Chapter 13 Possible Industry Issues in Transfer Pricing
Transcript of Chapter 13 Possible Industry Issues in Transfer Pricing
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
1/104
Chapter 13 Possible Industry Issues in Transfer
Pricing
13.1. Agriculture, Forestry and Fishing
13.2. Mining and uarrying
13.3. Manufacturing
13.!. "lectricity, gas, stea# and air conditioning
supply
13.$. %ater supply, se&erage, &aste #anage#ent
and re#ediation acti'ities
13.(. Construction
13.). %holesale and retail trade* repair of #otor
'ehicles and #otorcycles
13.+. Transportation and storage
13.. Acco##odation and Food -er'ice Acti'ities
13.1. Infor#ation and Co##unication
13.11. Financial and Insurance Acti'ities
13.12. /eal "state Acti'ities
13.13. Professional, -cientific and Technical
Acti'ities
13.1!. Ad#inistrati'e and -upport -er'ice
Acti'ities
13.1$. "ducation13.1( 0u#an 0ealth and -ocial %or Acti'ities
13.1). Arts, "ntertain#ent and /ecreation
1
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
2/104
13.1+. on-toc onProfit 4rgani5ation and
Cooperati'e
13.1. P"6A /egistered "nterprises
7earning 4b8ecti'es9
Describe the economic activities of entities with
different industry classification
Know the possible transfer pricing issues in the
industry
Learn the different transfer pricing methods which
can be used in the industry
transfer pricing analysis
Know the sources of comparables for each industry
Introduction
Transfer pricing study deals with economicconditions as required in comparability
analysis. In the study of economics, simultaneous
study of all elements is not always possible.
Classification of elements according to particular
characteristics is important for purposes of
analysis.The hilippines uses the !tandard Industrial Code
issued by the "ational !tatistical
2
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
3/104
Coordination #oard $"C!#% to be the standard
classification of productive economic activities in
the country. Industry is defined by "C!# as the set
of all production units engaged primarily in
the same or similar &inds of productive economic
activity. Industries are classified according to
the economic activity they carry out.
The hilippine !tandard Industrial Classification
$!IC% is intended to be a standard
classification of productive economic activities in
the hilippines. The purpose of which is to
provide a set of activity categories that can be used
for the collection and presentation of
statistics according to such activities. 'ntities are
classified according to the economic activity
they carry out.In determining the groups or classes of industrial
activities, homogeneity was considered
as a primary factor. To account for homogeneity, the
ma(or aspects of the activities considered
were)
$a% Characteristics of the final goods and servicesproduced*
$b% +ses to which the goods and services were put*
and
3
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
4/104
$c% Inputs, the process and the technology of
production.
nother ma(or consideration in delineating the
groups or classes was the relative
importance of the activities in the economy. In
general, economic activities-industries with
significant contributions to the economy are given
separate codes and-or elevated to higher level
of classification. Three $% factors were considered
in selecting the industries to be elevated or
downgraded to another level of classification,
namely)
$a% /ighest value added*
$b% '0port winning capability* and
$c% "umber of establishments engaged in an
activity.In applying the nature of the goods and services
produced as a criterion in classifying
industries economic activities, account was ta&en of
the physical composition and stage of
fabrication of the items and the needs served by
them. The nature of goods and servicesproduced provided the basis for grouping producing
units according to similarities in, and lin&s
4
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
5/104
between, the raw materials consumed, and sources
of demand and mar&ets for the items
produced. The criterion relating to the economic
agents, $e.g., producers, financial institutions,
households, etc.% and the purpose to which the goods
and services are disposed of $e.g.
intermediate consumption, capital formation, final
consumption and the li&e% reinforce the first
criterion regarding the stage of fabrication of, and
the needs served by these items. This second
criterion enhances the value of the !IC in
distinguishing producing units according to sources
of demand and mar&ets for their output and in
tracing the ties among producing units, and
between them and the rest of economy. The third
criterion relating to the process, technologyand organi1ation of production reinforces the
consideration for grouping producing units
according to degrees of similarity in cost2structure,
relative magnitude of fi0ed capital and labor
employed, and relative productivity and scale of
operations. $!ource) 3445 hilippine !tandardIndustrial Classification, "ational !tatistical
Coordination #oard%.
5
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
6/104
13.1. Agriculture, Forestry and Fishing
13.1.1. "cono#ic Acti'ities
The economic activities of establishments engage in
agriculture includes the e0ploitation
of vegetal and animal natural resources, comprising
the activities of growing crops, raising and
breeding of animals, harvesting of timber and other
plants, animal or animal products from a
farm or their natural habitats.
Crop and animal production, hunting and related
service activities involves the
production of food and non2food crops) livestoc&
and poultry production and animal products)
hunting and trapping of animals and related support
activities. This includes production for the
mar&et or for own subsistence use* organically andgenetically modified crops and livestoc&.
The hilippines have banana and pineapple
plantation in 6indanao which are produced
in large quantities for e0port. The 7isayan region is
noted for the production of sugarcane,
palay, coffee, root crops, livestoc& and poultry.Lu1on is noted for its rice, vegetables, coconut
and other economic products.
6
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
7/104
13.1.2. Possible Transfer Pricing Issues
Transfer pricing issues arise when the pricing of
goods and services between related
entities is not comparable to the price of the same
goods and services in comparable situation and
condition between independent enterprises as
e0plained in Chapter of this boo&.
ossible transfer pricing issues in agriculture are)
8verlapping crop year wherein the e0penses of
one crop year can be claimed again for
the ne0t crop year
8wnership of by2product li&e molasses is assigned
to cooperative en(oying ta0
e0emptions when the real owner of which is the
individual farmer 9ecognition and measurement of income and
e0penses are not consistent with the
generally accepted accounting standards and lac&
documentary evidence
Difficulties in maintaining inventory of biological
assets as such are sub(ect to mortality ccounting of agricultural products are difficult
due to ris& of loss cause by robbery and
theft during the harvest
7
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
8/104
9ecording of income is left to the discretion of the
owner due to insufficient documents
to verify the actual production
8wnership of operating assets of land and
machineries belong to related entities and the
ta0payer is charged with a very e0pensive rental
charges
Transport equipments used to deliver the products
are owned by another related entitiesand a very high delivery charges to the ta0payer
Claim of depreciation e0pense is overstated
especially in cases where the owner of the
operating assets are other related entities
:ote9 Possible transfer pricing issues discussedin this chapter are li#ited. 4ther issues
#ay be disco'ered during the actual audit.;
13.1.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
9/104
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
10/104
Comparable +ncontrolled rice $C+% 6ethod in
case of product sales
9esale rice 6ethod $96% in case of distributorof agricultural products
Cost lus 6ethod $C6% in case of indirect labor
and service providers or subcontractors
of agricultural farms
Transactional "et 6argin 6ethod $T"66% for
growers of agricultural productsthat require speciali1ed &nowledge and techniques
rofit !plit 6ethod $!6% for agricultural (oint
ventures where both parties
contributed tangible and intangible assets
13.2. Mining and uarrying13.2.1. "cono#ic Acti'ities
6ining and quarrying includes the e0traction of
minerals occurring naturally as
solids $coal and ores%, liquids $petroleum% or gas
$natural gas%. '0traction can be achieved by
different methods such as underground or surfacemining, well operation, seabed mining, etc.
This section also includes supplementary activities
aimed at preparing the crude materials for
10
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
11/104
mar&eting, for e0ample, crushing and grinding,
cleaning, drying, sorting, concentrating ores,
liquefaction of natural gas and agglomeration of
solid fuels.
6ining of coal and lignite includes the e0traction of
solid mineral fuels through
underground or open2cast mining with operations
li&e grading, cleaning, compressing and other
steps necessary for transportation leading to a
mar&etable product.
'0traction of crude petroleum and natural gas
includes the production of crude
petroleum, the mining and e0traction of oil from oil
shale and oil sands, and the production of
natural gas and recovery of hydrocarbon liquids. It
also includes the activities of operatingand-or developing oil and gas field properties such
as drilling, completing and equipping wells,
operating separators, emulsion brea&ers, desilting
equipment and field gathering lines for crude
petroleum and all other activities in the preparation
of oil and gas up to the point of shipmentfrom the producing property.
6ining of metal ores includes mining for metallic
minerals $ores%, performed through
11
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
12/104
underground or open2cast e0traction seabed mining,
etc. lso included are ore dressing and
beneficiating operations such as crushing, grinding,
washing, drying, sintering, calcining or
leaching ore, gravity separation or flotation
operations.
8ther mining and quarrying includes e0traction from
a mine or quarry, but also dredging
of alluvial deposits, roc& crushing and the use of salt
marshes. The products are used most
notably in construction $e.g. sands, stones, etc.%
manufacture of materials $e.g. clay, gypsum,
calcium, etc.%, manufacture of chemicals, etc.
6ining support service activities includes
speciali1ed support services incidental
to mining provided on a fee or contract basis. Itincludes e0ploration services through traditional
prospecting methods such as ta&ing core samples
and ma&ing geological observations as well as
drilling, test2drilling or re2drilling for oil wells,
metallic and non2metallic minerals. 8ther typical
services cover building oil and gas well foundations,cementing oil and gas well casings,
cleaning, boiling and swabbing oil and gas wells,
draining and pumping mines, overburden
12
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
13/104
removal services at mines, etc. $!ource) 3445
hilippine !tandard Industrial Classification,
"ational !tatistical Coordination #oard%.
13.2.2. Possible Transfer Pricing Issues
ccounting treatment of accounts li&e recognition
of sales and valuation of inventories.
The International ;inancial 9eporting !tandards
$I;9!% requires recognition and
measurement standards that should be followed. If
domestic ta0 legislation requires a
different treatment, reconciliation should be
recorded in the boo&s and disclosed in the
financial reports.
6ining and quarrying industries has intensive
capital requirements. Corporate financing
is a scheme used to infuse capital to the pro(ect. This
can be done through creation of a
subsidiary company through which all financing
needs of the mining and quarrying
pro(ects are handled. /igher financing charges are
collected from the pro(ect thereby
reducing the income sub(ect to ta0.
6ining and quarrying company often show a small
capital in its balance sheet especially
13
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
14/104
in the !toc&holders 'quity ccount. Thin
capitalisation is a scheme used wherein little
capital is infused to the company but interest bearing
liabilities are simultaneously incurred creating a
huge interest e0pense leaving the company with no
ta0able income.
>or&ing capital requirements are provided by
related companies. Loans are often
guaranteed by the parent company charging a
guarantee fees.
Interest free loans are granted to related parties
through transfer of funds or advances
depriving the mining and quarrying company of the
income for the cost of money granted
as loan. Terms of trade are confined to only one and the
same supplier and customer which is the
parent company. In this case the company is not
doing a business of its own but merely
providing services to the parent company.
arental guarantees have a cost to the company bypaying huge amount of guarantee fee
computed based on the loanable amount.
14
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
15/104
Ta0 effective asset financing are used to acquire
operating assets through loans with high
amount of finance charges.
Conduit financing arrangements where one person
$the financing entity% advance money
or property, or grant rights to use property to another
person $the financed entity% who
receives money or other property or rights to use
property. The third entity, anintermediate entity, lin&s the financing and the
financed entity for a fee. #ac&2to2bac&
financing scheme is involved but for transfer pricing
purposes one of the entities can be
disregarded for ta0 purposes.
9eceipt and disbursement of cash are carriedthrough financial engineering. 8ne of the
strategies is done where the flow of cash as it is
collected after sales* go directly to the
parent company or to other subsidiary without
depositing in the account of the entity
ma&ing the actual sales. #an& reconciliationstatements of the subsidiary will not show
any cash balances related to the sales account.
;unctional currency used is different from the
currency of the domestic country where
15
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
16/104
the subsidiary operates allowing claims for foreign
e0change losses to decrease income
sub(ect to ta0.
Commodity price fluctuations of mining and
quarrying products are constant because of
the demands in the mar&et. ?ain or loss declared by
an entity must be verified for
possible under or over declaration to understate
ta0able income.
The use of intangibles, especially &now2how, in
the operation of mining and quarrying
entities is recogni1ed &nowing the high2ris&
activities of the entities. #ut high ris&s
carries with it high rewards. Intangibles used in the
operation is owned by the parent orother related entities whose benefits for high rewards
also flow to that entities leaving
behind the mining and quarrying company with no
income.
Intra2?roup !ervices incurred by the mining and
quarrying company should bescrutini1ed if the services are actually rendered as
needed, with arm:s length charges or
consideration properly accounted.
16
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
17/104
6ar&eting arrangements are a scheme when the
owner of the inventory produced by
mining and quarrying company is transferred to a
mar&eting hub at a very low price or
consideration ma&ing the company operation not
profitable. #ut the mar&eting hub
company ma&es a lot of profit but pay little ta0es
because it is situated in a ta0 haven.
Corporate overheads are charged to the company
but actually incurred by another related
company.
urposely, a subsidiary company is created to
supply the plant and equipment of the
mining and quarrying company to control and
determine the price of the equipments. Itis usually overstated so that a bigger amount of
depreciation can be claimed.
Cash collected by the group of related entities are
remitted to the Central Treasury,
usually in the parent home country, charging
centralised treasury services where all of theassociated enterprises or subsidiary entities remit
their cash collection and a small portion
of cash is released bac& to the subsidiary entity for
use in its operation.
17
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
18/104
Delivery of inventories from mining and quarrying
are done through shipping services
provided by a related entity that charges the cost of
shipping and delivery services much
higher than what is prevailing in the mar&et.
13.2.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
19/104
comparables can be internal or e0ternal. Internal
comparables can be derived from the dealings
of the company with other related entities or its
associated enterprises. '0ternal comparables can
be derived from the industry data reported by
regulatory agencies, published articles, databases
and other sources.
13.2.$. -uggested Transfer Pricing Methods
ll the five $@% transfer pricing methods
recommended by the 8'CD 34A4 Transfer
ricing ?uidelines for 6ultinational 'nterprises and
Ta0 dministrations can be used because of
the many transfer pricing issues involved.
A% Comparable +ncontrolled rice $C+% 6ethod
for comparing the price of the miningand quarrying products with the price in the open
mar&et*
3% 9esale rice 6ethod $96% for mar&eting goods
or services purchased from other
entities
% Cost lus 6ethod $C6% for the charging ofservices to other related entity or the
charges of services received from other related
entity.
19
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
20/104
B% Transactional "et 6argin 6ethod $T"66% for
the determination of transfer price for
the services or goods using intangibles, in this case
the &now2how.
@% rofit !plit 6ethod $!6% for highly integrated
services performed by the parent and
subsidiary from the operation of mining and
quarrying to the reali1ation of cash sales
of the products treated as one complete transaction
and not as chopped or
incomplete transactions as declared for ta0
purposes.
13.3. Manufacturing
13.3.1. "cono#ic Acti'ities
6anufacturing includes the physical or chemicaltransformation of materials, substances,
or components into new products. The raw materials
are products of agriculture, forestry,
fishing, mining or quarrying as well as products of
other manufacturing activities. !ubstantial
alteration, renovation or reconstruction of goods isgenerally considered as manufacturing.
6anufacturing units are described as plants,
factories or mills and characteristically use
20
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
21/104
power2driven machines and materials2handling
equipment. +nits that transform materials into
new products by hand, in the wor&er:s home, or sell
products made on the same premises from
which they are sold are also included here.
6anufacturing units may process materials or may
contract with other units to process their materials
for them. #oth types of units are included in
manufacturing.
6anufacture of food products includes processing of
the product of agriculture, forestry
and fishing into human or animal foods, and
includes intermediate products and may be of
greater or lesser value. This division is organi1ed by
activities dealing with different &ind of
food products. roduction can be carried out for ownaccount or by third party. !ome activities
are considered manufacturing even though there is
retail sale of the products in the producer:s
own shop. /owever, where the processing is
minimal and does not lead to a real transformation,
the unit is classified to >holesale and retail trade.6anufacturing of beverages includes the
manufacture of beverages, such as nonalcoholic
21
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
22/104
beverages and mineral water, manufacture of
alcoholic beverages mainly through
fermentation, beer and wine, and the manufacture of
distilled alcoholic beverages.
The division e0cludes the production of fruit and
vegetable (uices, mil&2based drin&s, and
the manufacture of coffee, tea and mate products.
6anufacture of tobacco products and products of
tobacco substitute li&e cigarettes,
cigars, pipe tobacco, cigarette tobacco, chewing
tobacco.
6anufacture of te0tiles includes preparation and
spinning of te0tile fibers, weaving and
finishing of te0tiles and wearing apparel,
manufacture of made2up te0tile articles, e0cept
apparel$e.g. household linen, blan&ets, rugs, cordage, etc.%.
!pinning, weaving and finishing of te0tiles
includes preparatory operations, spinning, weaving
and finishing of te0tiles and the weaving of
te0tiles. This can be done from varying raw
materials, such as sil&, wool, other animal,vegetable or manmade fibers, paper or glass, etc.
lso included is the finishing of te0tiles and
22
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
23/104
wearing apparel such as bleaching, dyeing, and
similar activities.
6anufacture of wearing apparel includes alltailoring $ready2to2wear or made2tomeasure%,
in all materials $e.g. leather, fabric, &nitted and
crocheted fabrics, etc.% of all items of
clothing $e.g. outerwear, underwear for men, women
or children* wor&, city or casual clothing,
etc.% and accessories. There is no distinction madebetween modern and traditional clothing.
6anufacture of leather and related products includes
the transformation of hides into
leather by tanning or curing and fabricating the
leather into products for final consumption. It
also includes the manufacture of similar productsfrom other materials $imitation leathers or
leather substitutes% such as rubber footwear, te0tile
luggage, etc. The products made from
leather substitutes are included here, since they are
made and are often produced in the same
unit.6anufacture of wood and products of wood and
cor&, e0cept furniture* manufacture of
23
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
24/104
articles of bamboo, cane, rattan and the li&e*
manufacture of articles of straw and plaiting
materials includes the manufacture of wood products
mostly used for construction and includes
various processes from sawing, to shaping and
assembling of wood products, and assembling
into finished products, such as wood containers.
6anufacture of paper and paper products includes
the manufacture of pulp, paper and
converted paper products. The manufacture of these
products is grouped together because they
constitute a series of vertically connected processes.
rinting and reproduction of recorded media
includes printing of products such as
newspapers, boo&s, periodicals, business forms,
greeting cards, and other materials andassociated support activities such as boo&binding,
plate2ma&ing services, and data imaging.
6anufacture of co&e and refined petroleum products
includes the transformation of crude
petroleum and coal into usable products. The
dominant process is petroleum refining whichinvolves the separation of crude petroleum into
component products through such techniques as
crac&ing and distillation.
24
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
25/104
6anufacture of chemicals and chemical products
includes the transformation of organic
and inorganic raw materials by a chemical process
and the formation of products. It
distinguishes the production of basic chemicals that
constitute the first industry group from the
production of intermediate and end products
produced by further processing of basic chemicals
that ma&e up the remaining industry classes.
6anufacture of basic pharmaceutical products and
pharmaceutical preparations includes
the manufacture of medicinal chemical and botanical
products.
6anufacture of other non2metallic mineral products
includes manufacturing activities
related to a single substance of mineral origin. Thisdivision includes the manufacture of glass
and glass products $e.g. flat glass, hollow glass,
fibres, technical glassware, etc.%, ceramic
products, tiles and ba&ed clay products, and cement
and plaster from raw materials to finished
articles. The manufacture of shaped and finishedstone and other mineral products is also
included.
25
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
26/104
6anufacture of basic metals includes activities of
smelting and-or refining ferrous and
non2ferrous metals from ore, pig or scrap, using
electrometallurgic and other process metallurgic
techniques. It includes manufacture of metal alloys
and super2alloys by introducing other
chemical elements to pure metals. The output of
smelting and refining, usually in ingot form, is
used in rolling, drawing and e0trunding operations to
ma&e products, such as plate, sheet, strip,
bars, rods, wire, tubes, pipes and hollow profiles,
and in molten form to ma&e castings and other
basic metal products.
6anufacture of fabricated metal products, e0cept
machinery and equipment includes the
manufacture of pure metal products $such as parts,containers and structures%, usually with a
static and immovable function.
6anufacture of electrical equipment includes the
manufacture of products that generate,
distribute and use electrical power, electrical
lighting, signalling equipment and electrichousehold appliances.
6anufacture of machinery and equipment that act
independently on materials either
26
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
27/104
mechanically or thermally or perform operation on
materials $such as handling, spraying,
weighting or pac&ing%, including their mechanical
components that produce and apply force, and
any specially manufactured primary parts. This
category includes fi0ed and mobile or hand2held
devices, regardless of whether they are designed for
industrial building and civil engineering,
agricultural or home use. The manufacture of special
equipment for passenger or freight
transport within demarcated premises also belongs
within this division. $!ource) 3445 hilippine
!tandard Industrial Classification, "ational
!tatistical Coordination #oard%.
13.3.2. Possible Transfer Pricing Issues
7aluation of inventory should be at cost or net
reali1able value and shall be determined
using the ;irst2In2;irst28ut 6ethod. Cost of
inventory purchased from a related party
may not be the real price of inventory in the open
mar&et but a dictated price influenced
by the control of the parent over the subsidiary or an
imposed price for the inventory*
27
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
28/104
8wnership of raw materials shall belong to the
manufacturing company because it is an
essential ingredient in manufacturing a product. If
the owner of the raw materials used in
manufacturing processes is not the manufacturer, the
economic activity is not really
manufacturing but tolling*
Treatment of obsolete inventory should pass a
certain criteria. Inventory written off asdeduction in the balance sheet inventory account
should have proper documentation.
Inventory loss due to fortuitous event should be
reported to regulatory agencies and
properly valued*
ermit to manufacture food and medicinalproducts should be approved by the ;ood and
Drug dministration, Local ?overnment +nits
$L?+s%, #I9 and other regulatory
agencies*
Compliance to environmental requirements set by
Department of 'nvironment and"atural 9esources $D'"9%*
Customs valuation of imported raw materials
should be arm:s length and not understated
28
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
29/104
Local sales of manufactured products intended for
e0port should be verified if proper
payment of local and national ta0es have been paid*
Capital deficiency is augmented by advances from
stoc&holders as a corporate financing
scheme*
Thin capitalisation or little capital is shown in the
!toc&holders: 'quity ccount in spite
of a huge business transactions involve in theoperations*
>or&ing capital requirements is augmented by
substantial amount of loans that resulted
to huge finance charges and decrease in income*
Terms of trade given to related parties for sales on
account are different from the termsgiven to unrelated third parties*
arental guarantees on loans given by the parent
company to its subsidiaries on a fee
basis that is not arm:s length*
Ta0 effective asset financing for machineries and
equipments used in manufacturing thatresulted to a huge amount o charges to factory
overhead in the form of finance or interest
charges*
29
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
30/104
Conduit arrangements or bac&2to2bac& loan
arrangement with intermediaries*
;unctional currency used is different from the localcurrency and a loss on foreign
e0change transactions always e0ceed the gains*
Commodity price fluctuations are reported as gain
or loss but most often the loss is
always bigger than the gain*
+se of intangibles owned by parent company or
related party I company, embedded in
the manufacturing of goods have no consideration
for royalty payments*
Intra2?roup !ervices for management fees and
other charges are not properly
documented and most often very e0cessive* 6ar&eting arrangements of products manufactured
with mar&eting hub often have a very
low profit margin or even brea& even sales*
Corporate overheads comprise of accounts not
actually incurred or deliberately charged
by a related companies* !upply of plant and equipment by a related party
the price of which are not arm:s length
30
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
31/104
Centralised treasury services are done by parent
company who control the cash flow and
most often siphon the cash from subsidiaries* and
!hipping services for the transport of goods are
provided by a related party that charges a
high amount of delivery fees.
13.3.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
32/104
ny of the five $@% method can be used depending
on the transactions.
13.!. "lectricity, >as, -tea# and Air
Conditioning -upply
13.!.1. "cono#ic Acti'ities
The activities include providing electric power,
natural gas, steam, hot water and the li&e
through a permanent infrastructure $networ&% of
lines, mains and pipes. The dimension of the
networ& is not decisive. lso included are the
distribution of electricity, gas, steam, hot water
and the li&e in industrial par& or residential
buildings, operation of gas utilities, which generate,
control and distribute electric power or gas, steam
and air2conditioning supply.
13.!.2. Possible Transfer Pricing Issues
The industry requires asset intensive activities so
that investment or use of capital to
purchase the operating assets is a sound business
decision if one has to consider
profitability which is the ultimate purpose of
business. If the assets used in operations are
32
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
33/104
owned by other related entities there is potential
transfer pricing issue that should be
verified.
Different account charges in the billing statement
should be verified for ta0 purposes
Chopped transactions from the generation of
electricity to the distribution should be
verified for arm:s length price
Intercompany loans and advances should becharged with arm:s length interest rates
:ote9 4ther transfer pricing issues are already
discussed in other industries.;
13.!.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
34/104
13.!.!. -ources of Co#parables
Comparables can be found in the financial reports of
companies having the same industry
activities. 6ultiple transfer pricing issues require
different &inds of comparables from different
sources. Transfer pricing analyst should verify the
sources and documents of comparables as to
their reliability so that it can withstand scrutiny of
ta0 authorities.
13.!.$. -uggested Transfer Pricing Methods
ny of the five $@% methods can be used as
previously discussed.
13.$. %ater supply, se&erage, &aste #anage#ent
and re#ediation acti'ities
13.$.1. "cono#ic Acti'ities
ctivities related to the management of various
forms of waste, such as solid or non2solid
industrial or household waste, as well as
contaminated sites. The output of the waste, as wellas sewage treatment process can either be disposed
of or become an input into other production
34
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
35/104
processes. ctivities of water supply are also
grouped in connection with units and treatment of
sewage. $!ource) 3445 hilippine !tandard
Industrial Classification, "ational !tatistical
Coordination #oard%.
13.$.2. Possible Transfer Pricing Issues
Contractual terms between the main supplier and
sub2contractor should be verified if
arm:s length price are charged*
cquisition of loans to e0pand and improve
customer services should be verified if
the loans are actually used in the pro(ects
:ote9 4ther transfer pricing issues &ere already
discussed in the preceding topics.;
13.$.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
36/104
Comparables can be coming from internal sources or
e0ternal information.
13.$.$. -uggested Transfer Pricing Methods
Transfer pricing methods can be used depending on
the transactions involved.
13.(. Construction
13.(.1. "cono#ic Acti'ities
ctivities includes general construction and
speciali1ed construction activities for
buildings and civil engineering wor&s. It includes
new wor&, repair, additions and alterations,
the erection of prefabricated buildings or structures
on the site and also construction of a
temporary nature.?eneral construction is the construction of entire
dwellings, office buildings, stores and
other public and utility buildings, farm building, etc.
8f the construction of civil engineering
wor&s such as motorways, streets, bridges, tunnels,
railways, airfields, harbours and other waterpro(ects, irrigation systems, sewerage systems,
industrial facilities, pipelines and electric lines,
sports facilities, etc.
36
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
37/104
The wor& can be carried out on own account or on a
fee or contract basis. ortions of the
wor& and sometimes even the whole practical wor&
can be subcontracted out. unit that carries
the overall responsibility for a construction pro(ect is
also classified along with repair of
buildings and engineering wor&s.
The renting of construction equipment with operator
is classified with the specific
construction activity carried out with this equipment.
lso included in construction activities are
the developments of building pro(ects for buildings
or civil engineering wor&s by bringing
together financial, technical and physical means to
reali1e the construction pro(ects for later sale.
If these activities are carried out not for later sale ofthe construction pro(ects, but for their
operation $e.g. renting of space in these building,
manufacturing activities in these plants%, the
activities are not classified as construction but
according to its operational activity. $!ource)
3445 hilippine !tandard Industrial Classification,"ational !tatistical Coordination #oard%.
13.(.2. Possible Transfer Pricing Issues
37
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
38/104
Construction of building or facilities for related
entities are overstated to claim a higher
depreciation and amorti1ation charges
9ecognition of income and e0penses are not
comparable with the independent party
transactions or dealings
317
;or the detailed e0planation of the following, please
refer to previous topics) Corporate ;inancing
Thin capitalisation
>or&ing capital requirements
Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing
Conduit arrangements
;inancial engineering
;unctional currency
6ar&et practice on debt tolerance Commodity rice ;luctuations
Intangibles
Intra2group !ervices
38
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
39/104
6ar&eting arrangements
Corporate overheads
!upply of plant and equipment Centralised treasury services
!hipping services
13.(.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
40/104
ny of the five $@% methods previously discussed
can be used.
13.). %holesale and /etail Trade* repair of #otor
'ehicles and #otorcycles
13.).1. "cono#ic Acti'ities
>holesale and retail trade* repair of motor vehicles
and motorcycles include the
economic activities of wholesale and retail sale $i.e.
sale without transformation% of any type of
goods and the rendering of services incidental to the
sale of these goods. >holesaling and
retailing are the final steps in the distribution of
goods. ?oods bought and sold are also referred
to as merchandise. lso included are the repair of
motor vehicles and motorcycles.!ale without transformation is considered to include
the usual operations $or
manipulations% associated with trade, for e0ample,
sorting, grading and assembling of goods,
mi0ing $blending% of goods $for e0ample, sand%
bottling $with or without preceding bottlecleaning%, pac&ing, brea&ing bul& and repac&ing for
distribution in smaller lots, storage $whether
40
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
41/104
or not fro1en or chilled%, cleaning and drying of
agricultural products, cutting out of wood
fibreboards or metal sheets as secondary activities.
$!ource) 3445 hilippine !tandard Industrial
Classification, "ational !tatistical Coordination
#oard%.
13.).2. Possible Transfer Pricing Issues
7aluation of inventory
Treatment of obsolete goods
Terms of payment with suppliers
Loss on inventory
9ecognition of income on sales
Treatment of capital e0penditures
Corporate financing Thin capitalisation
>or&ing capital requirements
Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing
Conduit arrangements
;inancial engineering
41
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
42/104
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations Intangibles
Intra2group !ervices
6ar&eting arrangements
Corporate overheads
!upply of plant and equipment
Centralised treasury services
!hipping services
13.).3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
43/104
price.
13.+. Transportation and -torage
13.+.1. "cono#ic Acti'ities
The economic activities of transportation and storage
include the provision of passenger
or freight transport, whether scheduled or not, by
rail, pipeline, road, water or air and associated
activities such as terminal and par&ing facilities,
cargo handling, storage, etc. lso included is
the renting of transport equipment with driver or
operator, and the postal and courier activities,
transport of passengers and freight via road and rail,
as well as freight transport via pipelines and
railways.
8ther passenger road transport includes charters,e0cursions and other occasional coach
services, ta0i operations, airport shuttles, operations
of telfers, funiculars, s&i and cable lifts if
not part of urban or suburban transit systems, rental
of cars and truc&s with driver, passenger
transport by man2or animal2drawn vehicles, (eepneyand asian utility vehicle $+7% operation,
tricycles and pedicabs operation, public utility cars
and ta0icabs operation, truc&2for2hire
43
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
44/104
operation $with driver% freight truc& operation, tan&
truc& delivery services, freight transport
operation, water and air transport. $!ource) 3445
hilippine !tandard Industrial Classification,
"ational !tatistical Coordination #oard%.
13.+.2. Possible Transfer Pricing Issues
8wnership of transportation equipments is by a
related party that charge a high rental
fees*
!upply of fuel and oil by a related company that is
not arm:s length*
6aintenance and repairs of transportation
equipments is done by a related company that
charges a higher amount of fees* Losses from operation because of overcharging of
e0penses*
!ale of transportation equipment to related parties
and leasing it bac& for a higher amount
to claim a higher e0penses*
bsence of provisions to pay for the royalty ofusing business name of parent company*
!ubstantial accounts receivable when nature of
business is cash basis*
44
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
45/104
Corporate financing
Thin capitalisation
>or&ing capital requirements Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing
Conduit arrangements
;inancial engineering
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations
Intangibles
Intra2group !ervices 6ar&eting arrangements
Corporate overheads
!upply of plant and equipment
Centralised treasury services
!hipping services
13.+.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
46/104
The conduct between associated enterprises or
related parties should be comparable with
that of independent enterprises or unrelated parties.
In the transportation industry, the
determination of arm:s length transactions between
related and unrelated enterprises can be done
through comparison of their business dealings.
9elationship between comparing parties should
be established so that confusion that an enterprise
thought to be independent is in fact dependent
and therefore, cannot be designated as comparable.
To &now if an enterprise is dealing with an
associated enterprise can be seen through the
structure of their contract or dealings. ;or e0ample,
an owner of the transportation equipments,
lease the equipments to another party at a very highor very low rental consideration compared to
other dealings for the same transactions which is the
rental of transportation equipments. If the
rental charges is too high or too low compared to
other independent enterprise dealings, then the
transaction can be an indicator that the transaction isartificial or controlled.
nother consideration if the dealings are between
controlled parties is if the dealings lac&
46
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
47/104
economic substance. ;or e0ample, the company
engaged in the transportation business can be
very well afford to buy its own transportation
equipments but preferred to lease it from a related
company at a higher price. In this case, a
comparability analysis and ad(ustment should be
made in order to &now the correct rental charges that
eventually influence the cost of services and
lower the gross profit.
13.+.!. -ources of Co#parables
Comparables can be gathered from the company
dealings with other related parties.
Comparables can be ta&en from databases, published
articles and financial reports to regulatory
agencies.
13.+.$. -uggested Transfer Pricing Methods
ny of the five $@% methods previously discussed.
13.. Acco##odation and Food -er'ice Acti'ities
13..1. "cono#ic Acti'ities
ccommodation and food service activities includes
the provision of short2stay
47
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
48/104
accommodation for visitors and other travellers and
the provision of complete meals and drin&s
fit for immediate consumption. The amount and type
of supplementary services provided
within this classification can vary widely.
!hort term accommodation activities include the
provision on daily or wee&ly basis,
principally for short stay by visitors. This includes
the provision of furnished accommodation
in guest rooms and suites or complete self2contained
units with &itchens, with or without daily
or other regular house&eeping services, and may
often include a range of additional services
such as food and beverage services, par&ing, laundry
services, swimming pools and e0ercise
rooms, recreational facilities and conference andconvention facilities.
These include the provision of short2term
accommodation provided by hotels, motels,
resort, hotels, suite-apartment hotels, condotels, inns,
guesthouses, youth, hostels, pensions,
visitor flats and bungalows, chalets, house&eepingcottages and cabins, holiday homes, timeshare
units.
48
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
49/104
;ood and beverage serving activities provide
complete meals or drin&s fit for immediate
consumption, whether in traditional restaurants, self2
service or ta&e2away restaurants, whether
as permanent or temporary stands with or without
seating. Decisive is the fact that meals fit
for immediate consumption are offered, not the &ind
of facility providing them.
9estaurant and mobile food service activities include
the activities of providing food
services to customers, whether they are served while
seated or serve themselves from a display
of items, whether they eat the prepared meals on the
premises, ta&e them out or have them
delivered. This includes the preparation and serving
of meals for immediate consumption frommotori1ed vehicles or non2motori1ed carts.
'conomic activities include the activities of
restaurants, cafeterias, fast2food restaurants,
pi11a delivery, ta&e2out eating places, ice cream
truc& vendors, mobile food carts, food
preparation in mar&et stalls, refreshment stands,&ios&s and counters, dining cars, and other
restaurants and mobile food service activities.
$!ource) 3445 hilippine !tandard Industrial
49
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
50/104
Classification, "ational !tatistical Coordination
#oard%.
13..2. Possible Transfer Pricing Issues +se of facilities by related parties where the price
is not arm:s length or without any
compensation at all*
ersonnel wor&ing in a group of related companies
but claim salaries only in onecompany*
!ervices provided by related entities, li&e laundry
services, charge a higher fee compared
to independent third parties*
morti1ation and depreciation charges for lant,
roperty E 'quipment is e0cessive* Charges for the maintenance and use of software
for computeri1ed accounting system by
a related entity are higher compared to independent
service providers*
rovision for capital e0penditures are not properly
implemented*8ther issues already discussed)
Corporate ;inancing*
Thin capitalisation
50
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
51/104
>or&ing capital requirements
Interest free loans
Terms of trade arental guarantees
Ta0 effective asset financing
Conduit arrangements
;inancial engineering
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations
Intangibles
Intra2group !ervices
6ar&eting arrangements
Corporate overheads !upply of plant and equipment
Centralised treasury services
!hipping services
13..3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
52/104
is necessary that the dealings of related parties be
similar to the dealings of independent parties
for purposes of determining arm:s length price.
13..!. -ources of Co#parables
Comparables can be derived from competitors:
financial records and reports to regulatory
agencies. Internal comparables can be ta&en from the
internal dealings of the company with its
related companies and comparing it with the
dealings of the company with unrelated
companies or independent entities. ny differences
can be sub(ected to a comparability
analysis and eventually to comparability
ad(ustments.
13..$. -uggested Transfer Pricing Methods
Transfer pricing methods that can be used to
determine arm:s length prices for the
transactions are)
A% Comparable +ncontrolled rice $C+% 6ethod
for the price of rooms and otheraccommodations charged between related parties
and independent parties*
52
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
53/104
3% 9esale rice 6ethod $96% for sale of
inventories purchased from related
enterprises*
% Cost lus 6ethod $C6% for the cost of services
charged to related parties and the
cost of services paid to service providers*
B% Transactional "et 6argin 6ethod $T"66% for
transactions between related parties
that requires the use of intangibles whether owned
by the parent or by a related I
Company*
@% rofit !plit 6ethod $!6% for highly integrated
services that uses intangibles for both
parent and subsidiary companies.
13.1. Infor#ation and Co##unication
13.1.1. "cono#ic Acti'ities
Information and communication includes the
production and distribution of information
and cultural products, the provision of the means to
transmit or distribute these products as wellas data or communications, information technology
activities and the processing of data and
53
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
54/104
other information service activities. ublishing
includes the acquisition of copyrights to content
$information products% and ma&ing this content
available to the general public by engaging in $or
arranging for% the reproduction and distribution of
the content in various forms. ll the feasible
forms of publishing $in print, electronic or audio
form, on the internet, as multimedia products
such as CD2986 reference boo&s, etc% are also
included.
The activities include the publishing of boo&s,
brochures, leaflets, dictionaries,
encyclopaedias, atlases, maps and charts* publishing
of newspapers, (ournals and periodicals*
directory and mailing list and other publishing as
well as software publishing.rogramming and broadcasting activities include the
activities of creating content or
acquiring the right to distribute content and
subsequently broadcasting that content, such as
radio, television and data programs of entertainment,
news, tal& and the li&e. lso included isdata broadcasting, typically integrated with radio or
T7 broadcasting. The broadcasting can be
54
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
55/104
performed using different technologies, over2the2air,
via satellite, via a cable networ& or via
internet. The activities also includes the production
of programs that are typically narrowcast in
nature $limited format, such as news, sports,
education and youth2oriented programming% on a
subscription or fee basis, to a third party, for
subsequent broadcasting to the public.
Telecommunication includes activities of providing
telecommunications and related
service activities, that is transmitting voice, data,
te0t, sound and video. The transmission
facilities that carry out these activities may be based
on a single technology or a combination of
technologies. The commonality of activities
classified in this division is the transmission ofcontent, without being involved in its creation. The
brea&down in this division is based on the
type of infrastructure operated. In the case of
transmission of television signals, this may include
the bundling of complete programming channels to
programme pac&ages for distribution.Computer programming, consultancy and related
activities provide e0pertise in the field
55
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
56/104
of information technologies) writing, modifying,
testing and supporting software, planning and
designing computer systems that integrate computer
hardware, software and communication
technologies, on2site management and operation of
client:s computer.
Information service activities include the activities
of web search portals, data processing
and hosting activities, as well as other activities that
primarily supply information. Data
processing, hosting and related activities include the
provision of infrastructure for hosting, data
processing services and related activities.
!peciali1ed hosting activities include web hosting,
streaming services, application hosting, application
service provisioning, general time2shareprovision of mainframe to clients, data processing
activities li&e complete processing of data
supplied by clients, generation of speciali1ed reports
from data supplied by clients and provision
of data entry services. $!ource) 3445 hilippine
!tandard Industrial Classification, "ational!tatistical Coordination #oard%.
13.1.2. Possible Transfer Pricing Issues
56
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
57/104
9ecognition of income and e0penses should be
done by a company and not shifted to
another related company that en(oys ta0 e0emptions
or holidays*
ccounting method used in valuing cost of
services and recognition of income or sales
>ithholding of ta0es by customers using credit
cards*
'2services should be properly recorded and
transactions recorded in the boo&s of
accounts
8ther issues already discussed in the previous
topics)
Corporate ;inancing
Thin capitalisation >or&ing capital requirements
Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing Conduit arrangements
326
;inancial engineering
57
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
58/104
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations Intangibles
Intra2group !ervices
6ar&eting arrangements
Corporate overheads
!upply of plant and equipment
Centralised treasury services
!hipping services
13.1.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
59/104
Comparables can be ta&en from internal documents
maintained by the companies and can
be obtained only through the ta0 authorities requests.
13.1.$. -uggested Transfer Pricing Methods
ny of the five $@% methods previously discussed
can be used to determine arm:s length
price or transactions.
13.11. Financial and Insurance Co#panies
13.11.1. "cono#ic Acti'ities
;inancial and insurance activities include financial
services activities including insurance,
reinsurance and pension funding and activities to
support financial services, holding assets,trusts, funds and similar financial activities.
6onetary intermediation includes the obtaining of
funds in the form of transferable
deposits $i.e. funds that are fi0ed in money terms,
and obtained on a day2to2day basis, and apart
from central ban&ing obtained from financialsources. Central ban&ing includes issuing and
managing country:s currency, monitoring and
control of the money supply, ta&ing deposits that
59
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
60/104
are used for clearance between financial institutions,
supervising ban&ing operations, holding the
country:s international reserves, acting as ban&er to
the government.
8ther monetary intermediation includes the
receiving of deposits and-or close substitutes
for deposits and e0tending of credit or lending funds.
The granting of credit can ta&e a variety of
forms, such as loans, mortgages, credit cards, etc.
These activities are generally carried out by
monetary institution other than central ban&s, such
as ban&s, savings ban&s, and credit unions.
lso included are e0panded commercial ban&ing
$universal ban&ing%, regular commercial
ban&ing, savings and mortgage ban&ing, private
development ban&ing, stoc& savings and loanactivities, regular rural ban&ing, cooperative rural
ban&ing, speciali1ed government ban&ing, and
other ban&ing activities. Insurance, reinsurance and
pension funding include insurance,, life insurance,
non2life insurance, reinsurance, pension funding
such as employee benefit plans, pension funds andretirement plans. ctivities au0iliary to financial
service and insurance activities includes the
provision of services involved in or closely related to
60
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
61/104
financial service activities, but not themselves
providing financial services which include
commodity contracts e0changes, securities
e0changes, stoc& e0changes and stoc& or commodity
options e0changes, security and commodity
contracts bro&erage such as dealing in financial
mar&ets on behalf of others $e.g. stoc& bro&ing% and
related activities, securities bro&erage, commodity
contracts bro&erage, foreign e0change dealing
and other activities. $!ource) 3445 hilippine
!tandard Industrial Classification, "ational
!tatistical Coordination #oard%.
13.11.2. Possible Transfer Pricing Issues
Interest charges to related parties are lower
compared to independent third parties*
>rite2off of interest charges for the related parties
loan accounts*
?ranting of unsecured loans to related parties*
+se of special purpose vehicle to lower ta0
payable* !ale of foreclosed assets to related parties at cost*
6isclassification of accounts for ?ross 9eceipt
Ta0 purposes*
61
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
62/104
8utsourcing of services, i.e. IT services, to a
related party charged a higher pay
compared to charges in the same independent
activity.
6anagement fees charged by parent company are
too e0cessive and without
withholding ta0es and not properly documented*
>rite2off of receivables from a related party is not
arm:s length*lease see previous e0planations on the following
transfer pricing issues)
Corporate ;inancing
Thin capitalisation
>or&ing capital requirements
Interest free loans Terms of trade
arental guarantees
Ta0 effective asset financing
Conduit financing arrangements
;inancial engineering
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations
62
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
63/104
Intangibles
Intra2group !ervices
6ar&eting arrangements Corporate overheads
!upply of plant and equipment
Centralised treasury services
!hipping services
13.11.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
64/104
ny of the five $@% methods previously discussed
can be used to determine arm:s length
dealings of financial and insurance companies.
13.12. /eal "state Acti'ities
13.12.1. "cono#ic Acti'ities
The economic activities include acting as lessors,
agents and-or bro&ers in one or more of
the following) selling or buying real estate, renting
real estate, providing other estate services
such as appraising real estate or acting as real estate
escrow agents. ctivities may be carried out
on own or leased property and may be done on a fee
or contract basis. lso included is the
building of structures, combined with maintainingownership or leasing of such structures.
9eal estate activities also include leasing of land,
apartment building and dwelling, nonresidential
building, e0hibition halls, self2storage facilities,
malls and shopping centers,
development of building pro(ects for own operation,subdividing real estate into lots, without
land improvement, operation of residential mobile
home sites, development and sale of land and
64
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
65/104
cemetery lots and operation of apartelles. $!ource)
3445 hilippine !tandard Industrial
Classification, "ational !tatistical Coordination
#oard%.
13.12.2. Possible Transfer Pricing Issues
9evenue recognition on pre2selling activities*
Cancelled or revo&ed sales but the amount
previously paid are forfeited* Lease of assets to a related parties at a very low
considerations*
8wnership of real estate assets belong to a related
party and not by the one operating it*
6anagement fee, compensation of #oard of
Directors, and other charges are e0cessiveand not arm:s length*
Losses are declared in the ta0able year that it was
not reali1ed*
Commission fees are paid and handled by a related
party*
Intercompany loans does not charge finance
charges*
lease see previous e0planations on the following
transfer pricing issues)
65
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
66/104
8verstated cost of building constructed by a
related parties
9ecognition of income Instalment sales
Foint venture pro(ects
Classification of capital e0penditures
Corporate ;inancing
Thin capitalisation
>or&ing capital requirements
Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing
Conduit arrangements ;inancial engineering
;unctional currency
6ar&et practice on debt tolerance
Commodity rice ;luctuations
Intangibles Intra2group !ervices
330
6ar&eting arrangements
66
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
67/104
Corporate overheads
!upply of plant and equipment
Centralised treasury services !hipping services
13.12.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
68/104
13.13. Professional, -cientific and Technical
-er'ices
13.13.1. "cono#ic Acti'ities
'conomic activities include speciali1ed professional,
scientific and technical activities
that require a high degree of training, and ma&e
speciali1ed &nowledge and s&ills available to
users. Legal and accounting activities include legal
representation of one party:s interest against
another party, whether or not before courts or other
(udicial bodies by, or under supervision of,
persons who are members of the bar, such as advice
and representation in civil cases, advice and
representation in criminal actions, advice and
representations in connection with labor disputes.It also includes preparation of legal documents such
as articles of incorporation, partnership
agreements or similar documents in connection with
company formation, patents and copyrights,
preparation of deeds, wills, trusts, etc., as well as
other activities of notaries public, civil lawnotaries, bailiffs, arbitrators, e0aminers and referees.
It also includes accounting and
68
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
69/104
boo&&eeping services such as auditing of accounting
records, preparing financial statement and
boo&&eeping.
ctivities of head offices, management and
consultancy include the provision of advice
and assistance to businesses and other organi1ations
on management issues, such as strategic and
organi1ational planning, financial planning and
budgeting, mar&eting ob(ectives and policies,
human resource policies, practices, and planning,
production scheduling, and control planning.
It also includes the overseeing and managing of
other units of the same company or enterprise
i.e. the activities of head offices%.
rchitecture and engineering activities, technicaltesting and analysis include the
provision of architectural services, engineering
services, drafting services, building inspection
services and surveying and mapping services. It also
includes the performance of physical,
chemical and other analytical testing services.!cientific research and development includes the
activities of three types of research and
69
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
70/104
development) A% basic research) e0perimental or
theoretical wor& underta&en primarily to acquire
new &nowledge of the underlying foundations of
phenomena and observable facts, without
particular application or use in view* 3% applied
research) original investigation underta&en in
order to acquire new &nowledge, directed primarily
towards a specific practical aim or ob(ective*
and % e0perimental development) systematic wor&,
drawing on e0isting &nowledge gained from
research and-or practical e0perience, directed to
producing new materials, products and devices,
to installing new processes, systems and services,
and to improving substantially those already
produced or installed.
dvertising and mar&et research includes thecreation of advertising campaigns and
placement of such advertising in periodical,
newspapers, radio and television, or other media as
well as the design of display structures and sites. It
also includes in2house capabilities or
subcontracting, advice, creative services, productionof advertising material, media planning, and
buying.
70
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
71/104
8ther professional scientific and technical activities
includes the provision of speciali1ed
design activities, fashion design related to te0tiles,
wearing apparel, shoes, (ewelry, furniture and
other interior decoration and other fashion goods as
well as other personal or household goods.
lso include industrial design i.e. creating and
developing designs and specifications that
optimi1e the use, value and appearance of products,
including the determination of the materials,
construction, mechanism, shape, color and surface
finishes of the product, ta&ing into
consideration human characteristics and needs,
safety, mar&et appeal and efficiency in
production, distribution, use and maintenance.
7eterinary activities include the provision of animalhealth care and control activities for
farm animals or pet animals. These activities are
carried out by qualified veterinarians in
veterinary hospitals as well as when visiting farms,
&ennels or homes, in own consulting and
surgery rooms or elsewhere. It also includes animalambulance activities. $!ource) 3445
hilippine !tandard Industrial Classification,
"ational !tatistical Coordination #oard%.
71
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
72/104
13.13.2. Possible Transfer Pricing Issues
!cientific research conducted by a subsidiary
company for the account of the parent
company at a lower fee compared to the charges
made between unrelated parties*
Legal and accounting services provided by the
parent company to the subsidiaries
are charge with higher fees compared to chargesmade between independent parties*
!peciali1ed services by a subsidiary company to
parent company is charged with a
very minimal fee*
"o royalty payments charge to parent company on
intangibles owned by a subsidiaryand in the production of goods sold to parent
company.
.13.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
73/104
associated enterprises or subsidiaries, the charges or
fees charged to the services rendered by a
subsidiary should be at par with the charges or fees
charged to the same service if provided by
independent third parties.
13.13.!. -ources of Co#parables
Comparable transactions can be derived from
competitors providing the same &ind of
services and from information or databases from
independent sources.
13.13.$. -uggested Transfer Pricing Methods
Transfer pricing methods that can be applied in
services are)
A% Comparable +ncontrolled rice $C+% 6ethodfor the charges made to a subsidiary
comparing it with the charges of the same &ind of
services made by independent
enterprises*
3% Cost lus 6ethod $C6% for the services
provided by a related parties that form partand cannot be separated from the cost of the goods
manufactured*
73
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
74/104
% Transactional "et 6argin 6ethod $T"66% for
services rendered with the use of an
intangible owned by either parent or subsidiary*
B% rofit !plit 6ethod $!6% for highly integrated
services rendered by both parent and
subsidiary for the completion of one whole product.
13.1!. Ad#inistrati'e and -upport -er'ice
Acti'ities
13.1!.1. "cono#ic Acti'ities
dministrative and support service activities include
a variety of activities that support
general business operations. 9ental and leasing
activities include rental and leasing of tangible
333
and non2financial intangible assets, including a wide
array of tangible goods, such as
automobiles, computers, consumer goods and
industrial machinery and equipment to customers
in return for a periodic rental or lease payment. It is
subdivided into) A% renting and leasing ofmotor vehicles* 3% renting and leasing of personal
and household goods* % renting and leasing
74
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
75/104
of other machinery, equipment and tangible goods*
and B% leasing of intellectual property
products and similar products.
'mployment activities includes activities of listing
employment vacancies and referring
or placing applicants for employment, where the
individuals referred or placed are not employees
of the employment agencies, supplying wor&ers to
clients: businesses for limited period of time
to supplement the wor&ing force of the client and the
activities of providing human resources and
human resource management services for others on a
contract or fee basis. It also include
e0ecutive search and placement activities, including
activities of theatrical casting agencies.
Travel agency, tour operator, reservation service andrelated activities include the activity
of selling travel, tour, transportation and
accommodation services to the general public and
commercial client and the activity of arranging and
assembling tours that are sold through travel
agencies or directly by agents such as tour operatorsas well as other travel2related services,
including reservation services. The activities of
tourist guides and tourism promotion activities
75
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
76/104
are also included.
!ecurity and investigation activities includes
security2related services such as)
investigation and detective services, guard and patrol
services, pic&ing up and delivering money,
receipts, or other valuable items with personnel and
equipment to protect such properties while
in transit, operation of electronic security alarm
systems, such as burglar and fire alarms, where
the activity focuses on remote monitoring of these
systems, but also involves sale, installation
and repair services.
!ervices to building and landscape activities include
the provision of a number of general
support services, such as the provision of a
combination of support services within a client:sfacilities, the interior and e0terior cleaning of
buildings of all types, cleaning of industrial
machinery, cleaning of trains, buses, planes, etc.,
cleaning of the inside of road and sea tan&ers,
disinfecting and e0terminating activities for
buildings, ships, trains, etc., bottle cleaning, streetsweeping, provision of landscape care and
maintenance services and provision of these services
76
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
77/104
along with the design of landscape plans and-or the
construction $i.e. installation% of wal&ways,
retaining walls, dec&s, fences, ponds, and similar
structures.
8ffice administrative, office support and other
business support activities include the
provision of a range of day to day office
administrative services, as well as ongoing routine
business support functions for others, on a contract
or fee basis. $!ource) 3445 hilippine
!tandard Industrial Classification, "ational
!tatistical Coordination #oard%.
13.1!.2. Possible Transfer Pricing Issues
!upport services are established by the parent for
its own convenience and subsidiary is
not really ma&ing a business of its own*
The income for the transaction belongs to the
parent and the subsidiary is only paid for
the reimbursement of e0penses*
Intangibles used in the provision of services areowned by the parent, and in rare cases
are owned by the subsidiary, but no provision for the
use of intangible are made by
either parent or subsidiary*
77
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
78/104
Contractual terms are not being followed by the
parent and subsidiary.
13.1!.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
79/104
A% Comparable +ncontrolled rice $C+% 6ethod
for the charges made to a subsidiary
comparing it with the charges of the same &ind of
services made by independent
enterprises*
3% Cost lus 6ethod $C6% for the services
provided by a related parties that form part
and cannot be separated from the cost of the goods
manufactured*
% Transactional "et 6argin 6ethod $T"66% for
services rendered with the use of an
intangible owned by either parent or subsidiary*
B% rofit !plit 6ethod $!6% for highly integrated
services rendered by both parent and
subsidiary for the completion of one whole product.
13.1$. "ducation
13.1$.1. "cono#ic Acti'ities
'conomic activities include education at any level or
for any profession, oral or written
as well as by radio and television or other means ofcommunication. It includes education by the
different institutions in the regular school system at
its different levels as well as adult education,
79
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
80/104
literacy programmes, etc. lso included are military
schools and academies, prison schools, etc.,
at their respective levels. This section includes
public as well as private education, instruction
primarily concerned with sport and recreational
activities and education, support activities.
'ducation can be provided in rooms, radio,
television broadcast, Internet, correspondence or at
home. ;or each level of initial education, the classes
include special education for physically or
mentally handicapped pupils.
8ther education includes provision of instruction
and speciali1ed training, generally for
adults, not comparable to the general formal
education and does not include activities of
academic schools, colleges, and universities.'0amples of this &ind are) education that is not
definable by level, academic tutoring services,
college board preparation, learning centers
offering remedial courses, professional e0amination
review courses, language instruction and
conversational s&ills, speed reading instruction,religious instruction, automobile driving schools,
flying schools, lifeguard training, survival training,
public spea&ing training and computer
80
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
81/104
training.
'ducational support services include provision of
non2instructional services that support
educational processes or systems. '0amples are
educational consulting, educational guidance
counselling services, educational testing and
evaluation services, organi1ation of students
e0change programs, etc. $!ource) 3445 hilippine
!tandard Industrial Classification, "ational
!tatistical Coordination #oard%.
13.1$.2. Possible Transfer Pricing Issues
8wnership of roperty, lant E 'quipment
belongs to another related company but
charging a high amount of rental charges*
'mployees compensation do not pay withholding
ta0es properly because of claimed
e0emption as 6inimum >age 'arners not sub(ect to
ta0 even if the total
compensation really e0ceed the minimum wage.
'0cess amounts from 6inimum
>age are charged to de minimis benefits or overtime
fee, ha1ard fee, night shift
differential and holiday pay*
81
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
82/104
Compensation of the #oard of Directors, who are
also stoc&holders, are e0cessive*
Charges for capital e0penditures are not properlyaccounted*
lease see previous e0planations on the following
transfer pricing issues)
8verstated cost of building constructed by a
related parties
9ecognition of income
Instalment sales
Foint venture pro(ects
336
Classification of capital e0penditures
Corporate ;inancing
Thin capitalisation
>or&ing capital requirements
Interest free loans
Terms of trade
arental guarantees
Ta0 effective asset financing Conduit arrangements
;inancial engineering
;unctional currency
82
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
83/104
6ar&et practice on debt tolerance
Commodity rice ;luctuations
Intangibles Intra2group !ervices
6ar&eting arrangements
Corporate overheads
!upply of plant and equipment
Centralised treasury services
!hipping services
13.1$.3.
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
84/104
13.1$.$. -uggested Transfer Pricing Methods
Transfer pricing methods that can be used to
determine arm:s length prices for the
transactions are)
A% Comparable +ncontrolled rice $C+% 6ethod
for the price of goods and other
services charged between related parties and
independent parties*
3% 9esale rice 6ethod $96% for sale of goods
purchased from related enterprises*
% Cost lus 6ethod $C6% for the cost of services
charged to related parties and the
cost of services paid to service providers*
B% Transactional "et 6argin 6ethod $T"66% for
transactions between related partiesthat requires the use of intangibles whether owned
by the parent or by a related I
Company*
@% rofit !plit 6ethod $!6% for highly integrated a
service that uses intangibles for
both parent and subsidiary companies.
13.1( 0u#an 0ealth and -ocial %or Acti'ities
13.1(.1. "cono#ic Acti'ities
84
-
8/9/2019 Chapter 13 Possible Industry Issues in Transfer Pricing
85/104
'conomic activities include the provision of health
and social wor& activities, involving a
wide range of activities, starting from health care
provided by trained medical professionals in
hospitals and other facilities, over residential care
activities that st