Tax Articles

Tax Strategy: Advance Pricing Agreement

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc. 140 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

In tax assessments, taxpayers are obligated to defend against issues and assumptions made in past years. It is only after the fact of the transaction, more often after several years, that an issue would be raised questioning it. But what if there is a way to agree in advance with the BIR how certain transactions are to be treated? Enter the Advance Pricing Agreement.

Advance Pricing Agreement, or APA, is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time. The purpose and benefits of an APA has been recognized by the BIR as early as 2013. While it took a very long time to get here, we are now at the cusp of implementing it after the BIR issued its draft Revenue Regulations.

To be clear, Advance Pricing Agreements are not for everybody. Not all taxpayers may avail of it and not all business transactions may be covered. But to those that are eligible and may be covered, it would offer a level of tax certainty that is comparable with a tax ruling.

The Revenue Regulation for APAs is not yet final so we will not delve too much into the details. But let’s go over some basic questions for us to get to know the basics of APA and to get a sense of how the BIR plans to implement it.

What are the types of APAs? Depending on the related parties involved, taxpayers may either seek a Unilateral APA (UAPA), a Bilateral APA (BAPA), or a Multilateral APA (MAPA). UAPAs may be resorted to by taxpayers with transactions with related party/ies in the Philippines or in foreign countries that are not treaty partners. On the other hand, a BAPA is generally resorted to if the transacting related parties are in the Philippines and in a foreign jurisdiction that is a tax treaty partner. Lastly, MAPA is similar to BAPA but there is more than one tax treaty partner involved. In both BAPA and MAPA, the involvement of the tax authority of the foreign country is necessary.

Why are foreign tax authorities involved in BAPA or MAPA? This is to prevent double taxation in instances wherein the transacting related parties are in different jurisdictions. Tax treaty partners are bound to respect and implement the provisions of the APA in their respective jurisdictions.

Who stands to benefit From APAs? Basically, taxpayers with related party transactions, preferably those with complex related party transactions, will benefit from an APA. Instead of defending adopted transfer pricing policies in a tax audit, taxpayers may now agree with the BIR as to the proper transfer pricing for a fixed period. It provides tax certainty and stability in related party transactions.

Is the APA mandatory for all taxpayers with related party transactions? No. The APA is purely voluntary. Eligible taxpayers may or may not avail themselves of the APA. Simply put, the APA is just an opportunity, not a requirement.

Are taxpayers availing of APA now relieved from doing transfer pricing analysis? No. While APAs are intended to provide transfer pricing certainty, taxpayers are still required to do the transfer pricing analysis for their related party transactions. This is because the APA application itself would require taxpayers to conduct a transfer pricing analysis as a pre-requisite. In addition, a transfer pricing analysis may be necessary to determine compliance with the terms of the APA.

Is the BIR required to accept the transfer pricing adopted by the taxpayer? No. The BIR will evaluate if the transfer pricing adopted by the taxpayer follows the arm’s length principle. If compensating adjustments are necessary, it would be indicated in the terms of the APA which the taxpayer may agree to or not.

How long is an APA valid for? If a taxpayer agrees with the terms of the APA as laid down by the BIR, the APA will be issued and will generally be valid for a limited period of five years. Renewals of the APA may be applied for by the taxpayer.

Are APA applications free? Unfortunately, no. APA applications are not free. Aside from the initial application fee, additional fees may be charged to the taxpayer to defray travel costs and to secure the services of an independent consultant, appraiser, or valuator.

If APA is something new to you, make no mistake. Is it tedious? Yes. Is it expensive? Very likely. Is it difficult? I bet it is. But, if done right, APAs may be a new tool for corporations to manage tax risk and avoid laborious assessment protests and costly litigation. From the eyes of a tax professional, it may very well be a tax strategy worth exploring.