Philippines

Market overview

The Philippine government in 2013 issued new TP regulations to give guidance on the application of the arm's-length principle based on the OECD's BEPS principles. The principle applies to cross-border and domestic transactions between associated enterprises. These regulations may not be enough to handle the rising tide of transfer pricing challenges, even though they took almost seven years to be agreed upon.

Maria Carmela Peralta, head of TP at R.G. Manabat & Co, recently commented on the state of transfer pricing for International Tax Review, saying that "the regulations do not have real teeth as there are no enforcement mechanisms in place".

Peralta highlighted the issues the Bureau of the Internal Revenue (BIR), the country's tax authority, has been having. Although it is at the forefront of the war against base erosion, not all tax practitioners are confident that the BIR is up to the task. Peralta said that the BIR faces many challenges in implementing the regulations and in releasing more guidelines.

"One factor to explain this is that many of its trained personnel have left. The BIR is still building capacity in transfer pricing," she said. "Within this transfer pricing landscape, it is unlikely for the BIR to push for the adoption of the master file, CbCR, and the local file requirements of the BEPS action plan in the near future."

This does not mean that businesses in the Philippines are unaffected by BEPS, as they have to engage with inbound and outbound transactions. Counterparties may be located in countries that have signed up to the BEPS action plan, particularly Action 13 regarding CbCR.

Deonah Marco-Go, a tax partner at SyCip Gorres Velayo & Co, commented that it is best that such businesses adopt a cautious approach to these circumstances.

"This may have potential effects on Filipino companies that do business and invest or have outbound transactions in countries which have already adopted the action plan," she said. "Filipino companies with outbound transactions may be required to comply with the new transfer pricing documentation and CbCR requirements in countries where they are doing business, and failure to comply may result in significant penalties. In such critical matters involving taxation and regulatory compliance, it may be advisable for Filipino companies to err on the side of caution," said Marco-Go.

While there are some reservations about the BIR's capability where transfer pricing is concerned, its current and potential actions give another perspective. The Philippines is not be a member of the OECD, but the BIR applies the OECD's guiding principles when tackling tax issues.

Proposed reforms by the government may increase the BIR's powers. Emmanuel Bonoan, vice chairman and CEO of R.G. Manabat & Co., said that the proposed reforms would give the Commissioner of the Inland Revenue of the BIR greater powers to obtain banking information of taxpayers. This would occur where there is an obligation to exchange information with a foreign tax authority.


Tax authorities

Bureau of Internal Revenue
BIR National Office Bldg, BIR Road, Diliman, Quezon City
Tel: +63 981 8888; +63 981 7000
Email: contact_us@cctr.bir.gov.ph
Website: www.bir.gov.ph/index.php/international-tax-matters.html


Tax rates at a glance

(As of August 2017)

Corporate income tax rate 30%
Capital gains tax rate
Real property 6%
Shares 5/10% (a)
Branch tax rate 30%/15% (b) (f)
 
Withholding tax
Dividends n.a. (c)
Interest on peso deposits 20% (d)(e)
Royalties from patents, know-how, etc. 20% (e)
Branch remittance tax 15%
 
Net operating losses (years)
Carryback 0
Carryforward 3

  1. These rates apply to capital gains on shares in domestic corporations not traded on a local stock exchange.
  2. Certain types of Philippine-source income of foreign corporations are taxed at preferential rates.
  3. Under domestic law, dividends paid to domestic corporations or resident foreign corporations are not subject to tax. Dividends paid to non-resident foreign corporations are generally subject to a final withholding tax of 30%. However, this rate may be reduced to 15% if certain conditions are met.
  4. The withholding tax rate for interest on peso deposits derived by domestic and resident foreign corporations is 20%.
  5. Under domestic law, if the recipient is a non-resident foreign corporation, the final withholding tax rate is 30%. For reduced rates under tax treaties for non-resident foreign corporations.
  6. Regional operating headquarters taxed at 10%. Minimum income of 2% applies to gross income, unless regular corporate tax rate is greater, and 10% surtax levied on improperly accumulated earnings. Additional 15% tax imposed on remittances by branch to foreign head office.

Source: EY 2017 Worldwide Corporate Tax Guide and Deloitte


Firm contact details

Du-Baladad and Associates