IN BRIEF:
• The Bureau of Internal Revenue (BIR) has released a revised draft of the Advance Pricing Agreement (APA) regulations, and understanding the nuances of this process becomes essential for businesses navigating the complexities of transfer pricing.
• While the APA process can be resource-intensive, it offers significant benefits such as preventing transfer pricing disputes and minimizing compliance costs.
• The Philippines is among the few ASEAN countries yet to implement APA regulations, and establishing such a program could enhance its attractiveness as a destination for foreign direct investment.
The Advance Pricing Agreement (APA) process serves as a vital tool for taxpayers and tax authorities alike, providing a framework for establishing fair pricing in related party transactions. The Bureau of Internal Revenue (BIR) has released a revised draft of the APA regulations, and understanding the nuances of this process becomes essential for businesses navigating the complexities of transfer pricing.
APAs are binding, voluntary agreements between a taxpayer and the tax authorities of one or more countries or jurisdictions that are entered into in advance of a related party transaction. This is for the purpose of establishing an appropriate set of criteria of how the price for such a transaction is to be determined based on the arm’s length standard over a fixed period of time. APAs can be unilateral, bilateral or multilateral, depending on the number of tax administrations that are parties to the APA. Bilateral or multilateral APAs are preferred over unilateral APAs.
This article delves into the key insights from the BIR’s revised draft regulations, exploring the stages of the APA process, its benefits, and the implications for the Philippines as it seeks to enhance its investment climate within the ASEAN region.
APA STAGES AND PURPOSE
The APA process involves five stages, consisting of 1) the early engagement and pre-filing, 2) formal filing of the application, 3) review & negotiation, 4) formal agreement, and lastly, 5) implementation and compliance monitoring. The process can be time-consuming and resource-intensive, but owing to the multiple benefits that APAs provide, notably transfer pricing (TP) dispute prevention, APAs have become a staple in a company’s overall tax strategy.
APAs are similar to tax rulings or written confirmations from the BIR. However, their similarity ends there. Unlike rulings, though, which usually confirm the tax implications of a particular transaction, APAs are an advance confirmation that the basis used by a taxpayer for determining the price for a related party transaction, such as the method selected, the comparables, the critical assumptions, is acceptable as an arm’s length price for such transaction. Tax rulings are issued for all kinds of transactions, but APAs are issued specifically for related party transactions.
The main purpose of APAs is to have that advance certainty or predictability on the pricing policy for related party transactions. Because taxpayers and tax authorities have agreed in advance on the conditions by which an arm’s length price in a related party transaction is to be determined, the expectation is that there should be no more TP adjustments for the taxable years covered by the APA if the taxpayer complies with its terms and conditions. TP disputes, including protracted litigation, are minimized or totally avoided, and compliance costs are, thus, reduced.
More importantly, double taxation is avoided in the case of bilateral or multilateral APAs where two or more jurisdictions may adopt differing views of an arm’s length price for cross border transactions. An APA in place prevents a situation where a tax jurisdiction performs a TP adjustment on a cross-border transaction, with the other jurisdiction involved disagreeing with the basis on which the adjustment is made, thus, depriving the tax benefit, in the form of reduced income or additional deduction, to the party operating in the other jurisdiction.
ISSUES AND CONSIDERATIONS
As currently worded, the draft BIR regulations are generally comprehensive enough to cover all aspects of the APA process. The draft regulations significantly adopt international best practices as outlined under the Organisation for Economic Co-operation and Development (OECD) Bilateral Advance Pricing Arrangement (BAPA) Manual and picks up from certain provisions of APA regulations of other jurisdictions. Although some issues need to be addressed, the draft version is well-researched and follows the structure of the other APA regulations in other countries.
Some key issues to consider in the draft regulations involve the need to have a dedicated group of BIR personnel to administer the APA process to ensure they have the time and technical expertise to navigate the long APA process end-to-end with the taxpayer. These people should not be the same examiners who conduct the tax audits or perform other functions in tax administration.
Having a dedicated group of personnel to handle the APA applications will also preserve the confidentiality of the documents and information submitted during the APA process and expedite its processing.
Other issues to consider involve the prohibition against the use of any document or information submitted during the APA process in any tax audit or examination. Such use should be limited to verifying compliance with the terms and conditions of the APA. It will also help if the regulations clearly provide the criteria, in terms of complexity and amount, of the transactions that may be the subject of an APA, the grounds for the termination of an APA process that has started, and the revocation or cancellation of an existing APA. This will contribute to the transparency of the whole APA process while also serving as advance notice to prospective applicants to devote time and resources only to transactions that may qualify for an APA.
THE APA REGULATORY LANDSCAPE
Within ASEAN, the Philippines is one of the few remaining countries that have yet to issue APA regulations. Countries that usually compete with the Philippines for foreign direct investments (FDIs), such as Malaysia, Indonesia, Thailand, Vietnam and Singapore, have APA programs in place. Singapore’s APA program has been in place for more than 20 years. Based on 2023 statistics published by its government, Singapore also has the most number of APA cases, 23 all in all, that were granted or closed for 2023.
Hence, it is not a coincidence that Singapore also has the largest share of FDI within the ASEAN region for that year because its active and robust APA program definitely contributed to its status as a top investment destination within ASEAN. APAs promote certainty on the tax treatment of related party transactions, and predictability of tax policy is one of the factors that foreign investors look for in a country as a possible investment destination.
By releasing a revised draft of the APA regulations and seeking comments from stakeholders, the BIR has taken the right step in setting in place an APA program for the Philippines. As the Philippines competes for FDI within ASEAN, it is very laudable that the BIR is pursuing the issuance of formal APA regulations that will contribute to the consistency and stability of rules, which will progress towards the Philippines’ being viewed favorably as an investment destination in the region.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Reynante M. Marcelo is a Tax Partner of SGV & Co.