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Free money for everyone won’t solve our problems

FREEPIK

By Satyajit Das

THE WORLD ECONOMY is turning toward a depressingly familiar cycle of lower rates, renewed quantitative easing and more fiscal stimulus. The return to a persistent semi-slump in advanced economies is likely to increase interest in universal basic income, or UBI — an idea supported by Democratic presidential contender Andrew Yang and business figures from Facebook Inc.’s Mark Zuckerberg to Tesla Inc.’s Elon Musk. If adopted, this radical prescription is unlikely to prove a magic bullet.

Advocates argue that guaranteeing every individual a flat-rate payment irrespective of circumstances will help to address the poverty traps inherent in traditional welfare systems, the declining share of income going to labor, and increasing threats to employment from automation. Yang, a tech entrepreneur and an outsider for the Democratic nomination, proposes giving $1,000 a month in cash to every American and has made the plan a key talking point in candidate debates.

The concept isn’t new. It was first suggested by Sir Thomas More in his 16th century work Utopia, and was championed by free-market economists such as Friedrich Hayek and Milton Friedman in the 20th century. In a national referendum in 2016, Switzerland rejected a proposal to establish a universal basic income.

The case for UBI is that it can increase the efficiency of welfare systems by minimizing bureaucracy, the administrative costs of delivery, and drainage of resources through political exploitation or benefit fraud. Trials in Finland, Canada, and India have been inconclusive, showing psychological improvements among recipients but limited success in achieving economic or social objectives.

Critics point to the financial constraints of funding such programs. In the US, $1,000 per month per person would equate to a total cost of around $4 trillion per year, approximately the size of the 2018 federal budget. The Organization for Economic Co-operation and Development found that income tax would have to increase by almost 30% to fund a modest UBI.

The key to the proposal’s renewed political appeal is how it could neutralize rising criticism of QE, which has disproportionately benefited the wealthy by driving up the prices of financial assets. UBI funded by new rounds of central bank purchases of government bonds — branded as “QE for the people” — may be a more palatable way to return to monetary stimulus.

UBI would allow for the introduction by stealth of “helicopter money,” a controversial proposal for central banks to print money and distribute it to consumers to boost growth and inflation. The idea covers a wide range of policies including the permanent monetization of budget deficits and direct transfers to households financed with base money.

Friedman outlined the concept in his 1969 parable of dropping money from a helicopter. If everyone is convinced that this is a unique, non-repeatable event, then it is assumed they will spend the money, increasing economic activity. The concept generated revived interest in recent years as a means of preventing deflation.

There’s a telling link between universal basic income and modern monetary theory (MMT), an unconventional economic approach that’s been gaining ground with politicians. MMT, loosely, argues that a state cannot go bankrupt where it can print its currency — a version of the argument that deficits don’t matter. Under MMT, governments should borrow and spend when demand is inadequate to move the economy to full employment. It provides theoretical cover for governments to issue debt to central banks in greater amounts than hitherto contemplated. This can then finance spending programs — such as a universal basic income — to maintain economic activity.

Whether a guaranteed minimum income can produce economic recovery is questionable, though. It’s a repackaging of existing approaches that have had limited effectiveness. There’s little new in central banks financing governments via QE or fiscal stimulus, including welfare spending. It doesn’t address key structural issues such as excessive debt, imbalances, wage levels and demographics. Adoption of such an approach would also mean the economy becomes dependent on government intervention to sustain activity.

A universal basic income financed by helicopter money may perversely increase uncertainty. Ordinary people may react to unlimited money printing by shutting their wallets and hoarding. Australia’s recent “cash back” program, which provided up to A$1,080 ($740) to taxpayers earning less than A$126,000, doesn’t appear to have offset pessimism about the outlook.

That’s unlikely to deter more countries from embracing such solutions. The reality is that existing policy is increasingly constrained. Significant debt restructuring and writedowns as well as acceptance of lower growth and stagnant or diminishing living standards is unacceptable. Policymakers will be desperate to show that there are more tools to stave off loss of confidence in their powers.

Friedman believed that policies should be judged by results, not intentions. Unfortunately, the continued lure of a painless and easy solution to economic problems dictates that universal basic income will remain on the political agenda.

 

BLOOMBERG OPINION

The world’s oil security blanket has been torched

By Julian Lee

THE REAL IMPACT of the attack on Saudi oil installations last weekend goes well beyond the temporary loss of 5% of global oil production: It strikes at the heart of the mechanism that’s guaranteed the security of the world’s crude supply for most of the past 50 years.

Ever since the western oil majors lost control of output in the Middle East, Saudi Arabia’s willingness to maintain idle production capacity has been the world’s safety valve to offset its dependence on the volatile region. When there was conflict and blockages elsewhere, Riyadh could always turn on the taps and serve the international market. But its new vulnerability requires a complete rethink of how we view and perhaps pay for the future security of supplies.

Some 25 pilotless aircraft and cruise missiles of Iranian origin were used to strike the two sites, the Saudi Defense Ministry said at a press briefing four days after the attacks. The extent of Iran’s involvement remains unclear. It may have taken a direct role or it may have supplied the Houthi rebels in Yemen with hardware. That second possibility is almost more troubling because it puts the power to wreak havoc into the hands of anybody able to fly a drone.

If the attack was indeed launched from Iran, that raises very serious questions about the ability of Saudi Arabia’s expensive air defense systems (or the people using them) to defend the most important oil installation on the planet. The failure to detect 25 incoming threats travelling 280 miles from the direction of your sworn enemy would be a major failure. Missing them from an unexpected direction would be easier to understand, although no less devastating.

The damage to infrastructure will be repaired. The Khurais field resumed 30% of its output within 24 hours, pumping about 360,000 barrels a day, and the Abqaiq plant was processing 2 million barrels a day by Tuesday, down from 4.5 million before the strikes. The kingdom’s production capacity will be restored to 11 million barrels a day by the end of the month and in full by the end of November, according to the new energy minister Abdulaziz bin Salman. Some independent analysts see it taking longer. Energy consultants FGE said the Saudi plans were optimistic, while Rystad Energy said repairs at Abqaiq may only be completed “as we approach the end of the year.”

The disruption will be offset initially by increased production from Saudi fields that don’t rely on Abqaiq or Khurais for processing, by drawing on the kingdom’s own reserves at home and overseas, and through increased production from other countries. Emergency stockpiles in oil-consuming countries may be tapped if necessary, although the International Energy Agency doesn’t believe they will be needed.

But Saudi Arabia’s 12 million barrels a day of maximum sustainable capacity has just lost its effectiveness as the world’s hydrocarbon security blanket.

Strategic stockpiles held by oil-consuming countries have only ever been a sticking plaster, designed to get us through a short supply interruption while Saudi Arabia boosts output. But the attack has, at a stroke, taken out much of that spare capacity along with current supplies.

What the world needs now is an outbreak of peace, or at least “live and let live,” in the Middle East. Unfortunately that seems as unlikely as ever. Demonizing Iran or any other country won’t reduce tensions even if it’s a natural reaction to the strikes.

In the absence of political calm, clearly there needs to be an extensive upgrade to the protection of key assets — although that might not thwart a repeat attack.

Holding all of the world’s spare production capacity in one place has always been a risk. A broader system of allocating and paying for an output buffer across different geographies may be desirable, even for the US, which remains a net importer of oil. With international institutions losing their luster, however, I don’t hold out much hope.

 

BLOOMBERG OPINION

Mining taxes eyed for sovereign wealth fund

By Arjay L. Balinbin
Reporter

REPRESENTATIVE Jose Ma. Clemente S. Salceda, the Ways and Means committee chair from Albay’s second district, said he will push for a mining tax that sets aside 30% of the government revenue generated from the industry to help set up a sovereign wealth fund.

“I can assure you that (sovereign wealth fund) will be a key feature of the law,” he told BusinessWorld in a phone interview Friday.

Congress is currently considering legislation reforming the mining tax regime, and Mr. Salceda said his position is to share out mining taxes on a 70-30 basis, with 70% funding the spending by the national and local governments and the remainder going into the fund.

He also proposes an auction system for mining tenements, instead of the current “first-come, first-served” basis.

“I prefer 70% (of fund) current needs and 30% set aside for the future, (for the) sovereign wealth fund,” he said, adding that the remaining issue is the split between national and local governments of the 70% component.

“Kasi yung ginto pag nawala, wala na, diba? Pero hindi naman lahat ng iyan ay atin lang, sa mga future Filipinos din ‘yun diba? So kailangan, lahat makinabang doon sa isang non-repeated source ng wealth of the nation. Ito para sa national, kasi ‘yung natural resources should be for everyone (When we deplete our gold reserves, they’re gone forever. But the gold is not entirely ours, it also belongs to future Filipinos. Everyone must benefit from depletable resources)” he said.

He said the grant of new mining tenements should be via “auction by the MGB (Mines and Geosciences Bureau), but the approval of the mining projects will be under an institutionalized MICC (Mining Industry Coordinating Council) with representatives from private sector and local community.”

He said the current “first-come, first-served” system does not adequately unlock the value of resources because there is no competition.

The basis for the auction could be “how much taxes are you willing to pay? How much share are you willing to give to the government?” he said.

Mr. Salceda said the proposed measure should be approved by Congress “before the end of the year.”

The Finance department has said the mining tax reform is part of the government’s comprehensive tax reform program although President Rodrigo R. Duterte did not mention it in his fourth State of the Nation Address on July 22.

Mr. Duterte has asked Congress to approve the remaining tax reform packages, starting with the proposal to reduce the corporate income tax rate to 20% by 2029 from 30% currently and rationalize fiscal incentives by making them more time-bound and performance-based. He also cited proposals to increase excise tax rates for alcohol products and e-cigarettes, centralize real property valuation and assessment, and simplify the tax structure for financial investment instruments.

The proposed tax reform for mineral products nearly made it out of the 17th Congress that ended in June, as the Senate adopted House Bill No. 8400 with minor amendments. The bill reduced the royalty on large-scale mining within mineral reserves to 3% of gross output from 5% currently and introduced a 1-5% margin-based royalty on those outside mineral reserves.

Senate President Vicente C. Sotto III and Majority Leader Juan Miguel F. Zubiri have each filed bills increasing the government’s revenue share from mineral products; while three bills have been filed in the House of Representatives.

If enacted, these will be levied on top of other taxes, such as the corporate income tax, the excise tax which Republic Act No. 10963 doubled to 4%, royalty to indigenous people and local business tax, among others.

Price-controlled drug list expected after issuance of health care IRR

By Gillian M. Cortez
Reporter

THE PRICE ceilings on patented medicines will be released soon after the issuance of the Universal Health Care (UHC) Law Implementing Rules and Regulations next month.

Pharmaceutical Division head Anna Melissa S. Guerrero of the Department of Health (DoH) told BusinessWorld that medicines covered by the Maximum Retail Price (MRP) scheme will be released within the year.

She said such drugs are typically those that have no competition in the market. Further public hearings will be held before a list is finalized.

The DoH hopes to include drugs that address the country’s top 40 health problems in the MRP scheme.

“Priority for the DoH is the UHC act but at the last public hearing, we only published 63 medicines which we said is subject to change. There may be additional drugs,” she said.

Health Secretary Francisco T. Duque III said last week that the DoH will be issuing the implementing rules and regulations (IRR) of the UHC Law on Oct. 10, over seven months since the law was signed by President Rodrigo R. Duterte in February. Under the law, the DoH was given 180 days or six months to complete the IRR.

In August, the Drug Price Advisory Council (DPAC) convened for its first public hearing regarding the MRP of selected medicines. The council was formed under the IRR of Republic Act No. (RA) 9502, or the Universally Accessible Cheaper and Quality Medicines Act of 2008. The DPAC is tasked to determine which medicines will be covered under the MRP.

The council will send its recommendation to the Health Secretary, who will then submit the list to Malacañang.

Ms. Guerrero said there is a need for patented medicine prices to fall in time for the first year of implementation of the UHC Law. She added that domestic prices are more expensive compared to other Asian countries.

“The purpose of the DoH is that the cheaper medicines act was put there so we can make it accessible and affordable. From what we see it, mas mataas ang presyo dito (prices are still higher here). You’re selling the same drug in different countries and what we want is the same ang presyo (similar pricing),” Ms. Guerrero said.

In chance remarks to reporters, Mr. Duque noted that the list could exceed 100, saying “There is now an effort to put together at least 120 molecules or 120 drugs and medicines for the maximum retail price list which means the prices of these drugs… will be reduced by different rates.”

He said price orders could be authorized by the issuance of an executive order (EO).

Legislator seeks probe of gaming operators not registered as companies

A LEGISLATOR on Sunday called for an investigation into unregistered Philippine Offshore Gaming Operators (POGOs) and to look into their ultimate ownership.

Representative Robert Ace S. Barbers of Surigao del Norte’s second district claimed that he has received reports that 46 out of the 58 POGO firms licensed by the Philippine Amusement and Gaming Corp. (PAGCOR) are unregistered corporations.

“I may not be too accurate but I am certain that most if not all of the 46 POGOs have no legal personality because their names are not found in the business/company name registry in the Philippines or abroad,” Mr. Barbers said.

He urged the Philippine National Police, the Drug Enforcement Agency, and the National Bureau of Investigation to “dig deeper” into the people behind POGOs and physical casinos licensed by PAGCOR.

Mr. Barbers also said that PAGCOR should exercise caution in granting licenses to POGOs.

“In short, our authorities should determine the beneficial owners and workers of these POGO firms. Are they of good repute and are not associated with persons with questionable reputations, character, honesty and integrity?,” he said.

POGOs have been receiving licenses since 2016, and the industry employs about 138,000 workers, most of them from China.

The Department of Finance recently warned of a crackdown on POGOs found to be evading taxes owed by their foreign workers.

BusinessWorld asked PAGCOR to comment, but it had not replied at deadline time. — Vince Angelo C. Ferreras

House to question Senate’s proposed tax on vaping devices, prefers to tax refills

REPRESENTATIVE Jose Ma. Clemente S. Salceda, the Ways and Means committee chair from Albay’s second district, rejected the Senate’s proposal to impose a 20% excise tax on e-cigarette devices, saying that he prefers to tax consumption.

“You tax the consumption… Kung di nabibili ‘yung device, minahalan mo ‘yung device, makikihiram… baka maka transfer ka pa ng sakit (If the device is taxed, it will become more expensive, and might encourage the borrowing of devices, which might be a risk for disease transfer)” Mr. Salceda said in a chance interview at the Palace last week.

Senator Emmanuel D. Pacquiao’s Senate Bill No. 987 will increase rates to P45 per pack of heated tobacco products and per milliliter of vapor products beginning in 2020. This is to increase by P5 per year until it reaches P60 in 2023; and by 5% every year thereafter.

The proposal will also impose a 20% excise tax on e-cigarette devices based on the wholesale price or the value of importation.

Finance Undersecretary Karl Kendrick T. Chua has said the Senate’s version of the e-cigarette tax could generate P3.2 billion in the first year of implementation, much higher than the equivalent House bill’s projection of P1.2 billion.

House Bill 1026, which also provides for higher taxes on alcoholic beverages, received third and final reading approval in that chamber on Aug. 20.

Revenue from the measure will help fill the P62-billion funding gap for Republic Act No. 11223, or the Universal Health Care (UHC) Act, due to roll out in 2020.

The tax law, which will become RA No. 11346 if passed, will gradually increase excise tax on tobacco products to P60 per pack by 2023 from P35 currently. The same law introduced the following rates on vapor products: P10 on 10 milliliter vapor products, P20 on 20 ml, P30 on 30 ml, P40 on 40 ml, P50 on 50 ml and so on.

The Philippine e-cigarette Industry Association (PECIA) and the Vapers Philippines (Vapers PH) said in August that taxing e-cigarette and vapor products on par with regular cigarettes will not curb tobacco use and will discourage use of their “less harmful alternatives” if they were taxed at the same rate.

They urged legislators to consider studies which found that e-cigarettes and vapor products are a “significantly less harmful alternative.”

“Heavy taxes on reduced-risk products will only result in smokers sticking it out with conventional cigarettes instead of switching to less harmful nicotine products,” Vapors PH said.

PECIA also pushed for a public consultation on proposed tax legislation which they said will be a venue to discuss other measures to reduce tobacco use. — Arjay L. Balinbin

DTI vaping rules mainly concerned with safety, product standards

TRADE SECRETARY Ramon M. Lopez said that the Department of Trade and Industry’s (DTI) upcoming guidelines on e-cigarettes and vaping devices will be mainly to ensure the safety of products available on the market.

In an interview with BusinessWorld, Mr. Lopez said that the joint guidelines with the Department of Health (DoH) will consider reports of malfunctioning devices have exploded and injured users.

“I think the important part of it is the safety of the product. Kailangan natin ma-assure ang (We need to assure the) safety of the product and if it’s within standards,” he said, adding that the guidelines will be released in a month’s time after meeting with stakeholders.

Mr. Lopez told BusinessWorld earlier that the DTI will be working on the guidelines “from a standards viewpoint and certification of standards compliance.”

The joint order is part of a series of guidelines that the DoH will issue in relation to its Administrative Order (AO) 2019-0007 published in June. The AO requires all makers, sellers and distributors involved in the Electronic Nicotine and Non-nicotine Delivery Systems (ENDS/ENNDS) industry to obtain a license to operate (LTO) from the Food and Drug Administration (FDA).

The AO also requires that separate memos be drafted for the labeling and packaging; registering of products; applying for LTO; and selling of flavored e-liquid of ENDS/ENNDS.

Prior to the release of the AO, there was no regulation of ENDS/ENNDS products. — Gillian M. Cortez

Salary standardization, OFW dep’t top common agenda items for legislative, executive branches

THE Legislative-Executive Coordinating Council (LECC) has identified the measures the legislature is prioritizing which are in line with the President’s legislative agenda, the House majority leader said Sunday.

Representative Ferdinand Martin G. Romualdez of Leyte’s first district said Congressional leaders and Cabinet officials agreed on the immediate approval of the fifth tranche of the Salary Standardization Law for government workers; the creation of the Department of Overseas Filipino Workers; the postponement of the May 2020 barangay and Sangguniang Kabataan elections to May 2023; and free legal assistance to the members of the Armed Forces of the Philippines.

“Let’s wait the official communication from the Palace about the final list of priority legislative measures it will be submitting to Congress. This is just the initial list. In the meantime, we agreed to pursue these as our common priority measures,” according to Mr. Romualdez, who also chairs the House committee on rules, in a statement.

The LECC is the small-group Legislative-Executive Development Advisory Council (LEDAC) meeting, according to Senate President Vicente C. Sotto III in a phone message.

Aside from Mr. Romualdez and Mr. Sotto, the small group meeting was attended by Speaker Alan Peter S. Cayetano, Deputy Speaker and Camarines Sur 2nd district Rep. Luis Raymund F. Villuarte, Jr., Senate Majority Leader Juan Miguel F. Zubiri, Senators Christopher T. Go and Joel J. Villanueva, Finance Secretary Carlos G. Dominguez III, Labor Secretary Silvestre H. Bello III, and acting Budget Secretary Wendel E. Avisado.

Mr. Romualdez said the House leadership is “eyeing the passage of the common legislative measures before Congress adjourns this December.”

During his fourth State of the Nation Address, President Rodrigo R. Duterte asked Congress to pass measures creating a department for overseas Filipino Workers, approving the latest tranche of the salary standardization law, and rescheduling the barangay elections.

Recently, Rep. Jose Ma. S. Salceda, the Ways and Means committee chairperson from Albay’s second district, said the 2020 budget provides for P32 billion for wage increases and P4 billion worth of miscellaneous benefits for government workers, including nurses and teachers.

Last week, the House committees on government reorganization and overseas workers affairs agreed to form a technical working group that will consolidate 31 bills seeking to create a Department of Overseas Filipino Workers.

Mr. Romualdez reiterated that the chamber is aiming for “tighter” coordination with the Palace and the Senate.

“We are eyeing zero vetoes for all bills to be approved by the Senate and the House. We hope to avoid any possibility of a Presidential veto by working closely with Cabinet members and Senate officials,” Mr. Romualdez said.

Rep. Isidro T. Ungab, the House Appropriations committee chair from Davao City’s third district, said that the House will tackle this week in committee the extension of the validity of the 2019 budget until December 2020.

“Sa next Committee hearing namin i-tackle iyong extension ng validity ng 2019 budget. (We will tackle the budget validity extension at the next committee hearing) There are pending measures requesting extension of the validity of the 2019 budget,” Mr. Ungab told BusinessWorld in a phone message.

“Considering that the 2019 budget was only signed into law in April, the validity of the appropriations will be extended from Dec. 31, 2019 to Dec. 31, 2020.”

The chamber on Friday also approved the proposed P4.1-trillion national budget for 2020 on third and final reading, two weeks ahead of its Oct. 4 deadline. — Vince Angelo C. Ferreras

Debt service bill nearly doubles in July

THE government’s debt service bill nearly doubled in July because of increased amortization payments, the Bureau of the Treasury (BTr) said.

The national government’s total debt payments rose 95.84% year-on-year in July to P92.46 billion, and was higher compared to P83.81 billion paid out in June.

Interest payments in July amounted to P50.97 billion, up 13.66% from a year earlier.

Some 60% or P30.64 billion went to domestic creditors while payments made to foreign creditors totaled P20.33 billion.

Meanwhile, amortization payments amounted to P41.59 billion, significantly higher than the P2.37 billion paid a year earlier.

Of the total, P39.95 billion went to domestic lenders, including payments through the Bond Sinking Fund, while P1.55 billion worth of prepayments went to foreign creditors.

The government borrows from both domestic and foreign lenders to pay for public projects and programs not covered by its ability to generate revenue, thereby financing its deficit.

As of the end of July, the government made P477.71 billion in debt service payments, up 3.15% from a year earlier.

This accounted for 53.8% of the P887.91 billion debt service budget for 2019, based on the Budget of Expenditures and Sources of Financing (BESF) report.

Of the total, P246.68 billion was paid to settle principal obligations while interest payments amounted to P231.04 billion.

More than half of the total amortization bill or P137.12 billion for the period went to domestic lenders while P109.56 billion went to external creditors.

The breakdown of interest payments was 60% to domestic creditors and 40% foreign. — Beatrice M. Laforga

Seizures of counterfeit goods valued at P13.7 billion in first seven months

THE National Committee on Intellectual Property Rights (NCIPR) seized approximately P13.73 billion of counterfeit products valued at P13.73 billion in the seven months to July.

In a statement Saturday, the Intellectual Property Office of the Philippines (IPOPHL) said that seizures during the period were equivalent to nearly 60% of the 2018 total.

Partially validated data accounting for a fifth of the total inventory found that top seizures included counterfeit branded cigarette and alcohol products; pharmaceutical and personal products; and handbags and wallets.

IPOPHIL said that NCIPR has yet to authenticate an additional P8 billion of mostly tobacco products seized by the National Bureau of Investigation and the P3.9 billion haul of mostly wearable items seized by the Bureau of Customs.

NCIPR is preparing for a rise in counterfeits of cigarette products following expected tobacco excise tax hikes in 2020.

“The implementation of the hike in taxes on tobacco will start next year. Also, we are closely watching developments on the proposal to impose taxes on alcohol,” IPOPHL Director-General and NCIPR vice-chair Josephine R. Santiago said.

“As early as now, we are readying ourselves for the possible rise of counterfeiting of these products by intensifying our exploration of new enforcement strategies to employ,” she added.

Senate Bill 2233 approved a tax rate of P45 per pack in 2020, increasing by P5 each year until the rate reaches P60 in 2023.

Cigarette products last year set a record for NCIPR seizures, accounting for 85.81% of the inventory at P20.25 billion. — Jenina P. Ibañez

Transfer pricing audits are coming… Get ready!

(First of two parts)

Related party transactions have come under renewed scrutiny from regulators lately due to their importance in promoting corporate good governance and in preventing further erosion of the tax base.

In April, the SEC issued Memorandum Circular (MC) No. 10, requiring all publicly-listed companies to submit a policy on material related party transactions (RPT). The MC was issued to protect the interests of minority investors and to promote good governance by ensuring that these transactions do not create financial, commercial and economic benefits to favored individuals or affiliated companies.

About three weeks ago, it was the Bureau of Internal Revenue (BIR)’s turn to issue Revenue Audit Memorandum Order (RAMO) No. 1-2019, prescribing the procedures and techniques in conducting an audit of taxpayers who have RPTs and intra-firm transactions.

The guidelines (known as the Transfer Pricing [TP] Audit Guidelines) are the anticipated sequel to the TP regulations, which the BIR issued in 2013. In the experience of countries or jurisdictions that have adopted their own TP regulations, the TP regulations are first issued, followed by the conduct of TP audits in order to test the application of the arm’s-length standard and the principles contained in the TP guidelines.

The RAMO applies to RPTs where at least one party is assessable or chargeable for tax in the Philippines, and those between a permanent establishment (PE) and its head office or other related branches. Also covered are intra-firm transactions, which occur when a firm engaged in business activities that are subject to different tax regimes (such as income tax holiday, the 5% gross income tax and the regular corporate tax) misallocates profits and costs to minimize tax liabilities.

Including intra-firm transactions means that an entity — without engaging in a transaction with another affiliate but undertaking different business activities — may be subjected to a TP audit. An example would be if its costs or expenses are heavily allocated to activities where these costs or expenses can be deducted to reduce the income tax liability, over other activities where costs or expenses will not be deductible because of income tax exemption or a gross-income based taxation.

On the covered transactions, no threshold amounts — either in terms of revenue or costs/expenses from such transactions — were specifically mentioned in the RAMO to identify the transactions that would be subject to audit.

Thus, regardless of amount, all taxpayers with RP transactions are potential candidates for a TP audit.

It is also unclear whether a TP audit will be an integral part of a regular tax audit. As a fact-intensive exercise, a TP audit is time-consuming because it involves a more extensive collection and analysis of data on the different aspects of business operations, such as those dealing with the industry of the taxpayer, the functions of the parties to the RP transaction, their financial results and the potential comparables. In many cases, it will require documents and other information in the possession of members of a multinational group other than the local affiliate.

If a TP audit is incorporated into the regular audit, a company faces the prospect of preparing all the necessary documents and information to defend its TP policy on its RPTs within a relatively short period of 120 days, the general timetable required to complete such regular audit. Also, a company’s TP policy has to be further supported by industry information, as well as functions, assets, risk (FAR) and comparability analyses.

In TP, the compensation to be received by a related party to a transaction is the result of the value created from the functions that it performs, the assets that it employs, and risks assumed in the RPT. In all cases, these three factors, functions, assets and risks, cannot be readily inferred from the intercompany agreements executed by the parties to the transactions nor from the audited financial statements of the parties involved. Interviews have to be conducted with employees involved in the operations to determine the distribution of functions and headcount within the organization. The group’s value chain will have to be analyzed to determine where the company under audit stands in relation to the other members of the group in terms of the value contributed to the business of the group.

There is also the comparability analysis, which requires the company to support its TP analysis with the necessary benchmarks. Again, data on comparable transactions or companies are not readily available and, even if the data are available, the comparables will have to be further analyzed to determine whether they meet certain comparability criteria.

In countries or jurisdictions that have adopted their own TP audit guidelines, TP audits have resulted in huge deficiency tax assessments and years of litigation. This has put a strain on companies’ financial resources and has exposed companies to reputational risk. More importantly, due to the years that a TP case can remain pending in courts, the TP assessment results in significant uncertainty for the business.

Thus, a TP audit cannot just be dismissed as like any regular tax audit. The key to managing the risk from a TP audit is really preparation. Given the audit process involved in a TP audit as outlined in the RAMO, there has never been a better time than now to prepare TP documentation. To begin with, TP documentation is among the first items that may be requested by the BIR in a TP audit. It simplifies the audit and creates a favorable impression that the taxpayer has done prior due diligence work in ensuring that its pricing policies for RPTs are conducted at arm’s-length conditions. Moreover, the taxpayer is spared the additional time and effort required to produce the information and documents to support its TP policy since the facts and data supporting the TP analysis are already summarized in the TP documentation.

In the next article, we will continue our discussion on the other provisions of the RAMO on intra-group services, interest payments and intangibles.

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.

 

Reynante M. Marcelo is a Partner for International Tax and Transaction Services of SGV & Co.

Filipinos support Duterte’s deadly war on drugs

MAJORITY of the Filipinos remained satisfied with President Rodrigo R. Duterte’s deadly war on drugs that has killed thousands, despite worldwide criticism, according to the latest Social Weather Stations (SWS) poll.

The polling firm found that 82% of Filipinos were satisfied with the government’s illegal drug campaign, while only 12% were dissatisfied, resulting in an “excellent” +70 net satisfaction rating. The rest were undecided.

Philippine police have said they have killed more than 6,000 people in illegal drug raids, many of them resisting arrest. Some local nongovernmental organizations and the national Commission on Human Rights have placed the death toll at more than 27,000.

The June 2019 net rating tied with the excellent +70 in March 2019. Net Satisfaction with the campaign has always been either very good (+50 to +69) or excellent (+70 and above) in the past 11 polls.

Mr. Duterte’s drive against illegal narcotics recorded its highest satisfaction rating in December 2016 at +77.

The presidential palace in July said the president would continue his war on drugs despite a United Nations resolution that seeks to investigate alleged human rights abuses by the police.

The UN Human Rights Council on July 11 ordered its human rights office to present a comprehensive report as it expressed concerns about human rights violations in the Philippines. The body adopted a resolution that Iceland proposed and 17 other nations supported.

The council urged the government to cooperate with UN offices by allowing visits by its officials and by “refraining from all acts of intimidation or retaliation.”

The resolution also called on the Philippines “take all necessary measures to prevent extrajudicial killings and enforced disappearances, to carry out impartial investigations and to hold perpetrators accountable.”

The government has dismissed the council order, saying states who supported it had been misinformed about the Philippine situation.

Net satisfaction with the government’s campaign against illegal drugs was highest in Mindanao at +84, followed by very good levels in Balance Luzon at +69, Metro Manila at +64, and the Visayas at +60.

In all areas, people cited fewer drug suspects as the top reason for their satisfaction. The arrest of drug suspects was the second most common reason for being satisfied for the Visayas and the rest of Luzon. Mindanao’s second-most common reason was fewer crimes.

People from Metro Manila equally cited fewer crimes and the arrest of drug suspects as the second most common reason for their satisfaction with Mr. Duterte’s campaign against illegal drugs.

In his fourth State of the Nation Address in July, Mr. Duterte said drug traffickers must be put to death, noting that the illegal drug menace persists despite his deadly war on drugs.

SWS interviewed 1,200 adults on June 22 to 26 for the poll, which had an error margin of ±3 points.

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