I.

INTRODUCTION

The Bureau of Internal Revenue has continued to set its eye on transfer pricing and
has highlighted the same as a key focus area for tax collection.

Thus, on 23 January 2013, the Bureau of Internal Revenue released Revenue

Regulations (RR) No. 2-2013. This new regulations implement Section 50 of the
Philippine Tax Code, which authorizes the Commissioner of Internal Revenue to
distribute, apportion or allocate gross income or deductions between or among
controlled organizations, trade or business, if such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to reflect the
income of such organization, trade or business.1

Therefore, this study aims to briefly and comprehensively discuss how to determine
transfer pricing by applying the Arm-Length Methodology in accordance with the
Guidelines setforth in the aforesaid Regulations.

II. DEFINITION OF IMPORTANT TERMS

The following terms are the key words to remember for further understanding of this
study, defined as follows:

1. Transfer Pricing - In taxation and accounting, transfer pricing refers to the rules
and methods for pricing transactions between enterprises under common ownership
or control.2

2. Arm-Length Principle - This is an internationally accepted standard for

determining the appropriate transfer prices of controlled transactions of associated
enterprises. The principle requires that a transaction with a related party should be
made under comparable conditions and circumstances as a transaction with an
independent party. Essentially, a taxpayer’s income from a related party transaction
must be equivalent to what would be earned by a similarly situated taxpayer from a
transaction with a third party.

In the application of the arm’s length principle, RR 2-2013 provides for a three-step
approach, namely:

1. Conduct a comparability analysis;

2. Identify the tested party and the appropriate transfer pricing method; and
3. Determine the arm’s length result.3

3. Cost Plus Method - this is one of the five methods in determining the arm-length
price. The cost plus method is typically used by comparing gross profits to cost of
sales.4

1
http://www.ey.com/Publication/vwLUAssets/Alert:_Philippines_issues_Transfer_Pricing_Regulations/$FILE/20
13G_CM3170_TP_Philippines%20issues%20TP%20Regulations.pdf
2
https://en.wikipedia.org/wiki/Transfer_pricing#cite_note-:2-1
3
http://www.sgv.ph/the-new-philippine-transfer-pricing-regulations-by-romulo-s-danao-jr-first-of-two-parts-feb
ruary-42013/
4
http://www.transferpricing.wiki/general-transfer-pricing-information/transfer-pricing-methods/
III. SCOPE

For thorough analysis of Transfer Pricing, the researchers selected the following
companies as the sample of data analysis:

1. Aeon Credit Systems Philippines

2. Aeon Credit Service Phils., Inc.
3. Accenture, Inc.
4. BCS Technology
5. Fujitsu Phils
6. Hewlett Packard

Moreover, the researchers collected the financial data of the aforesaid companies for
the years 2012-2015 from the audited Financial Statements submitted to the
Securities and Exchange Commission (SEC). The data used and collected are limited
to the finding of (1) Gross income, (2) Cost of Sales, (3) Net Income, (4) Gross Profit
Ratio and (5) Net Profit Ratio.

IV. SUMMARY OF RESULTS/DATA

A. AEON CREDIT SYSTEMS PHILIPPINES

AEON CREDIT SERVICE SYSTEM

2012 2013 2014 2015

GROSS PROFIT RATIO 26% 25% 18% -18%

NET PROFIT RATIO 23% 27% 20% 55%

B. AEON CREDIT SERVICE PHILIPPINES

AEON CREDIT SERVICE PHILIPPINES
2012* 2013 2014 2015

GROSS PROFIT RATIO 105% 5% 35%

NET PROFIT RATIO -180% -89% -23%

*Note: Aeon Credit Service Philippines was incorporated only on February 2013

C. ACCENTURE, INC.
ACCENTURE
2012 2013 2014 2015

GROSS PROFIT RATIO 12% 14% 13% 14%

NET PROFIT RATIO 11% 15% 12% 13%

D. BCS TECHNOLOGY
BCS. PTY. LTD
2012 2013 2014 2015

GROSS PROFIT RATIO -7% 35% 31% 18%

NET PROFIT RATIO -43% 5% 2% 0%

E. FUJITSU PHILIPPINES
FUJITSU
2012 2013 2014 2015

GROSS PROFIT RATIO 16% 16% 27% 26%

NET PROFIT RATIO 3% 3% 10% 5%

F. HEWLETT PACKARD
HAWLETT PACKARD
2012 2013 2014 2015

GROSS PROFIT RATIO 11% 9% 11% 13%

NET PROFIT RATIO 3% -1% 0%* -2%

*Note: 2014 NPR is -0.12%

See attached Comprehensive Statements of Income for the aforesaid companies ---
Annex “A” for Aeon Credit Service Phils., Inc.; Annex “B” for Aeon Credit
Systems Philippines; “Annex “C” for Accenture, Inc.; Annex “D” for BCS
Technology ; Annex “E” for Fujitsu Phils; Annex “F” for Hewlett Packard

V. DATA ANALYSIS

VI. CONCLUSION