Transfer pricing is an accounting and tax practice related to the pricing of goods or services between related parties like a parent company and its subsidiary. It also refers to parties who are located in different tax jurisdictions or to those who are in the same country such as the Philippines. Learn more about this concept and how it applies to your business in the Philippines.
BIR Regulations and Guidelines on Transfer Pricing
The Bureau of Internal Revenue has implemented guidelines and regulations on transfer pricing which will help ensure that there is transparency and fair prices according to the arm’s length principle. According to tax services in Manila, the following are BIR’s main guidelines:
- RAMO or Revenue Audit Memorandum Order No. 01-2019 provides standard audit procedures for the conduct of audits related to the party. This serves as BIR’s manual which can also be used by taxpayers like you as a guide in preparing for an audit and avoiding adjustments.
- Revenue Regulations No. 02- 2013 requires you to provide transfer pricing documentation as proof of efforts. This will help determine the arm’s length price for any related-party transactions.
- Revenue Memorandum Circular No. 76-2020 provides you with further details on the documents and attachments you need to submit in pursuant to the RR 19-2020.
- Revenue Regulations 19-2020 requires you to properly disclose the transactions of any related party with the goal of achieving effective implementation of the Philippine Accounting Standards 24.
- Revenue Regulations No. 34-2020 or the RR No 34-2020 provides you with the details of the procedures and guidelines for submitting your documents such as the BIR Form No. 1709 and other supporting documents.
Is there a set rate, method, or rate for transfer pricing?
According to expert accounting services in the Philippines, there is no set methodology and specific rate. Instead, the BIR will determine the amount by following the set guidelines of the OECD or the Organization for Economic Cooperation and Development Guidelines. The said guidelines will help to determine the arm’s length price for the transactions of related parties.
What is the Arm’s Length Principle?
This is the foundation of transfer pricing regulations. One of its requirements is to make sure the charged prices of the related parties are compatible with the charged prices of the parties who are not related but have similar goods and services. This requirement is implemented to ensure fairness and prevent any potential manipulation or abuse of pricing within related party transactions.
By comparing the charged prices of related parties to those of unrelated parties with similar goods and services, it promotes a level playing field in the market. This maintains transparency, prevents profit shifting, and ensures that all parties are treated equally in terms of pricing.
BIR Transfer Pricing Audit Program
This is one of the programs that BIR prioritizes a lot. The RR No. 02-2013 was issued in the year 2013. For BIR’s strategic plan from the year 2019 to the present, they declared their focus will be on specific issues that can lead to base erosion and profit shifting.
BIR Form No. 1709. You need to submit this form if:
- you are required to file an Annual Income Tax Return or AITR
- you have transactions with a related party that’s foreign or domestic during your taxable period
- if you are a large taxpayer, enjoy tax incentives, report net operating losses, and if you are a related party who transacts with the mentioned categories
Documentation of Transfer Pricing
You are only required to submit this if you also need to submit the BIR Form No. 1709. You also need to submit this requirement if you meet any of the following thresholds:
- Comparability Analysis is a comparison of the prices charged between the related parties and the unrelated parties who have similar goods and/or services.
- Function, Assets, and Risk Analysis show and describe the functions that each related party performs. It also describes the risks of each party and the assets that each party uses.
- Intercompany Transactions Documentation is a compilation of invoices, contracts, and other documents that are related to the transactions of the intercompany.
Penalties for Violations
If you haven’t filed or if you are late for filing the BIR Form No. 1709, you will get a penalty of not less than 1,000 PHP but not more than 25,000 PHP. If you have repeated offenses, you will be penalized 25,000 PHP (maximum penalty). Any type of penalty will eat at your profits and put you in a bad light in the eyes of officials, so it’s best to avoid this for smooth-sailing operations.
Why You Need To Comply
Transfer pricing is still a recurring challenging issue for many companies. When you comply with BIR’s regulations, you will be able to help maintain a sustainable tax system that will benefit the economy and society. Most of all, you can avoid the hassle of a BIR tax audit and investigation with compliance.
Are you ready to become a transfer pricing master? Armed with valuable knowledge about transfer pricing in the Philippines, it’s time to step up and make a difference! Don’t fret over the hazy maze of transfer pricing. Give our accounting services in Pasig a call, so our expert team members can help you conquer the realm of fair pricing. Compliance is your secret weapon for success!