BW to Philippine Transfer Pricing rules II

(Second of three parts)

By: Reynante M. Marcelo

First Published in Business World (2/11/2013)

With the issuance of the Transfer Pricing Regulations (the “TP Regs”) in Revenue Regulations (RR) No. 2-2013 which took effect last February 9) the next development would be the issuance of separate regulations on Advance Pricing Arrangements (APAs) and Mutual Agreement Procedures (MAPs).

According to the TP Regs, an APA is agreement entered into between the taxpayer and the Bureau of Internal Revenue (BIR) to determine in advance an appropriate set of criteria (e.g., method, comparables and appropriate adjustments thereto) to ascertain the transfer prices of controlled transactions over a fixed period of time. An APA is a binding agreement between the taxpayer and the BIR on the arm’s length transfer price or profit (following certain assumptions) applicable to certain transactions between or among associated enterprises for future taxable years. On the other hand, an MAP provides a mechanism whereby the Philippine competent authority and the competent authority of a tax treaty partner can mutually arrive at a satisfactory solution to eliminate double taxation issues arising from transfer pricing adjustments. The term “Competent authority” is usually identified in a tax treaty to be the person or body to whom issues can be addressed within the contracting state that is a party to the treaty.

APAs and MAPs have proven to be effective and less expensive means of avoiding or resolving transfer pricing disputes. As indicated in a 2012 tax authority survey conducted by Ernst & Young, APAs have grown in popularity in that more and more countries are adopting their own APA rules. The survey further showed that MAPs remain the predominant means of settling transfer pricing disputes involving cross-border transactions, and nearly all countries report that MAP cases are resolved without double taxation.

APAs

APAs can be unilateral, bilateral or multilateral. A unilateral APA is an agreement involving the taxpayer and the tax authorities of one country. A bilateral/multilateral APA is an agreement involving the tax authorities of a country and those of one or more of its treaty partners. As in other countries, the availment of the APA program is not mandatory; it is a facility available to taxpayers who are engaged in cross-border transactions. The objectives of an APA process are to facilitate principled, practical and cooperative negotiations, to resolve transfer pricing issues expeditiously and prospectively, to use the resources of the taxpayer and the tax administration more efficiently, and to provide a measure of predictability for the taxpayer. APAs are intended to supplement the traditional administrative, judicial and treaty mechanisms for resolving transfer pricing disputes.

An APA offers certain advantages, not only to the taxpayer, but to the tax authorities as well. For the taxpayer, the most important advantage of having an APA is that it provides a degree of certainty – the taxpayer is assured that, upon compliance with certain conditions, its transfer pricing for the covered related party transactions will no longer be questioned by the tax authorities during the taxable years covered by the APA. Taxpayers are thus able to better predict costs and expenses, specifically tax liabilities. Bilateral and multilateral APAs also avoid and eliminate potential double taxation.

On the part of the tax authorities, the APA process offers an inexpensive and less time-consuming way of avoiding prolonged transfer pricing disputes compared to traditional audits. Historically, transfer pricing audits can put a strain on the resources of the tax authorities because of the longer time needed to probe certain facts involving the business of the taxpayer and the industry to which it belongs. During these audits, more staff and experts in the fields of economics and finance are deployed to assist in analyzing the transfer pricing practices of the taxpayer, thus increasing the costs of such audits.

Typically, a company starts the APA process by filing an application with the tax authorities, which will then schedule the application for a pre-filing conference. In general, an APA application contains the name and address of the taxpayer, the proposed covered transaction, the period covered by the APA, the proposed transfer pricing methodology and comparables and the critical assumptions on the basis of which the proposed methodology and analysis will be applied to the covered transactions.

A pre-filing conference is held in order to determine certain issues in advance, such as whether the transactions involved are suitable for a unilateral, bilateral or multilateral APA, whether there is a need to get experts involved or conduct site visits to the taxpayer’s facilities. Once these issues are threshed out, the APA application is accepted for filing and negotiations begin. In some countries, the processing of a unilateral APA takes a minimum of two months while that of a bilateral or multilateral APA takes at least two years or longer. Many countries have published the various phases and timelines for the process to be completed.

The process of securing an APA differs from that of a traditional private ruling. An APA application is factual in nature while private rulings address particular provisions of tax laws when applied to a particular transaction. The facts underlying a private ruling are those represented by the taxpayer requesting the ruling, while the facts in an APA process are still to be ascertained, investigated and analyzed. An APA may cover several transactions, while a private ruling is generally binding only for specific transactions.

Similar to private rulings, APAs may be revoked or cancelled in exceptional cases, such as where there is fraud or misrepresentation; change in the business of the taxpayer; failure to submit annual reports proving compliance with the terms and conditions of the APA; or where the original critical assumptions which secured the approval of APA are no longer valid and applicable.

On the other hand, APAs can be renegotiated to consider new facts and circumstances, or renewed where there have been no material changes in the APA. All documents submitted in support of the APA application should be kept confidential. In some jurisdictions, annual reports of APAs signed and renewed, as well as the industries covered by the APAs, are published for purposes of transparency in the submission of APA requests.

In next week’s column, Part 3, we will continue the discussion on the significance of the new TP Regs in the context of MAPs.

Reynante M. Marcelo is a Tax Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.