RR No. 2-2013: Prescribes the transfer pricing guidelines

Summary

RR No. 2-2013 prescribes transfer pricing guidelines for applying the arm’s length principle to cross-border and domestic transactions between associated enterprises, largely based on the OECD Transfer Pricing Guidelines.

Key points

1. Basis and arm’s length principle. Section 50 of the Tax Code lets the Commissioner allocate gross income or deductions between commonly owned or controlled businesses to clearly reflect income. Related-party transactions must be under conditions comparable to those between independent parties.
2. Three-step approach. Step 1 is a comparability analysis covering goods, services or intangibles, functions, risks and assets, and commercial and economic circumstances. Step 2 identifies the tested party and the transfer pricing method, and Step 3 determines the arm’s length results.
3. Methods and ranges. The BIR has no preferred method and uses the one giving the most reliable result. The methods are Comparable Uncontrolled Price, Resale Price, Cost Plus, Profit Split and Transactional Net Margin. A controlled transaction within the arm’s length range is not adjusted.
4. Advance Pricing Arrangements and MAP. An APA, available for cross-border transactions, may be unilateral or bilateral/multilateral, and is not mandatory. A taxpayer without an APA may still invoke the Mutual Agreement Procedure article of the tax treaties, and the BIR will issue separate guidelines on APA and MAP.
5. Documentation. Documents are not filed with the returns but must be kept and submitted when required. They must be contemporaneous, covering items such as organizational structure, controlled transactions, functional analysis and the method chosen.

Who is affected

• Taxpayers with controlled transactions with associated enterprises

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.