Tax notes: Issuance of transfer pricing regulations

THE Bureau of Internal Revenue (BIR) has issued the Transfer Pricing Regulations implementing Section 50 of the National Internal Revenue Code of 1997 (NIRC) on the power of the BIR Commissioner to distribute, apportion, or allocate the gross income or deductions between or among related organizations.

Revenue Regulations (RR) No. 2-2013, issued last Jan. 23, 2013, defines “transfer pricing” as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises. Typically, a transfer price occurs between a taxpayer of a country with high income taxes and a related or associated enterprise of a country with low income taxes. In the Philippines, “intra-firm/inter-related” transactions account for a substantial portion of the transfer of goods and services. However, the revenue collection from related-party groups continues to go on a downtrend.

While transfer pricing issue typically occurs in cross-border transactions, it can also occur in domestic transactions. One context where transfer pricing issue occurs domestically is where one associated enterprise, entitled to income tax exemptions, is being used to allocate income away from a company subject to regular income taxes.

The Transfer Pricing Regulations shall apply to: (1) cross-border transactions between associated enterprises; and (2) domestic transactions between associated enterprises.

The guidelines under RR 2-2013 are largely based on the arm’s length methodologies set out under the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines.

The Transfer Pricing Regulations seek to provide guidelines in applying the arm’s length principle for cross-border and domestic transactions between associated enterprises.

(Source: Punongbayan & Araullo)