Transfer pricing - Philippines

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.

• Comparable Uncontrolled Price (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)
• Profit Split Method (PSM)
• Transactional Net Margin Method (TNMM)

• 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 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.

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.