On May 26, 2025, BusinessWorld Online published an article detailing a transfer pricing audit conducted by the Philippine Bureau of Internal Revenue (BIR) on a local call center services company. This case offers valuable lessons for multinational companies operating in the country.
Case background
The audited company, established in 2022, provided support, consulting, and maintenance services exclusively to its parent company. Despite being newly established, it received a Letter of Authorization (LoA) from the BIR to examine its tax compliance in 2023.
Following the audit, the BIR alleged an understatement of income based on a discrepancy in the 2023 Audited Financial Statements (AFS): total costs reported amounted to approximately PHP 100 million, while income declared was only PHP 90 million. The BIR applied an industry standard margin of 10% on total costs, adjusting income to PHP 110 million and considering the difference of PHP 20 million as unreported income subject to regular corporate tax.
Factors triggering audits
The BIR identifies certain red flags that may trigger transfer pricing audits, such as:
- Declaration of net losses, especially in new companies.
- Profit margins that do not align with industry standards.
- Inconsistencies between reported costs and declared income.
In this case, the declaration of a net loss in 2023 was a key factor that attracted the attention of the BIR.
Importance of robust documentation
The audited company was able to defend its position thanks to robust transfer pricing documentation, which included:
- A clear transfer pricing policy and intercompany agreements detailing the pricing structure.
- Justification that non-recurring start-up costs were not subject to a profit margin, in line with the OECD Transfer Pricing Guidelines.
- Comparability analysis showing that the margin applied was within the market range for limited-risk service providers.
This documentation was crucial in explaining the pricing methodology to the BIR and mitigating potential tax adjustments.
Conclusions and recommendations
- Taxpayers can mitigate risks in their transactions with related parties by maintaining pricing and cost agreements that are in line with market conditions and the economic situation of their sector.
- Consider audits as opportunities to improve accountability and tax compliance.
- Maintain transfer pricing documentation that is up to date and consistent with actual transactions.
- Review transfer pricing policies annually to ensure they are aligned with financial results.
- Adequately justify losses, especially in the first years of operation, demonstrating that they are commercial in nature and not the result of inappropriate pricing practices.
Is your company prepared for a transfer pricing audit?
At TPC Group, we have experts who can help you structure and document your intercompany operations in accordance with best practices and current regulations. Contact us for a specialized consultation.
Source: BWorldOnline