The Bureau of Internal Revenue (BIR) has issued Transfer Pricing Audit Guidelines under Revenue Audit Memorandum Order (RAMO) No. 1-2019 on 20 August 2019, which provides standardized audit procedures and techniques in auditing taxpayers with related party transactions to ensure a quality audit. The guidelines applies to controlled transactions or transactions between related parties where at least one party is taxable in the Philippines and it covers the sale, purchase, transfer and utilization of tangible and intangible assets, provision of intra-group services, interest payments, and capitalization. The Revenue Officers are required to make and submit a report upon completion of the audit or investigation. This guide will be effective immediately after its approval.
In accordance with RAMO No. 1-2019, companies with shareholders owning more than 25% of the equity or those with related party transactions that are more than 20% of the relevant threshold are deemed to be non-independent and should be disallowed as comparables for benchmarking.
The similar rules of regular audits will be followed in transfer pricing audit. A Letter of Authority (LoA) will also be served. The document regarding information regarding related party transactions, segmented financial statements, functions, assets, and risks (FAR) analysis, business types, comparability analysis, transfer pricing method used, comparables used in applying the arm’s length principle and determination of the profits in the related party transactions are being requested. The BIR will likewise require the taxpayer to submit the document within five (5) working days from receipt of notice.
The RAMO No. 1-2019 also provides transfer pricing methods which are consistent with the methods identified in the local Transfer Pricing Guidelines, but with more detailed explanation. These methods are used in the test of application of arm’s length principle by way of determining which is the most appropriate to the facts and conditions of the transactions.
The manual describes the transfer pricing methods in detail, their applicability on different types of transactions, the comparability factors that must be considered in selecting comparable companies for benchmarking, and the adjustments that can be adopted to increase the comparability if there are differences that may affect the price or profit. Corresponding adjustments can be requested by the other party to the transaction, referred to as secondary adjustments. It also provides guidance on when transactions should be tested individually or evaluated as combined transactions.
