Transfer Pricing in the Philippines

By Carina C. Laforteza and Ma. Christina C. Ortua-Ang

March 10, 2023

This Q&A provides an overview of transfer pricing regulations and compliance in the Philippines and helps to better understand the key considerations involved in transfer pricing in the Philippines.

Conventus Law: What is transfer pricing and why is it important for businesses operating in the Philippines?

SyCipLaw: Transfer pricing is generally defined as the pricing of cross-border, inter-firm transactions between related parties or associated enterprises (1). Typically, it is an arrangement between a taxpayer of a country with high-income taxes and a related or associated enterprise of a country with low-income taxes (2). It may also be an arrangement between taxpayers who are subject to different taxation regimes such as a taxpayer that is under an incentive regime and a taxpayer under the regular tax regime.

In the Philippines, the basis for transfer pricing regulations is Section 50 of the National Internal Revenue Code, as amended (NIRC). Section 50 authorizes the Commissioner of Internal Revenue (CIR) to distribute, apportion or allocate gross income or deductions between or among two or more organizations, trades or businesses owned or controlled directly or indirectly by the same interests if he determines that such is necessary to clearly reflect the income of any such organization, trade or business. In line with this, the CIR is authorized to make transfer pricing adjustments to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes for such transactions (3).

Local businesses need to consider transfer pricing issues and ensure compliance with relevant regulations because their failure to do so may subject them to deficiency tax assessments and imposition of penalties such as interest and surcharge.

What are the transfer pricing regulations in the Philippines, and how do they affect businesses operating in the country

The Department of Finance and the Bureau of Internal Regulation (BIR) have issued various transfer pricing regulations that seek to strengthen the transfer pricing risk assessment of the BIR and to allow the BIR to focus its resources on the audit of important transfer pricing issues (4). These regulations apply to both cross-border and domestic transactions between related parties (5).

The first comprehensive transfer pricing regulations issued pursuant to the NIRC was Revenue Regulations No. 02 - 2013 (RR No. 02-13) or the Transfer Pricing Guidelines. Prior to RR No. 02-13, the BIR relied on the Organization for Economic Cooperation and Development (OECD) transfer pricing guidelines in its audit of related parties (6). Under the Transfer Pricing Guidelines, the BIR adopts the use of the arm's length principle as the most appropriate standard to determine the transfer prices of related parties. The arm's length principle "requires the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. (7)" RR No. 02-13 further requires taxpayers to maintain adequate documentation that shows that "their transfer prices are consistent with the arm's length principle (8)."

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(1) Secretary of Finance, Revenue Regulations No. 2-2013 (RR No. 02-13), at 1 (January 23, 2013) citing the UN Practical Manual on Transfer Pricing for Developing Countries (2013).
(2) RR No. 02-2013 at 1 citing the UN Practical Manual on Transfer Pricing for Developing Countries (2013).
(3) RR No. 02-13, Section 3.
(4) Secretary of Finance, Revenue Regulations No. 34-2020 (R.R. No. 34-20), at Section 1 (December 18, 2020).
(5) RR No. 02-13, Section 1.
(6) Commissioner of Internal Revenue, Revenue Memorandum Circular No. 26-2008 (RMO No. 26-08) (March 24, 2008).
(7) RR No. 02-13, Section 5.
(8) RR No. 02-13, Section 12.