Businesses operating across borders often need to transfer goods, services, or intangible assets between branches or subsidiaries in different countries. This is where transfer pricing comes into play. It is a key concept in international taxation that ensures transactions between related parties are priced reasonably and transparently. In the Philippines, transfer pricing methods must follow specific regulations to prevent tax avoidance and ensure compliance with global standards.
What is Transfer Pricing
Transfer pricing refers to the pricing of transactions between associated enterprises or related parties, such as parent companies and their subsidiaries. These transactions may involve the transfer of goods, services, intellectual property, or even loans.
The goal of transfer pricing rules is to ensure that prices charged in intra-group transactions are comparable to those that would have been charged between independent entities under similar circumstances. This is known as the arm’s length principle, a core concept in transfer pricing.
In the Philippines, transfer pricing is governed by the Bureau of Internal Revenue (BIR) under Revenue Regulations (RR) No. 2-2013, which adopts the arm’s length principle in line with the Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines.
Who Needs to Use Transfer Pricing
Under RR No. 2-2013, transfer pricing applies to businesses engaged in transactions between related parties, whether domestic or cross-border, as long as at least one party is subject to Philippine income tax.
Companies that need to comply with transfer pricing rules include:
- Multinational corporations (MNCs) with operations in the Philippines
- Domestic corporations with subsidiaries or affiliates
- Companies involved in intercompany sales or service agreements
- Firms that license intellectual property between related entities
- Entities issuing loans or guarantees to related parties
If your business falls under any of these categories and engages in intercompany transactions, you must ensure these are priced at arm’s length. You may also be required to prepare and maintain transfer pricing documentation, especially if (as stated in BIR RR No. 34-2020):
- Gross sales/revenue for the taxable year exceed PHP 150 million
- The total amount of related party transactions exceeds PHP 90 million (covering sales, service fees, interest, etc.)
Different Methods of Transfer Pricing
Several accepted methods exist for determining whether a controlled transaction meets the arm’s length standard under RR No. 2-2013. The BIR recognizes the following transfer pricing methods:
- Comparable Uncontrolled Price (CUP) Method
Compares the price charged in a controlled transaction with the price charged in an uncontrolled (independent) transaction under similar conditions. - Resale Price Method (RPM)
Used when a product is purchased from a related party and resold to an independent party. The resale price is reduced by an appropriate gross margin to arrive at the transfer price. - Cost Plus Method (CPM)
Applies a markup to the costs incurred by the supplier of goods or services to determine the appropriate transfer price. - Transactional Net Margin Method (TNMM)
Examines the net profit relative to an appropriate base (such as sales or assets) that a taxpayer realizes from a controlled transaction. - Profit Split Method (PSM)
Divides the combined profits from intercompany transactions between related parties based on their relative contributions.
The choice of method depends on the nature of the transaction, availability of reliable data, and comparability of uncontrolled transactions.
Basic Example Scenarios of Transfer Pricing
Here are a few simple examples to illustrate transfer pricing in action:
- Example 1: Selling goods between related entities
A Philippine subsidiary sells electronics to its parent company in Japan. Using the CUP method, it determines that similar goods sold to an independent Japanese buyer fetch USD 100 per unit. The same price should apply to the parent company. - Example 2: Shared services
A multinational firm based in the U.S. provides accounting and HR support to its Philippine branch. The firm uses the cost-plus method, applying a 10% markup on actual service costs incurred, to determine the fair price for those services. - Example 3: Intellectual property licensing
A domestic company licenses its proprietary software to a foreign affiliate. It compares similar licensing arrangements in the market (CUP method) to determine the royalty rate.
Transfer Pricing Documentation in the Philippines
To comply with transfer pricing regulations in the Philippines, businesses must fulfill two primary documentation requirements:
- BIR Form No. 1709: The Information Return on Related Party Transactions, detailing related-party dealings.
- Local File Documentation: Information on related-party transactions, covering their nature, terms, and pricing.
- Additional documents, such as the Master File and Country-by-Country Report (CbCR), are generally supplementary and not strictly required by Philippine law.
Non-compliance may lead to BIR audits, taxable income adjustments, and penalties.
Final Thoughts
Transfer pricing is a tax compliance requirement for businesses engaged in related-party transactions. In the Philippines, companies must ensure their pricing policies comply with the arm’s length principle using BIR-approved methods. You should also maintain proper documentation to support these practices in accordance with RR No. 34-2020. Our experienced legal and accountancy team can assist you with transfer pricing—minimizing tax risks, avoiding penalties, and ensuring full compliance.
Do You Need Help with Transfer Pricing? Our Experts Are Here to Support You
Transfer pricing is a legal requirement for Philippine businesses engaged in transactions with affiliates or subsidiaries. To minimize tax risks, avoid penalties, and ensure full compliance, you must use BIR-approved methods and maintain proper documentation. However, meeting the BIR’s strict requirements can be challenging, especially for businesses without dedicated compliance teams.
That’s where Triple i Consulting comes in. We’re among the best accounting outsourcing companies in the Philippines, offering bookkeeping, payroll, auditing, tax planning, and advisory services. So let our experienced lawyers and accountants provide comprehensive support for your business, so you don’t have to stress over the paperwork.
Contact us today to schedule a consultation with one of our experts:
- Fill out the form below
- Call us at: +63 (02) 8540-9623
- Send an email to: info@tripleiconsulting.com
