This Q&A provides an overview of transfer pricing regulations and compliance in the Philippines and helps to better understand the key considerations involved in transfer pricing in the Philippines.
Conventus Law: What is transfer pricing and why is it important for businesses operating in the Philippines?
SyCipLaw: Transfer pricing is generally defined as the pricing of cross-border, inter-firm transactions between related parties or associated enterprises(1). Typically, it is an arrangement between a taxpayer of a country with high-income taxes and a related or associated enterprise of a country with low-income taxes (2). It may also be an arrangement between taxpayers who are subject to different taxation regimes such as a taxpayer that is under an incentive regime and a taxpayer under the regular tax regime.
In the Philippines, the basis for transfer pricing regulations is Section 50 of the National Internal Revenue Code, as amended (NIRC). Section 50 authorizes the Commissioner of Internal Revenue (CIR) to distribute, apportion or allocate gross income or deductions between or among two or more organizations, trades or businesses owned or controlled directly or indirectly by the same interests if he determines that such is necessary to clearly reflect the income of any such organization, trade or business. In line with this, the CIR is authorized to make transfer pricing adjustments to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes for such transactions (3).
Local businesses need to consider transfer pricing issues and ensure compliance with relevant regulations because their failure to do so may subject them to deficiency tax assessments and imposition of penalties such as interest and surcharge.
What are the transfer pricing regulations in the Philippines, and how do they affect businesses operating in the country?
The Department of Finance and the Bureau of Internal Regulation (BIR) have issued various transfer pricing regulations that seek to strengthen the transfer pricing risk assessment of the BIR and to allow the BIR to focus its resources on the audit of important transfer pricing issues (4). These regulations apply to both cross-border and domestic transactions between related parties (5).
The first comprehensive transfer pricing regulations issued pursuant to the NIRC was Revenue Regulations No. 02 – 2013 (RR No. 02-13) or the Transfer Pricing Guidelines. Prior to RR No. 02-13, the BIR relied on the Organization for Economic Cooperation and Development (OECD) transfer pricing guidelines in its audit of related parties (6). Under the Transfer Pricing Guidelines, the BIR adopts the use of the arm’s length principle as the most appropriate standard to determine the transfer prices of related parties. The arm’s length principle “requires the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. (7)” RR No. 02-13 further requires taxpayers to maintain adequate documentation that shows that “their transfer prices are consistent with the arm’s length principle (8).”
Revenue Regulations No. 19 – 2020 (RR No. 19-20) sets out disclosure requirements for related party transactions by requiring the submission of BIR Form 1709 or Information Return on Related Party Transactions (Domestic and/or Foreign), which replaces BIR Form 1702-H – Information Return on Transactions with Related Foreign Persons. RR No. 19-20 provides guidelines for determining related parties and related party transactions. Generally, a related party is a person or entity that is related to the reporting entity (i.e., the entity that is preparing its financial statements). RR No. 19-20 sets out the rules for determining whether a person or entity is a related party. An entity is related to a reporting entity if, among other conditions, both entities are members of the same group (which means that each parent, subsidiary, and fellow subsidiary is related to the others). A person or a close member of that person’s family is related to a reporting entity if that person, among other conditions, has control or joint control of the reporting entity. In all cases, the substance of relationships between entities, and not merely the legal form, must be considered. On the other hand, a related party transaction refers to the transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. RR No. 19-20 includes a non-exhaustive list of what may be considered related party transactions (9).
Revenue Regulations No. 34 – 2020 (RR No. 34-20), as clarified by Revenue Memorandum Circular No. 54-2021, amended RR 19-20, to streamline the guidelines and procedures for the submission of BIR Form No. 1709, Transfer Pricing Documentation (TPD) and other supporting documents. It also provided for a simplified BIR Form No. 1709.
Under RR No. 34-20, a taxpayer must submit BIR Form No. 1709 or the Related Party Transaction Form (RPT Form), together with the Annual Income Tax Return, if the following conditions are present:
- It is required to file an Annual Income Tax Return;
- It has transactions with a domestic or foreign related party during the concerned taxable period; and
- It falls under any of the following categories:
a) Large Taxpayers;
b) Taxpayers enjoying tax incentives (i.e., those enjoying income tax holiday or subject to preferential income tax rate);
c) Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years; and
d) A related party which has transactions with any of the above.
Taxpayers who are not covered above must disclose in the Notes to their Financial Statements that they are not covered by the requirements and procedures for related party transactions provided under RR No. 34-20.
Entities who are covered above must also prepare and submit transfer pricing documents (TPDs) if they meet the following materiality thresholds:
- Annual gross sales/revenue for the subject taxable period exceeding ₱150,000,000 and the total amount of related party transactions with foreign and domestic related parties exceeds ₱90,000,000.
- Related party transactions meeting the following materiality threshold:
- If involving sale of tangible goods in the aggregate amount exceeding ₱60,000,000 within the taxable year;
- If involving service transaction, payment of interest, utilization of intangible goods or other related party transaction in the aggregate amount exceeding ₱15,000,000.00 within the taxable year; or
- If TPDs were required to be prepared during the immediately preceding taxable period for exceeding either (a) or (b) above (10).
The related party transactions under (a) refer to transactions involving all related parties in general, while those under (b) relate to transactions with a specific related party only (11).
The TPDs and other supporting documents need not be attached to the RPT Form but must be submitted within 30 calendar days upon receipt of a request by the CIR or his duly authorized representatives, pursuant to a duly issued letter of authority covering all internal revenue taxes, subject to a non-extendible additional period of 30 calendar days based on meritorious grounds (12).
The CIR has also issued revenue memorandum circulars to clarify certain issues and specific provisions of the abovementioned revenue regulations (13).
How does the Bureau of Internal Revenue (BIR) in the Philippines monitor and enforce transfer pricing compliance?
As previously discussed, the BIR requires Philippine taxpayers with related party transactions to disclose certain information (e.g., details of foreign and domestic related parties, description, and amount of related party transactions) by submitting the RPT Form. Through the information gathered from the RPT Form and its attachments, the BIR will conduct an initial transfer pricing risk assessment, identify the high-risk taxpayers and make an informed decision whether or not to conduct a thorough transfer pricing review or audit of a particular entity or transaction (14). In this way, and given its limited resources, the BIR will be able to focus its audit and commit its resources only to the most important transfer pricing issues (15). This notwithstanding, the BIR retains the right to conduct transfer pricing audits against taxpayers with related party transactions, irrespective of whether or not they are required to file the RPT Form and submit TPDs. The BIR may raise transfer pricing issues in the course of a general audit of the internal revenue tax liabilities of a taxpayer for a taxable year. When subjected to an audit, taxpayers who are not required to file the RPT Form and to submit TPDs must still present sufficient evidence to prove that their related party transactions were conducted at arm’s length terms (16).
What are the consequences of non-compliance with transfer pricing regulations in the Philippines, including penalties and fines?
If the BIR determines that the related party transactions of a taxpayer are not in compliance with the arm’s length principle, it may make transfer pricing adjustments to the taxpayer’s income and deductions, assess deficiency taxes and impose penalties such as interest and surcharge.
Taxpayers who fail to file the RPT Form and supporting documents due to reasonable cause and not to willful neglect are subject to a penalty of not less than One thousand pesos (P1,000.00) but not more than Twenty-five thousand pesos (P25,000.00) (17). If after receiving the valid summons to produce the RPT Form and supporting documents, the taxpayer still fails or neglects to produce the same, the partner, president, general manager, branch manager, treasurer, officer-in-charge, and the employees responsible for the violation shall, upon conviction, be punished by a fine of not less than Five thousand pesos (P5,000.00) but not more than ten thousand pesos (P10,000.00) and suffer imprisonment of not less than one (1) year but not more than two (2) years (18).
How can businesses ensure they are in compliance with transfer pricing regulations in the Philippines?
Businesses should ensure that their related party transactions comply with the arm’s length principle, which is the core requirement under the local transfer pricing regulations. They should also maintain adequate records to prove the same. These requirements apply to all taxpayers with related party transactions even if they are not required to file the RPT Form or to submit TPDs to the BIR (19). The retention periods applicable to books of accounts and other accounting records also apply to TPDs, which means that TPDs must be kept by businesses for 10 years (i.e., in hard copy for the first 5 years, and in electronic copy for subsequent years) (20). It is also in the best interest of taxpayers to maintain TPDs to support any application for Mutual Agreement Procedure (MAP) (21) or for purposes of possible transfer pricing examination (22). MAP is a means through which tax authorities endeavor to resolve by mutual agreement any difficulties or doubts on the interpretation or application of double tax agreements (23). It can be used to eliminate double taxation that could arise from a transfer pricing adjustment (24). Furthermore, businesses have the option to enter into Advance Pricing Agreements (APAs) to reduce the risk of transfer pricing examination and double taxation, as will be discussed in number 8 below. Lastly, businesses must be updated with the relevant issuances on transfer pricing.
What documentation is required for transfer pricing purposes in the Philippines, and how should it be prepared?
As discussed in number 2 above, taxpayers who meet certain conditions are required to submit the RPT Form, together with the Annual Income Tax Return, and TPDs to the BIR. Other taxpayers must still present, when subjected to an audit, sufficient evidence to prove that their related party transactions are at arm’s length. In general, a taxpayer should present the following supporting documents in relation to a transfer pricing audit or investigation:
a. Certified true copy of the relevant contracts or proof of transaction;
b. Withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR;
c. Proof of payment of foreign taxes or ruling duly issued by the foreign tax authority where the other party is a resident;
d. Certified true copy of Advance Pricing Agreement, if any; and
e. Any transfer pricing documentation (25)
The TPDs must include but are not limited to, the following information: 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; and background documents (26).
The TPDs must be contemporaneous, that is, they exist or are brought into existence at the time the associated enterprises develop or implement any arrangement that might raise transfer pricing issues or review these arrangements when preparing tax returns (27). The BIR has clarified that TPDs must be prepared prior to or at the time of the transaction or after the transaction but not later than the date of filing the tax return for the fiscal/calendar year in which the transaction takes place (28). In short, the taxpayer cannot prepare the TPDs only when the taxpayer is being audited by the BIR.
How can businesses defend themselves in the case of a transfer pricing audit or investigation by the BIR in the Philippines?
Businesses should maintain adequate and contemporaneous documentation to demonstrate that their related party transactions are at arm’s length. This will enable businesses to defend their transfer pricing analysis and minimize disputes during a transfer pricing audit or investigation. It is also best practice for businesses to have a policy in place for the periodic review of their transfer prices and for compliance with relevant transfer pricing rules and regulations.
What is the role of Advance Pricing Agreements (APAs) in transfer pricing compliance in the Philippines, and how can they benefit businesses?
An Advance Pricing Arrangement (APA) is a facility available to taxpayers who are engaged in cross-border transactions. It is an agreement entered into between the taxpayer and the BIR to determine in advance an appropriate set of criteria (e.g., method, comparables, and appropriate adjustments thereto) to ascertain the transfer prices of controlled transactions over a fixed period of time (29).
There are two kinds of APA: (i) Unilateral APA; and (ii) Bilateral or Multilateral APA. A unilateral APA is an agreement involving only the taxpayer and the BIR, while a bilateral/multilateral APA is an agreement involving the Philippines and one or more of its treaty partners (30).
An APA reduces the risk of transfer pricing examination and double taxation (31). Related party transactions covered by an APA may be exempt from disclosure in the RPT Form, provided that the APA has been approved and accepted by the BIR. However, the BIR is not obliged to accept any unilateral APAs entered into by a foreign taxpayer and the tax authority of the country of residence, although it applies to an international transaction between such foreign taxpayer and its related party in the Philippines (32).
- (1) Secretary of Finance, Revenue Regulations No. 2-2013 (RR No. 02-13), at 1 (January 23, 2013) citing the UN Practical Manual on Transfer Pricing for Developing Countries (2013).
- (2) RR No. 02-2013 at 1 citing the UN Practical Manual on Transfer Pricing for Developing Countries (2013).
- (3) RR No. 02-13, Section 3.
- (4) Secretary of Finance, Revenue Regulations No. 34-2020 (R.R. No. 34-20), at Section 1 (December 18, 2020).
- (5) RR No. 02-13, Section 1.
- (6) Commissioner of Internal Revenue, Revenue Memorandum Circular No. 26-2008 (RMO No. 26-08) (March 24, 2008).
- (7) RR No. 02-13, Section 5.
- (8) RR No. 02-13, Section 12.
- (9) Secretary of Finance, Revenue Regulations No. 19-2020 (RR No. 19-20) at Section 4 (July 8, 2020).
- (10) RR No. 34-20, Section 3.
- (11) Commissioner of Internal Revenue, Revenue Memorandum Circular No. 54-2021 (RMC No. 54-21), at Question 16, (April 27, 2021).
- (12) RR No. 34-20, Section 3.
- (13) See Revenue Memorandum Circular No. 76-2020 (July 29, 2020); Revenue Memorandum Circular No. 98-2020 (September 15, 2020); Revenue Memorandum Circular No. 44-2021 (March 31, 2021); and Revenue Memorandum Circular No. 54-2021 (April 27, 2021).
- (14) Commissioner of Internal Revenue, Revenue Memorandum Circular No. 76-2020 (RMC No. 76-20), at Question 1, (July 29, 2020).
- (15) RMC No. 76-20, Question 1.
- (16) RMC No. 54-2021, Question 23.
- (17) RMC No. 76-20, Question 22.
- (18) RMC No. 76-20, Question 22.
- (19) RMC No. 54-21, Questions 14 and 23.
- (20) RR No. 02-13, Section 12 (a) with reference to Secretary of Finance, Revenue Regulations No. 05-2014 (RR No. 05-14), at Sections 2 and 3, (August 1, 2014).
- (21) RR No. 02-13, Section 12 (a) and Section 4.
- (22) RR No. 02-13, Section 12 (a) with reference to National Internal Revenue Code, Section 222.
- (23) RR No. 10-2022, Section 1
- (24) RR No. 02-13, Section 4.
- (25) RR No. 19–20, Section 6.
- (26) RR No. 02-13, Section 12.
- (27) RR No. 02-13, Section 12.
- (28) RMC No. 76-20, Question 11.
- (29) RR No. 02-13, Section 11.
- (30) RR No. 02-13, Section 11.
- (31) RR No. 02-13, Section 11.
- (32) RMC No. 54-21, Question 34.