The document summarizes key aspects of Philippines' minimum wage law and tax treaty relief rulings. It explains that minimum wage earners are exempt from income tax and defines minimum wage earners. It also outlines the process for obtaining a tax treaty relief ruling from the Bureau of Internal Revenue to confirm eligibility to avail of preferential tax rates under tax treaties.

1. MINIMUM WAGE LAW
•Republic Act (RA) No. 9504 exempts minimum wage earners from
paying income tax.
•Revenue Regulations (RR) 10—2008 implements the provisions of
RA No. 9504.
•Minimum Wage Earner - shall refer to those who are working in the
private and public sector being paid the Statutory Minimum Wage as
fixed by the Regional Tripartite Wage and Productivity Board and the
National Wages and Productivity Commission.
•Statutory Minimum Wage – refers to the rate fixed by the RTWPB as
defined by the Bureau of Labor and Employment Statistics of the
Department of Labor and Employment .

2. MINIMUM WAGE LAW
• Compensation income of Minimum Wage Earners (MWE) who work
in the private sector and being paid the Statutory Minimum Wage
are exempted from the requirements of the withholding tax on
compensation including holiday pay, overtime pay, hazard pay and
night differential.
• “De minimis benefits," furnished or offered by an employer to his
employees, are not considered as compensation subject to income
tax and consequently to withholding tax, if such facilities or
privileges are of relatively small value and are offered or furnished
by the employer merely as means of promoting the health, goodwill,
contentment, or efficiency of his employees.

3. MINIMUM WAGE LAW
• An employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime
pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are
not exempt from income tax, and consequently, from withholding
tax.
• Income of Minimum Wage Earners derived from the conduct of
trade, business or practice of profession are not exempt from
withholding tax and income tax except those subject to the final
withholding tax.

4. MINIMUM WAGE LAW
• Any reduction or diminution of wages for purposes of exemption
from income tax shall constitute misrepresentation and therefore,
shall result to the automatic disallowance of expense, i.e.
compensation and benefits account, on the part of the employer.
The offenders may be criminally prosecuted under existing laws.

5. TRANSFER PRICING
• The BIR has recently issued Revenue Memorandum
Order (RMO) No. 23-2009 authorizing the BIR National
Investigation Division to conduct an audit/investigation of
inter-related companies and conglomerates, including
related individual taxpayers, from certain industries.
• The audit/investigation of inter-related companies and
conglomerates, including related individual taxpayers,
shall be undertaken to ensure that such taxpayers are
clearly reflecting income and expenses that are
attributable to controlled and inter-related transactions.

6. TRANSFER PRICING
• Transfer pricing refers to the allocation of profits for tax and other purposes
between parts of a multinational corporate group.
• Consider a profitable UK computer group that buys micro-chips from its own
subsidiary in the Philippines: how much the UK parent pays its subsidiary –
the transfer price – will determine how much profit the Philippine unit reports
and how much local tax it pays.
• If the parent pays below normal local market prices, the Philippine unit may
appear to be in financial difficulty, even if the group as a whole shows a
decent profit margin when the completed computer is sold. UK tax
administrators might not grumble as the profit will be reported at their end,
but their Philippine counterparts will be disappointed not to have much profit
to tax on their side of the operation; if the UK company bought its
microchips from an independent company in Philippines it would pay the
market price, and the supplier would pay taxes on its own profits in the
normal way.

7. TRANSFER PRICING
• The legislative basis for the conduct of transfer pricing examination
by the Bureau of Internal Revenue (BIR) is found in Section 50 of
the Philippine Tax Code, as follows:
“Sec. 50. Allocation of income and deductions. – In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization,
trade or business, if he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to reflect
the income of any such organization, trade or business.”
• The above provision authorizes the BIR to allocate income between
organizations directly owned by the same interests if a related
taxpayer has not reported its true taxable income.

8. TRANSFER PRICING
• To implement Section 50 of the Tax Code, the BIR has issued
Revenue Audit Memorandum Order (RAMO) No. 1-98 dated 1 July
1998 which provides basic audit guidelines in the examination of
inter-related group of companies. RAMO 1-98 applies to controlled
group of companies. The term control is defined as follows:
2.5.2 The term 'controlled' for purposes of this RAMO shall
mean any kind of control, direct or indirect, whether legally
enforceable and however exercisable or exercised. It is the
reality of the control which is decisive, not its form or the mode
of its exercise or ownership. A presumption of control arises if
income and expenses have been arbitrarily shifted.

9. TRANSFER PRICING
• On March 24, 2008, the Bureau of Internal Revenue
(BIR) issued Revenue Memorandum Circular (RMC) No.
26-2008, entitled “Interim Transfer Pricing Guidelines”.
• RMC 26-2008 states that the BIR is revising the final
draft of the revenue regulations on transfer pricing.
However, in order to preclude any issue that may arise in
the interim, the BIR, as a matter of policy subscribes to
the Transfer Pricing Guidelines issued by the
Organization for Economic Cooperation and
Development (OECD).

10. TRANSFER PRICING
• Under the OECD Transfer Pricing Guidelines,
the following methods (among others) are
recommended for an arm’s length price in
transfer pricing:
1.Comparable Uncontrolled Price Method
2. Resale Price Method
3. Cost Plus Method

11. TRANSFER PRICING:
Comparable Uncontrolled Price Method
The CUP method provides the best evidence of an arm's length price. A CUP
may arise where:
• the taxpayer or another member of the group sells the particular product, in
similar quantities and under similar terms to arm's length parties in similar
markets (an internal comparable);
• an arm's length party sells the particular product, in similar quantities and
under similar terms to another arm's length party in similar markets (an
external comparable);
• the taxpayer or another member of the group buys the particular product, in
similar quantities and under similar terms from arm's length parties in similar
markets (an internal comparable); or
• an arm's length party buys the particular product, in similar quantities and
under similar terms from another arm's length party in similar markets (an
external comparable).

12. TRANSFER PRICING:
Comparable Uncontrolled Price Method
Transactions may serve as comparables
despite the existence of differences
between those transactions and non-arm's
length transactions, if:
• the differences can be measured on a
reasonable basis; and
• appropriate adjustments can be made to
eliminate the effects of those differences.

13. TRANSFER PRICING:
Resale price method
• The resale price method begins with the resale price to arm's length
parties (of a product purchased from an non-arm's length
enterprise), reduced by a comparable gross margin. This
comparable gross margin is determined by reference to either:
– the resale price margin earned by a member of the group in comparable
uncontrolled transactions (internal comparable); or
– the resale price margin earned by an arm's length enterprise in comparable
uncontrolled transactions (external comparable).

14. TRANSFER PRICING:
Resale price method
• Under this method, the arm's length price of goods acquired by a
taxpayer in a non-arm's length transaction is determined by reducing
the price realized on the resale of the goods by the taxpayer to an
arm's length party, by an appropriate gross margin. This gross
margin, the resale margin, should allow the seller to:
- recover its operating costs; and
- earn an arm's length profit based on the functions performed, assets used, and
the risks assumed
• The resale price method is most appropriate in a situation where the
seller adds relatively little value to the goods. The greater the value-
added to the goods by the functions performed by the seller, the
more difficult it will be to determine an appropriate resale margin.
This is especially true in a situation where the seller contributes to
the creation or maintenance of an intangible property, such as a
marketing intangible, in its activities.

15. TRANSFER PRICING:
Cost plus method
• The cost plus method begins with the costs incurred by a supplier of
a product or service provided to an non-arm's length enterprise, and
a comparable gross mark-up is then added to those costs.
• This comparable gross mark-up is determined in two ways, by
reference to:
-the cost plus mark-up earned by a member of the group in
comparable uncontrolled transactions (internal comparable); or
-the cost plus mark-up earned by an arm's length enterprise in
comparable uncontrolled transactions (external comparable).

16. TRANSFER PRICING CASES
• BIR RULING NO. 124-84, 25 July 1984
• Taxpayer requests for a ruling on whether it can claim a
tax credit equivalent to the sales tax deemed paid on the
tax-exempt raw materials which the said company uses
in the manufacture of sodium tripolyphosphate (STPP).
• The BIR aside from answering the query advises the
taxpayer that “a transfer price based on market price to
third parties shall be fixed on the phosphoric acid upon
being transferred to another division for use in the
manufacture of STPP; and that the sales tax deemed
paid shall be based on the said market price.”

17. TRANSFER PRICING CASES
• CYNAMID PHILIPPINES, INC. vs. CIR, C.T.A. Case No.
4724. 28 August 1995
• Issue was whether or not petitioner overstated its cost of goods due to
transfer pricing.
• The court sustained petitioner’s argument that the difference in price was
due to the difference in products involved.
• CTA: It can be gleaned readily from the facts that the physical property and
circumstances in the processing and sale of petitioner's products are not
"identical" or "so nearly identical that any difference can either have no
effect on price, or such difference can be reflected by a reasonable number
of adjustments to the price" of Pfizer's products. By the adjective "identical"
or the phrase "so nearly identical," the compared products must be exactly
or essentially alike.

18. TRANSFER PRICING CASES
AVON PRODUCTS MFG., INC. vs. CIR, C.T.A. Case No.
5908, 20 January 2005
• The BIR averred that petitioner did not declare all its export sales. The
BIR maintained that petitioner sold its products to its foreign affiliated
companies in a lower price than the price of its local sales.
• Petitioner was able to successfully justify its transfer pricing strategies
through the following arguments:
1) The export prices at which petitioner sells its products to its affiliates in
Asia represent the fair market price of the products.
2) The domestic selling price is not a benchmark price for export sales
because the export and domestic markets are two different markets.
For one, the export market is competitive while the domestic market is a
captured market.

19. TRANSFER PRICING CASES
3) Here, the purchasers in both domestic and export sales are affiliates
of the Petitioner — Avon Cosmetics, Inc. and the different Avon
companies in Malaysia, Thailand, US, Europe and Japan
4) The export sales prices are determined at arm's length. The practice
of Avon companies worldwide is that a buying Avon company
requests for price quotations from various companies producing a
particular Avon product. The company with the best price gets the
business. To beat the price quotations of other Avon companies with
lower cost of production than the Philippines, petitioner offers the
export products at a lower mark-up as compared to domestic sales
in order to get the business and in the process maximize the
utilization of its production facilities which were not fully utilized.

20. TAX TREATY RELIEF RULINGS
• According to Revenue Memorandum Order 1-00 dated
25 November 1999, it is to the best interest of both the
taxpayer and the BIR that any availment of the tax treaty
provisions be preceded by an application for treaty relief
with the International Tax Affairs Division (“ITAD”) of the
BIR.
• In this way, the consequences of any erroneous
interpretation and/or application of the treaty provisions
can be averted before proceeding with the transaction
and/or paying the tax liability covered by the tax treaty.

21. TAX TREATY RELIEF RULINGS
• As to whether the procedure of securing a confirmatory ruling is
mandatory, Philippine courts have ruled that it is mandatory as each ruling
is based on the peculiar circumstances of the requesting party and resolved
on a case-to-case basis [Mirant (Philippines) Operations Corporation vs.
Commissioner of Internal Revenue, CTA EB Case No. 40, CTA Case No,
6382, 7 June 2005]. The Mirant Case made the following discussion:
“it must be remembered that a foreign corporation wishing to avail of
the benefits of the tax treaty should invoke the provisions of the tax
treaty and prove that indeed the provisions of the tax treaty applies to
it, before the benefits may be extended to such corporation. In other
words, a resident or non-resident foreign corporation shall be taxed
according to the provisions of the National Internal Revenue Code,
unless it is shown that the treaty provisions apply to the said
corporation, and that, in cases the same are applicable, the option to
avail of the tax benefits under the tax treaty has been successfully
invoked.”

22. TAX TREATY RELIEF RULINGS
• Aside from the Mirant Case, the following cases have also ruled that a tax
treaty relief ruling is now required before availing of any preferential tax
rates or exemptions based on tax treaties:
1. Deutsche Bank vs. CIR, CTA No. 7344 dated 29 August 2008.
- This is essentially a reiteration of CTA EB No.40.
2. CBK Power vs. CIR (Amended decision on CTA Cases No. 6699,6684
and 7166) dated 12 February 2009
-This is a more recent reiteration of CTA Case EB. No. 40. It is
important to note that in this decision, the CTA stated that the Supreme
Court issued a Resolution dated 18 February 2008 on CTA EB No. 40 –
the MIRANT case - and now requires that an ITAD ruling must be
obtained prior to availing a preferential tax rate. Given that the High
Court has already issued such a resolution upholding the MIRANT decision,
then the issue may be considered as the prevailing position at present.