Transfer pricing considerations during calamities

As the Philippines reels from the successive landfalls of Typhoons Crising, Dante, and Emong, and the relentless southwest monsoon (habagat), businesses across the archipelago are once again reminded of nature’s unforgiving power.

- JEMAIMAH FAITH M.

Flooded warehouses, paralyzed logistics, power outages, and damaged infrastructure have disrupted operations across the country. For many enterprises, the immediate priority has been survival and recovery.

Yet beneath the surface of these operational challenges lies a quieter but equally pressing concern: the transfer pricing implications of such disruptions. For multinational enterprises (MNEs) with Philippine entities, the question is no longer just how to rebuild, but how to ensure that their intercompany pricing remains defensible under the arm’s length principle in the wake of calamity.

Natural disasters like typhoons disrupt the economic assumptions underlying many intercompany pricing arrangements. In the Philippines, where entities often operate as contract manufacturers, limited-risk distributors, or limited-risk/ routine service providers, transfer pricing models typically assume a stable environment. However, production halts, logistics constraints, and extraordinary costs can misalign actual conditions with intercompany agreements.

At the core of this issue is the need to reexamine how the functions, assets, and risks (FAR) assigned to various related entities have shifted. The Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines emphasize aligning pricing outcomes with value creation and risk assumption. A Philippine entity deemed low risk may earn routine margins under normal conditions, but when calamities damage inventory or delay shipments, it may find itself shouldering risks it was never intended to bear. Without appropriate adjustments, standard returns may no longer reflect arm’s length outcomes.

From the Bureau of Internal Revenue’s (BIR) perspective, it may assess whether the losses align with the contractual and functional arrangements or whether the intercompany pricing mechanism requires adjustment to reflect economic substance.