Bridging gaps in related-party transactions: The role of transfer pricing adjustments

As businesses engage in cross-border transactions with related parties, transfer pricing adjustments become essential to ensure compliance with the arm’s length principle.

- DONNA KASANDRA A. DELA TORRE

These adjustments help align intercompany pricing with market standards, reducing the risk of tax disputes, penalties, and double taxation.

Transfer pricing adjustments are revisions or corrections made to the pricing of transactions between related parties to ensure that such prices reflect the arm’s length principle, reflecting what unrelated entities would have agreed upon under similar conditions.

Adjustments can be initiated voluntarily by the taxpayer or imposed by the tax authority during an audit.

TRANSFER PRICING ADJUSTMENT KEY POINTS

1, Arms-length principle: Taxpayers must price their related-party transactions as if they are between independent entities under similar conditions. Philippine regulations, particularly Section 5 of Revenue Regulations No. 2-2013, reinforce this standard by mandating that transfer prices reflect economic reality.

2, Adjustments

+ Comparability adjustments: To proactively align actual intercompany results with arm’s length benchmarks and to eliminate material differences between controlled and comparable transactions that could affect the reliability of the transfer pricing analysis.

Although comparability adjustments themselves are not accounting entries, they play a critical role in establishing an arm’s length range. Once this range is determined, a taxpayer may perform internal true-ups or year-end corrections to ensure that its actual intercompany results fall within the adjusted range. ‘These true-ups are acceptable when they reflect genuine economic conditions and are applied consistently with the taxpayer’s documented transfer pricing policy. However, adjustments that are excessive, immaterial, or highly subjective should be avoided, as they may undermine the reliability of the analysis.