Do you have operations in Philippines? Philippines’s new transfer pricing guidelines may impact you

InsightsDo you have operations in Philippines? Philippines’s new transfer pricing guidelines may impact you

Do you have operations in Philippines? Philippines’ new transfer pricing guidelines may impact you.

The Bureau of Internal Revenue (BIR) is the body that governs and deals with the transfer pricing (TP) aspects in the Philippines.

In January 2013, the BIR introduced its transfer pricing guidelines (The TP Guidelines) in the form of Revenue Regulation No. 2-2013. The Revenue Regulation No. 2-2013 provides about the application of the arm’s length principle for cross-border and domestic transactions between associated enterprises. These guidelines are largely based on the arm’s length methodologies as set out under the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines.

In August 2019, the BIR also issued Revenue Audit Memorandum Order No. 1-2019 (The TP Audit Guidelines) to introduce standardised audit procedures and techniques applicable to taxpayers with related party transactions.

With the recent the release of the TP Audit Guidelines, the BIR is likely to conduct more TP audits and impose assessments on taxpayers, targeting specific industries such as the pharmaceutical and manufacturing industries. Therefore, it is recommended that taxpayers review their TP policy and ensure the TP documentation is ready in place.

We summarised the key requirements of Philippines’s Transfer Pricing Guidelines for companies to be transfer pricing ready in Philippines.

What are the documents due for lodgement?

Taxpayers are not required to lodge TP documentation in the Philippines. Taxpayers are recommended to maintain contemporaneous TP documentation to be able to respond to BIR queries when required. The proposed legislation provides an indication of the type of documentation that would be helpful in an enquiry. The BIR leaves the decision to the taxpayer on the depth of detail that is provided, which should be commensurate with the level and complexity of the related party dealings.

Who is required to prepare the documentation?

Entities that have cross-border and domestic transactions with their associated enterprises.

How is a related party defined in the Philippines?

A related party is defined as:

Furthermore, control will be assumed to exist if “one entity holds not less than 30% of the outstanding shares entitled to vote of a corporation, in addition to other situations putting the parties in a controlled environment or relationship."

What is the content of the TP documentation?

Examples of information indicated in the proposed regulations as being helpful in an analysis of the arm’s length nature of related party transactions include:

1. Organisational structure;

2. Nature of the business/industry and market conditions;

3. Controlled transactions;

4. Assumptions, strategies, policies;

5. Cost contribution arrangements (“CCA”);

6. Comparability, functional and risk analysis;

7. Selection of the TP method;

8. Application of the TP method;

9. Background documents; and

10. Index to documents.


Which TP method to apply?

Philippines is not a member of the OECD. However, the BIR has adopted the arm’s-length principle and authorises the use of TP methodologies (e.g. comparable uncontrolled price, resale price method, cost plus method, transactional net margin method, and profit split method) endorsed by the OECD Guidelines to determine the market price of a transaction.

The BIR does not have a specific preference for any one method. The TP Guidelines highlight that the TP method that produce the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments should be utilised.

What type of comparables are accepted for the purpose of conducting a benchmarking study?

Local comparables are preferred when performing a comparable search. Foreign comparables are accepted in the event where local data are insufficient.

How long should the TP documentation be retained?

Documentation should be kept for three years after the last day prescribed by law for the filing of the return to which the documentation relates. However, it is to the best interest of the taxpayer to maintain documentation for purposes of Mutual Agreement Procedure (“MAP”) and possible TP examination.

What is the deadline for preparing and submitting the TP documentation?

The TP documentation should be prepared contemporaneously and submitted within 45 days upon request. This period can be extended subject to the discretion of the BIR Commissioner or his duly authorized representative.

Will the taxpayer be penalised for not preparing the TP documentation?

If TP adjustment leads to additional income tax, a penalty of 25 percent is charged on the extra tax amount. An interest of 20 percent (50 percent in case of fraud) per year is charged on penalties. Interest is imposed on the deficiency tax (but not on the surtax) at 20 percent per annum. A compromise penalty up to Philippines Peso (“PHP”) 50.000 may also be imposed.

How is the TP audit conducted?

The TP Audit Guidance released by the BIR provides a framework and guidance for TP examinations conducted in the Philippines. The TP Audit Guidance is intended for controlled transactions including sale, purchase, transfer and utilisation of tangible and intangible assets, provision of intra-group services, interest payments and capitalisation among others, between associated parties where at least one party is assessable or chargeable to tax in the Philippines.

The Philippines TP Audit Guidelines also addresses the considerations for business restructuring, intra-group services, intangible assets and interest payments.

The TP audit procedure can be broadly categorised into three sections, namely the
(i) preparation of TP audit, followed by
(ii) implementation of the TP audit and finally the
(iii) reporting on the TP audit.

The steps taken for each of the audit procedure are provided in the table below:

Preparation of TP audit

Implementation of TP audit

Reporting on TP audit

  • Review on the available information relating to taxpayer’s related party transactions
  • Schedule for initial meeting is set with the taxpayers
  • Evaluation of information and documents
  • TP orientation meeting is set with taxpayers
  • Clarification/explanation provided by taxpayers
  • Revenue Officers to analyse the risk of arm’s length price in the related party transactions
  • Re-assessment meeting is scheduled with taxpayers
  • Determination of the characteristics of taxpayer’s business
  • Review on the TP methods selected
  • Application of the arm’s length principle 

  • Report on the TP audit finding is drafted
  • Meeting is held with taxpayers to discuss on the findings
  • Report on TP audit is finalised
  • TP adjustment proposed, if any

Contact Transfer Pricing Solutions. We can assist with the preparation of transfer pricing documentation locally and regionally, Master File and Local File, local, regional and global benchmarking.


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Contributed by consultant Kaval Aulakh

Kaval works as a consultant for Transfer Pricing Solutions Australia, Transfer Pricing Solutions Asia and Transfer Pricing Solutions Malaysia. Kaval has more than five years of experience in various areas of transfer pricing assignments such as transfer pricing documentation, comparability studies, shared costs allocation and Mutual Agreement Procedure (MAP).

In her spare time, Kaval enjoys socialising, reading and playing badminton.

Contributed by Director Adriana Calderon

Adriana is the co-founder of Transfer Pricing Solutions Asia and Transfer Pricing Solutions Malaysia and Lead Partner in Asia.
Adriana has extensive international experience with Big Four and mid-tier firms advising multinational companies in the areas of corporate and international taxation across South America, the US, Australia and the Asia Pacific Region.

As a TP practitioner, Adriana has advised companies in the Asia Pacific Region across various industries and in a wide range of projects associated with planning.

Adriana also enjoys teaching and is a regular speaker and facilitator of Transfer Pricing seminars and workshops in Singapore. She is a transfer pricing trainer for the Institute of Singapore Chartered Accountants and Singapore Institute of Accredited Tax Professionals.

Adriana lives in Singapore with her family and is a mother to two energetic boys.