BIR’s power to allocate gross income among related taxpayers

I.  INTRODUCTION

 

With the promising benefits of globalization, businesses began to expand business operations on a worldwide level, either through setting up a subsidiary, branch, representative office, or other business structures. Undeniably, however, the dramatic increase in globalization brings as well the harmful tax practices that have resulted in tremendous losses of tax revenues for governments. This is true as multinationals have learned how to exploit globalization and take advantage of the tax loopholes allowing them to evade their tax obligations.

 

As one of the common practices, multinationals organize offshore centers in tax haven countries primarily to hold the assets of these multinationals. In tax haven countries, as you already know, multinationals are sheltered from the payment of huge amount of taxes as they assess little or no taxes on income. Even more important and critical is the transfer pricing schemes and methods used by these multinationals giving them a venue to allocate and shift profits among members of its corporate organization, in a less noticeable way.

 

It is due to these growing transactions and its negative impact to the government’s tax collection that the tax authorities of different countries have coherently implemented rules and regulations to intensify its tax collection efforts on global transactions. Currently among different countries, tax treaties were created to ensure double-taxation and double non-taxation did not occur, rules on information sharing and enforcement were implemented to facilitate the free flow of information among tax authorities of different countries, and effective regional tax rules were issued such as the transfer pricing regulations drafted in accordance with the Organization for Economic Cooperation and Development (OECD) model.

 

At this juncture, it is but necessary to discuss how our own country addresses this global concern through the enacted laws and implemented regulations and assess whether these have been sufficiently and effectively applied to resolve the issue. It is important especially considering the increasing investment placed by multinationals in the Philippines and the volume of domestic and cross-border transactions entered into by these entities with their related parties.