Overview of the Transfer Pricing Regulations in the Philippines

When a Japanese parent company conducts transactions with its Philippine subsidiary or other group companies, it must comply with transfer pricing rules and regulations. Specifically, it is necessary to ensure that the transaction terms between related parties are equivalent to those applied in dealings with independent third parties and that profits are appropriately allocated. If certain criteria are met, the preparation and submission of various documents, including transfer pricing documentation, are required.

In this section, we will provide an overview of the transfer pricing tax system and transfer pricing documentation.

What is the transfer pricing tax system?

The transfer pricing tax system is a tax framework that requires intra-group transaction prices (transfer prices) to be equivalent to the prices that would be applied between independent third parties (the Arm’s Length Price).

When intra-group transaction prices are freely determined, there is potential for improper manipulation of income allocation. To prevent distortions in the distribution of taxable income among countries, transfer pricing tax systems around the world require transactions to be conducted based on the Arm’s Length Price.

If a foreign tax authority determines that the profits of a foreign entity should be reallocated to a Japanese entity, there is a risk that the reallocated portion will be subject to taxation.

Transfer Pricing Tax System in the Philippines

In the Philippines as well, transfer pricing guidelines were issued in 2013. Subsequently, additional rules related to the transfer pricing tax system were released, including the Transfer Pricing Audit Guidelines (RMO No. 1-2019) in 2019, and further regulations in July 2020 (RR No. 19-2020, RMC No. 76-2020 Q4), September 2020 (RMC No. 98-2020), and December 2020 (RR No. 34-2020).

As of June 2023, the regulations regarding the transfer pricing tax system in the Philippines are as follows, presenting three response approaches from ① to ③:

① Submission Criteria for BIR Form 1709

Taxpayers who fall under the following categories are required to submit BIR Form 1709 to the BIR together with their Annual Income Tax Return (AITR).

a) Large taxpayers
b) Companies enjoying tax incentives (e.g., PEZA, BOI)
c) Companies reporting operating losses for three consecutive years, including the most recent year
d) Companies that have transactions with entities meeting any of the criteria in a)–c)

② Criteria for Preparing Transfer Pricing Documentation

Among the taxpayers required to submit BIR Form 1709, those who additionally meet the following materiality criteria are required to prepare transfer pricing documentation.

Transfer pricing documentation and other supporting documents (such as contracts, invoices, and tax returns/payments) do not need to be submitted together with BIR Form 1709. However, if requested by the BIR during a tax audit or similar review, they must be submitted within 30 days.

a) Revenue exceeding PHP 150 million and related-party transactions exceeding PHP 90 million
b) Related-party transactions involving fixed assets exceeding PHP 60 million, or service transactions, interest payments, use of intangible assets, or other related-party transactions exceeding PHP 15 million

③ Taxpayers Excluded from the Transfer Pricing Rules

Small and medium-sized enterprises (SMEs) that are not required to submit BIR Form 1709 only need to disclose in the notes to their audited financial statements that they are not subject to RR No. 34-2020. At present, no specific action is considered necessary.

Penalties

The penalties for companies falling under categories ① and ② that fail to submit transfer pricing documentation and related documents are set forth as follows.

<If there is a reasonable cause and the failure is not due to willful neglect>
A fine of PHP 1,000 to PHP 25,000, in accordance with Tax Code Section 250.

<In the case of repeated violations>
A fine of PHP 25,000, in accordance with Tax Code Section 274.

<If a violation occurs despite receiving a summons from the authorities>
In accordance with Tax Code Section 266, partners, presidents, general managers, branch managers, finance officers, and other employees responsible for the violation are subject to a fine of PHP 5,000 to PHP 10,000 and imprisonment for 1 to 2 years.

The series of publications has clarified the policy approach regarding the transfer pricing tax system in the Philippines.

Our firm also provides services for the preparation of transfer pricing documentation. Companies that fall under the above categories are encouraged to contact us for consultation.