Transfer Pricing Documentation in the Philippines: Who Must Prepare It

Who must prepare transfer pricing documentation in the Philippines

A Philippine taxpayer must prepare transfer pricing documentation (TPD) only if it is first required to file BIR Form No. 1709 (the Related Party Transaction or RPT Form) and it meets at least one of the materiality thresholds in Section 3 of RR No. 34-2020. The thresholds are: annual gross sales or revenue exceeding P150,000,000 with total related party transactions exceeding P90,000,000; sale of tangible goods to one related party exceeding P60,000,000; or service, interest, royalty, intangible or other related party transactions with one related party exceeding P15,000,000. A taxpayer that prepared a TPD in the immediately preceding taxable period must also prepare one for the current year.

What transfer pricing documentation is and why the BIR requires it

Transfer pricing refers to the pricing of cross-border, intra-firm transactions between related parties or associated enterprises, as defined in Revenue Regulations No. 2-2013. The Bureau of Internal Revenue adopted the arm's length principle as the standard for these transactions: a transaction with a related party must be made under comparable conditions and circumstances as a transaction with an independent party.

RR No. 2-2013 requires the maintenance or safekeeping of the documents necessary for the taxpayer to prove that efforts were exerted to determine the arm's length price in transactions among associated enterprises. That body of records is the TPD. It supports the taxpayer's position that its controlled transactions were priced at arm's length.

Who are associated enterprises or related parties

Under RR No. 2-2013, two or more enterprises are associated if one participates directly or indirectly in the management, control, or capital of the other, or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises. These are also referred to as related parties.

Control means any kind of control, direct or indirect, whether or not legally enforceable. Control is deemed present if income or deductions have been arbitrarily shifted between two or more enterprises. A controlled transaction is any transaction between two or more associated enterprises.

The two-step test: RPT Form first, then TPD

The obligations are sequential. Section 2 of RR No. 34-2020 lists who must file the RPT Form, and Section 3 sets the conditions that trigger the TPD. A taxpayer not required to file the RPT Form is not mandated to prepare a TPD.

The RPT Form applies to a taxpayer that files an annual income tax return, has transactions with a domestic or foreign related party during the taxable period, and falls under any of these categories: large taxpayers; taxpayers enjoying tax incentives, such as Board of Investments-registered or economic zone enterprises, those enjoying an Income Tax Holiday, or those subject to a preferential income tax rate; taxpayers reporting net operating losses for the current taxable year and the immediately preceding two consecutive taxable years; or a related party that has transactions with any of the foregoing.

A large taxpayer is one classified and duly notified by the Commissioner of Internal Revenue for having satisfied the criteria prescribed in the applicable revenue regulations. Notification may be made by registered mail, publication, or any other mode of service. A taxpayer who meets the criteria but was not notified cannot be considered a large taxpayer. The specific revenue regulation prescribing those criteria is not reproduced in the materials available here, so the classification should be confirmed against the current issuance.

The materiality thresholds for preparing a TPD

Under Section 3 of RR No. 34-2020, preparation of a TPD is mandatory if the taxpayer meets any of the following:

• Annual gross sales or revenue for the subject taxable period exceeding P150,000,000 and total related party transactions with foreign and domestic related parties exceeding P90,000,000.
• Sale of tangible goods involving the same related party exceeding P60,000,000 within the taxable year.
• Service transaction, payment of interest, utilization of intangible goods, or other related party transaction involving the same related party exceeding P15,000,000 within the taxable year.
• A TPD was required to be prepared during the immediately preceding taxable period for exceeding any of the above.

The P150,000,000 threshold refers to gross sales, receipts, revenues, or fees reported in the annual income tax return, regardless of whether the source is a related or unrelated party. The P90,000,000 threshold covers transactions with all related parties in general, while the P60,000,000 and P15,000,000 thresholds relate to transactions with a specific related party.

In computing total related party transactions, amounts received or receivable from related parties, amounts paid or payable to related parties, and outstanding balances of loans and non-trade amounts due from or to related parties are totalled. Compensation paid to key management personnel, dividends, and branch profit remittances are excluded.

Filing, disclosure, and audit

The TPD and other supporting documents are no longer attached to the RPT Form. Under the last paragraph of RR No. 34-2020, they are instead made available during audit. The RPT Form must disclose all related party transactions regardless of amount, and no less than the actual amounts may be declared.

Filing the RPT Form does not exempt a taxpayer from audit. The BIR uses the RPT Forms for an initial transfer pricing risk assessment to identify high-risk taxpayers and decide whether to conduct a transfer pricing audit. Even taxpayers not required to file the RPT Form or prepare a TPD must still present sufficient evidence that their related party transactions were conducted at arm's length, because the burden of proof rests on the taxpayer.

Frequently asked questions

Is a small company required to prepare transfer pricing documentation? Not if it is not required to file the RPT Form. If it is required to file the RPT Form but does not exceed any Section 3 threshold, no TPD is mandatory. It may still prepare one voluntarily to show that its related party transactions were at arm's length.

What happens if a taxpayer fails to provide material information in the RPT Form? The BIR will regard the RPT Form as not duly filed, and the penalty for failure to file the required information return will be imposed.

Can a taxpayer that meets the thresholds skip the TPD if it has no tax incentives? No. The thresholds apply based on the taxpayer's sales, revenue, and related party transaction amounts, not on whether it enjoys tax incentives.

Practical takeaways

• The TPD obligation begins with the RPT Form. No RPT Form requirement means no mandatory TPD.
• Review the Section 3 thresholds every year, since a TPD prepared in the prior year triggers the same requirement in the current year.
• Keep the TPD and supporting documents ready for audit, as they are no longer filed with the RPT Form.
• Total related party transactions carefully, including outstanding loan and non-trade balances, while excluding key management compensation, dividends, and branch profit remittances.
• Even without a mandatory TPD, be ready to prove that related party dealings follow the arm's length principle.

Primary sources

The rules discussed above are drawn from the following issuances, embedded here in full for your reference.

RR No. 2-2013 — Prescribes the transfer pricing guidelines (Published in Manila Bulletin on January 25, 2013) Digest | Full TextOpen in Law LibraryDownload PDF

RMO No. 26-2020 — Prescribes the use of the revised Exchange of Information Manual, amending for this purpose Revenue Memorandum Order Nos. 2-2013 and 3-2013Open in Law LibraryDownload PDF

RMC No. 54-2021 — Clarifies certain provisions of Revenue Regulations No. 34-2020 Digest | Full TextOpen in Law LibraryDownload PDF

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.