Strategic convergence of ESG, APA, and transfer pricing

As global tax regimes increasingly prioritize transparent reporting, responsible governance, and sustainable development, the convergence of Environmental, Social, and Governance (ESG) principles, sustainability goals, and Advance Pricing Agreements (APA) within transfer pricing (TP) frameworks is emerging as a strategic imperative. What may initially appear as three distinct areas, ESG, APA, and TP, are in fact deeply interconnected.

ESG focuses on how companies manage environmental impact, social responsibility, and governance standards, influencing operational decisions, cost structures, and reputational risk. TP, on the other hand, governs how profits are allocated among related entities across jurisdictions, requiring that intercompany transactions reflect economic substance and arm’s length pricing. APAs serve as a proactive mechanism to secure tax certainty by agreeing in advance with tax authorities on acceptable transfer pricing methodologies.

For corporate taxpayers, proactively integrating ESG considerations into APA strategies and transfer pricing policies enables businesses to reinforce their commitment to sustainability-driven practices while securing long-term reliability in cross-border tax arrangements.

UNDERSTANDING APA AND ESG
In last month’s article, “BIR to hold public consultation on Advance Pricing Agreements: What it means for businesses,” we defined an APA as a formal agreement between a corporate taxpayer and the BIR that establishes in advance a mutually agreed set of criteria, such as the transfer pricing method, selection of comparables, and necessary adjustments, to determine the pricing of related-party transactions over a specified period, with the primary objective to minimize the likelihood of transfer pricing audits and avoid instances of double taxation. Globally, APAs are widely regarded as a key instrument for ensuring consistent and reliable tax treatment, particularly in complex cross-border transactions.

Recently, the BIR issued a draft revenue regulation on APA and conducted a public consultation. The draft outlines the types of APA, the expected benefits for corporate taxpayers, the procedural steps for application and monitoring, a phased implementation approach, and the applicable APA fees.

The APA initiative was positively received by the business community and tax professionals, who presented recommendations to enhance the draft regulations. Key suggestions included clarifying the criteria for acceptance and rejection of APA applications, specifying minimum documentation requirements, establishing standard timelines for each stage of the APA process, detailing the methodology for monitoring compliance, providing guidance on renewal and revision procedures, outlining criteria for evaluating ESG-linked or intangible-heavy transactions, and benchmarking against APA programs in other ASEAN jurisdictions.

On the other hand, ESG refers to a set of non-financial performance indicators that assess a company’s impact on environmental sustainability, ethical practices, and corporate governance, which has become a central framework for evaluating long-term value creation, risk management, and stakeholder trust. Sustainability is a broader concept that encompasses long-term environmental, social, and economic viability. While ESG provides the metrics and reporting structure, sustainability represents the overarching goal that guides strategic decision-making.

In the Philippines, a growing number of businesses are embedding ESG principles into their core operations. On the environmental front, many invest in renewable energy, reduce water and energy consumption, and implement waste management programs to minimise their ecological footprint. Social initiatives often include inclusive hiring practices, employee wellness programs, and community engagement efforts such as education, healthcare, and disaster relief. From a governance standpoint, companies are adopting transparent reporting standards, strengthening board oversight, and aligning executive compensation with sustainability goals.

According to the Securities and Exchange Commission (SEC), 95% of publicly listed companies in the Philippines submitted sustainability reports in 2024, which marks a significant increase from 22% in 2019, when the SEC first introduced its Sustainability Reporting Guidelines.

IMPACT OF ESG IN APA AND TP
In the context of transfer pricing, ESG factors increasingly shape how value is created, allocated, and justified across related entities. Integrating ESG into the transfer pricing documentation and APAs helps ensure that sustainability-related activities are properly valued and defended in cross-border tax arrangements.

Consider a Philippine manufacturing company that sources from environmentally certified suppliers, invests in inclusive workforce programs, and supports community development. These initiatives not only elevate the operating costs but also create long-term value. To proactively manage the pricing implications of these ESG commitments, the company enters into an APA with the BIR. Through the APA, it agrees on a transfer pricing method that accounts for sustainability premiums and ESG-related expenditures. Complementing this, the company maintains detailed transfer pricing documentation and integrates ESG metrics in its annual reports. As a result, the company enjoys tax incentives, avoids tax audits, and attracts ESG-focused investors.

Beyond the manufacturing example, other Philippine businesses are also navigating ESG integration in their transfer pricing strategies. For instance, a renewable energy firm licensing green technologies to its affiliates may need to demonstrate how its research and development investments and environmental commitments enhance the arm’s length value of its intangibles, such as royalties. Similarly, a business process outsourcing provider that implements inclusive hiring and workforce development initiatives may need to justify cost-plus margins that reflect ESG-linked operational risks and social impact expenditures.

These are not merely theoretical constructs but are emerging realities where ESG is not merely a reporting concern, as it directly influences how profits are allocated and defended across borders, ensuring that intercompany pricing reflects economic substance rather than just formal legal arrangements. By aligning ESG with APA and TP, Philippine businesses are not just managing risk; they are actively shaping a future where tax strategy drives sustainable growth.

CHALLENGES AND CONSIDERATIONS
While APAs are not yet formally implemented in the Philippines, the integration of ESG factors into TP and APA presents a forward-looking opportunity for businesses seeking both tax certainty and alignment with global sustainability standards. However, realizing this potential requires navigating several key challenges.

Among the most pressing issues are the absence of ESG-specific tax guidance from the BIR, limited availability of comparable data for benchmarking ESG-linked transactions, evolving global standards, and the valuation complexity of ESG-related intangibles, such as green technologies, ethical brand reputation and social impact programs.

Furthermore, ESG-driven costs, from carbon reduction programs to green technology investments, often span multiple jurisdictions with differing tax treatments. While generally guided by the Organisation for Economic Co-operation and Development (OECD) principles, interpretations may vary depending on local regulations, the nature of the ESG initiative and how value is created and shared across the group. For example, a regional sustainability program may support compliance in multiple jurisdictions, but the cost allocation must reflect actual benefit and economic substance.

Despite these challenges, Philippine companies can take proactive steps to prepare for ESG-aligned transfer pricing strategies. To strengthen their position for future APA applications and defend ESG-related pricing structures, companies should consider conducting a gap analysis of current transfer pricing policies against ESG goals, engaging in pre-filing consultations with the BIR, preparing robust economic justifications for ESG-linked pricing structures, and reviewing the Information Return on Related Party Transactions (BIR Form No. 1709) and transfer pricing documentation to reflect ESG-linked functions, assets, and risks.

FINAL THOUGHTS
The convergence of ESG, APA, and TP marks a transformative shift in how Philippine businesses approach tax governance, sustainability, and cross-border compliance. In a world where transparency is currency and sustainability is strategy, companies that embrace ESG-aligned transfer pricing are future-proofing their businesses not only for regulatory certainty but also for long-term resilience and stakeholder trust.

While this strategic opportunity comes with unresolved complexities, it is critical for stakeholders to engage in meaningful dialogue in order to advance and shape future policy. For instance, how should ESG-related costs and value creation be reflected in transfer pricing models to ensure fairness and defensibility? What mechanisms can the BIR adopt to recognize ESG-linked intangibles and sustainability premiums in future APA negotiations? Can ESG-aligned transfer pricing become a basis for tax incentives or preferential treatment under Philippine tax law? How can businesses balance the financial impact of ESG initiatives with the need for competitive margins in intercompany transactions?

Addressing these questions will require collaboration among businesses, regulators, and industry experts to build a future where ESG completes the strategic triangle with APA and transfer pricing as not just a reporting obligation but a strategic pillar of responsible growth.

Let’s Talk TP is an offshoot of Let’s Talk Tax, a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Sheena Marie D. Daño is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.