Revenue Regulations (RR) No. 2-2013: Transfer Pricing Guidelines

Last January 23, 2013, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 2-2013 providing guidelines to transfer pricing.  These Regulations seek to provide guidelines in applying the arm’s length principle for cross-border and domestic transactions between associated enterprises.  These guidelines are largely based on the arm’s length methodologies as set out under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.


To download and read more of Revenue Regulations No. 2-2013Click Here!

RR No. 2-2013 is applicable to cross-border transactions between associated enterprises and domestic transactions between associated enterprises.


BACKGROUND. — 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.

Transfer pricing is generally defined as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises. Typically, a transfer price occurs between a taxpayer of a country with high income taxes and a related or associated enterprise of a country with low income taxes. In the Philippines, “intra-firm / inter-related” transactions account for a substantial portion of the transfer of goods and services, however, the revenue collection from related-party groups continue to go on a downtrend.
The revenues lost from intra-related transactions can be attributed to the fact that related companies are more interested in their net income as a whole (rather than as individual corporations), as such there is a desire to minimize tax payments by taking advantage of the loopholes in our tax system.

While transfer pricing issue typically occurs in cross-border transactions, it can also occur in domestic transactions. One context where transfer pricing issue occurs domestically is where one associated enterprise, entitled to income tax exemptions, is being used to allocate income away from a company subject to regular income taxes. In the Philippines, there is a domestic transfer pricing issue when income are shifted in favor of a related company with special tax privileges such as Board of investments (BO!) incentives and Phiiippine Economic Zone Authority (PEZA) fiscal incentives or when expenses of a related company with special tax privileges are shifted to a related company subject to regular income taxes or in other circumstances, when income andior expenses are shifted to a related party in order to minimize tax liabilities.

Pursuant to the provision of Section 244 in relation to Section 50 of the National internal Revenue Code of 1997, as amended (“Tax Code”) these regulations are hereby promulgated to:

  1. implement the authority of the Commissioner of internal Revenue (“Commissioner”) to review controlled transactions among associated enterprises and to aiiocate or distribute their income and deductions in order to determine the appropriate revenues and taxable income of the associated enterprises involved in controlled transactions;
  2. prescribe guidelines in determining the appropriate revenues and taxable income of the parties in the controlled transaction by providing for the methods of establishing an arm’s length price and
  3. require the maintenance or safekeeping of the documents necessary for the taxpayer to prove that efforts were exerted to determine the arm’s length price or standard in measuring transactions among associated enterprises.

To download and read more of Revenue Regulations No. 2-2013Click Here!

Disclaimer: Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information and are not substitute for expert advice. Contact for more information and if you want to avail professional services. Find us on Facebook!

Orlando Calundan is a CPA who has exposures in FS audit of entities in various industries such as real estate, food/restaurants, manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.

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