TRANSFER pricing schemes employed by companies have resulted in annual revenue losses of at least P43 billion in 2015, the Department of Finance (DoF) said.
Finance Undersecretary Karl Kendrick T. Chua said some businesses abuse transfer pricing arrangements, whereby profit is maximized in low-tax jurisdictions.
Mr. Chua added that the lost revenue comes on top of the projected P301 billion in foregone revenue that year as a result of tax incentives.
Apart from international transfer pricing, Mr. Chua said there are also instances of domestic transfer pricing where profits are recognized in units located in economic zones or to units enjoying tax breaks.
“A firm can also pad its direct costs with indirect costs to pay even lower taxes under a regime where it only gets to pay the 5% GIE (gross income earned) tax,” Mr. Chua said in a statement yesterday.
“Certain favored companies, particularly those in SEZs (special economic zones), get to enjoy this special 5% forever under the current tax-incentives system.
Transfer pricing abuse has also been cited by the DoF as one of the “top 10 abuses” of the country’s tax incentive regime, and called upon the Senate Committee on Ways and Means to pass the second tax reform package meant to address the issue.
By booking sales, loans, royalties, and management contracts under related entities enjoying lower tax rates, a company can significantly reduce its tax payments to the government.
Estimates made by the DoF and the Bureau of Internal Revenue show that the government lost some P25.9 billion in 2011, P36.5 billion in 2012, P35.1 billion in 2013, and P40 billion in 2014 from such practices.
Other schemes currently under scrutiny are investment incentives from regional enterprise and export zones, the disguise of unqualified activities as worthy of tax breaks, the overvaluation of assets, and “fictitious employees” and fake training programs to enjoy employment and training credits, the DoF has said.
The House of Representatives approved House Bill 8083 or the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Act last month. The measure seeks to gradually reduce the corporate income tax rate to 20% from the current 30% by two percentage points every other year starting 2021. This will accompanied by a new one-size-fits-all scheme for tax incentives, which will replace various types granted by investment promotion agencies and likewise cap the number of years a company can enjoy such perks.
Under the proposal, incentives will include a three-year income tax holiday (ITH) as well as allowable deductions up to five years for “labor, training, infrastructure building, and research and development expenditures.” This compares with the current regime which grants an ITH for up to nine years, with a 5% tax on gross income.
The measure is now pending at committee level in the Senate. — Melissa Luz T. Lopez