Transfer Pricing in the Philippines: A Guide for Foreign Investors

The Philippines is an emerging hub for foreign investment, driven by its robust economy, strategic location, and skilled workforce. However, investors must carefully navigate local tax laws and business regulations, particularly transfer pricing, to ensure compliance and mitigate risks in cross-border transactions.

Transfer pricing regulations in the Philippines

The Philippine government, through the Bureau of Internal Revenue (BIR), enforces transfer pricing rules that align with international standards set by the Organisation for Economic Co-operation and Development (OECD). 

The BIR issued Revenue Regulations No. 2-2013 (RR No. 2-2013), which sets out the guidelines for transfer pricing in the Philippines. The key aspects of these regulations include:

1. Arm’s Length Principle:
   The arm’s length principle is the cornerstone of transfer pricing in the Philippines. This principle requires that transactions between related parties be priced as if they were between unrelated parties, reflecting fair market value.
2. Documentation Requirements:
   Under RR No. 2-2013, businesses engaged in intercompany transactions must maintain transfer pricing documentation. This documentation should provide evidence that the pricing is in line with the arm’s length principle. The BIR requires that this documentation be available for inspection upon request.

The required documentation includes:

• • Local file: This file should contain detailed information about the business, its financial statements, and the intercompany transactions.
  • Master file: This file provides a global overview of the MNC’s business operations and transfer pricing policies.

3. Methods of Transfer Pricing:
The BIR recognizes several methods to determine arm’s length pricing. These methods are aligned with OECD guidelines and include:

• • Comparable Uncontrolled Price (CUP) Method: Compares the price charged in a controlled transaction to the price charged in a similar uncontrolled transaction.
  • Resale Price Method: Used when the reseller purchases goods and then sells them to a third party, comparing the resale price to the cost of acquiring the goods.
  • Cost Plus Method: Adds an appropriate markup to the costs incurred in producing goods or services.
  • Transactional Net Margin Method (TNMM): Compares the net profit margin of controlled transactions to that of similar uncontrolled transactions.
  • Profit Split Method: Allocates profits between related parties based on their contribution to the value of the transaction.

4. Advanced Pricing Agreements (APAs):
   The Philippines offers Advanced Pricing Agreements (APAs), allowing businesses to agree with the BIR on transfer pricing methods for intercompany transactions. APAs provide certainty, reduce dispute risks, and help avoid audits and penalties. Companies can apply for unilateral or bilateral APAs based on transaction complexity. 

Transfer pricing and investment incentives

Foreign investors in the Philippines are attracted by investment incentives, especially in special economic zones (SEZs) and Philippine Economic Zone Authority (PEZA) programs. However, transfer pricing rules still apply, and companies must ensure their intercompany transactions align with the arm’s length principle to maintain compliance with both transfer pricing and incentive requirements.

The Philippines’ key transfer pricing thresholds

• PHP 3 million (US$53,751) in annual gross sales/receipts: Companies are required to maintain transfer pricing documentation (local file).
• PHP 50 billion (US$892.86 million) in consolidated annual revenues: Companies must submit Country-by-Country (CbC) reporting.
• Small and medium enterprises (SMEs): Companies with gross sales/receipts below PHP 3 million (US$53,571) are generally exempt from documentation requirements unless involved in significant cross-border transactions. However, they must still ensure compliance with the arm’s length principle for related-party transactions.
• Advanced Pricing Agreements (APAs): Businesses can apply for APAs with the BIR to agree on transfer pricing methods in advance, minimizing audit risks.
• Intercompany transactions: Transfer pricing regulations also apply to intercompany loans and financial transactions, which must follow the arm’s length principle.

Industry-specific considerations for transfer pricing in the Philippines

Manufacturing sector

Transfer pricing challenges stem from allocating costs for raw materials, labor, and production. Intercompany sales must follow the arm’s length principle, and appropriate royalty rates for intellectual property are crucial. Manufacturers must maintain proper documentation to avoid audits and penalties from the Bureau of Internal Revenue (BIR).

Service industry

Transfer pricing for services is challenging due to their intangible nature and lack of clear market prices. Companies must ensure intercompany transactions meet the arm’s length standard, document service agreements properly, and manage permanent establishment (PE) risks to avoid tax liabilities.

Intangible property considerations

Transfer pricing for intangible assets like intellectual property (IP) is challenging due to the lack of clear benchmarks. Businesses must use advanced valuation methods, ensuring proper royalty rates and profit allocation based on the DEMPE functions (Development, Enhancement, Maintenance, Protection, and Exploitation) for compliance.

Financial transactions

In financial transactions between related parties, businesses must align terms with the arm’s length principle, including setting fair interest rates, compensating for loan guarantees, and evaluating pricing in cash pooling. They must also ensure debt-to-equity ratios comply with market norms to avoid tax scrutiny and penalties.

Transfer pricing compliance and penalties

Foreign investors operating in the Philippines must ensure that they comply with the transfer pricing regulations set by the BIR. Failure to do so may result in significant penalties, including fines, interest charges, and possible adjustments to taxable income. Additionally, the BIR may initiate audits to review the transfer pricing practices of multinational companies.

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