Transfer Pricing 2024 Comparisons

The rules governing transfer pricing in the Philippines are based on Section 50 of the National Internal Revenue Code of 1997 (NIRC), which authorises the Commissioner of Internal Revenue (“Commissioner”) to “distribute, apportion or allocate gross income or deductions” between or among “organizations, trades or businesses” ... “owned or controlled directly or indirectly by the same interests” when necessary to prevent evasion of taxes or to clearly reflect the income of such organisation, trade or business.

The statutory provision is implemented by Revenue Regulations (RR) No 02-13 or the “Transfer Pricing Guidelines” issued by the Secretary of Finance in 2013 with the recommending approval of the Commissioner. RR No 02-13 has the force and effect of law.

Transfer Pricing Regulations

RR No 02-13 provides for:

• the use of the arm’s length principle as the standard to determine transfer prices for related-party transactions;
• the methodologies in determining the arm’s length price, which are largely based on the OECD Transfer Pricing Guidelines (“OECD TP Guidelines”); and
• the requirement for taxpayers to prepare and retain adequate transfer pricing documentation.

The arm’s length principle, as stated in RR No 02-13, requires the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. If two associated enterprises derive profits at levels above or below the comparable market level solely by reason of the special relationship between them, the profits will be deemed as non-arm’s-length. In such a case, the Philippine Bureau of Internal Revenue (BIR) can adjust the taxable profits of the related parties to reflect the true value that would otherwise be derived on an arm’s length basis.

Transfer Pricing Audit Guidelines

In 2019, the BIR published Revenue Audit Memorandum Order (RAMO) No 01-19 or the “Transfer Pricing Audit Guidelines”. The audit guidelines detail the procedures and methods used by revenue examiners in transfer pricing audits, and the principles observed in examining specific cases, such as intra-group services, intangible asset transactions and cost contribution arrangements. The audit guidelines provide useful insights to taxpayers conducting a transfer pricing analysis, but the procedures in RAMO No 01-19 are not mandatory for taxpayers.

Since then, the Secretary of Finance and the BIR have also issued various revenue regulations (ie, RR No 19-20, which was amended by RR No 34-20) and revenue memorandum circulars (ie, RMC No 76-20 and RMC No 54-21) on taxpayer disclosure of related-party transactions.

The Commissioner’s authority to allocate income and deductions among controlled organisations, trades, and businesses under Section 50 of the NIRC can be traced a long way back to Section 44 of the 1939 National Internal Revenue Code. Fundamentally, the wording of the law remains unchanged up to this day.

However, the current transfer pricing regime developed only in the last three decades, in response to a downtrend in revenue collection from related-party groups despite their growth and the increase in related-party transactions globally.

In 1998, the BIR issued RAMO No 01-98 establishing special audit procedures for joint and co-ordinated tax examination of interrelated group of companies. It recognised the use of the arm’s length principle as an audit standard for determining prices but did not provide specific details on its application. The manner of application was left to the “best judgment” of the revenue examiner who is permitted to refer to the methods under the OECD TP Guidelines. In several tax controversies up to the early 2000s, although the tax court recognised the use of the arm’s length principle as a proper standard, the court found the revenue examiners’ methods for determining the arm’s length price to be unjustified.

RR No 02-13 issued in 2013 is the first formal regulation adopting the arm’s length principle and establishing transfer pricing methods. The regulation is supported by RAMO No 01-19 issued in 2019, both of which remain in force.

The transfer pricing rules apply to any domestic or cross-border transaction between two or more associated enterprises, known as a “controlled transaction”. The regulations also apply, by analogy, to transactions between a permanent establishment and its head office or other related branches, which are treated as separate and distinct enterprises for tax purposes, and to intra-firm transactions. Intra-firm transactions apply to taxpayers with different tax regimes (ie, income tax holiday, 5% gross income tax and regular corporate tax).

Two or more enterprises are associated or related if (i) one participates directly or indirectly in the management, control, or capital of the other, or if (ii) the same persons participate directly or indirectly in the management, control, or capital of the enterprises.

Control refers to any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised. The regulations do not provide for any percentage or other technical threshold for control. Moreover, control is deemed present if income or deductions have been arbitrarily shifted between two or more enterprises.

The regulations list the following transfer pricing methods that taxpayers may use:

• Comparable Uncontrolled Price (CUP) Method;
• Resale Price Method (RPM);
• Cost Plus Method (CPM);
• Transactional Net Margin Method (TNMM); and
• Profit Split Method (PSM), which is classified into:
1. Contribution Profit Split Method; and
2. Residual Profit Split Method.

Taxpayers may also use other methods not specified by the regulations if they are appropriate to the transaction. Other methods may include methods based on cost approach, market approach, and revenue approach.

The Philippines does not have a hierarchy of methods or preference for any one method. RR No 02-13 provides that the transfer pricing methods that “produce the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments, should be utilized.”

RAMO No 01-19, nonetheless, recognises certain methods to be useful in certain transactions or situations.

• The CUP Method is useful when evaluating related-party transactions of a manufacturer or service provider.
• The RPM is appropriate in a situation where the reseller adds relatively little value to the properties sold, as in the case of a distributor.
• The CPM is useful where semi-finished goods are sold between associated enterprises or where the controlled transaction involves the provision of intra-group services.
• The TNMM is appropriate when the gross profit of the business is not easy to determine such that either CPM, in case of a manufacturer or service-provider, or RPM, in case of a distributor, cannot be used. Since the net margin figure is ordinarily available, the TNMM may be used.
• The PSM is useful in cases involving highly integrated operations or where both parties make unique and highly valuable contributions, so that the testing cannot be done separately. Particularly, the Contribution Profit Split Method is applied when transactions occur between parties that are closely integrated, while the Residual Profit Split Method is applied in cases where both parties have unique and highly valuable contributions (eg, unique or valuable intangible property).

The regulations recognise that in some cases, the application of appropriate transfer pricing methods produce a range of figures that are relatively equally reliable, rather than a single figure or specific ratio that may be considered arm’s length. In such cases, the use of ranges to determine an “arm’s length range” shall be applied, provided that the comparables are reliable.

If the range includes a sizeable number of observations, such as those extracted from a database, statistical tools that take account of central tendency to narrow the range may be used to determine the arm’s length range. RAMO No 01-19 suggests the use of the interquartile range or other percentiles to enhance the reliability of the analysis.

If the relevant conditions of the controlled transaction (eg, price or margin) are within the arm’s length range, no adjustment should be made. However, if they are outside the arm’s length range determined by the BIR, the taxpayer shall have the opportunity to present its arguments. The taxpayer must establish (i) the applicable arm’s length range, which is different from that asserted by the BIR, and (ii) that the conditions of the controlled transaction fall within the arm’s length range and satisfy the arm’s length principle.

The Philippines requires comparability adjustments, if necessary, to improve the reliability of comparables used in determining the arm’s length price. These include adjustments for differences in contractual terms, accounting methods, functions performed, and risks assumed.

Comparability adjustments are intended to eliminate the effects of differences that exist between the situations being compared, which could materially affect the condition (eg, price or margin) being examined. These are not performed to correct differences that have no material effect on the comparison.

Philippine transfer pricing rules recognise two major categories of intangibles: (i) manufacturing intangibles, and (ii) marketing intangibles.

In transfer pricing of intangibles, RR No 02-13 requires the examination of the following characteristics, among others:

• the form of the transaction;
• the type of intangible;
• the duration and degree of protection; and
• the anticipated benefits from the use of the property.

RAMO No 01-19, Chapter VI, also provides general guidelines on the analysis of intangible asset transactions. The transfer price for the utilisation or transfer of an intangible asset must consider the perspectives of the party that delivers (ie, transferor) and the party that receives (ie, transferee) the asset. On one hand, the transferor should obtain greater benefit from the transfer or utilisation of its intangible asset than the costs that it has expended to acquire or protect it. On the other, the transferee should receive a greater benefit than the costs that it must pay for the intangible asset acquired or utilised.

In valuing licences for intangible assets, RAMO No 01-19 identifies the following factors for consideration:

• protection and timeframe;
• exclusiveness;
• geographical coverage;
• useful life of the intangible asset;
• right to develop, revise, and make improvements;
• existence of other intangibles or services inherent in the delivery or utilisation of the intangible asset;
• existence of right to sublicense to third parties; and
• other factors that could influence the value of the licence.

The Philippines does not have special rules on hard-to-value intangibles.

The Philippines recognises cost contribution arrangements (CCA) for the joint development or acquisition of property and services, and joint development of intangibles. Guidance on the transfer pricing of CCAs is available in RAMO No 01-19, Chapter VII.

In analysing the arm’s length nature of the CCA, the following matters should be addressed: (i) the CCA is entered into by the participants with prudent and practical business judgment and a reasonable expectation of benefits; and (ii) the terms of the CCA are agreed upon up-front in accordance with economic substance, which may be judged by reference to circumstances known or reasonably foreseeable at the time of entry into the arrangement. Considerations for the entry or withdrawal of one or more participants, as well as the termination of the CCA, should also be dealt with at arm’s length.

Under Section 6 (A) of the NIRC, any return filed with the BIR, including the Information Return on Transactions with Related Party (BIR Form No 1709), may be modified, changed, or amended within three years from the date of filing, provided that no notice for audit or investigation of such return or of the corresponding taxable period has in the meantime been actually served upon the taxpayer.

The Philippines has signed 43 double taxation agreements (DTAs) and the OECD Multilateral Convention on Mutual Assistance in Tax Matters (as amended in 2010). These agreements require the country to share tax information with its tax treaty partners to better implement national tax laws and prevent tax evasion and avoidance.

In 2009, the Philippines also passed Republic Act (RA) No 10021, otherwise known as the “Exchange of Information on Tax Matters Act of 2009”. This law affirms the country’s commitment to the internationally agreed tax standards for exchanging tax information with its tax treaty partners. This helps fight international tax evasion and avoidance and addresses tax concerns that affect international trade and investment. Since then, various tax regulations have been implemented to clarify the details of RA No 10021 and ensure its implementation. Further, the NIRC, Section 6(F), specifically authorises the Commissioner to inquire into bank deposits and other related information held by financial institutions, of a specific taxpayer or taxpayers, upon a valid request for tax information by a foreign tax authority pursuant to an international convention or agreement to which the Philippines is a signatory or a party of.

All requests for tax information must go through the BIR International Tax Affairs Division, which processes such requests within specific periods.

The Philippines has yet to issue separate regulations establishing an APA programme. This is expected to cover unilateral, bilateral, and multilateral APAs, which are recognised under existing transfer pricing regulations.

The APA programme will be administered by the BIR. According to existing transfer pricing regulations, APAs shall be entered into between the taxpayer and the BIR.

Based on RR No 10-22, which prescribes the guidelines and procedure for requesting Mutual Agreement Procedure (MAP) assistance, the MAP team of the BIR will negotiate bilateral or multilateral APAs with the competent authorities of other jurisdictions through the MAP process.

The limits on taxpayers or transactions eligible for an APA, if any, are not yet known.

The timeline pertaining to an APA application is not yet provided for by existing transfer pricing regulations.

Based on RR No 10-22, fees are expected to be charged in relation to the negotiation of bilateral or multilateral APAs. The amount is not yet provided.

The duration of APA cover is not yet provided for by existing transfer pricing regulations.

Existing regulations do not provide for a retroactive effect of APAs.

Under RR No 34-20, which regulates the submission requirements relating to transfer pricing, non-compliance shall be subject to the penalties provided under the NIRC, Section 250 (Failure to File Certain Information Returns) and Section 266 (Failure to Obey Summons), among other relevant NIRC provisions.

Section 250 of the NIRC imposes a penalty in Philippine pesos of PHP1,000 for each failure to timely file an information return, statement, or list, or keep any record, or supply any information required by the NIRC or the Commissioner, subject to a maximum amount of PHP25,000 per year. To defend against the imposition, a taxpayer must prove that the failure is due to a reasonable cause and not to wilful neglect.

Section 266 of the NIRC imposes a fine of between PHP5,000 to PHP10,000 and imprisonment of between one and two years, upon conviction in a criminal proceeding, of a person who neglects to appear to testify or to produce books of accounts, records, memoranda or other papers, or to furnish information required under the NIRC, despite having been being duly summoned by the BIR to do so. The substance of the offence is “neglect,” which means to omit, fail, or avoid doing something that can be done, or that is required to be done. It can also mean a lack of care or attention in the doing or omission of a given act (Ang v People, C.T.A. EB Crim Case No 095, 2 August 2023). To defend itself, the taxpayer must prove the absence of “neglect” by demonstrating compliance with the BIR-issued subpoena duces tecum (SDT) through (i) appearance at the designated time and date, and (ii) presentation of the required documents. However, substantial compliance with the SDT is enough. The law allows for the possibility that the documents requested may not be available or may not exist. A taxpayer will not be required to produce documents that it cannot submit; otherwise, it would be at the mercy of the BIR, which may require documents that are unavailable or may not exist (BIR v Guevarra, C.T.A. Case No 10298, 15 October 2021).

Documentation Requirements

RR No 34-20 requires certain taxpayers to file an information return on related-party transactions (BIR Form No 1709) together with their annual income tax return. Further, subject to materiality thresholds, they must contemporaneously prepare transfer pricing documentation and submit the same to the BIR within 30 days upon request, in the course of a tax audit. Transfer pricing documentation includes the following information:

• organisational structure;
• nature of the business/industry and market conditions;
• controlled transactions;
• assumptions, strategies and policies;
• cost contribution arrangements;
• comparability, functional and risk analysis;
• selection of the transfer pricing method;
• application of the transfer pricing method;
• background documents; and
• index to documents.

Taxpayers with related-party transactions who are not covered by these requirements shall disclose such non-coverage in the Notes to their Financial Statements.

The Philippines is not an OECD member country and is not bound by the OECD TP Guidelines. There is no taxpayer requirement to maintain the files and reports (ie, master file, local file, and country-by-country report) under the OECD TP Guidelines.

Philippine transfer pricing rules are broadly aligned with the OECD TP Guidelines with respect to the arm’s length principle, the transfer pricing methodologies, and the conduct of comparability analysis. Specifically, RR No 02-13 refers to the OECD TP Guidelines as basis for the arm’s length pricing methodologies established in the regulations, and the OECD Model Tax Convention on Income and on Capital, Article 9, paragraph 1, as the authoritative statement of the arm’s length principle.

The regulations, however, do not adopt the OECD’s three-tiered approach to transfer pricing documentation. Also, the specific OECD guidelines on intangibles, intra-group services, CCAs, business restructurings, and financial transactions are not found in the regulations. Instead, RAMO 01-19 offers guiding principles in the BIR’s examination of these transactions.

Philippine transfer pricing rules are aligned with the arm’s length principle.

On 8 November 2023, the Philippines joined the OECD/G20 Inclusive Framework on BEPS to combat tax avoidance. The Philippines has pledged to address tax challenges resulting from the digitalisation of the economy by participating in the Two-Pillar Solution (Pillar 2). This initiative aims to reform international taxation regulations and ensure that multinational corporations pay their fair share of taxes wherever they operate. By joining the BEPS inclusive framework, the Philippines will implement four minimum requirements, which include countering harmful tax practices, preventing treaty abuse, transfer pricing documentation, and enhancing dispute resolution. However, the Philippines has not yet domestically implemented the OECD Pillar 2 guidelines by issuing any new laws or regulations.

In line with its commitment as a member of the OECD/G20 Inclusive Framework on BEPS, the Philippines is expected to implement BEPS 2.0 (ie, Pillar 2) soon. This will require a re-evaluation of the country’s current tax laws. The Philippine government will need to balance the inflow of foreign investments with the tax implications of Pillar 2. As such, the Philippines is expected to create new rules that maximise tax collection under Pillar 2 while maintaining the country as an attractive investment destination.

Philippine laws do not provide a mechanism where one entity is allowed to bear the risk of another entity’s operations by guaranteeing a return for that entity.

The Philippines has not officially adopted the UN Practical Manual on Transfer Pricing for Developing Countries. However, this Manual is referenced in RR No 02-13, which explains the background of transfer pricing in the Philippines.

Philippine transfer pricing regulations do not provide “safe harbours” as per the OECD TP Guidelines. However, the regulations provide “materiality thresholds”. According to Section 3 of RR No 34-20, only certain taxpayers who reach these thresholds must submit transfer pricing documentation and other supporting documents to the BIR as per RR No 02-13.

These taxpayers are:

• (a) large taxpayers;
• (b) taxpayers enjoying tax incentives (ie, Board of Investments-registered and economic zone enterprises enjoying the Income Tax Holiday or are subject to preferential income tax rates);
• (c) taxpayers reporting net operating losses for the current taxable year and the immediately preceding two consecutive taxable years; and
• (d) related parties (as defined in RR No 19-20, Section 3) that have transactions with (a), (b) or (c) above.

Meanwhile, the materiality thresholds are:

• (1) annual gross sales/revenue for the subject taxable period exceeding PHP150 million and the total amount of related-party transactions with foreign and domestic related parties exceeding PHP150 million; or
• (2) related-party transactions:
1. in the aggregate amount exceeding PHP60 million within the taxable year, if involving a sale of tangible goods; or
2. in the aggregate amount exceeding PHP15 million within the taxable year for payment of interest, utilisation of intangible goods, or other related-party transaction, if involving a service transaction.

If transfer pricing documentation was required to be prepared during the immediately preceding taxable period for exceeding either (1) or (2) above, the covered taxpayers must also submit the transfer pricing documentation and other supporting documents.

Taxpayers who do not meet the specified thresholds are not required to submit transfer pricing documentation, but the BIR may still audit them independently.

The Philippines does not have specific rules governing savings that arise from operating in the country, like the business restructuring “location savings” under the OECD TP Guidelines. However, Chapter IV of RAMO No 01-19 acknowledges that business restructuring in a multinational group could lead to changes in the nature of the business and profitability of a local (ie, Philippine) entity. If the profits of the local entity decrease, RAMO No 01-19 states that it should be because there is a reduction in the functions performed, assets used, or risks taken (FAR). If these FAR factors are actually transferred, it is considered reasonable for a multinational group to restructure and achieve tax savings. However, if the local entity continues to perform the same functions and bear the same risks, RAMO No 01-19 states that revenue officers should make the necessary adjustments. The tax regulation assumes that in a fair market situation, an independent party will not restructure its business if it leads to negative consequences, especially if it has other options.

According to RAMO No 01-19, the following types of activities among members of a multinational corporation group are not considered intra-group services for tax purposes, and any service fees paid in relation to these activities are not allowed as deductions.

• Shareholder activities, such as:
1. activities for the reporting needs of the parent company, such as preparation of consolidated financial statements;
2. activities relating to the legal status and structure of the parent company, such as overseeing compliance of required annual reports, holding of shareholder meetings, issuance of shares, and management by the oversight board; and
3. collection of funds to be used by the parent company to acquire another business or branch.
• Duplicative services performed by a member of a multinational corporation group that duplicate activities performed by the taxpayer or by a third party.
• Services that provide only incidental benefit to the taxpayer.
• Passive association.
• On-call services, if:

1. the potential for use of the service is very low;
2. the benefit obtained from the service is insignificant or negligible; or
3. the on-call service could be obtained immediately at any time and is available from an independent party without first having to enter into an on-call service agreement.

The Philippines does not require co-ordination between transfer pricing assessment and customs valuation. The BIR evaluates related entities’ transfer pricing independently of the Philippine Bureau of Customs. However, the BIR ordinarily refers to the Third-Party Matching-Bureau of Customs (TPM-BOC) Data Programme in the course of a tax audit, to verify amounts of importations.

RR No 02-13 does not provide specific guidelines on resolving transfer pricing-related disputes. However, taxpayers may seek the usual remedies in the context of regular audits through Section 228 of the NIRC.

When the BIR determines that a taxpayer owes taxes (ie, based on incorrect transfer pricing), following the issuance of a notice of informal conference and a preliminary assessment notice, it will issue a formal letter of demand and final assessment notice (FAN) that includes all the necessary information. If the taxpayer disagrees with the assessment, it may file a protest within 30 days of receiving the FAN. The protest can be a request for reconsideration if it is based on existing records without requiring additional evidence. If the protest involves re-evaluating the assessment based on newly discovered or additional evidence, it must be submitted as a request for re-investigation. Supporting documents must be submitted within 60 days of filing the request for re-investigation.

If the protest is denied, the taxpayer may either appeal to the Court of Tax Appeals (CTA) or file an appeal with the office of the Commissioner of Internal Revenue within 30 days of receiving the decision. An appeal to the Commissioner is only available if an authorised representative of the Commissioner issues the denial. If the Commissioner issues the denial, a direct appeal to the CTA is the appropriate remedy.

In the Philippines, only decisions rendered by the Philippine Supreme Court (SC) are considered as judicial precedents or “case law” and are deemed as part of the Philippine legal system. However, the judicial precedent on transfer pricing in the Philippines is not well-developed, and as a result, tax authorities mainly depend on BIR issuances when making transfer pricing assessments. So far, there have only been two SC decisions significantly discussing transfer pricing. The relevant rulings in these decisions are outlined below.

Department of Finance v Asia United Bank, G.R. Nos 240163 & 240168-69, 1 December 2021, SC Third Division

“Under Section 50 of the NIRC the said provision, the CIR is authorized to distribute, apportion, or allocate gross income or deductions if [it] determine[s] that such distribution, apportionment, or allocation: (a) is necessary in order to prevent evasion of taxes; or (b) clearly to reflect the income of organizations, trades, or businesses.

...

... Section 50 is limited only to allocating expense deductions between two or more organizations, trades or business. ... [Its] purpose ... is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. If this has not been done and the taxable net incomes are understated, the law grants the CIR the authority to intervene by making distributions, apportionments or allocations of gross income or deductions among the controlled taxpayers to determine the true net income of each controlled taxpayer.

...

In determining the true net income of a controlled taxpayer in transactions with another controlled taxpayer, the CIR is not restricted to the cases of improper accounting, fraudulent transactions, or distortion or shifting of income and deductions to reduce or avoid tax. Its power extends to cases where, inadvertently or by design, the net income is other than what it would have been had it been an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer. In other words, Section 50 of the NIRC places a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer.

...

Various issuances of the BIR itself illustrate the import of Section 50 of the NIRC. In Revenue Audit Memorandum Order 1-1998, the BIR recognizes that ‘the authority for allocating income and expenses between or among related parties’ under Section 50 pertains to the ‘allocation of income and expenses between or among controlled group of companies, if related taxpayer has not reported its true taxable income.’ Moreover, it confirms that Section 50 is intended to place ‘a controlled taxpayer in tax parity with an uncontrolled taxpayer by determining the arm’s-length price of intercompany transactions.’

RR No 2–2013, which provides the guidelines for the method of income/cost allocation in related-party transactions (ie, transfer pricing), explicitly invokes Section 50 of the NIRC, which authorizes the CIR ‘to distribute, apportion or allocate gross income or deductions between or among two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, if he determines that such distribution, apportionment or allocation is necessary in order to clearly reflect the income of such organization, trade or business. Thus, the Commissioner is authorized to make transfer pricing adjustments.’

... [T]ransfer pricing is generally defined as the pricing of intra-firm transactions between related parties or associated enterprises. Parties are considered related if they are owned or controlled, directly or indirectly, by the same interests. There is a domestic transfer pricing issue when income is shifted in favor of a related-party with special tax privileges, or when expenses of a related company subject to regular income taxes or in other circumstances, when income and/or expenses are shifted to a related-party in order to minimize tax liabilities. The revenues lost from intra-related transactions can be attributed to the fact that related companies are more interested in their net income as a whole (rather than an individual corporation), as such there is a desire to minimize tax payments by taking advantage of the loopholes in the tax system.

... [T]here is a need to determine the arm’s length price only when one organization, trade, or business passes off a cost to a related organization, trade, or business at an amount different from what would have been charged had the transaction been between two unrelated organizations, thereby manipulating the amount of the reported income of the organizations. For this purpose, Section 50 grants authority to the CIR to allocate expense deduction where transactions involving more than one organization, trade, or business are not done at arm’s length.”

Commissioner of Internal Revenue v American Express International, Inc. (Philippine Branch), G.R. No 152609, 29 June 2005, SC Third Division

“... The business concept of a transfer price allows goods and services to be sold between and among intra-company units at cost or above cost. A branch may be operated as a revenue center, cost center, profit center or investment center, depending upon the policies and accounting system of its parent company. Furthermore, the latter may choose not to make any sale itself, but merely to function as a control center, where most or all of its expenses are allocated to any of its branches.

...

A ‘transfer price’ is ‘[t]he price charged by one segment of an organization for a product or service supplied to another segment of the same organization ...’ There are three general methods for determining transfer prices; namely, market-based, cost-based, and negotiated. The method chosen must lead each sub-unit manager to make optimal decisions for the organization as a whole, in order to meet the three criteria of goal congruence, managerial effort, and sub-unit autonomy.”

There are no specific restrictions on outbound payments related to uncontrolled or controlled transactions in the Philippines, except for the domestic and foreign currency transfer restrictions set by the country’s central monetary authority, the Bangko Sentral ng Pilipinas (BSP). For outbound transfers or payments of Philippine Pesos, up to PHP50,000 per person is allowed without prior written authorisation from the BSP. However, BSP written authorisation is required for amounts exceeding the limit, as per Section 4 of the BSP Manual of Regulations on Foreign Exchange Transactions (updated May 2023).

By the same rule, for outbound transfers or payments of US dollars or other foreign currencies, up to USD10,000 (or its equivalent in other foreign currencies) per person is allowed without prior BSP written authorisation. If the amount exceeds this limit, it can still be allowed but must be declared using the appropriate BSP foreign currency declaration form. Further, to service certain outbound payments (eg, interest and loan repayments, and capital repatriation) using foreign currency resources of the Philippine banking system, BSP registration or, in certain cases, approval of the corresponding inward investment must be secured.

From a tax perspective, any outgoing transfers or payments may be subject to final withholding taxes. If the BIR determines that transfer pricing adjustments are necessary in accordance with transfer pricing regulations, the local entity may be assessed for deficiency withholding tax on these transfers or payments.

Refer to 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions.

The Philippines does not have rules regarding the effects of other countries’ legal restrictions. It adheres to its own regulations on foreign payment restrictions.

The Philippine government does not disclose information about APAs or transfer pricing audit (TPA) results. With some exceptions, which do not include APAs and TPA outcomes, Section 270 of the NIRC prohibits the unlawful disclosure of taxpayer information. These include “information about the business, income, or estate of a taxpayer, the secrets, operation, style, or work, or apparatus of any manufacturer or producer, or confidential information about the business of any taxpayer,” which may cover APAs and TPA outcomes.

The Philippines does not prohibit using “secret comparables” or information available only to the BIR because the same was obtained from other taxpayers’ tax filings or audits. The law allows the tax authorities a wide berth in determining arm’s length transactions, in accordance with the Commissioner’s power to obtain information and make assessments under Sections 5 and 6 of the NIRC. The BIR is not legally obligated to use only local comparables (ie, companies within the Philippines) to determine the arm’s length price of controlled transactions. However, the BIR often uses local companies as a benchmark under the reliability requirement for transfer pricing evaluations. Comparables in the Asia-Pacific region may be used at the BIR’s option if local comparables are unavailable.