Executive Briefing on

1

• Executive Briefing on
• TRANSFER PRICING
• in the Philippines
• Atty. Roberto L. Tan
• KPMG Laya Mananghaya Co.
• E-mail rltan_at_kpmg.com
• Contact No. 885 7000 loc. 348

2
Basic Law on Transfer Pricing Section 50 of the
Tax Code

• Sec. 50. Allocation of income and deductions.
  In the case of two or more organizations, trades
  or businesses (whether or not incorporated and
  whether or not organized in the Philippines)
  owned or controlled directly or indirectly by the
  same interests, the Commissioner is authorized to
  distribute, apportion or allocate gross income or
  deductions between or among such organization,
  trade or business, if he determines that such
  distribution, apportionment or allocation is
  necessary in order to prevent evasion of taxes or
  clearly to reflect the income of any such
  organization, trade or business. (Emphasis ours.)

3
Rules Regulations Related to Section 50 of the
Tax Code

• Revenue Audit Memorandum Order No. (RAMO) 1-95,
  
• 19 July 1999
• RAMO 1-95 amended an earlier issuance, RAMO
  1-86, both of which addressed issues on
  (transfer) pricing between Philippine
  branches/Liaison Offices of Multi-national
  Enterprises (MNE) and their corresponding Head
  Office. RAMO 1-95 provided a modified advance
  pricing agreement whereby the income to be
  allocated to the Philippine branch of an MNE will
  be computed based on a pre-determined formula
  agreed with the Bureau of Internal Revenue
  (BIR) and the Philippine branches/liaison
  offices of the MNEs.

4
Rules Regulations Related to Section 50 of the
Tax Code

• Revenue Memorandum Order No. (RMO) 61-98
• Revenue Audit Memorandum Order No. (RAMO) 1-98,
  
• 07 July1998
• The RMO and RAMO 1-98 provided guidelines in the
  joint and coordinated examination of interrelated
  taxpayers for taxable year 1997 and prior years.
  It also provided certain rules for the
  determination of the true taxable income of
  controlled taxpayers.
• Revenue Memorandum Order No. (RMO) 63-99,
• 19 July 1999
• The RMO adopted certain arms length standards
  on inter-company loans, advances, and
  indebtedness arising from business operations.

5
Rules Regulations Related to Section 50 of the
Tax Code

• DRAFT Revenue Regulations (Rev. Regs.)
• as of 24 February 2006
• The BIR is in the process of providing revenue
  regulations to implement Section 50 of the Tax
  Code on allocation of income and deductions
  between inter-related organizations, trades or
  business.

6
CONTROLLED Defined
7
CONTROLLED TAXPAYER Defined
8
TRUE TAXABLE INCOME Defined
9
Arms Length Pricing Methologies
10
Comparable Uncontrolled Price Method (CUP)

• The CUP method evaluates the arms length price
  by reference to the amount charged in a
  comparable uncontrolled transaction. In
  evaluating comparability, the following factors
  are to be considered
• Trademark
• Product Differences
• Geographical Differences
• Extraordinary Market Conditions
• Terms and Volume of the Sales

11
Resale Price Method (RPM)

• Evaluates arms length by reference to the gross
  profit margin realized in comparable
  transactions. Usually employed in cases where
  distributors or resellers purchase a large
  portion or their entire inventory from a related
  manufacturer or producer.

12
Cost Plus Method (CPM)

• Evaluates the arms length by adding the
  appropriate gross profit to the controlled
  taxpayers cost of producing the property
  involved in the controlled transaction and then
  impose the applicable profit rate. Begins with
  the costs incurred by the supplier of property
  (or services) in a controlled transaction for
  property transferred or services provided to a
  related purchaser.

13
Profit Split Method

• Done by dividing the profit between the members
  involved in the transaction taking into
  consideration the extent of their participation
  in the realization of the transaction.Seeks to
  eliminate the effect on profits of special
  conditions made or imposed in a controlled
  transaction by determining the division of
  profits that independent enterprises would have
  expected to realize from engaging in the
  transactions.

14
Loans Advances, and Financing Arrangement
15
Performance of ServicesEx. Marketing,
Managerial, Administrative, Technical or other
services.
16
Sharing of CostsEx. RD, office and factory
spaces, legal and consultancy services, etc.
17
Other Features of the DRAFT Rev. Regs.

• 1. Draft Rev. Regs. introduces Advance Pricing
  Arrangements (APA) in order to avoid and
  resolve transfer pricing disputes
• to be formally initiated by the taxpayer
• may cover all transfer pricing issues of the
  taxpayer, or limited to specified affiliates and
  inter-company transaction.
• 2. Documentation The taxpayer has the obligation
  of prove and provide documentation to establish
  whether the transfer price is appropriate and in
  accordance with the arms-length principle.

18

• Commissioner v. Cyanamid Philippines, Inc.,
• C.A. G.R. SP No. 39933 dated 04 February 1999
  _
• The Court of Appeals ruled The burden of proof
  rests upon the taxpayer to show that the
  determination of arms length pricing (by the
  BIR) is arbitrary, capricious and unreasonable,
  or an abuse of authority in cases where a
  distribution, apportionment or allocation of
  income or deductions has been made by the taxing
  authorities. (Insertion ours.)
• The BIR issued tax assessment allegedly because
  Cyanamid overstated its cost due to transfer
  pricing of products which were purchased from the
  parent company. The courts CANCELLED the income
  tax assessment because it was proven that
  Cyanamids products possess different
  characteristics from that of Pfizers products,
  which the BIR used as comparables.

19

• Filinvest Development Corporation vs.
  Commissioner of Internal Revenue, CA-G.R. SP No.
  72992, 16 December 2003
• The BIR issued tax assessment based on IMPUTED
  interest income on interest-free advances between
  related parties. The Court of Appeals CANCELLED
  the tax assessment.
• The interest-free cash advances by affiliates for
  financial assistance in order to sustain
  operational and capital expenditures were treated
  as capital contributions and NOT loans hence
  (now) Section 50 is not applicable. Also, since
  there was no evidence that the income of the
  taxpayer had been arbitrarily shifted to evade or
  avoid payment of correct taxes, then Section 50
  is not applicable. The non-imposition of interest
  by the taxpayer on advances to its affiliates is
  NOT an indica of fraud.

20

• Thank You.