On August 20, 2019, the Philippine Bureau of Internal Revenue (BIR) issued Revenue Audit Memorandum Order No. 1-2019 (the TP Audit Guidelines), to provide standardized audit procedures and techniques during transfer pricing audits.
The TP Audit Guidelines provides guidance for BIR officers in reviewing both domestic and cross-border related party transactions, including transactions involving permanent establishments. Transfer pricing audits generally start with the preparation stage where the BIR reviews all available documents, conducts research and discusses with taxpayers to identify potential transfer pricing issues. Once the BIR decides to move forward with a transfer pricing audit, the implementation phase includes the characterization of the taxpayer’s business, selection of the appropriate transfer pricing method and application of the arm’s length principle.
Moreover, the TP Audit Guidelines also address considerations for business restructuring, intra-group services, intangible assets and interest payments. Once the audit is completed, the BIR is required to issue a written report and they should discuss the audit findings with taxpayers before they issue the report. In the event that controlled transactions are not in accordance with the arm’s-length principle, an adjustment will be proposed by the BIR.
After the release of the TP Audit Guidelines, it is expected that the BIR will conduct more transfer pricing audits for transfer pricing adjustments, targeting specific industries such as the BPO, pharmaceutical and manufacturing industries. Therefore, it is recommended that taxpayers review their transfer pricing policy and ensure that relevant documentation are ready in place.
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