Transfer Pricing Thresholds Philippines: When Documentation Becomes Mandatory

The Philippines imposes transfer pricing documentation requirements based on peso thresholds set by the Bureau of Internal Revenue. Under Revenue Regulations No. 34-2020, as clarified by Revenue, a taxpayer required to file a Related Party Transaction (RPT) Form must prepare Transfer Pricing Documentation (TPD) only if it meets specific materiality thresholds. These thresholds are: annual gross sales or revenue exceeding P150 million combined with total related party transactions exceeding P90 million; sales of tangible goods to a single related party exceeding P60 million; or service, interest, royalty, or other related party transactions with a single related party exceeding P15 million. Meeting any one threshold triggers the TPD requirement.

Who Must File the RPT Form

The threshold question begins with the RPT Form, not the TPD. Under RMC No. 54-2021, a taxpayer must file an RPT Form if three conditions are present: it is required to file an Annual Income Tax Return; it had transactions with a domestic or foreign related party during the taxable period; and it falls under any of four categories.

The first category covers large taxpayers, meaning those classified and duly notified as such by the Commissioner of Internal Revenue under. A taxpayer who meets the criteria but was not notified cannot be considered a large taxpayer.

The second covers taxpayers enjoying tax incentives, such as Board of Investments-registered enterprises, economic zone enterprises, those enjoying an Income Tax Holiday, or those subject to a preferential income tax rate.

The third covers taxpayers reporting net operating losses for the current taxable year and the immediately preceding two consecutive taxable years. Net operating loss is based on income tax purposes, not the amount in the audited financial statements.

The fourth covers a related party that has transactions with any taxpayer falling under the first three categories.

The Materiality Thresholds for TPD

Once a taxpayer is required to file the RPT Form, the preparation of a TPD becomes mandatory only if it meets any of the conditions under Section 3 of RR No. 34-2020, as explained in RMC No. 54-2021:

• Annual gross sales or revenue for the subject taxable period exceeding P150 million, and total related party transactions with foreign and domestic related parties exceeding P90 million.
• Sale of tangible goods involving the same related party exceeding P60 million 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 million within the taxable year.
• If a TPD was required to be prepared during the immediately preceding taxable period for exceeding any of the above.

The P150 million and P90 million thresholds under the first condition refer to transactions involving all related parties in general. The P60 million and P15 million thresholds under the second and third conditions relate to transactions with a specific related party only. Annual gross sales or revenue means the amount reported in the Annual Income Tax Return, regardless of whether the source is a related or unrelated party.

How Related Party Transactions Are Counted

In computing the total amount of related party transactions, the taxpayer totals 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 all related parties. Compensation paid to key management personnel, dividends, and branch profit remittances are excluded.

A taxpayer required to file the RPT Form must disclose all related party transactions regardless of amount. The materiality threshold is relevant only in determining who must prepare a TPD. Similar transactions with the same related party may be aggregated. The actual amounts must be declared; a reasonable estimate is not sufficient.

The Consequence of Missing a Threshold

Failing to meet the thresholds does not exempt a taxpayer from the arm's length principle. Under RR No. 2-2013, the Bureau adopted the arm's length principle as the standard for determining transfer prices of related parties. The Commissioner is authorized under of the Tax Code to distribute, apportion, or allocate gross income or deductions between controlled businesses to clearly reflect income.

A taxpayer not required to file the RPT Form is likewise not mandated to prepare a TPD. However, nothing prevents any taxpayer from preparing a TPD voluntarily to demonstrate during audit that its related party transactions were conducted at arm's length. The burden of proof rests on the taxpayer. The Bureau retains the right to conduct a transfer pricing audit regardless of whether the taxpayer was required to file the RPT Form or prepare a TPD.

Frequently asked questions

Is there a materiality threshold for reporting related party transactions in the RPT Form?

No. A taxpayer required to file the RPT Form must disclose all related party transactions regardless of amount. The materiality threshold applies only to the preparation of a TPD.

If a taxpayer is not required to file the RPT Form, must it still prepare a TPD?

No. The enumeration of taxpayers required to file the RPT Form is exclusive. If a taxpayer is not required to file the RPT Form, it is not mandated to prepare a TPD. It must still be able to prove that its related party transactions were conducted at arm's length if audited.

If a taxpayer met the threshold last year but not this year, must it still prepare a TPD?

Yes. If a TPD was required to be prepared during the immediately preceding taxable period for exceeding the thresholds, the taxpayer is also mandated to prepare a TPD for the current taxable year, even if it no longer meets any threshold.

Practical takeaways

• The TPD obligation flows from the RPT Form: a taxpayer must first be required to file the RPT Form before the TPD thresholds become relevant.
• The key thresholds are P150 million annual gross sales or revenue with P90 million in related party transactions, P60 million in tangible goods sold to one related party, and P15 million in other transactions with one related party.
• All related party transactions must be reported in the RPT Form regardless of amount; only TPD preparation is subject to the thresholds.
• Once a TPD is required for a taxable period, it is also required for the following period even if the thresholds are no longer met.
• Even taxpayers below the thresholds must be ready to prove arm's length pricing during audit, since the burden of proof rests on the taxpayer.

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.