In January 2013, the Bureau of Internal Revenue (BIR) of the Philippines published the Transfer Pricing Guidelines through Regulation No. 02-2013, which provides for the application of the Arm’s Length Principle for cross-border and domestic transactions between associated enterprises. These Guidances are in accordance with the OECD Transfer Pricing Guidelines.

In 2019, the audit procedures applicable to taxpayers performing related party transactions were regulated. Likewise, in July 2020, the Transfer Pricing Compliance Requirements were introduced to ensure the Arm’s Length Principle compliance through Regulation N°34-2020 in related party transactions performed by companies are planned and executed in line with the Arm’s Length Principle.  

Related Parties

A related party is defined as: 

  • A company that directly or indirectly participates in management, control, or capital of another company; or.
  • The same person that directly or indirectly participates in the management, control, or capital of two companies.

In addition, a transaction may be controlled presumed if “the entity owns more than 30% of the outstanding shares with voting rights of a corporation, as well as other situations that place the parties in a controlled environment or relationship”.

Transfer Pricing Methods 

The BIR does not have a specific preference for any method since the most reliable method, according to the circumstances, shall be used. The BIR may implement, in exceptions when no comparable transactions or sufficient data to apply, the following approaches to verify whether controlled transactions are under the Arm’s Length Principle: 

  • Extension of transfer pricing methods. The comparable may be applied to companies in another industry segment or group of segments.
  • Use of a combination or mixture of methods or other approaches. 

Transfer Pricing Documentation

In the Philippines, there are two Transfer Pricing documentation requirements:  

  1. Information Related Party Transactions Statement (Form No. 1709).
  2. Transfer Pricing Report.

Form 1709 or Information Related Party Transaction Statement

Taxpayers complying with these three conditions must file BIR Form No. 1709: 

  • The taxpayer is required to file an Annual Income Tax Return (AITR).
  • The taxpayer must have transactions with a domestic or foreign related party during the taxable period in question.
  • The taxpayer fits into any of the following categories:
  • Large taxpayer;
  • Taxpayers enjoying tax incentives;
  • Taxpayers reporting net operating losses for the current taxable year and the two (2) immediately preceding consecutive taxable years.

Transfer Pricing Report

The filing of the Transfer Pricing documentation is mandatory for taxpayers who: 

  • Have annual gross sales/revenues for the tax period in question exceeding PhP150 million (US$3.1 million) and the total amount of transactions with foreign and domestic related parties exceeding PhP90 million (US$1.9 million);
  • Disposal of tangible goods involving the same related party exceeding PhP60 million within the taxable year;
  • Transaction of services, payment of interest, utilization of intangible goods, or other related party transaction involving the same related party exceeding PhP15 million within the taxable year.

The documentation must be retained for three years from the last day prescribed by law for filing the statement referred to in the documentation. Such documentation must be filed within 45 days from the date of application. This period may be extended based on the discretion of the BIR.

Transfer Pricing Penalties

There are no specific Transfer Pricing penalties in the Philippines.

Therefore, general tax penalties apply under the NIRC (National Internal Revenue Code) and other relevant laws. Generally, a 25% surtax (50% in cases of fraud) is imposed on tax deficiencies.

Interest is imposed on the deficiency tax (but not on the additional tax) at 20% per annum. A compromise penalty (the penalty for failure to file the information statement, neglect to maintain any records, or failure to provide any information required by the BIR) of up to Php25,000 may also be imposed.  

Source: Bureau of Internal Revenue 

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