The Bureau of Internal Revenue (BIR) is strengthening its capacity to analyze cross-border transactions that can help shore up tax collection and address base erosion payments.
The Base Erosion and Profit Shifting (BEPS) Action Plan, an initiative of 60 countries, including the Organization of Economic Co-operation and Development (OECD), G-20 and developing countries like the Philippines and Vietnam, was launched in 2013.
Revenue losses from BEPS are conservatively estimated at $100 billion to $240 billion annually. There were also complaints that corporations are not paying their “fair share” of taxes and BEPS has also been eroding citizens’ trust in the fairness of tax systems worldwide.
“Currently, we do not devote a lot of resources in analyzing cross-border transactions, other than what we have in the usual tax process. Unlike in other countries, which have their own units that analyze the transfer pricing cases or auditing international transactions. That’s how important BEPS is. We’re now able to understand that actually we have cross-border transactions that affect our tax base,” a BIR official said.
“This is a realization, that we encounter base erosion payments. We are focusing our efforts in developing capacity for our auditors to analyze cross-border transactions, which involve base eroding payments,” the source said.
Tax and Global Managing Director Tim Wach said that, historically, the avoidance of double taxation was a key driver in the international tax system. Now, under the BEPS Action Plan, the key driver is elimination of double nontaxation.
“The international tax landscape is changing, it’s no longer business as usual. Be ready for increased reporting, prepare for country-by-country reporting, be ready for increased disputes, beware of uncoordinated action and beware of diverted profit taxes,” he said.
The Standardized Country-by-Country Reporting and other documentation requirements will give tax administrations a global picture of where multinational enterprise (MNE) profits, tax and economic activities are reported.
Wach said tax administrators can use this information “to assess transfer pricing and other BEPS risks, so they can focus audit resources where they will be most effective.”
The MNEs must report their revenues, pre-tax profits, income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets in each jurisdiction where they operate.For banking and insurance sectors, they recognize that these sectors have specific features that must be taken into account, and therefore there is a need to develop suitable and specific rules for them.
Wach said further technical work will be conducted on specific areas of the recommended approach, including the detailed operation of the worldwide group ratio rule and the specific rules to address risks posed by banking and insurance groups. This work is expected to be completed in 2016.
The BEPS has enumerated 15 actions plans, which include Addressing Tax Challenges of the Digital Economy, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments and Transfer Pricing-Aligning Transfer Pricing Outcomes with Value Creation.