Understanding Transfer Pricing and Related Party Taxation: Ensuring Compliance in a Global Economy

In an increasingly interconnected world, multinational corporations and local subsidiaries face the complex challenge of managing transfer pricing — the pricing of goods, services, and intangibles exchanged between related parties. The recent presentation, “Transfer Pricing Rules and Taxation of Related Party Transactions,” provided an in-depth guide to the regulatory framework, compliance requirements, and documentation standards governing these transactions in the Philippines.

The Global Context

According to the International Consortium of Investigative Journalists (ICIJ), countries collectively lose about $483 billion annually to global tax abuse — a staggering figure that highlights the need for fair and transparent international tax rules. Lower-income nations are disproportionately affected, losing nearly half of their public health budgets to tax avoidance and profit shifting by multinational corporations.

Transfer Pricing Framework in the Philippines

The Philippines applies the arm’s length principle, which ensures that transactions between related parties reflect the pricing independent entities would have agreed upon under comparable circumstances.

• This principle is embedded in Section 50 of the National Internal Revenue Code (NIRC).

• It mirrors Section 482 of the U.S. Internal Revenue Code, which authorizes the Bureau of Internal Revenue (BIR) to reallocate income or deductions to prevent tax evasion or distortion.

Key Regulations and Guidelines

The local transfer pricing regime is anchored in both domestic and international issuances:

• BIR Revenue Regulation (RR) 2-2013 – Establishes transfer pricing methods and documentation requirements.

• Revenue Audit Memorandum Order (RAMO) 1-2019 – Provides audit guidelines for transfer pricing examinations.

• RR 34-2020 – Updates procedures for submitting BIR Form 1709 (Information Return on Related Party Transactions).

• OECD Transfer Pricing Guidelines (2022) and UN Manual on Transfer Pricing (2017) – Provide frameworks for comparability analysis and risk assessment.

BIR Form 1709 and Related Party Transactions (RPTs)

Taxpayers under certain categories — such as large taxpayers, BOI-registered entities, and those reporting net operating losses — are required to file BIR Form 1709 together with their annual income tax returns.

Materiality thresholds include:

• ₱150 million in gross sales/revenue and ₱90 million in total RPTs for mandatory Transfer Pricing Documentation (TPD) submission.

• ₱60 million for tangible goods, or ₱15 million for service/intangible transactions.

Non-compliance, or failure to provide material information, may result in penalties under Sections 250 and 266 of the NIRC, including fines and imprisonment for repeat offenses.

Documentation and Disclosure Requirements

To demonstrate compliance with the arm’s length principle, taxpayers must maintain contemporaneous Transfer Pricing Documentation (TPD) that includes:

• Organizational structure and transaction details

• Functional and risk analyses

• Selection and application of transfer pricing methods

• Comparable data and economic conditions

The presentation also compared PAS 24 financial statement disclosures with BIR Form 1709, noting that the latter demands more detailed, entity-specific information such as TINs, registered addresses, and country of tax residence.

Common Compliance Issues

Frequent taxpayer lapses identified include:

• Lack of formal agreements for cost-sharing or intercompany services

• Omission of dividend declarations and proofs of payment

• Absence of documentation for intragroup loans and non-trade receivables

Such omissions can expose taxpayers to audit risks and significant financial penalties.

Transfer Pricing in the Broader Legal Landscape

The presentation clarified that laws such as the Data Privacy Act (R.A. 10173) and the Bank Secrecy Law (R.A. 1405) cannot be used to withhold documents required by the BIR.

Under Section 5(B) of the NIRC, the Commissioner retains the authority to obtain and verify any information necessary for tax assessments.

Key Takeaway

Transfer pricing compliance is not merely a technical requirement — it is a commitment to transparency and corporate integrity. With the BIR’s enhanced scrutiny and digital filing systems like eAFS, businesses must ensure that their documentation, contracts, and disclosures are accurate, complete, and defensible.

As tax authorities worldwide collaborate to combat profit shifting and promote equitable taxation, compliance not only safeguards an organization’s reputation but also supports fair and sustainable economic growth.