With the boom of the business processing outsourcing industry in the Philippines, more and more foreign companies have started to set up shop in our shores. With that, related party transactions have started and are still continuing to proliferate both on a local and global scale.
In keeping with the times, the Bureau of Internal Revenue has intensified its risk assessment and audit activities when it comes to transfer pricing for Philippine taxpayers. Just in 2019, the BIR provided a set of guidelines for revenue officers to propose adjustments through an arm’s length price on related party transactions that are not in accordance with the arm’s length principle.
During the height of the pandemic, the BIR issued more guidelines on transfer pricing. Here’s what you need to know about it and related party transactions and what the compliance requirements for businesses and corporations based in the Philippines are.
What is transfer pricing?
Transfer pricing refers to the pricing of goods or services between related parties, such as a parent company and its subsidiaries, located in different tax jurisdictions or to related parties within the same country (e.g. Philippines). It has gained a lot of attention in recent years, both in the Philippines and around the world.
What are the regulations and guidelines implemented by the BIR on transfer pricing?
The BIR has issued several guidelines related to transfer pricing in the Philippines. These guidelines are designed to ensure that taxpayers comply with set regulations and that the prices are fair and transparent in accordance with the arm’s length principle. Below are the main guidelines issued by the BIR.
- Revenue Regulations No. 02- 2013 (Philippine Transfer Pricing Regulations)– this document requires taxpayers to maintain the transfer pricing documentation to prove that they have exerted efforts to determine the arm’s-length price for their related-party transactions.
- Revenue Audit Memorandum Order (“RAMO”) No. 01-2019 (Transfer Pricing Audit Guidelines)– this memorandum order provides standardized audit procedures and techniques in the conduct of an audit of taxpayers with a related party or intra-firm transactions. It is a manual for BIR officers and can be used by taxpayers as a guide on how to prepare for the audit and avoid adjustments.
- Revenue Regulations 19-2020– this issuance aims to achieve effective implementation of Philippine Accounting Standards 24, which requires the proper disclosures of related party transactions.
- Revenue Memorandum Circular No. 76-2020– this issuance of the BIR provides further details on the documents and attachments needed to submit pursuant to RR No. 19-2020.
- Revenue Regulations No. 34-2020– this document details the guidelines and procedures when submitting the transfer pricing documentation, BIR Form No. 1709, and other supporting documents.
Who determines the methodology or rates for transfer pricing?
There is no set methodology, rate, or percentage when it comes to transfer pricing. However, as the entity responsible for enforcing the country’s tax laws, the BIR determines how much to charge companies per the guidelines set by the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
These guidelines provide a framework for determining arm’s length prices for transactions between related parties. The BIR may also consider other factors such as the nature of the goods or services being transferred, the functions and risks assumed by each party, and the economic conditions of the market when determining rates.
The arm’s length principle
The arm’s length principle is the foundation of transfer pricing regulations in the Philippines. It requires that the prices charged between related parties are comparable to prices charged between unrelated parties for similar goods and services.
What is the transfer pricing audit program of the BIR?
Transfer pricing is currently one of BIR’s priority programs and plans. In 2013, they issued the RR No. 02-2013 or the Philippine Transfer Pricing Regulations. In addition to the BIR’s Strategic Plan for 2019- 2023, the BIR declared that it will focus on these specific issues especially when it leads to base erosion and profit shifting.
What documents should I prepare for the audit?
There are two documentation requirements for the audit. First is the Information Return on Transactions with Related Party (BIR Form No. 1709) and the second is the transfer pricing documentation.
For the BIR Form 1709, only taxpayers who meet all the three conditions below are required to submit:
- The taxpayer is required to file an Annual Income Tax Return (AITR)
- The taxpayer has transactions with a domestic or foreign related party during the concerned taxable period
- The taxpayer falls under any of these categories:
- Large taxpayers
- Taxpayers enjoying tax incentives
- Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two consecutive taxable years
- A related party that has transactions with the above categories.
Meanwhile, only taxpayers who are required to submit the BIR Form No. 1709 and meet any of these thresholds are mandated to prepare transfer pricing documentation. Here they are.
- Function, Assets, and Risk Analysis– This analysis describes the functions performed by each related party, the risks assumed by each party, and the assets used by each party.
- Comparability Analysis- This analysis compares the prices charged between related parties to those charged between unrelated parties for similar goods or services.
- Documentation of Intercompany Transactions– This documentation includes invoices, contracts, and other documentation related to intercompany transactions.
Are there penalties for violations?
Yes, the BIR has implemented penalties for non-compliance with transfer pricing guidelines and regulations. These penalties can range from fines to imprisonment, depending on the severity of the violation.
Late filing or non-filing of BIR Form No. 1709 is penalized with not less than P1,000 but not more than P25,000. The maximum penalty is P25,000 in case of repeated offenses.
When the BIR finds that a price in a controlled transaction is not at arm’s length, it can make an adjustment to reflect the arm’s length price or interest rate for the transaction. Should the relevant conditions of the controlled transaction fall outside the arm’s length range of the BIR, the taxpayer may present arguments on why the conditions of the transaction satisfy the arm’s length principle.
Why should I comply with transfer pricing regulations in the Philippines?
Despite the many efforts of the BIR, transfer pricing remains a complex and challenging issue for many companies in the Philippines. By complying with regulations and implementing transparent and fair pricing policies, companies can contribute to a more stable and sustainable tax system, which benefits both the economy and society. Moreover, compliance with the regulations ensures that you minimize the risk of penalties and other risks that non-compliance may pose to your business.
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