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Global transfer pricing guide

Transfer pricing - Philippines

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Introduction to transfer pricing in Philippines
Transfer pricing rules
  • In 2013, the Transfer Pricing Guidelines was issued by the Bureau of Internal Revenue (BIR) through Revenue Regulations (RR) No. 2-2013 which requires taxpayers to demonstrate that their transfer prices are consistent with the arm’s length principle (ALP) by preparing adequate and contemporaneous transfer pricing documentation (TPD).

  • In 2019, the BIR issued Revenue Audit Memorandum Order (RAMO) No. 1-2019 or the Transfer Pricing Audit Guidelines.

  • The TP rules are applicable on controlled transactions including sale, purchase, transfer and utilization of tangible and intangible assets, provision of intra-group services, interest payments and capitalization among others, between related/associated parties, where at least one party is assessable or chargeable to tax in the Philippines.

  • The TP rules are also applicable by analogy, in relation to transactions between permanent establishment (PE) and its head office or other related branches hence, for TP purposes, the PE will be treated as a separate and distinct enterprise from its head office or other related branches/subsidiaries for tax purposes.

OECD guidance
  • The Philippine Transfer Pricing Guidelines are largely based on the arm's length methodologies as set under the Organisation for Economic Cooperation and Development Transfer Pricing Guidelines.
Transfer pricing methods
  • Transfer pricing methods (TPM)
    • Comparable Uncontrolled Price (CUP)
    • Resale Price Method (RPM)
    • Cost Plus Method (CPM)
    • Profit Split Method (PSM)
    • Transactional Net Margin Method (TNMM)
  • The selection of a TPM is aimed at finding the most appropriate method for a particular case. Accordingly, the method that provides the most reliable measure of an arm’s length result shall be used.
  • The BIR does not have a specific preference for any one method. Instead, the TPM that produce the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments, should be utilized.
  • In exceptional circumstances where there may not be comparable transactions or sufficient data to apply the TPM the BIR may use the following approaches to verify whether the controlled transactions comply with the ALP:
    • Extension of the transfer pricing methods. The comparable may be with enterprises in another industry segment or group of segments; and
    • Use of a combination or mixture of the TPMs or other methods or approaches.
  • In all cases, taxpayers should be able to explain why a specific TPM is selected or used in recording controlled transactions through proper documentation.
  • Philippines has a self-assessment regime system of taxation; hence, the taxpayer is responsible for compliance with the tax law.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • In Philippines there are two documentation requirements for transfer pricing: (1) Information Return on Transactions with Related Party (BIR Form No. 1709) and (2) Transfer pricing documentation.

    Accomplishment and submission of Information Return on Transactions with Related Party (BIR Form No. 1709)

  • Taxpayers who meet all the three conditions below are required to submit the BIR Form No. 1709.

    • The taxpayer is required to file an Annual Income Tax Return (AITR);

    • The taxpayer has transactions with a domestic or foreign related party during the concerned taxable period; and

    • The taxpayer falls under any of the following categories:

      1. large taxpayer;

      2. taxpayers enjoying tax incentives;

      3. taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years; or

      4. a related party that has transactions with (1), (2) or (3).

  • The form shall be filed to the BIR annually as an attachment to the AITR.

    Preparation and submission of TPD (local file)

  • Only taxpayers who are required to submit the BIR Form No. 1709 and meet any of the materiality thresholds below are mandated to prepare a TPD.

    1. Annual gross sales/revenue for the subject taxable period exceeding One Hundred Fifty Million Pesos (P150,000,000), irrespective of the source, and the total amount of related party transactions (RPTs) with foreign and domestic related parties exceeds Ninety Million Pesos (P90,000,000); or

    2. Sale of tangible goods involving the same related party exceeding Sixty Million Pesos (P60,000,000) within the taxable year; or

    3. Service transaction, payment of interest, utilization of intangible goods or other related party transaction involving the same related party exceeding Fifteen Million Pesos (P15,000,000.00) within the taxable year; or

    4. If the TPD was required to be prepared during the immediately preceding taxable period for exceeding (1) to (3).

  • TPD shall be prepared contemporaneously which is prior to or at the time of undertaking the related party transactions (RPTs). Nevertheless, the BIR will also accept TPD prepared after the RPT but not later than the date of filing of the AITR for the fiscal/calendar year in which the RPT takes place.

  • The TPD shall be submitted to the BIR within thirty (30) calendar days upon receipt of request by the tax authority during tax audit subject to a non-extendible period of 30 calendar days based on meritorious grounds.

  • Nothing prevents any taxpayer, however, from preparing a TPD and presenting the same during tax audit to prove that its RPTs were conducted at arm’s length. If the taxpayer is not required to prepare a TPD, it still needs to reasonably assess and prove whether its dealings with related parties adhere to the ALP. After all, the burden of proof rests upon the taxpayer.

Master and local file
  • Master file and CbCR are not yet a requirement in the Philippines.
  • Local TPD is required for those taxpayers who meet any of the four conditions enumerated above.
  • Local TPD is preferred over the TPD prepared by foreign parent company or related party because the local file provides a more detailed information relating to specific RPTs. Also, local TPD must apply the general and financial review criteria prescribed by the BIR in selecting comparables.
Some risk factors for challenge
  • Taxpayers who suffered losses over several years.
  • Domestic transfer pricing issue when income is shifted in favor of a related company with special tax privileges such as Board of Investments (BOI) Incentives and Philippine Economic Zone Authority (PEZA) fiscal incentives or when expenses of a related company with special tax privileges are shifted to a related company subject to regular income taxes or in other circumstances, when income and/or expenses are shifted to a related party in order to minimize tax liabilities.
  • Late filing or non-filing of BIR Form No. 1709 is penalized with not less than P1,000 but not more than P25,000. In case of repetition of offense, the maximum penalty of P25,000.

  • Where the BIR has found that a price in a controlled transaction is not at arm's length, the BIR may make an adjustment to reflect the arm's length price or interest rate for the transaction by substituting or imputing the price, or interest, as the case may be. In such instances, the adjustment will also be reflected by a corresponding adjustment upon request of the other party of the controlled transactions.

    Adjustments will be made where:

    • For the supply of property/goods or services, the consideration is less than the consideration that would have been received or receivable in an arm's length arrangement;

    • For the acquisition of property/goods or services, the consideration is more than the consideration that would have been given or agreed to be given in an arm's length arrangement; or

    • No consideration has been charged to the related/associated party for the supply or services.

  • If the relevant conditions of the controlled transaction (e.g., price or margin) fall outside the arm's length range asserted by the BIR, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the ALP, and that the result falls within the arm's length range (i.e., that the arm's length range is different from the one asserted by the BIR). If the taxpayer is unable to establish this fact, the BIR must determine the point within the arm's length range to which it will adjust the conditions of the controlled transaction.

  • Adjustments to transfer price made by the BIR arising from the tax audit would result the taxpayer liable to pay deficiency taxes plus incremental penalties.

Economic analysis and how to demonstrate an arm’s length result
  • Manual search and selection criteria by using publicly available data such as commercial database and by applying the general and financial review criteria prescribed by the BIR in selecting comparables.

  • Use of multiple-year data. Multiple-year data are used when they can improve the results of the comparability analysis. Analysis of multiple-year data can improve the process of screening of candidate comparables, for example by identifying comparables with significant differences from the tested party. In certain cases, this can lead to rejection of a candidate comparable or the detection of anomalies in candidate comparables. The use of multiple-year data in comparability analysis does not mean that the determination of the fair price or profit uses the average performance of multiple-year data.

  • Per transaction or combined transaction approach. Testing of related party transactions can be done per transaction or by combining transactions, considering the facts and conditions. Testing of combined related party transactions is more appropriate, for example, when the transactions are closely linked or continuous.

  • Use of an interquartile range.

Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • The BIR recently issued the guidelines and procedures for requesting Manual Agreement Procedure (MAP) assistance in the Philippines through RR No. 10-2022.
  • However, for Advance Pricing Agreement (APA) program, the BIR will issue a separate Regulations.
  • Exemption from filing BIR Form No. 1709 and preparation of TPD applies only to taxpayers who do not meet the requirements and threshold amounts.
Related developments
Digital services tax
  • The BIR has various strategies related to digital transformation and services.
  • No specific guidelines for the impact of COVID-19 pandemic.
  • However, there is a general guideline for the losses in general. Companies incur losses for variety of economic and business reasons such as startup losses, market penetration strategies, and research and development failure. However, an independent company would not endure continuous losses without taking appropriate measures to correct the situation within reasonable time, as it would contradict fundamental business objectives of making profits.

    The fact that related/associated company continuously suffers losses may be an indication that is not being compensated fairly. In determining whether the losses are acceptable, it is important to ensure that the controlled transaction entered into is commercially realistic and make economic sense. A taxpayer needs to establish that the losses are commercial in nature within the context of its characterization. In this regard, a taxpayer is expected to maintain contemporaneous documentation which outlines the non-transfer pricing factors that have contributed to the losses.

For further information on transfer pricing in Philippines please contact:

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Nikkolai Canceran
T 632 898 822 85

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Olivier D. Aznar
T 632 898 822 15

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Wendell Ganhinhin
T +633 223 160 90

Marie Fe F. Dangiwan
T + 639 399 333 911