The Bureau of Internal Revenue (BIR) issued on 27 August 2019 Revenue Audit Memorandum Order (RAMO) No. 01-2019, providing for the Transfer Pricing (TP) Audit Guidelines. The objectives of the said RAMO are:
· to supplement RAMO No. 1-2000, which is the BIR’s handbook on audit procedures
· to provide for standardized audit procedures and techniques to be followed in the audit of taxpayers with related-party transactions.
The TP Audit Guidelines are also applicable by analogy in relation to transactions between a permanent establishment (PE) and its Head Office or other related branches. The PE will be treated by the BIR as a separate and distinct enterprise from its Head Office and other related branches/subsidiaries.
The TP Audit Guidelines also apply to intra-firm transactions where there is a misallocation of profits and costs. A misallocation is defined as occurring when a firm with activities subject to different tax regimes (i.e. income tax holiday, 5% gross income tax, regular corporate income tax) manipulate revenues and costs to minimize tax liabilities.
The TP Audit Guidelines seek to enforce the arm’s-length principle as mandated in Section 5 of Revenue Regulations (RR) No. 02-2013, dated 23 January 2013, which provides for the Philippine TP Guidelines.
Based on the TP Audit Guidelines, the BIR will perform its own functional analysis and comparable search. If necessary based on the results of the comparable search, the BIR will make TP adjustments. Nevertheless, taxpayers will be allowed to contest these adjustments.
Further, the TP Audit Guidelines have additional discussions on certain related-party transactions – business restructuring, intra-group services, intangible asset transactions, cost contribution agreements, and interest payment transactions.
· The TP Audit Guidelines seem to have been issued for the BIR’s internal use / reference only. For this reason, there is no specific regulatory requirement for taxpayers to comply with, other than the requirement under RR No. 02-2013 to maintain TP documentation.
· It is advisable for taxpayers to prepare and maintain robust and contemporaneous TP documentation as provided in RR No. 02-2013. Such documentation could serve as a good defense in case of TP adjustments. RR No. 02-2013 recognizes this when it states that the main purpose of keeping adequate documentation is for taxpayers to be able to defend their TP analysis and prevent TP adjustments.
· To assist taxpayers in handling their TP concerns, it may be advisable for the BIR to clarify the following:
- the first taxable year that RAMO No. 1-2019 will cover for TP audits
- its strategy for implementing RAMO No. 1-2019 (such as, for example, identification of which revenue district offices will undergo training in TP audits)
- whether it will adhere strictly to the definition of “contemporaneous documentation”
- acceptability of regional comparables over local comparables
- whether it will have a preferred TP database and preferred search strategy.
· It is also helpful if the BIR issues additional guidelines or, hopefully, revenue regulations to clarify other matters such as:
- Calculation and nature of tax deficiencies arising from the TP adjustments – While RAMO No. 1-2019 authorizes the BIR to make TP adjustments, it does not provide guidance on how the BIR will arrive at the tax deficiencies and if it will limit the said deficiencies to income tax only.
- Characterization and/or treatment of secondary adjustments.
The foregoing is for general information only and is not meant to be taken as professional advice. It is best to consult a tax professional when warranted by specific facts and circumstances.
DISCLAIMER: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although R.G. Manabat & Co. endeavors to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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