Transfer Pricing BIR Ruling

The dramatic increase in globalization of trade has also led to harmful tax practices that have resulted in tremendous losses of tax revenues for governments. The most significant international tax issue emerging from globalization confronting tax administrations worldwide is transfer pricing.

Section 50 of the National Internal Revenue Code of 1997, as amended (Tax Code), gives the Internal Revenue Commissioner the authority to allocate income and expenses between or among related parties and taxpayers or make transfer pricing adjustments to reflect the true taxable income of taxpayers.

The BIR came out with several issuances to implement Section 50 and further explaining on the power and authority of the Commissioner to allocate income and expenses among related taxpayers and prescribing the arm’s-length standard for the pricing of transactions between or among related taxpayers, as well as the methods for determining the arm’s-length price for related party transactions.

The BIR issued Revenue Memorandum Order (RMO) No. 5-2012 on March 29 2012. RMO 5-2012 prescribes the guidelines and policies under the Performance Benchmarking Method. Under the RMO, benchmarking will be done separately for corporate and individual taxpayers. Taxpayers will be categorized by the BIR as high- risk (more than 30% below the benchmark), medium-risk (16% to 30% below the benchmark) and low-risk (15% or less below the benchmark). Taxpayers classified as high-risk shall be the top priority for enforcement such as an audit.

On 23 January 2013, the BIR released Revenue Regulations (RR) No. 2-2013, known as the Transfer Pricing Guidelines. The regulations provide guidelines in determining the appropriate revenues and taxable income of parties in the controlled transaction by prescribing the arm’s-length principle as the standard to determine transfer prices of related parties. The transfer pricing regulations apply to cross-border transactions between associated enterprises and domestic transactions between associated enterprises.