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Philippines: Transfer pricing costs gov’t P43 billion a year, says DOF
MANILA, Philippines — The government is losing about P43 billion in revenue each year due to companies that abuse transfer pricing schemes, according to the Department of Finance (DOF).
In a report to Finance Secretary Carlos Dominguez, Finance Undersecretary Karl Kendrick Chua said some companies avoid paying the correct amount of taxes to the government by taking advantage of incentives given by investment promotion agencies (IPA) and abusing the practice of transfer pricing.
Chua said transfer pricing abuse refers to the corporate practice of shifting profit from a high-tax country to tax havens where they would be required to pay lower taxes, or from certain corporations to their related businesses that are located in special economic zones (SEZs) where they get tax perks.
He said this could also happen when firms shift profits or costs between projects or activities within the same firm to cut their tax payments.
According to Chua, estimates from the DOF and the Bureau of Internal Revenue (BIR) showed that the government incurred tax leakages amounting to P25.9 billion in 2011, P36.5 billion in 2012, P35.1 billion in 2013, P40 billion in 2014 and P42.7 billion in 2015 due to this practice.
He said the DOF-BIR analysis covered 5,155 firms in 2015, of which 558 were allegedly involved in the abuse of transfer pricing scheme.
The DOF official said these figures are on top of the foregone revenues incurred by the government in the form of fiscal incentives granted to big companies. In 2015, the DOF said the government gave away P301 billion in incentives and other perks to corporations.
Chua noted that the abuse in transfer pricing is one of the reasons why the DOF is pushing for the Congressional approval of the second package of the Comprehensive Tax Reform Program (CTRP).
The measure aims to reduce the corporate income tax rate to 20 percent from the current 30 percent, while rationalizing fiscal incentives.
The House of Representatives approved on the third and final reading last September 10 its own version of the tax reform package, dubbed as the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill.
The Senate version, named as the Corporate Income Tax and Incentives Reform Act, is still being discussed at the committee level.
In 2016, Chua said there were 3,102 corporations which were granted income tax incentives. He said 2,358 firms of these paid the special rate of five percent on gross income earned (GIE).
Because of the differentiated rate, Chua said these firms were able to pay tax rates ranging from six percent to 13 percent, lower as compared to regular corporations that paid 30 percent.
Source: https://www.philstar.com/business/2018/10/03/1856690/transfer-pricing-costs-govt-p43-billion-year-says-dof#GRgbWTkxqP23vyeV.99