Transfer Mis-Pricing: Regulations to Address

Critique Paper

According to International Accounting Standards 24: Related Party Disclosures,

entities are required to have in their financial statements disclosure of transactions and
outstanding balances concerning its related parties. It aims to emphasize the possibility
of the entitys financial statements, particularly its financial position and income
statement, to have been affected by the said required disclosure and its commitments
with such parties. The standard defines related party transactions as, a transfer of
resources, services or obligations between a reporting entity and related party,
regardless of whether a price is charged. Also IAS 24 focuses on defining such parties,
including persons and entities involved, and the information that needs to be disclosed
and how it is disclosed.
As Llesol (2013) introduces the news article, related party transactions or intrarelated transactions, as he used in the piece, became a normal practice due to
globalization. The common scenarios of which includes dealings between parent and its
subsidiary or between sister companies. On such transactions, when the entities
involved set a price, they are engaging in transfer pricing.
Transfer pricing is one of the most important tax issues that are being faced by
different taxing authorities around the world. One of the reasons is that most companies
are focusing on the income as a whole rather than as individual entities. Therefore,
there will be a possibility of manipulating transfer prices and reduce declared income. In
effect, it may also decrease revenue collection by the government. Hence, the term
transfer mis-pricing.
However, the government should not immediately doubt and assume intent

manipulation on decreasing transfer prices by reporting entities. As the Transfer Pricing

Guidelines of the Organization for Economic Cooperation and Development (OECD)
provides that, companies might truly suffer in accurately defining a market price due to
absence of a market or when adjusting to a specific commercial strategy.

The said

guidelines of OECD are observed by most of the countries.

To provide solution to the said issue, a standard price for related party
transactions has been given, called Arms Length Principle. It requires intra-related
transactions to assume that entities involved are transacting with an independent or
unrelated party. Therefore the transfer price is valued at fair value or market price,
which is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between involved parties at valuation date or the date
of transaction.
The article also discussed about the issuance of the Revenue Regulations No.
02-2013 by the Secretary of Finance that aims to solve such problem that is also being
faced by the Philippine government, specifically by the Bureau of Internal Revenue
(BIR). One of the issues stated was the use of special tax privileges and transfer of
income or expenses between related parties to reduce tax liabilities as a whole group.
The regulation provides different guidelines in measuring transfer price, also
observed from the OECD Transfer price Guidelines. Such methods includes,
comparable uncontrolled price method, resale price method, cost plus method, profit
split method, and transactional net margin method. Any of the said measurements could
be used in order to come up with the most reliable values, considering the quality of

available data and the degree of accuracy of adjustments. Also, as stated in the Tax
Code, the Commissioner of Internal Revenue has the authority to make transfer price
adjustments between related companies in order to prevent avoidance of tax liability.
Furthermore, the said regulation provides other alternatives for companies with regards
to transfer price measurement for other specific circumstances. Then, it requires entities
to provide documentations and proofs for such valuation of related party transactions.
Though related party disclosures were discussed in class, further information
about measurements were not tackled and IAS 24 is more detailed about the related
parties. One of the major responsibilities of the ones preparing financial statements is of
course to comply with the standards but also to consider the regulations of the
authorities or the government, specifically taxing authorities. BIR has been active lately
in finding loopholes in the tax system and providing solutions to it. As the economy in
the country becomes bigger, many companies are also engaging to business
combinations and thus becoming related parties. For the financial statement users,
especially external users such as investors and taxing authorities, it is important to
disclose to them related parties and transactions between them for it might have
affected the financial statements. But also, as compliance with the law, it should also
provide the information on how the said transactions are valued. It would not only satisfy
the tax regulation but also the reliability and faithful representation of the reports.
Reference:
Llesol, R. (2013). Transfer mis-pricing: regulations to address. The Philippine Star.
Retrieved from http://www.philstar.com/business/2013/02/05/904871/transfermis-pricing-regulations-address.