Transfer Pricing Regulations in the Philippines

Business organizations are now interconnecting among nations around the world which leads to a global impact. Since the introduction of globalization, business owners start to think critically on how to stretch their capacity worldwide.

Multinational companies adopt a system of diversified operations in different countries not just to spread their product or brand but also to minimize certain costs while incrementing a substantial amount of profit. Different operations are conducted geographically wise to support the operation of the parent company. Since multinational companies are more concerned about the collective profit of their group of companies rather than segmented profit, they shift their profits and costs between parents and subsidiaries which leads to controlled transactions.

These controlled transactions create a transfer pricing issue that greatly affects tax collection in different countries. To address this issue, the Organisation for Economic Co-operation and Development (OECD) provided transfer pricing guidelines, which is an internationally accepted standard implemented by many countries.

Transfer pricing is an accounting practice used in pricing transactions between companies under common ownership, known as related parties. These guidelines include the application of “arm’s length principle”, requiring related party transactions to be with the same equivalent as independent party transactions, under which pricing of the transaction would reflect the true economic value.

On January 23, 2013, a BIR Regulation has been released prescribing guidelines in allocating income and deductions between related parties. However, it was only on August 20, 2019, that they have issued Revenue Audit Memorandum Order 1-2019 known as “Transfer Pricing Audit Guidelines” which provides framework and procedures for BIR officers in the conduct of transfer pricing examination, this gave an indication that BIR will now focus on this matter. This is true as BIR has already conducted several transfer pricing audits in 2019 and expected to have more. This is also one way of increasing revenue collection to support government projects.

Upon receipt of Letter of Authority (LoA), the taxpayer shall be requested to provide the following information within 5 working days from receipt of notice:

• Information on Related Party Transactions; 
• Segmented Financial Statement; 
• Supply Chain Management Analysis; 
• Function, Assets and Risks Analysis (“FAR Analysis”); 
• Characteristics of Business; and 
• Comparability Analysis. 

Considering the short period of time to provide the information requested, it is important to be prepared prior to the BIR examination. This is where transfer pricing documentation comes in. Section 12 of Revenue Regulation 2-2013 states that taxpayers must prove that their transfer prices are consistent with the arm’s length principle. Although BIR does not require transfer pricing documents to be submitted when the tax returns are filed, such documents should be retained and submitted upon request by BIR.

Transfer pricing documentation includes, but not limited to the following:

• Organizational structure 
• Nature of the business/industry and market conditions 
• Controlled transactions 
• Assumptions, strategies, policies 
• Cost contribution arrangements (CCA) 
• Comparability, functional and risk analysis 
• Selection of the transfer pricing method 
• Application of the transfer pricing method 
• Background documents 
• Index to documents 

In order to avoid getting caught unprepared by the tax authority, it is best to seek competent accounting and/or auditing firms that can help you. In Accountable PH, we can help you address the issue of transfer pricing by providing complete and reliable transfer pricing documentation.