REVENUE REGULATIONS 2-2013

(Prescribes the Transfer Pricing Guidelines)

TRANSFER PRICING
- The most significant international tax issue emerging from globalization
confronting tax administrations worldwide.
- The pricing of cross-border, intra-firm transactions between related parties or
associated enterprises.
- It can also occur in domestic transaction:
o One associated enterprise, entitled to income tax exemptions, is being
used to allocate income away from a company subject to regular income
taxes.
SECTION 1: OBJECTIVE AND SCOPE
These regulations are promulgated to:
a) CIR – authority to associated enterprises involved in controlled transactions
i. Review
ii. Allocate and distribute their income and deductions
iii. Determine the appropriate revenues and taxable income
b) Prescribe guidelines by providing methods of establishing an arm’s length price;
and
c) Require maintenance and safekeeping of the documents to prove standard in
measuring transactions among associated enterprises (arm’s length price)

Apply to:
a) Cross-border transactions between associated enterprises; and
b) Domestic transactions between associated enterprises
SECTION 2: PURPOSE OF THE REGULATIONS
Under the Organization for Economic Cooperation and Development (OECD) Transfer
Pricing Guidelines:
- To provide guidelines in applying the arm’s length principle for cross-border
and domestic transactions between associated enterprises.
SECTION 3: AUTHORITY OF THE COMMISSIONER TO ALLOCATE INCOME AND
DEDUCTIONS
1. Determine is such distribution, apportionment or allocation in necessary in
order to clearly reflect the income of any such organization, trade or
business.
 2. Commissioner is authorized to make transfer pricing adjustments to ensure
that taxpayers clearly reflect income attributable to controlled transactions
and to prevent the avoidance of taxes with respect to such transactions.
SECTION 5. ARM’S LENGTH PRINCIPLE
Arm’s Length Principle
- Most appropriate standard to determine transfer prices of related parties.
- It requires the transaction with a related party to be made under comparable
conditions and circumstances as a transaction with an independent party.
- Tax authorities that adopt the arm’s length principle can make the necessary
adjustments to the taxable profits of the related parties in their jurisdictions
so as to reflect the true value that would otherwise be derived on an arm’s
length basis.
- Based on a comparison of the prices or margins adopted or obtained by related
parties with those adopted or obtained by independent parties engaged in
similar transactions.
Guidance on the Application
Step 1: Conduct a comparability analysis.
Comparability Analysis – an analysis of the similarities and differences in the
conditions and characteristics that are found in the associated enterprise transaction
with those in an independent party transaction.
Step 2: Identify the tested party and the appropriate transfer pricing method.
Step 3: Determine the arm’s length results.
SECTION 6. COMPARABILITY ANALYSIS
For such price or margin comparisons to be meaningful, all economically relevant
characteristics of the situations being compared should be sufficiently similar so that:
(1) None of the differences (if any) between the situations being compared can
materially affect the price or margin being compared, or
(2) Reasonably accurate adjustments can be made to eliminated the effect of any
such differences.
Factors Affecting Comparability
(1) Characteristics of Goods, Services or Intangible Properties
To be examined include, but are not limited to the following:
In the case of transfer of goods – the physical features, the quality and
reliability, and the availability and volume of supply of the goods
In the case of provision of services – the nature and extent of the services; and
 In the case of intangible property – the form of transaction, the type of
intangible, the duration and degree of protection, and the anticipated benefits from
the use of the property
(2) Analysis of Functions, Risks and Assets
It must be emphasized that only functions, risk and assets that are
economically significant in determining the value of transactions or margins of
entities should be identified and compared.
(3) Commercial and Economic Circumstances
In order to make meaningful comparisons of prices or margins between
entities/transactions, the markets and economic conditions in which the entities
operate or where the transactions are undertaken should be comparable.
Should be examined in determining comparability for transfer pricing purposes:
 Government policies and regulations
 Business strategies
SECTION 7. IDENTIFICATION OF THE TESTED PARTY AND THE APPROPRIATE
TRANSFER PRICING METHOD
(a) Determination of the Tested Party
Tested Party – is the entity to which a transfer pricing method can be most
reliably applied to and from which the most reliable comparable can be found.
(b) Selection and application of Transfer Pricing Methodologies (TPM)
The method that provides the most reliable measure of an arm’s length
result shall be used.
1. The respective strengths and weaknesses of each of the transfer
pricing methods;
2. The appropriateness of the method considered in view of the nature
of the controlled transactions, determined in particular through a
functional analysis;
3. The availability of reliable information (in particular on uncontrolled
comparables) in order to apply the selected method and/or other
methods; and
4. The degree of comparability between controlled and uncontrolled
transactions, including the reliability of comparability adjustments
that may be needed to eliminate material differences between them.
The Bureau may use the following approaches to verify whether the
controlled transactions comply with the arm’s length principle:
 1. Extension of the transfer pricing methods. The comparable may be
with enterprises in another industry segment or group of segments;
and
2. Use of a combination or mixture of the transfer pricing methods or
other methods or approaches.
Taxpayers should be able to explain why a specific TPM is selected or
used in recording controlled transactions through proper documentation.
(c) Selection of Profit Level Indicator (PLI)
Profit Level Indicator (PLI)
- Measures the relationship between profit and sales, costs incurred or assets
employed
- Use of an appropriate PLI ensures better accuracy in the determination of the
arm’s length price of a controlled transaction
Factors in selecting:
1. Characterization of the business;
2. Availability of comparable data; and
3. The extent to which the PLI is likely to produce a reliable measure of
arm’s length profit
SECTION 8. DETERMINATION OF THE ARM’S LENGTH RESULTS
The use of ranges to determine an arm’s length range shall be applied,
provided that the comparables are reliable.
1. If the relevant condition of the controlled transaction is within the arm’s
length range, no adjustment should be made.
2. If the relevant condition of the controlled transaction falls outside the
arm’s length range asserted by the Bureau, the taxpayer should present
proof or substantiation that the conditions of the controlled transaction
satisfy the arm’s length principle, and that the result falls within the arm’s
length range.
3. Where the range comprises results of relatively equal and high reliability, it
could be argued that any point in the range satisfies the arm’s length
principle.
4. Where the comparability defects remain, it may be appropriate to use
measures of central tendency to determine this point, in order to minimize
the risk for error due to unknown or unquantifiable remaining comparability
defects.
SECTION 9. COMPARABILITY ADJUSTMENT
Comparability Adjustment
- Are intended to eliminate the effects of differences that may exist between
situations being compared and that which could materially affect the condition
being examined in the methodology
The following adjustments should be avoided as they do not improve
comparability:
(1) Adjustments that are questionable when the basis for comparability
criteria is only broadly satisfied;
(2) Excessive adjustments or adjustments that too greatly affect the
comparable as such indicates that the third party being adjusted is in
actually not sufficiently comparable;
(3) Adjustments on differences that do not materially affect the
comparability;
(4) Highly subjective adjustments, such as on the difference in product
quality
SECTION 10. ARM’S LENGTH PRICING METHODOLOGIES
A. Comparable Uncontrolled Price (CUP) Method
- Evaluates whether the amount charged in a controlled transaction is at arm’s
length by reference to the amount charged in a comparable uncontrolled
transaction in comparable circumstances.
- Entails identification of all differences between the product or service of the
associated enterprise and that of the independent party.
B. Resale Price Methods (RPM)
- Is applied where a product that has been purchased from a related party is
resold to an independent party
- Evaluates whether the amount charged in a controlled transaction is at arm’s
length by reference to the gross profit margin realized in comparable
uncontrolled transactions.
- Most appropriate in a situation where the reseller adds relatively little value to
the properties
- The starting point in RPM is the price (the resale price) at which a product that
has been purchased in a controlled is then resold to an independent third party
(uncontrolled resale).
- Nonetheless, it can be expected that the more comparable the products, the
more likely it is that the RPM will produce better results.
C. Cost Plus Method (CPM)
- Focuses on the gross mar-up obtained by a supplier who transfers property or
provides services to a related purchaser
 - Most useful when semi-finished goods are sold between associated enterprises
or where the controlled transaction involves the provision of services

REVENUE REGULATIONS 19-2020

(Prescribes the use of the new BIR Form No. 1709, replacing Form No. 1702H, Series
of 1992. RR 19-2020)

REVENUE REGULATIONS 21-2020

(Prescribes the policies, procedures and guidelines in the implementation of the
Voluntary Assessment and Payment Program for Taxable Year 2018 under certain
conditions)
SECTION 2. Policy
To limit taxpayer contact considering existing COVID-19 related protocols and
social distancing measures while, at the same time, maximizing revenue collection
with the least administrative costs, the Bureau of Internal Revenue (BIR) is reducing
the number of audit investigations by encouraging an increase in voluntary tax
compliance.
SECTION 3. Coverage
Any person natural or juridical, including estates and trusts, liable to pay
internal revenue taxes for specified periods who due to inadvertence or otherwise
erroneously paid his its internal revenue tax liabilities or failed to file tax returns pay
taxes, may avail of the benefits under these regulations except those falling under
any of the following instances:
a. Those taxpayers who have already been issued a FAN that have become
final and executory on or before the effectivity of these regulations
 b. Persons under investigation as a result of verified information filed by a
Tax Informer with respect to the deficiency taxes that may be due out of
such verified information
c. Those with cases involving tax fraud filed and pending in the Department
of Justice or in the courts; and
d. Those with pending cases involving tax evasion and other criminal
offenses
SECTION 4. Period of Availment
Qualified persons can avail of the benefits of the VAPP until December 31, 2020
SECTION 5. Conditions for the availment requirements and processing of
applications
Mandatory Requirements:
a. Duly accomplished Application form [BIR Form No. 2119 (Annex A)] [original
for the Large Taxpayers Office/Revenue District Officer and duplicate for
the taxpayer]; and
b. Payment Form [BIR Form No. 0622 (Annex B)] with proof of payment
(original for the LT Office/RDO, duplicate for the taxpayer, and triplicate
for the collecting agent).
Additional Requirements:
c. Filed tax returns, proof of payment of taxes paid in 2017 and 2018 and
audited Financial Statements for the covered taxable year for those availing
of the program under Section 9.a:
d.
e.