Tax Articles

Beyond the Philippines: International Tax Updates

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc.380 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

We just zoomed past the halfway point of 2024 and the tax world is as vibrant and changing as it has ever been. During the first half of the year, we got a handful of local tax developments. New tax laws were passed, namely: the Ease of Paying Taxes Act (EOPT) and the Real Property Valuation and Assessment Reform Act (RPVARA). Tax regulations were also very dynamic with issuances tackling the tax obligation of e-marketplace operators and digital financial service providers, the tax implications of cross-border services, and the implementing rules of the EOPT, to name a few.

A lot of progress has been made but there are still more in the pipeline: amendments on the taxation of passive income and financial intermediaries (PIFITA), changes to the current tax incentive scheme (CREATE MORE), and the introduction of the digital services tax. All of these are still on the horizon.

While much has been done in the local setting, we have to remember that taxation is an international concern. What happens beyond our borders may still have an effect on us. The Philippines is not (and should never act as if it is) in a bubble of its own. Being mindful of international tax developments, anticipating its impact, and timely adapting to it is always a winning formula. One that should not be lost on our legislators and tax authorities.

Perhaps the biggest tax shift we have in 2024 involves anti-Base Erosion and Profit Shifting (BEPS) efforts. For context, the Organisation for Economic Co-operation and Development (OECD) has been spearheading anti-BEPS measures with the Two-Pillar (Pillar One and Pillar Two) Solution. It aims to address tax avoidance and tax transparency. Pillar One relates to the reallocation of a portion of the taxable income of multinationals to market jurisdictions. On the other hand, Pillar Two seeks to impose a minimum global tax rate to ensure that corporations are paying their just share in taxes.

The implementation of Pillar One is dependent on jurisdictions agreeing on the pillar’s technical complexities. However, differing impacts of its implementation are hindering a general consensus.

In addition, Pillar One intends to repeal digital service taxes. Several countries have already enacted their respective versions of the digital service tax. The Philippines is soon to join this growing number of countries as the Bicameral Conference Committee of both Houses of Congress recently approved the bill taxing digital service providers.

While it may be too soon a topic to discuss (considering that there is still no law on digital services tax as of the writing of this article), is the Philippines willing to shift from digital services tax to Pillar One? Proponents of Pillar One argue that digital services tax is discriminatory and that it may be used as a retaliatory measure by countries. On the other hand, digital services tax is much simpler to implement than the consensus-plagued Pillar One. Which way should the Philippines lean into?

Policymakers and tax authorities should also pay particular attention to Pillar Two since it is designed to ensure that taxes are paid by multinational groups, regardless of their jurisdiction and regardless of whether a particular country is implementing Pillar Two or not. Profits of these multinationals are bound to be taxed somewhere.

Profits generated in the Philippines (which do not yet implement Pillar Two) may be taxed in another jurisdiction (which implements Pillar Two). In effect, the Philippines losses out on the additional tax it would have otherwise had the right to collect. In addition, Pillar Two adversely impacts tax incentives offered by countries. For countries relying heavily on tax incentives to attract foreign investments, like the Philippines, Pillar Two provides diminished attractiveness for investments. Consequently, it may lessen the intended impact of the proposed CREATE MORE even before the measure becomes law.

Certain aspects of Pillar Two took effect this 2024 with additional rules taking effect starting 2025. Legislation must be put in place to both adapt to Pillar Two and work around its limiting effects. The sooner this is done, the better.

As an off-shoot of the Two-Pillar Solution, transfer pricing has likewise seen a surge in 2024. The push for transparency in taxation of multinational groups is making access to information easier for tax authorities. This is mostly implemented through the use of a three-tiered reporting approach: the Master File, Local File, and Country-by-Country Reporting (CbCR).

In a nutshell, a Master File contains standardized information relevant for all members of a multinational group. A Local File refers to the report containing the material transactions of the local taxpayer. A CbCR contains certain information relating to the global allocation of income and taxes and location of economic activity within the multinational group.

More and more countries are adopting this three-tiered reporting approach in their local transfer pricing regulations. In the Philippines, however, we only require the preparation of a Local File, more commonly referred to as the “Transfer Pricing Documentation.” The failure to adopt the other reporting requirements puts at a disadvantage not only the Philippine tax authorities but also the Philippine taxpayers.

Other international tax developments involve: (i) the rise in importance of tax as a measure of a company’s Environmental, Social, and Governance (ESG) performance; and (ii) the slow prevalence of carbon tax programs in several jurisdictions.

Perhaps by taking a more proactive approach at appreciating international tax developments, we would be able to better structure our own tax reform program. Future-proofing is something we Filipinos should begin taking more seriously.