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The Philippines is not a member of the Organisation for Economic Cooperation and Development (“OECD”), but their transfer pricing regulations are largely based on OECD Guidelines.On 11 October 2023, the Philippines joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”), an international collaboration with over 140 member countries and jurisdictions. Through its membership, the Philippines has committed to align with the OECD BEPS programs to address tax challenges arising from digitalisation of the economy through the reform of the international tax rules, with the objective of ensuring that multinational enterprises (“MNEs”) pay their fair share of tax, wherever they operate.
This follows the January 2023 announcement by the Bureau of Internal Revenue (“BIR”) that they plan to establish a specific audit group with a focus on Transfer Pricing, International Tax and BEPS issues, which aims to capture the significant revenues from international transactions that the BIR were missing out on. With the increased scrutiny on cross-border transactions in the Philippines, it is now more important than ever, for taxpayers to ensure that they are prepared in the event of a transfer pricing audit.
The Philippines Transfer Pricing audit guidelines
The Philippines BIR laid the groundwork to strengthen its transfer pricing initiatives through the issuance of the Revenue Audit Memorandum Order (“RAMO”) No. 1-2019 (Philippine Transfer Pricing Audit Guidelines) in August 2019, and RR No. 19-2020 on 8 July 2020, which required qualified entities to submit BIR Form No. 1709 (the Information Return on Related Party Transactions (“RPT”) Form).
Under RAMO No 1-2019, BIR examiners are required to determine the arm’s length price for each controlled transaction between related parties, based on the application of transfer pricing methods as prescribed in the OECD transfer pricing guidelines (“TPG”).
The BIR Form No. 1709 is submitted with the annual income tax return, and it provides the BIR with the preliminary information that they need to conduct initial assessments, identify high-risk taxpayers, and decide on whether to conduct a transfer pricing audit. However, it is important to note that transfer pricing audits are carried out as part of regular tax audits, and they may be initiated as long as there are RPTs, regardless of the taxpayer’s obligation to file the BIR Form 1709 or prepare transfer pricing documentation.