AccountingHow Transfer Pricing Consulting Services Help Businesses Stay Secure From Tax Risks

The process of managing intercompany pricing has become extremely strict in recent years. Businesses who take advantage of transfer pricing consulting services will ensure they are compliant with local tax law in the Philippines. You will also find that any intercompany and international related party transactions will be compliant with the arm’s length principle. With more countries in Asia Pacific increasing their audit coverage and information, any businesses with intercompany pricing need to ensure they can justify their pricing with economic analysis. If you fail to have intercompany prices that can be justified, you will be likely to face audits. This can cause large penalties, increased taxes and profits which cannot be deducted. To ensure you are protected from these risks, having an active tax strategy and using an external advisor will be essential.

What Is Required For Transfer Pricing Documentation?

To ensure your company complies with the complex rules around intercompany transactions you will need to produce documentation. The following are areas to consider for your transfer pricing documentation:

• Local File: Businesses will need to create detailed documentation to show what the legal ownership, management structure, business model and intercompany transactions are.
• Master File: Any businesses with an international presence will be required to produce a master file. This will give a clear overview to the tax authority of how the business operates globally, profit allocation, supply chain and ownership of intellectual property.
• Benchmarking: To ensure you have accurate benchmarking analysis you will need to utilise complex statistics. This will include analysing profit splits, margins and value.
• Timeline: Ensuring you meet the timeframes for documentation will mean you avoid any mandatory penalties. It will also ensure you have a strong defence if you are audited.
• Shared Service Fees: You need to ensure that any intercompany fees charged for management, technical and central services are justified. This should include evidence that services were provided, there was a benefit and it was necessary for your local subsidiary.
• Intangible Assets: You need to ensure any shared intangible assets such as IP, software, trademarks and technical processes are valued correctly. This will need specialist modelling.
• Loan Transactions: Any intra group loan, guarantees, cash pools and equity must be constantly analysed to ensure they are within current debt/equity limits and interest rates.
• Risk Allocation: You need to document how risk such as obsolete stock, bad debt, currency and market risk is divided between related parties. This will give a reason for profit distribution.

How To Defend Against Intercompany Tax Audits

If businesses fail to put in place strategies to defend against tax audits from the government they can face serious financial risks. An intercompany tax audit will look at whether the value of your transactions with related parties is at market value. This includes analysing profit allocation, IP royalties and shared costs. If the tax authority find any unverified pricing models or no documentation then you will face lengthy disputes, high legal costs and harsh taxes.

• Identify Red Flags: Your financial team will need to monitor for any red flags. This will include losses over multiple years, decreased margins and high royalties paid to overseas parents.
• Pre-Audit Review: Conducting audits will allow your internal tax team to identify any errors in your methodology.
• Complete Tax Defence Pack: Having a complete pack will ensure you can justify your position with clear economic analysis, contractual evidence and precedent.
• Match Financial Statements: Ensuring your local financial statements match your global statements will ensure there are no discrepancies with your transactions.
• Dispute Process: Implementing a dispute process will ensure you protect your finances, reduce legal costs and have clear steps to dispute any tax shortfalls.
• Evidence Of Economic Substance: Storing electronic copies of contracts, emails, minutes and delivery notes will help to prove your related party transactions had genuine economic substance.
• Tax Advisors: Using experienced tax advisors will ensure any technicalities are clearly explained and resolved.
• Sector Specific: Ensuring your processes are tailored to your industry will ensure your defences match the focus of the audit. This can include manufacturing, real estate, logistics, technology and financial services.

How To Protect Your Capital From Being Reallocated

If the tax authorities find that your related party pricing is not market based they can force you to reallocate your income. This often causes double taxation as the profits of your business will be taxed in multiple countries. To avoid this sudden loss of funds you will need to use economic modelling, monitor your transactions and adjust your pricing models.

• Reallocate Income: The tax authority can reclassify your unverified intercompany payments as a dividend or capital contribution. This will cause mandatory tax to be charged, high interest and non deductible penalties.
• Avoid Double Taxation: Using advance pricing agreements and tax treaties will ensure you are not double taxed on the same earnings.
• Year End Adjustments: Conducting year end price adjustments will ensure your actual results match your chosen benchmarks.
• Protect Cash Flow: By avoiding any retroactive taxes you will ensure you have the cash flow to continue running your business, invest, grow your business and return to shareholders.
• Avoid Penalties: Showing you have been completely transparent and carried out due diligence will ensure you qualify for penalties to be waived and interest relief.
• Restructure Protection: Ensuring any large changes to your supply chain, assets or responsibilities are supported by updated economic modelling will ensure you are not taxed during an audit.
• Avoid Excessive Withholding Tax: Ensuring your pricing matches the double tax treaties will ensure you don’t pay too much withholding tax on any technical or service fees.
• Ensure Profits Are Earned: Regularly updating your benchmarking will ensure your local profits are in line with the assets, staff and risk you have in place locally.

Main Regulations To Be Aware Of In The Philippines

The Philippines has become stricter. Revenue have introduced new regulations to ensure they can identify any base erosion and unverified profit shifting. To ensure you are always compliant you will need to keep up to date with any changes to revenue regulations, orders and mandatory thresholds. Businesses operating within the Philippines will need to regularly review their transactions, relationships and reporting requirements.

• Local Bureau: Any businesses will need to comply with local regulations to ensure all related party transactions are disclosed.
• Related Party Disclosure: Your tax department will need to prepare detailed tax forms to show who your counterparties are, their tax reference, volume of transactions and chosen pricing method.
• Exemptions: Reviewing your revenue and transaction volumes will help you identify if you need to fully document or are exempt.
• International Standards: The transfer pricing regulations in the country are based on international economic principles. Therefore your strategy will need to match both the local and global standards.
• Foreign Currency Conversion: Any transactions with your overseas parent will need to be converted into your local currency and accounting standards. This needs to be done in line with any exchange rate regulations.
• Storage: The local tax authority requires all transfer pricing documents, contracts, invoices and benchmarking to be stored for long periods of time. This needs to be stored electronically.
• Management Contracts: Ensuring any intercompany management contracts have clear performance measures, detailed description of services provided and formula for benefits will ensure you can claim back tax deductions.
• Customs And Tax: Ensuring your valuation models match those declared at customs will avoid you getting audited by both.

Why Work With BusinessRegistrationPhilippines.com

As managing your intercompany transactions can be very complex with the tax regulations, economic theory, data collection and strict enforcement it can pose serious risks to your business if you attempt to complete them without expert assistance. The entire process of collecting data, analysing benchmarking statistics, creating detailed economic reports and defending your position to the tax authority will require a high level of expertise which your accountants simply do not have. Working with a specialist will ensure your company is protected. Even small errors in calculations and benchmarking can cause large tax charges. BusinessRegistrationPhilippines.com can provide you with a trusted service to help you comply with all regulations. We can provide you with a complete compliance solution, advanced benchmarking and tax advice to protect your business.

• Expert Knowledge On Local Tax Law: Due to the complexity of tax law and international guidelines working with a specialist will ensure your board are aware.
• Benchmarking: Our expert tax advisors will create bespoke benchmarking models using global databases. This will ensure your pricing can withstand any intense audits.
• Comprehensive Risk Assessment: We will carry out a thorough risk assessment on all your intercompany revenues. This will help us identify and resolve any potential issues.
• Trusted: BusinessRegistrationPhilippines.com is a leading advisory service. We can ensure you have clear strategies in place to ensure you are completely compliant.
• Align With Business Objectives: Using specialist advisors will ensure that your tax risks are aligned with your business goals. This will ensure your margins are protected whilst complying with regulations.
• Represent You: Using experienced tax advisors will ensure your arguments are clearly explained.
• Stay Up To Date: Our dedicated advisors will keep you updated on any changes in tax law. This will allow your intercompany pricing to be updated before any changes come into place.
• Create Defensible Contracts: We can help you create detailed related party contracts. This will ensure the functions, assets and risk are clearly defined to match the real world.

Key Points To Remember

To ensure continued growth and protect your capital in today’s strict environment you need to ensure all your activities are completely compliant with local tax regulations. Using a transfer pricing consulting service will give you the tools to protect your business’ assets, avoid random reallocations and ensure transparency. Working with experienced compliance experts will allow you to manage any complex regulations, avoid any financial risk and grow your business with complete confidence.

Is Assistance Available?

Yes! BusinessRegistrationPhilippines.com can help you with your complex regulations by providing a transfer pricing consulting service. Get in touch to book an initial consultation with one of our experts.

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