable laws regarding the imposition of penalties and other appropriate sanctions shall be applied to any person who fails to comply with or violates the provisions and requirements of the RR. Hence, following the NIRC, in case of a deficiency tax assessment, a 25-percent surcharge may be imposed under certain conditions. The surcharge may be increased to 50 percent in case of willful neglect to file the return or in case a false or fraudulent return is willfully made. A substantial under-declaration of taxable sales, receipts or income or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return. Moreover, failure to report sales, receipts or income in an amount exceeding 30 percent of that declared per return and a claim of deductions in an amount exceeding 30 percent of actual deductions shall render the taxpayer liable for substantial under-declaration or overstatement.

Documentation requirements

The draft RR provides for the key principles and guidance on the types of documentation that taxpayers should keep to demonstrate that reasonable efforts have been taken to comply with the arm’s length principle.

There is no requirement to submit the documentation when the tax returns are filed. The documentation should be kept by the taxpayers and submitted to the BIR only when requested to do so. For administrative ease, the taxpayers may wish to consider aligning the retention period with the record keeping requirements specified under the NIRC – that is, generally for the three-year period within which the BIR is authorized to make assessments. However, the documentation must be provided within 45 days upon request by the BIR. The Commissioner of Internal Revenue or his duly authorized representative may in his discretion extend the period for producing the documentation.

The documentation required depends on the specific facts and circumstances of each case. However, the documentation should include the general information on the group of companies which the taxpayer belongs to, information on each related party in the Philippines, details of the transactions between the Philippine entity and all related parties, the transfer pricing analysis and all other relevant information.

The draft RR is silent on the geographic region from which the comparables should be selected. However, based on the draft RR, a taxpayer may justify the inclusion of regional comparables if he can show to the BIR that the markets in which the independent and related parties operate are comparable.

The draft RR does not impose any penalty for the taxpayer’s non-submission of the documentation or for its inadequacy. In addition, the BIR shall make a determination of the arm’s length standard even if the information available is incomplete. But the draft RR states that adequate documentation will facilitate reviews by the BIR and the resolution of TP issues.  

TP methods

The traditional transaction methods (i.e., the comparable uncontrolled price method, resale price method, and the cost plus method) and the transactional profit methods (i.e., profit split method and transactional net margin method) may be used. 

The traditional transaction methods are recognized to be the most direct means of establishing whether conditions in the commercial and financial relations between related parties are arm’s length. However, the draft RR states that neither the BIR nor the taxpayer is held to the hierarchy of the TP methods. The BIR does not have a specific preference for any one method. Instead, the method that produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments should be chosen.

(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]).