Tax Alert No. 64 [Revenue Audit Memorandum Order No. 1-2019 dated 20 August 2019]

05 Sep 2019

Transfer Pricing Audit Guidelines

The Commissioner of Internal Revenue has issued Revenue Audit Memorandum Order ("RAMO") No. 1-2019 also known as the "Transfer Pricing Audit Guidelines" to provide standardized audit procedures and techniques in the conduct of audit of taxpayers with related party and/or intra-firm transactions. 

The salient provisions are summarized as follows:

A. These Guidelines apply to, but not limited to the following transactions:

  1. Controlled transactions between related parties/associated enterprises, where at least one party is assessable or chargeable to tax in the Philippines.
    • Sale, purchase, transfer and utilization of tangible and intangible assets;
    • Provision of intra-group services;
    • Interest payments; and
    • Capitalization.
  2. Transactions between permanent establishment ("PE") and its head office or other branches. Based on the Guidelines, the PE will be treated as a separate and distinct enterprise from its head office or other related branches/subsidiaries for tax purposes.

B. The Guidelines provide three (3) phases of the transfer pricing audit procedures as follows:

  1. Preparation for transfer pricing audit - refers to the examination process which determines the scope of audit. During this phase, the BIR will request information and/or documents pertinent to the related party transactions of the taxpayer as well as request for meetings to discuss, where necessary, the taxpayer's business operations and findings, among others. Generally, the BIR will request and examine several documents such as the taxpayer’s annual income tax returns, audited financial statements, transfer pricing policy transfer pricing documentation, among others. The BIR will likewise require the taxpayer to submit within five (5) working days from receipt of notice, various information/proofs, in prescribed formats, on the following:
    • Related party transactions;
    • Segmented Financial Statement;
    • Supply Chain Management Analysis;
    • Function, Assets and Risks Analysis ("FAR Analysis");
    • Characteristics of Business; and
    • Comparability Analysis.
  2. Implementation of audit on transfer pricing comprises of the following:
    • Determination of the characteristics of the taxpayer's business;
    • Selection of the transfer pricing method; and
    • Application of the arm's length principle.
  3. Preparation of transfer pricing audit report which should include the following:
    • Executive summary;
    • Factual background and functional analysis of the taxpayer and the related party transaction/s at issue;
    • Summary of taxpayer’s proposed economic analysis for the related party transaction/s at issue;
    • Critique taxpayer's methodology and analysis for the related party transaction/s at issue;
    • Revenue Officer’s determination of arm's length price based on economic analysis; and
    • Summary and conclusion.

The Revenue Officer should likewise meet with the taxpayer to discuss audit findings on all issues before finalization of the report. 

C. The Guidelines also provided transfer pricing methods which are consistent with the methods identified in the Philippine Transfer Pricing Guidelines, but with more detailed explanation together with several examples on its application. 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.

D. The transfer pricing audit shall likewise cover business restructuring within a multinational group, intra-group services, intangible asset transactions, cost contribution arrangements, and interest payment transactions.

E. In instances where the Revenue Officer has found that a price in a controlled transaction is not compliant with the arm's length principle, he may make an adjustment to reflect the arm’s length price or interest rate for that transaction by substituting or imputing the price, or interest, as the case may be.

The Revenue Officers are required to make and submit a report upon completion of the audit or investigation.

You may access the RAMO below.

This RAMO is effective immediately after its approval.

Please be guided accordingly.

Contact us

Lyn Golez-Geronan

Tax Librarian, PwC Philippines

Tel: +63 (2) 845 2728 Ext. 2054

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