The Department of Finance recently issued the Transfer Pricing (TP) Regulations. These are found in Revenue Regulations (RR) No. 2-2013 dated January 23, 2013.
The new regulations implement the power of the BIR Commissioner under Section 50 of the Tax Code to distribute, apportion or reallocate gross income or deductions between or among controlled organizations, trade or business, if she determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of such organization, trade or business. The TP Regs are largely based on the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, and, in fact, refer to the OECD Transfer Pricing Guidelines for further guidance and examples.
The salient provisions of the regulations are as follows:
Coverage: Cross-border and domestic transactions
Standard to Determine Transfer Price: The Arm's Length Standard, which requires a transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party
Transfer Pricing Methods: Comparable Uncontrolled Price, Resale Price, Cost Plus, Profit Split, and Transaction Net Margin
Documentation: TP documentation is not required to be submitted with the tax returns, but must be retained and submitted to the BIR upon request. The documentation must be contemporaneous, that is, it must exist or brought into existence at the time the associated enterprises develop or implement any arrangement that might raise transfer pricing issues or review these arrangements when preparing tax returns
Penalties: The provisions of the Tax Code and other applicable laws shall be applied in case of failure to comply with or violation of the provisions and requirements of the Guidelines
Advance Pricing Arrangement (APA): Shall be available to taxpayers engaged in cross-border transactions; separate guidelines to be issued by the BIR
Transitory Provision: Transactions entered into prior to the effectivity of the TP Regs shall be governed by the laws and issuances prevailing at the time the controlled transactions were entered into
Effectivity: RR No. 2-2013 will take effect after 15 days following publication in a newspaper of general circulation. RR No. 2-2013 was published in the Manila Bulletin on January 25, 2013.
SGV & Co will conduct TP Seminars to further discuss and explain the new TP Regs. Dates and venue of the seminars will be announced soon.