Transfer pricing regulations

The Bureau of Internal Revenue (BIR) has issued the following guidelines in applying the arm’s length principle for cross-border and domestic transactions between associated enterprises.

Definition of “associated enterprises”

For transfer pricing (TP) purposes, two or more enterprises are associated if one participates directly or indirectly in the management, control, or capital of the other, or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises. The term “control” is defined as any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised. Moreover, control shall be deemed present if income or deductions have been arbitrarily shifted between two or more enterprises.

Determination of arm’s length price

The BIR adopts the use of arm’s length principle as the most appropriate standard in determining the transfer prices of associated enterprises or related parties. The arm’s length principle requires that the transaction with a related party be made under comparable conditions and circumstances as a transaction with an independent party.

In the application of the arm’s length principle, the following three-step approach shall be observed:

1. Conduct of comparability analysis

2. Identification of tested party and the appropriate transfer pricing method

3. Determination of the arm’s length results

Arm’s length pricing methodologies

The TP guidelines prescribed five methods in determining the arm’s length price of a transaction. These are comparable uncontrolled price (CUP), resale price method, cost plus method (CPM), profit split method (PSM) and transaction net margin method (TNMM). There is no single method that is applicable to all cases, and choice of appropriate transfer pricing method must be made depending on the evaluation of the transaction.

Details of the TP methodologies are explained in the regulations.

Advance Pricing Arrangement (APA)

The advance pricing arrangement (APA) is a facility available to taxpayers to enter into an agreement with the BIR to determine in advance the criteria (e.g., method, comparables and appropriate adjustments) to ascertain the transfer prices of controlled transactions over a fixed period of time. An APA may involve an agreement between the taxpayer and the BIR (unilateral APA) or an agreement involving the Philippines and one or more of its treaty partners (multilateral APA).

Transfer Pricing Documentation

TP document is not required at the time of the filing of the tax return. However, the taxpayer has the obligation to ensure that TP documents are available for submission when required or requested by the BIR. The TP documents must be retained or preserved within the retention period provided under the Tax Code.

Taxpayers are required to prepare contemporaneous TP documentation.

Documentation is contemporaneous if it exists or is brought into existence at the time the associated enterprises develop or implement any arrangement that might raise transfer pricing issues or review the arrangements when preparing returns.

(Revenue Regulations No. 2-2013, January 23, 2013)

Tax Brief – February 2013

Punongbayan and Araullo