BASIC TRANSFER PRICING

CHAPTER 1
Principles of Transfer Pricing
Instruction: Read conscientiously and
answer briefly to the best of your
knowledge.
1. State the meaning of globalization
and its significance in transfer pricing.
Answer: The Oxford Dictionary
provides that globalization is the
process by which the whole world
becomes a single market which means
that goods and services, capital and
labor are traded on a worldwide basis,
and information and the results of
research flow between countries.
It is significant to transfer pricing
because it creates great opportunities for
companies to enter new markets; such
that, greater access to geographically
dispersed customers, employees and
suppliers are acquired.
2. Name the two (2) common problems
brought about by globalization to both
MNEs and tax authorities.
Answer: The book of Ms. Elsa M.
Caete in Basic Transfer Pricing
provides the two (2) common problems
brought
about
by
globalization.
Different countries having different
domestic tax laws which cause higher
cost of compliance serves as a hindrance
for MNEs. Tax authorities; on the other
hand, faces problems arising from policy
implementation up to the practical level.
Policy problems arise when there
is a need to reconcile the legitimate right
to tax the profits of the taxpayers that
arise within the territory.
Practical problem occur due to
lack of data or difficulties in assessing
the data located outside of taxing
jurisdiction.
3. Enumerate the six (6) eras of the
Philippine economic history.
Answer: These are the six (6) eras of
the Philippine economic history:

1. The era of free trade under

American colonial administration
covering 1909 to 1941;
2. The Japanese occupation in 1942
to 1944;
3. The post-war reconstruction from
1945 to 1949 and the period of
Import and Exchange Controls in
1949 to 1961;
4. The decontrol period in 1961 to
1972;
5. The Martial Law period from 1972
to 1986; and
6. The post-EDSA period of 1986 to
date.
4.
Distinguish
multinational
corporations (MNCs) from transnational
corporations (TNCs).
Answer:
A
multinational
corporation (MNCs) is an enterprise
or entity operating in several countries
but managed from one (home) country
whereas
a
transnational
corporation (TNCs) does not identify
itself with one national home. The latter
locate it selves in many countries by
adopting local cultures.
5. Supply the missing information.
4a. Franchising: grant firms in
foreign countries the right to use its
trademarks, patents, brand names,
etc.;
Branches:
_________________________.
Answer: The multinational enterprise
opens branches in different countries.
These branches work under the
direction and control of head office. The
headquarters frames policies to be
followed by the branches.
4b.
Subsidiaries:
multinational
corporations establish wholly owned
subsidiaries in foreign countries;
Joint Venture: _______________.
Answer: A multinational corporation
establishes a company in foreign
country in partnership with local firms.
The multinational and foreign firm
shares the ownership and control of the
business. Generally, the multinational
provides technology and managerial

skill and the day-to-day management is

left to local partner.
6. Correlate turnkey projects to MNCs.
Answer: Turnkey Projects take
place when an MNC undertakes a
project in a foreign country. The
multinational constructs and operates
the industrial plan by itself. It provides
training to the staff in the operation of
the plant.
7. Explain the principle of transfer
pricing
pursuant
to
Revenue
Regulations No. 2-2013 (RR No. 22013).
Answer: Revenue Regulations No.
2-2013 provides that transfer pricing is
generally defined as the pricing of crossborder, intra-firm transactions between
related parties or associated enterprises.
8. Describe the arms length principle
exemplified on RR No. 2-2013 and/or
the
Organization
for
Economic
Cooperation and Development (OECD)
Model Tax Convention.
Answer: RR No. 2-2013 states that
the application of arms length
principle would, first and foremost,
involve the identification of arms length
principle would, first and foremost,
involve the identification of comparable
situation(s)
or
transaction(s)
undertaken by independent parties
against which the associated enterprise
transaction or margins is to be
benchmarked.
The Organization for Economic
Cooperation and Development
(OECD) Model Tax Convention
provides that where conditions are
made or imposed between two
enterprises in their commercial or
financial relations which differ from
those which would be made between
independent enterprises, then any
profits which would, but for those
conditions, have accrued to one of the
enterprises, but, by reason of those
conditions, have not so accrued, may be
included in the profits of that enterprise
and taxed accordingly.

9. Construct a printed figure illustrating

tax savings through transfer pricing by
shifting of profits from high tax
jurisdiction to low tax jurisdiction or tax
have.
Answer:
Country A
18% Tax Rate

Country B
45% Tax Rate

$100 Bag ---- $450 Bag ---- $750 Bag

Sold to Subsidiary

Sold to Third Party

Gross profit to Corporation:

1. Country A ($450 - $100) is $350.
2. Country B ($750 - $450) is $300.
Tax Payable by the Corporation:
1. Country A ($350 x $18%) is $63.
2. Country B ($300 x $45%) is $135.
10. Devise a game plan to avoid double
taxation using transfer pricing and the
arms length principle. Limit your
answer to four (4) sentences only.
Answer:
CHAPTER 2
Legal Basic of Transfer Pricing
Test I. Statement Analysis
Instruction: Answer capital letters A, if
the first statement (FS) is correct while
the second statement (SS) is incorrect;
B, if the FS is incorrect while the SS is
correct; C, both statements are correct;
and D, if both statements are incorrect.
1. FS: Legal Basis of the Domestic
Transfer Pricing Guidelines of the
Philippines. The statutory basis of
adopting the Transfer Pricing Guidelines
(Revenue Regulations No. 2-2013) is
Section 50 of the National Internal
Revenue Code of 1997, as amended.
SS: Basis for International Transfer
Pricing. The legal bases of transfer
pricing involving two or more different
taxing authorities are Articles 9, 7, and 5

of the Model OECD Convention and

Philippine tax treaty model.
Answer: C
2. FS: Double taxation is good to
taxpayers doing business in several
countries.
SS: International and domestic juridical
double transfer pricing means taxing a
taxpayer income by two or more taxing
authorities.
Answer: D
3. FS: Articles 9, 11, 12 and 26 of the
Philippine Tax Treaty Model have
express provisions about transfer
pricing implementation.
SS: Whereas, Articles 9, 11, 12 and 16
deals with Associated Enterprises,
Interest, Royalties and Exchange of
Information.
Answer: C
4. FS: The transfer pricing guidelines
dated January 23, 2013 provide
guidelines in applying the arms length
principle for cross border and domestic
transaction
between
associated
enterprises or related parties.
SS: The regulation fails to base largely
on the guidelines set by the OECD
Transfer Pricing Guidelines.
Answer: A
5. FS: When invoking the article of tax
treaty for permanent establishment, the
general documentary requirements
provided in the next statement may be
absent for compliance.
SS: The following are the general
documentary requirements required to
be attached when applying for Tax
Treaty Relief Applications (TTRA):
1.
2.
3.
4.

Proof of residency
Articles of Incorporation
Special Power of Attorney
Certification of Business Presence
in the Philippines
5. Certification of No Pending Case

Answer: B
Test II. Essay
Instruction: Read conscientiously and
answer briefly to the best of your
knowledge.
6. Discuss R.A 10021 otherwise known
as Exchange of Information on Tax
Matters Act of 2009.
Answer: R.A 10021 otherwise known
as Exchange of Information on Tax
Matters Act of 2009 mandates exchange
of information between the Bureau of
Internal Revenue and other tax
jurisdictions
pursuant
to
internationally-agreed tax standards in
compliance with existing international
conventions or agreements on tax
matters.
7. Discuss the term fixed place of
business through which the business of
an enterprise is wholly or partly carried
on.
Answer: According to Article 5 of the
OECD Model Tax Convention on
Permanent Establishment, paragraph 1,
the term fixed place of business
includes (1) a place of management; (2)
a branch, (3) an office, (4) a factory, (5)
a workshop, and (60 a mine, an oil or
gas well, a quarry or any other place of
extraction of natural resources.
8. Distinguish Revenue Memorandum
Circular 29-2010 (RMC 29-2010) and
Revenue Memorandum Circular 262008 (RMC 26-2008).
Answer: RMC 29-2010 publish the
full text of Republic Act No. 10021
entitled An Act to Allow the Exchange of
Information by the Bureau of Internal
Revenue on Tax Matters Pursuant to
Internationally-Agreed Tax Standards,
Amending Section 6(F) and 270 of the
National Internal Revenue Code of 1977,
as amended, and For Other Purposes,
whereas, RMC 26-2008 deals with the
Interim Transfer Pricing Guidelines
informing all internal revenue officials,
employees and others concerned that
the BIR is revising the final draft of the
Revenue Regulations on Transfer

Pricing, any issue that may arise, the

BIR, as a matter of policy, subscriber of
the OECD Transfer Pricing Guidelines.
9. RAMO 1-95 refers to the audit
guidelines and procedures on the proper
determination of the full income tax of
the Philippine branches and liaison
offices, MNEs engaged in soliciting
orders, service contracts, trading,
construction and other activities in the
Philippines.
Discuss
the
procedures
solicitation/trading activities.

for

Answer: Pursuant to RAMO 1-95, the

procedures for solicitation/trading
activities are:
1. Obtain a copy of the Worldwide
Financial Statements duly certified
by
an
independent
public
accountant of the country which
issues the financial statements and
authenticated by the Philippine
Embassy or Consulate situated
within the country where the
Home Office of the MNE is
located;
2. Verify correctness of Worldwide
Operating
Income
and
the
Worldwide Sales figures against
the financial statements obtained;
3. Request for a Summary of Sales to
the Philippines duly certified by an
independent public accountant
and
authenticated
by
the
Philippine Embassy or Consulate
situated within the country where
the Home Office of the MNE is
located. The Sales to the
Philippines shall include the
offshore portion of the local
construction
projects
which
includes the supply of machinery
and equipment.
10. Specify the procedures
construction activities.

for

Answer: Pursuant to RAMO 1-95, the

procedures
for
construction
activities are:
1. Review all Contacts and analyze
the nature of the Contracts, the
parties involved, the terms and

2.

3.
4.
5.

conditions, the total contract

price, the payment and other
pertinent information;
Determine method of accounting,
whether completed contract or the
percentage of completion, and
check the correctness of take up in
the books of accounts;
Segregate the income from exempt
transactions from that of taxable
transactions, if applicable;
Determine the total contract price
and composition of the project;
Verify that only supply of
local/civil works (onshore portion)
is included in the computation
referred to in 11 above; be aware of
charging of income and expenses
by mere book entries using the
branch/home office account.
CHAPTER 3
The Arms-Length Principles

Instruction: Read conscientiously and

answer briefly to the best of your
knowledge.
1. Explain the arms length principle.
Answer: The arms length principle is
the internationally accepted principle to
govern the relations between associated
enterprises compared to independent or
unrelated enterprises. The arms length
principle requires that, for tax purposes,
the terms and conditions agreed to
between non-arms length parties in
their commercial or financial relations
be those that one would have expected
had the parties been dealing with each
other at arms length.
2. State the 3-step approach.
Answer:
1. Conduct a comparability analysis;
2. Identify the tested party and the
appropriate
transfer
pricing
method; and
3. Determine the arms length result.
3. Name the factors that determine
comparability.

Answer:
The OECD 2010 Transfer Pricing
Guidelines for Multinational Enterprises
and Administration mandates the
following to be consider as factors
determining comparability:
1. Characteristics of property
services;
2. Functional analysis;
3. Contractual terms;
4. Economic circumstances; and
5. Business strategies.

or

4 and 5. Give equal and unequal

paradigms demonstrating Arms Length
Principle. Use charts.
Answer:
Equal
Transaction 1
Controlled
transaction
between
related parties
(e.g parent and
subsidiary)

Compare

Transaction 2
Uncontrolled
transaction
between
independent
parties.

A
(parent,
manufacturer)
sold
to
B
(subsidiary,
distributor)

Equal

C (independent
manufacturer)
sold
to
D
(independent
distributor)

Pair of shoes
for P200

Pair of shoes
for P700

Adjust + P400

Adjust - P100

Price P600

Price P600

Unequal
Transaction 1
Controlled
Transaction
between
related parties
(e.g parent and
subsidiary).
A
(parent,
manufacturer)
sold
to
B
(subsidiary,
distributor)
Pair of shoes
for P200.00

Compare

Not equal

Transaction 2
Uncontrolled
transaction
between
independent
parties.
C (independent
manufacturer)
sold
to
D
(independent
distributor)
Pair of shoes
for P700.00