Transfer Pricing Rules for a Philippine Subsidiary and Its Foreign Parent

A Philippine subsidiary that transacts with its foreign parent must price those transactions as if the two were unrelated parties. This is the arm's length principle, adopted by the Bureau of Internal Revenue (BIR) under Revenue Regulations No. 2-2013. The BIR may review controlled transactions among associated enterprises and adjust their income or deductions to clearly reflect taxable income. Separately, a subsidiary that meets the thresholds under RR No. 34-2020, as clarified by, must file a Related Party Transaction (RPT) Form and, in some cases, prepare Transfer Pricing Documentation (TPD).

What counts as a related party transaction

Under RR No. 2-2013, two enterprises are associated enterprises if one participates directly or indirectly in the management, control, or capital of the other, or if the same persons participate in both. They are also called related parties. A controlled transaction is any transaction between associated enterprises.

A Philippine subsidiary and its foreign parent are associated enterprises. Their cross-border dealings — sale of goods, services, royalties, interest, cost-sharing — are controlled transactions covered by the regulations.

The arm's length principle in practice

RR No. 2-2013 adopts the arm's length principle as the standard for transfer pricing. A transaction with a related party must be made under comparable conditions as a transaction with an independent party. If associated enterprises earn profits above or below comparable market levels solely because of their special relationship, those profits are treated as non-arm's length, and the BIR may adjust taxable profits.

The regulations outline a three-step approach:

1. Conduct a comparability analysis.
2. Identify the tested party and the appropriate transfer pricing method.
3. Determine the arm's length result.

Comparability analysis examines the characteristics of goods, services, or intangibles; the functions performed, risks assumed, and assets used (a functional analysis); and the commercial and economic circumstances. The tested party is the entity to which a method can be most reliably applied and for which reliable comparables exist.

Transfer pricing methods

RR No. 2-2013 identifies several methods, and the BIR does not prefer any single one. The method that produces the most reliable result should be used. These include the Comparable Uncontrolled Price (CUP) Method, which compares the price charged in a controlled transaction against a comparable uncontrolled transaction, and the Resale Price Method (RPM), which starts from the resale price to an independent party and deducts an appropriate gross margin.

The regulations also discuss selecting a Profit Level Indicator (PLI), such as return on costs, return on sales, or return on capital employed. Where results fall within an arm's length range, no adjustment should be made; where they fall outside, the taxpayer may present proof that the conditions still satisfy the arm's length principle.

BIR reporting: the RPT Form and TPD

Under RR No. 34-2020, as clarified by, a taxpayer must file an RPT Form if it 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; taxpayers reporting net operating losses for the current and the immediately preceding two consecutive taxable years; or a related party transacting with any of them.

A taxpayer required to file the RPT Form must also prepare a TPD if it meets any materiality threshold under Section 3 of RR No. 34-2020, including where annual gross sales or revenue exceed P150,000,000 and total related party transactions exceed P90,000,000. The TPD and supporting documents are not attached to the RPT Form but must be made available during audit.

Frequently asked questions

Is a Philippine subsidiary required to file an RPT Form if it transacts with its foreign parent? It depends. The subsidiary must file if it files an Annual Income Tax Return, has related party transactions, and falls under any category in RR No. 34-2020, such as being a large taxpayer or enjoying tax incentives.

What happens if the BIR finds the pricing is not arm's length? Under RR No. 2-2013, the Commissioner may allocate or distribute income and deductions to clearly reflect taxable income, and may make transfer pricing adjustments.

Does a subsidiary need a Transfer Pricing Documentation even if not required? states that nothing prevents a taxpayer from preparing a TPD voluntarily to show that its related party transactions were conducted at arm's length. The burden of proof rests on the taxpayer.

Practical takeaways

• Price all transactions with a foreign parent as if dealing with an unrelated party.
• Document the comparability analysis, tested party, and chosen method.
• Check whether the subsidiary must file an RPT Form and prepare a TPD under RR No. 34-2020.
• Keep TPD and supporting records ready for audit, even if not attached to the RPT Form.
• Remember that the BIR may conduct a transfer pricing audit regardless of RPT Form filing.

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.