It was July 2020 when the Bureau of Internal Revenue (BIR) implemented issued Revenue Regulations No. 10-2020 which requires taxpayers to file an Information Return on Related Party Transactions (International and/or Domestic) (BIR Form No. 1709) and relevant supporting documents, together with their Annual Income Tax Returns (AITR). A subsequent Revenue Regulations No. 34-2020 pertaining to the deadline of submission of Transfer Pricing Document (TPD) was released to set new deadlines both for TPD and other attachments.
WHAT IS TRANSFER PRICING?
Transfer pricing documents are records held by taxpayers to prove that the transactions of the relevant parties are carried out at arm’s length.
WHY IS TRANSFER PRICING REQUIRED?
This is to enforce the declaration of related party transactions (RPTs) in compliance with International Accounting Standard No. 24 and the implementation of the principle of arm’s length.
WHO ARE COVERED AND WHAT WILL BE THE SCOPE OF THE AUDIT?
The guidelines will apply to controlled transactions or transactions between related parties where at least one party is taxable in the Philippines. It will cover the sale, purchase, transfer and utilization of tangible and intangible assets, provision of intra-group services, interest payments, and capitalization.
A Philippine branch of a foreign company shall be recognized as a distinct agency from its head office for tax purposes. The transfer pricing laws shall also apply to the dealings of the branch with its head office, as well as to other branches or subsidiaries within the company.
WHO ARE ASSOCIATED ENTERPRISES:
Regulations describe “associated enterprises” as two (2) or more undertakings of which one is directly or indirectly involved in the management, control, or capital of the other; or where the same individuals are directly or indirectly involved in the management, control or capital of the undertakings.
HOW DOES TRANSFER PRICING (TP) APPLY TO DOMESTIC TRANSACTIONS OF RELATED PARTIES?
Several domestic transactions could also be subject to TP regulations, such as.:
- When income is transferred to the gain of a relevant organization with special tax benefits, such as the tax incentives provided by the Investment Board (BOI) and the Philippine Economic Zone Authority (PEZA); or
- When the expenses of a related business with certain privileges are passed to a related company subject to regular income taxes.
WHAT IS ARM’S LENGTH PRINCIPLE?
It assumes that where market factors drive the terms and conditions negotiated in an individual contract, the price of the transaction must represent the true economic value of the commitments by each entity to the transaction. Essentially, the income of a taxpayer from a related party transaction must be equal to the income of a comparable taxpayer from a third-party transaction.
HOW WILL THE AUDIT BE CONDUCTED?
The audit of transfer pricing will be regulated by the same guidelines for routine audits. A letter of authority (LOA) will also be issued. The order for documentation can contain the following, among others:
- information about the related party transactions;
- segmented financial statements;
- functions, assets, and risks (FAR) analysis;
- characteristics of the business;
- comparability analysis;
- transfer pricing method used;
- comparable used in applying the arm’s length principle;
- determination of the fair prices/profits in the related party transactions.
WHAT ARE YOUR TRANSFER PRICING OBLIGATIONS IN THE PHILIPPINES?
In the Philippines, documentation should contain the following:
- Organizational structure
- Nature of the business or industry and market conditions
- Controlled transactions
- Assumptions, strategies, policies
- Cost contribution arrangements (CCAs)
- Comparability, functional and risk analysis
- Selection of the transfer pricing method
- Application of the transfer pricing method
- Background documents
- Index to documents