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


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


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


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


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


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


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


8/104

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.


9/104


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


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


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


13/104

removal services at mines, etc. $!ource) 3445

hilippine !tandard Industrial Classification,

"ational !tatistical Coordination #oard%.


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


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


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


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


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


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.


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


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


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


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


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


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


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


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


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


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%.


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


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


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


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


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.


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


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.


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


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.


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


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


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


39/104

6ar&eting arrangements

Corporate overheads

!upply of plant and equipment Centralised treasury services

!hipping services

13.(.3.


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


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


Interest free loans

Terms of trade

arental guarantees




41


42/104

;unctional currency

6ar&et practice on debt tolerance

Commodity rice ;luctuations Intangibles



Corporate overheads

!upply of plant and equipment

Centralised treasury services

!hipping services

13.).3.


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


44/104

operation $with driver% freight truc& operation, tan&

truc& delivery services, freight transport

operation, water and air transport. $!ource) 3445



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


45/104

Corporate financing

Thin capitalisation

>or&ing capital requirements Interest free loans

Terms of trade

arental guarantees




;unctional currency


Commodity rice ;luctuations

Intangibles

Intra2group !ervices 6ar&eting arrangements

Corporate overheads



!hipping services

13.+.3.


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


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


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


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


50/104


#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


51/104


Interest free loans

Terms of trade arental guarantees




;unctional currency



Intangibles



Corporate overheads !upply of plant and equipment


!hipping services

13..3.


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)


for the price of rooms and otheraccommodations charged between related parties

and independent parties*

52


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*


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


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


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


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


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%.


56


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


57


58/104

;unctional currency


Commodity rice ;luctuations Intangibles



Corporate overheads



!hipping services

13.1.3.


59/104

Comparables can be ta&en from internal documents

maintained by the companies and can

be obtained only through the ta0 authorities requests.



can be used to determine arm:s length

price or transactions.

13.11. Financial and Insurance Co#panies


;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


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


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




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


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


Interest free loans Terms of trade

arental guarantees


Conduit financing arrangements


;unctional currency



62


63/104

Intangibles


6ar&eting arrangements Corporate overheads



!hipping services

13.11.3.


64/104


can be used to determine arm:s length

dealings of financial and insurance companies.

13.12. /eal "state 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


65/104

cemetery lots and operation of apartelles. $!ource)

3445 hilippine !tandard Industrial


#oard%.


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


65


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


Interest free loans

Terms of trade

arental guarantees


Conduit arrangements ;inancial engineering

;unctional currency



Intangibles Intra2group !ervices

330


66


67/104

Corporate overheads


Centralised treasury services !hipping services

13.12.3.


68/104

13.13. Professional, -cientific and Technical

-er'ices


'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


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


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


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



71


72/104


!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.


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.


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


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


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


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


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



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


78/104

Contractual terms are not being followed by the

parent and subsidiary.

13.1!.3.


79/104


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


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


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



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


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


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


Interest free loans

Terms of trade

arental guarantees

Ta0 effective asset financing Conduit arrangements


;unctional currency

82


83/104



Intangibles Intra2group !ervices


Corporate overheads



!hipping services

13.1$.3.


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)


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*


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


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

Documents

Chapter 13 Possible Industry Issues in Transfer Pricing