On May 26, 2025, BusinessWorld Online published an article detailing a Transfer Pricing audit performed 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.
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 BIR Letter of Authorization (LoA) in 2023 to examine its tax compliance.
After auditing, the BIR alleged an understatement of income based on a discrepancy in the Audited Financial Statements (AFS) for 2023: The total costs reported amounted to approximately PHP 100 million, while the reported income 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 PHP 20 million difference as undeclared income subject to regular corporate income tax.
Factors Triggering Audits
The BIR identifies certain red flags that can trigger Transfer Pricing audits, such as:
- Reporting 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, reporting a net loss in 2023 was a key factor that caught the BIR’s attention.
Importance of Solid Documentation
The audited company could defend its position due to solid Transfer Pricing documentation, which included:
- A clear Transfer Pricing policy and intercompany agreements detailing the fee structure.
- Supporting the non-recurring start-up costs was not subject to a profit margin, according to the OECD Transfer Pricing Guidelines.
- Demonstrating, through comparability analyses, 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 related-party transactions by maintaining pricing and cost agreements that reflect market conditions and align with their economic sector’s situation.
- Consider audits as opportunities for improvement in tax compliance and enforcement.
- Maintain Transfer Pricing documentation updated and consistent with actual operations.
- Review Transfer Pricing policies annually to ensure they are aligned with financial results.
- Adequately support losses, especially in the early years of operation, demonstrating that they are commercial and not the result of mispricing.
Is Your Company Prepared for a Transfer Pricing Audit?
At TPC Group, we have experts at your disposal to structure and document your intercompany transactions under best practices and current regulations. Contact us for specialized consulting.
Source: BWorldOnline