PHILIPPINES Law and Practice Contributed by: Carina Laforteza, Joanna Marie Joson, Kristina Paola Frias and Joanna Marie Reyes, SyCip Salazar Hernandez & Gatmaitan
Under the audit guidelines, the BIR must conduct a functional, asset and risk analysis to determine the nature of the taxpayer’s business. Functional analysis is performed to obtain accurate identification on the characteristics of the taxpayer’s business as well as its counterparts, and, consequently, the level of the risks borne and the remuneration or profit (which must be proportional to the risks borne) can be predicted. However, this firm has not yet seen, and is not aware, whether the BIR has already applied these audit guidelines and specifically challenged the use of related-party limited risk distribution arrangements. 4.6 Local Transfer Pricing Rules and OECD Standards While the Philippines was not yet a member of the OECD when the BIR issued transfer pricing regula - tions, the said regulations are largely based on the OECD Transfer Pricing Guidelines (the “OECD Guide - lines”). The Philippines applies OECD principles but adapts them to local realities, such as stricter filing deadlines and broader coverage of related-party transactions disclosures. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures International transfer pricing disputes are not preva - lent in the Philippines. However, the BIR has recog - nised transfer pricing issues in prior issuances, and it has recently issued guidelines and procedures for requesting mutual agreement procedure (MAP) assis - tance in the Philippines. While the typical recourse of a taxpayer affected by double taxation or inaccurate application of treaty provisions is to file an admin - istrative or judicial appeal, with the MAP guidelines, the taxpayer is given the option to resolve disputes through the MAP process. Resolution of a MAP case may take an average of 24 months. The time to com - plete the MAP case will depend on the complexity of the issue and the co-operation of the taxpayer and competent authorities. While specific guidelines have not yet been released, the BIR has signified that taxpayers may avail them - selves of advance pricing arrangements (APAs) to
reduce the risk of transfer pricing examination and double taxation. An APA may be unilateral, which is an agreement between the taxpayer and the BIR, or bilat - eral or multilateral, which is an agreement involving the Philippines and one or more of its treaty partners. If a taxpayer does not choose to enter into an APA, it may still invoke the Article on MAPs in Philippine tax treaties to resolve double taxation issues. Given that the MAP regulations are fairly new, there is no data yet on MAP cases. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments The Philippine Tax Code authorises the CIR to dis - tribute, apportion or allocate gross income or deduc - tions between or among two or more organisations, trades or businesses, whether or not incorporated and organised in the Philippines, owned or controlled directly or indirectly by the same interests, if neces - sary, in order to prevent evasion of taxes or clearly reflect the income of any such organisation, trade or business. Thus, transfer pricing adjustments made by the BIR are to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent tax evasion in such transactions. Under the transfer pricing audit guidelines, upon find - ing that the price or rate is not at arm’s length, the BIR will propose adjustments by imputing the arm’s length margin (eg, the discrepancy between the price or profit of the affiliated transactions and the arm’s length price or profit). The primary adjustments may also lead to secondary adjustments. The BIR will discuss its findings with the taxpayer, and the latter may contest the facts and issues identified. Thereafter, the regular tax audit process and remedies (eg, protest, administrative and judicial appeal) will be applicable. 5.2 Local Branches and Local Subsidiaries The term “non-local corporation” used here shall refer to a foreign corporation, defined under the Philippine
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