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Who said that the world is unfair?

Who said that the world is unfair?

By: Lysa Mae D. Atian


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Let us be honest – at some point, we all thought that life is never fair and so is the world. When a person observes others, one tends to sort out what one sees into whether acceptable or unacceptable; evaluates oneself through one’s perceived standards; and looks at himself/herself and makes efforts to meet his/her own standards. That is okay. Imperfections stir change which makes people work for what they want. While most people are quiet about it, there are also types of people who use their power to create strategies to get hold of what they want whatever it may cost, sometimes disregarding whatever the effects are. That, too, is okay if done within legal limits. In other words, almost everything is okay for as long as no law is violated. One may say the same thing in relation to paying taxes.

who said that the world is unfair

We know that tax evasion is not acceptable while tax avoidance is acceptable. Hence, companies come up with strategic plans to minimize their taxes without evading taxes. There is nothing wrong with tax planning as it does not violate any law. But allow me to digress. While tax avoidance allows profits to be artificially and legally shifted to low tax or no tax jurisdictions, tax planning that is so aggressive is also generally used to take advantage of the imperfections of the law and make use of them to exploit tax benefits to generate higher profits. Aggressive tax planning scheme is committed through tax planning structures which can be done via shifting interest payments and royalty payments to jurisdictions granting lower taxes, and strategic transfer pricing.

The pricing for the sale of goods or services from one entity to a related party may be the result of strategic transfer pricing (TP) planning. This strategic TP usually occurs when entities are in different tax jurisdictions and impacts the overall profitability of the related parties. It is often a result of an aggressive tax planning which aims to get reduced profits for jurisdictions with a higher tax rate, or increased profits for jurisdictions with a lower tax rate.

The International Tax system has been undergoing reparations through initiatives to address aggressive tax planning and promote fairness, especially to those who cannot access the benefits of the tax laws of other jurisdictions. Consequently, the international tax authorities established inclusive and impactful projects leading to the implementation of the Global Tax Transparency Standards in 2009 and the Base Erosion and Profit Shifting (BEPS) Project in 2013.

Locally, the Bureau of Internal Revenue (BIR) also promulgated issuances to address the dramatic increase in globalization of trade which had led to harmful tax practices and resulted in massive losses of tax revenues of the government.

In 2013, Revenue Regulations (RR) No. 02-2013 was issued to provide guidelines on how to apply the Arm’s Length Principle (ALP) for cross-border and domestic transactions between related parties. It is adopted so that the BIR can make the necessary adjustments to the taxable profits of the related parties to reflect the true value of the transaction. The issuance also requires taxpayers to show that their transfer prices are consistent with the ALP through a TP documentation. This documentation allows taxpayers to defend their transfer price, prevent TP adjustments arising from tax examinations, and support their applications for Mutual Agreement Procedures (MAP). It was also emphasized that taxpayers who have not prepared the said documentation may find their application for MAP rejected, or that the TP issue would be more difficult to resolve.

Nevertheless, as everyone knows, the BIR did not actively implement RR No. 02-2013.

In 2019, Revenue Audit Memorandum Order (RAMO) No. 01-2019 was issued by the BIR. This seeks to serve as a guide on how the BIR will conduct its TP audits. Under this RAMO, TP audits will be done through the following steps: 1) Preparation, 2) Implementation, and 3) Reporting. However, from the point of view of the taxpayers, the issuance of RAMO No. 01-2019 triggered more questions instead of throwing light on the gray areas brought about by RR No. 02-2013.

For now, we understand that the BIR will not issue a separate Letter of Authority (LOA) specifically for TP audits. Rather, TP audits will be part of the regular tax audits of the BIR. RAMO No. 01-2019 supplements the BIR’s audit guidelines for regular tax audits. The request for documents in a regular tax audit will now include requests for the agreements and contracts between related parties. The request also includes the duly filled-up Annexes of RAMO No. 01-2019 as part of the preparation phase.

In doing the TP audits, the BIR may also refer to the audited financial statements of the taxpayers. These financial statements provide initial information on the related-party transactions of the taxpayer. RAMO No. 01-2019 does not provide guidance as to the amount of the transaction to be subjected to TP audit. The BIR is silent whether they will provide a threshold as well.

RR No. 02-2013 emphasizes the need of a TP documentation. RAMO No. 01-2019 provides that the BIR will review to the taxpayer’s TP documentation in the course of its implementation phase. The implementation stage will start after the BIR has decided which related-party transactions to further investigate on. During regular tax audits, if the taxpayer fails to provide documents requested by the BIR, the BIR might resort to the issuance of a subpoena duces tecum. However, for TP audits from the perspective of the taxpayers, absent thresholds on the amount of the transaction to be subjected to TP audits, taxpayers will face a situation where getting a TP documentation for each related-party transaction may cost more than the amount of the transactions.

Moreover, the implementation phase includes the analysis of the functions, assets and risks (FAR) of the taxpayer, selection of the TP method, and the application of the ALP. The application of the ALP does not produce a specific arm’s length price as a point of comparison. Instead, the BIR will generate a range from a list of several comparable companies representing the taxpayer’s business.

It was said that the BIR will initially use the database of the Securities and Exchange Commission (SEC) for getting comparable companies. However, it must be admitted that most comparable companies could be located abroad. With this, how will the BIR obtain information if foreign entities will be used?

Also, before the BIR arrives at the final set of comparable companies, the BIR will adopt a series of screens. Under RAMO No. 01-2019, the BIR will reject companies that are owned by another company with more than 25% shareholding. Companies with revenues exceeding 10x higher or lower than the revenue of the company under review will not be accepted as well. This is because BIR wants to eliminate companies which are not operating under the same scale as the company under review. However, if the company under review is a start-up, this screen could be an issue. The BIR will look also at the research and development and intangible asset ratios as well. But it is submitted that these ratios may have to consider the industry of the company under review. All in all, the screens of the BIR might be too strict and might result to lesser comparable companies.

After arriving at the final set of comparable set and generating the range, the BIR will evaluate whether the company under review falls within the range or not. If the taxpayer is within the range, there is no guarantee that the transaction under review will no longer be part of the TP audit. Its inclusion and exclusion in the audit findings of the BIR will depend on the evaluation of the examiner.

In the Reporting phase, the BIR will have another discussion with the taxpayer to confirm the facts and to arrive at an agreement against any issues. After that, the BIR will prepare its own TP documentation in relation to the related-party transaction under review. Since RAMO No. 01-2019 does not expressly specify the criteria for the selection of the related party transaction that will be investigated, it might not be practical for the BIR to subject every related-party transaction to audit. This is especially considering that they will be preparing a comprehensive report that corresponds to their evaluation of these transactions.

Both RR No. 02-2013 and RAMO No. 01-2019 mention about the adjustments that will be made to the taxpayer’s books by the examiner. Will the adjustments form part of the audit? Will the BIR order the taxpayer to adjust its revenue in its tax returns moving forward to effect the findings from the TP audit? Will the BIR advice the taxpayer to perform a business restructuring? RR No. 02-2013 also mentions a penalty provision. However, it is not clear which specific section in the Tax Code will apply and how the penalties will be computed.

Lastly, RAMO No. 01-2019 mentions how to apply the ALP to certain transactions like business restructuring, intra-group services, transactions involving intangible assets, cost contribution agreements, and interest payment transactions. However, given that this issuance is only a RAMO and only aims to provide instructions or guidelines in the implementation of existing regulations, an RR should be issued first to prescribe or define rules and regulations. RR No. 02-2013 does not make reference to these transactions.

In the meantime, while the BIR is actively conducting TP audits, it makes sense for them to issue clarifications as soon as possible as this will require significant costs and considerable efforts from both the taxpayers and the tax authorities.

On a positive note, we must consider that understanding these imperfections and having continuing developments of the TP rules in the Philippines will eventually go down to the rewards of having a fairer tax system. We might have to wait, but it will surely happen. We just have to look at a different perspective and trust the process. Now, who said that the world is unfair?

Lysa Mae D. Atian is an Assistant Manager from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email or

© 2021 R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.


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