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12.4.1. Main Rules

The Philippines general transfer pricing regulations are contained in Revenue Regulation No. 2-2013, which was published on 23 January 2013. The regulations apply to both cross-border and domestic transactions between associated (related) enterprises.

Definition of Related Parties

For transfer pricing purposes, two or more persons /entities are associated (related) if:

  • One person or a close family member of that person participates directly or indirectly in the management, control, or capital of the other; or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises;
  • As per Regulation No. 19-2020, the following situations may be considered in determining whether an entity is a related party, based on the substance of the relationship of the parties over  legal form:
    • the entity and the reporting entity are members of the same group;
    • one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
    • both entities are joint ventures of the same third party;
    • one entity is a joint venture of a third entity, and the other entity is an associate of the third entity;
    • the entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity;
    • the entity is controlled or jointly controlled by an identified person;
    • an identified person has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); or
    • the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

Control refers to any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised. Moreover, control shall be deemed present if income or deductions have been arbitrarily shifted between two or more enterprises.

Applicable Transfer Pricing Methods

The applicable transfer pricing methods include:

  • Comparable uncontrolled price method;
  • Resale price method;
  • Cost-plus method;
  • Profit split method (residual profit split approach or contribution profit split approach); and
  • Transactional net margin method.

The selection of a transfer pricing method is aimed at finding the most appropriate method for a particular case. Accordingly, the method that provides the most reliable measure of an arm's length result shall be used. The tax authorities do not have a specific preference for any one method. Instead, the method that produces the most reliable results, considering the quality of available data and the degree of accuracy of adjustments, should be used.

Use and Availability of Comparables

The tax authorities allow the selection of local comparables for benchmarking purposes. Where reliable local comparables are not available, taxpayers may use Asia-Pacific comparables for benchmarking.