To help strengthen and support initiatives addressing base erosion and profit shifting (BEPS) concerns, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 11-2022. The RR prescribes guidelines and procedures for the spontaneous exchange of taxpayer-specific rulings, which framework provides tax administrators with access to timely information on rulings that have been granted to a foreign related party or a permanent establishment (PE) of their resident taxpayer, which can be used for risk assessments.
The exchange of information (EoI) provision in international exchange agreements, such as Double Taxation Agreements (DTAs), serves as the legal basis for the exchange between competent authorities of the contracting states as is necessary for carrying out the provisions of the DTA, or of domestic laws concerning the taxes to which the DTA applies.
COVERED RULINGS
RR 11-2022 specifically covers past and future rulings related to certain preferential regimes; unilateral advance pricing arrangements (APAs) or other cross-border unilateral rulings in respect to transfer pricing; rulings providing for a downward adjustment of taxable profits; PE rulings; and related party conduit rulings.
Past rulings in this case only refer to PE rulings or rulings concerning the existence or absence of a PE of a foreign enterprise in the Philippines that were issued either: on or after Jan. 1, 2015 but before Sept. 1, 2017; or on or after Jan. 1, 2012 but before Jan. 1, 2015, provided that they were still in effect as of Jan. 1, 2015. Future rulings refer to rulings issued after such periods.
TIMELINE
The International Tax Affairs Division (lTAD) of the BIR, through its EoI Section, is responsible for sending the taxpayer-specific rulings to the foreign tax authority within three months from issuing a future ruling. For past rulings, the information must be sent as soon as possible after identifying the potential exchange jurisdictions.
The office must likewise ensure that subsequent requests by another jurisdiction for a copy of the taxpayer-specific ruling is responded to, or a status update is provided, within 90 days upon receipt of the request.
FORMAT AND CONTENT
The template to be used is designed by the Forum on Harmful Tax Practices and the Inclusive Framework on BEPS (attached as Annex A to the RR). It contains information on the parties to the transaction, the type of transaction and amounts involved, as well as the reason for the exchange.
The information may either be sent by registered mail or encrypted electronic mail which should be password-protected.
POTENTIAL EXCHANGE JURISDICTIONS
Generally, the potential exchange jurisdictions are the countries of residence of all related parties with whom the taxpayer has the transactions that are covered by ruling, as well as those of the ultimate parent company and the immediate parent company.
• In case the past ruling does not contain sufficient information to enable identification of all the relevant countries with which the information needs to be exchanged, the tax authorities must exert best efforts to identify them. They may check the information included in the file supporting the tax treaty relief application, BIR Form 1709, and any relevant transfer pricing documentation, if available. They may likewise obtain information from the domestic withholding agent, foreign taxpayer or its representative in the Philippines, the Securities and Exchange Commission or other possible information holders.
TRANSFER PRICING CONSIDERATIONS
Clearly, the EoI covered by the RR primarily focuses on related parties. In either past or future rulings, transfer pricing documentation and the Information Return on Related Party Transactions (BIR Form 1709) may be requested by the BIR, especially if the documents provide sufficient information to carry out the EoI.
On that point, Philippine taxpayers, especially those belonging to a Multinational Group with members heavily dealing with cross-border transactions, must ensure their adherence to the arm’s length principle as provided in the Philippine Transfer Pricing Regulations and International Guidelines. Arm’s length means that the charge for intercompany transactions should be that which would have been made and accepted between independent parties in comparable circumstances. Compliance with the arm’s length principle can be demonstrated by ensuring that required information in transfer pricing documentation is properly incorporated and discussed as provided in the Philippine rules.
Considering that transfer pricing documentation is expected to contain complete information about related party dealings, including all the transacting related parties and overview of their operations, the document may provide additional reference for the BIR to identify potential foreign jurisdictions for EoI purposes.
The RR likewise states that the EoI can be used by tax administrators in conducting risk assessments. One of the rulings covered by the EoI are those providing for a downward adjustment of taxable profits. In view of this, in preparing their transfer pricing documentation, Philippine taxpayers should likewise consider how they can demonstrate the reasonableness and compliance of their transactions, especially for those transactions that are covered by such rulings.
On that same premise, taxpayers must likewise be able to explain in the transfer pricing documentation the rationale for entering into transactions with affiliates. It is necessary to maintain the supporting analysis for their intercompany arrangements (e.g., contracts, benchmarking study, etc.), as well as the basis for the applied transfer pricing policy to defend its reasonableness and compliance with the arm’s length principle.
While the BIR may still request documents other than the transfer pricing documentation, the above considerations may be helpful in the taxpayer’s position in case there is a need to apply for such covered rulings.
Finally, considering the continuous efforts of the BIR to address transfer pricing concerns, taxpayers must ensure that as early as possible, all the required information is addressed and maintained head on. With the growing means of tax administrators to access information on cross-border transactions, taxpayers must be one step ahead and should be able to establish that their tax practices are not just reasonable and compliant with Philippine regulations, but also with the relevant international rules.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Joyce Anne Boaloy is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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