![]() In conducting a TP analysis, consistency must be established between the material terms and conditions as stated in contracts or agreements supporting the RPTs with the facts and conditions as per the actual conduct of the transaction by the contracting parties. Just like how this concept applies to accounting standards, TP also gives more importance on the substance or the actual nature of an RPT over any documentation that otherwise provides for its supposed characteristics. While the BIR does not have a specific preference for any one of these methods, the regulations require that the TPM that produces the most reliable results should be used depending on the available data and present circumstances. These are the Comparable Uncontrolled Price (CUP) Method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), and the Transactional Net Margin Method (TNMM). There are five (5) commonly used transfer pricing methods (TPMs) in determining the ALP of the RPTs. TP schemes are also present in intra-firm or domestic transactions with the aim to maximize income tax incentives or tax assets of a related entity through RPTs. In a global scale, TP has led to harmful tax practices which have resulted to tax revenue losses of governments around the world. Tax authorities around the world are allocating enormous resources towards TP enforcement because they suspect that companies use TP to shift profits to low-tax jurisdictions by failing to charge appropriate prices for intercompany transactions. However, due to global related party transactions becoming more and more complex over the years, transfer pricing has become subject to abuse by many entities with the intent of avoiding or minimizing taxes. Transfer pricing, per se, is not illegal nor is it discouraged. Hence, mere reimbursements at cost or without mark-up, or not charging any amount at all for these intra-group services, do not support the ALP. Intra-group services require an arm’s length service fee to comply with the ALP. Some examples are services related to management, technical, purchasing, marketing, administration, distribution, and routine support services (e.g., accounting and auditing, accounts receivable and accounts payable processing, IT support, payroll and employee benefits support, general administration, legal services, staffing and recruitment, and training and employee development). RPTs also include “intra-group services” or those that are rendered by one party within the group which provide benefits for one or more other members of that same group. There is a wide variety of RPTs which include, but are not limited to, purchases or sales of goods, purchases or sales of property and other assets, rendering or receiving of services, leases, royalties, trademark, license, provision of guarantees or collateral, and loans. ![]() Simply stated, the material contractual terms and conditions, including the price charged, that a particular entity would agree to transact with a related party, shall not differ significantly if transacted with an independent third party. ![]() The ALP states that transactions among associated enterprises should be made under comparable conditions and circumstances as transactions with an independent party. TP issues occur when transactions between two or more related entities, especially those located under different taxing jurisdictions, with different income tax rates, are entered into in a manner that is not conducted within ALP, with the desire to minimize tax payments while maintaining the same level of group profits. Concept of transfer pricing and the arm’s length principle (ALP) Summarized below are the salient points discussed in the webinar.ġ. Last January 27, 2022, P&A Grant Thornton held a free webinar on TP concepts and documentation requirements. While it is normal to feel anxious about matters that involve uncertainties and the great unknown, it helps to be equipped with at least a bit of knowledge about what to expect. ![]() Since then, a lot of business entities have been anticipating how the tax authorities will be conducting audit investigations on RPTs, and whether they will be among the first ones to get to experience the TP audit. ![]() It’s been almost two years since the Bureau of Internal Revenue (BIR) released several issuances involving updated reporting requirements for related party transactions (RPTs) and compliance with transfer pricing (TP) regulations. ![]()
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