Transfer Pricing Audit in the Philippines: How the BIR Reviews Related-Party Transactions

A transfer pricing audit in the Philippines is the Bureau of Internal Revenue's examination of transactions between related parties to check whether they were priced at arm's length. The BIR first conducts a transfer pricing risk assessment using the Related Party Transaction (RPT) Form, identifies high-risk taxpayers, and then decides whether to audit a particular entity or transaction. Even taxpayers not required to file the RPT Form or prepare Transfer Pricing Documentation (TPD) may still be audited — and must still prove their related-party dealings were conducted at arm's length.

What transfer pricing means and why the BIR audits it

Transfer pricing is the pricing of cross-border, intra-firm transactions between related parties or associated enterprises. Under Revenue Regulations No. 2-2013, two or more enterprises are associated if one participates directly or indirectly in the management, control, or capital of the other, or if the same persons participate in both. A controlled transaction is any transaction between associated enterprises.

The BIR's concern is revenue loss. Related companies often care more about their net income as a group than as individual corporations, creating an incentive to minimize tax. While transfer pricing typically arises in cross-border transactions, RR No. 2-2013 also covers domestic transactions between associated enterprises — for example, shifting income toward a related company enjoying Board of Investments or Philippine Economic Zone Authority incentives, or shifting expenses to a related company taxed at regular rates.

The BIR's authority to adjust income

Under RR No. 2-2013, the Commissioner of Internal Revenue is authorized to distribute, apportion, or allocate gross income or deductions between or among businesses owned or controlled directly or indirectly by the same interests, when necessary to clearly reflect income. The Commissioner may make transfer pricing adjustments to prevent tax avoidance through controlled transactions. RR No. 2-2013 states that this authority is exercised pursuant to the National Internal Revenue Code of 1997, as amended (the "Tax Code"), but the library's copy of the regulation does not reproduce the specific Tax Code section numbers, so they are not cited here.

Who must report and prepare documentation

The BIR screens taxpayers through the RPT Form (BIR Form No. 1709). A taxpayer must file an RPT Form if it files an Annual Income Tax Return, has transactions with a domestic or foreign related party during the taxable period, and falls under any of these categories: large taxpayers; taxpayers enjoying tax incentives such as Income Tax Holiday or preferential income tax rates; taxpayers reporting net operating losses for the current and the immediately preceding two consecutive years; or a related party transacting with any of them.

Filing the RPT Form does not automatically mean preparing a TPD. The TPD becomes mandatory only when the taxpayer meets any of these thresholds: annual gross sales or revenue exceeding P150,000,000 and total related-party transactions exceeding P90,000,000; sale of tangible goods involving the same related party exceeding P60,000,000; service, interest, intangible, or other related-party transactions with the same related party exceeding P15,000,000; or a TPD was required in the immediately preceding taxable period for exceeding these thresholds.

Notably, the TPD is not attached to the RPT Form — it must be made available during audit. The materiality thresholds matter only for preparing a TPD; a taxpayer required to file the RPT Form must disclose all related-party transactions regardless of amount.

How a transfer pricing audit works

RR No. 2-2013 adopts the arm's length principle as the standard: a transaction with a related party must be made under comparable conditions as a transaction with an independent party. The Bureau applies a three-step approach:

1. Conduct a comparability analysis — examining the characteristics of goods, services, or intangibles; the functions performed, risks assumed, and assets employed; and the commercial and economic circumstances.
2. Identify the tested party and the appropriate transfer pricing method — the entity to which a method can be most reliably applied.
3. Determine the arm's length results.

The BIR has no fixed preference among methods. The method producing the most reliable result is used, chosen from the Comparable Uncontrolled Price method, the Resale Price Method, and other accepted approaches. Results are often expressed as a range. If the taxpayer's price or margin falls within the arm's length range, no adjustment is made; if it falls outside, the taxpayer must prove the transaction satisfies the arm's length principle, failing which the Bureau determines the adjustment point.

Exchange of information in cross-border cases

Cross-border audits may involve foreign information. Under Revenue Memorandum Order No. 26-2020, the BIR's Exchange of Information Unit handles requests with treaty partners, and information requested must be "foreseeably relevant" to the tax affairs being examined — a standard that excludes "fishing expeditions." Requests are channeled through the EOI Unit; revenue officers may not exchange information directly with foreign tax authorities.

Frequently asked questions

Do I need to prepare transfer pricing documentation if I file an RPT Form? Only if you meet the thresholds under the applicable revenue regulations. Filing the RPT Form alone does not require a TPD. However, any taxpayer may voluntarily prepare one to prove arm's length pricing during audit.

Will filing the RPT Form exempt me from a BIR audit? No. The RPT Form feeds the BIR's risk assessment, but the Bureau retains the right to conduct a transfer pricing audit against taxpayers with related-party transactions, whether or not they filed the RPT Form or prepared a TPD.

What happens if I fail to provide material information in the RPT Form? The BIR will regard the RPT Form as not duly filed, and the penalty for failure to file the information return will be imposed.

Practical takeaways

• The arm's length principle governs all controlled transactions — cross-border and domestic.
• File the RPT Form if you meet the criteria under the BIR's rules; disclose actual amounts, not estimates.
• Prepare a TPD only when the applicable thresholds are met — but remember the burden of proof rests on the taxpayer.
• Keep documentation ready: a TPD is not attached to the RPT Form but must be produced during audit.
• The BIR may audit related-party transactions even without an RPT Form or TPD, so evidence of arm's length pricing should always exist.

Primary sources

The rules discussed above are drawn from the following issuances, embedded here in full for your reference.

RR No. 2-2013 — Prescribes the transfer pricing guidelines (Published in Manila Bulletin on January 25, 2013) Digest | Full TextOpen in Law LibraryDownload PDF

RMO No. 26-2020 — Prescribes the use of the revised Exchange of Information Manual, amending for this purpose Revenue Memorandum Order Nos. 2-2013 and 3-2013Open in Law LibraryDownload PDF

RMC No. 54-2021 — Clarifies certain provisions of Revenue Regulations No. 34-2020 Digest | Full TextOpen in Law LibraryDownload PDF

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.