Preparing for BIR Transfer Pricing Audits: A Practical Guide
Documentation, Risk Management, and Strategic Readiness for Enterprises
Transfer pricing has become a central point of scrutiny for the Bureau of Internal Revenue (BIR), especially for medium to large corporations with cross-border or related-party transactions. With heightened audit efforts and increased reporting obligations, preparing for a BIR transfer pricing audit is not just about compliance but also about strategic risk management.
This article provides practical guidance for enterprises, especially those with intra-group services, royalties, or intercompany financing arrangements.
Professionals map out transfer pricing audit timelines as part of reinforcing documentation strategies.
When Does Transfer Pricing Apply?
In the Philippine context, transfer pricing rules apply to controlled transactions or dealings between related parties. These can be:
Parent & Subsidiary Companies
Affiliates Under Common Control
Branches & Head Offices
Related Party Service Providers
Transactions may include:
Sale of Goods or Services
Intercompany Loans or Guarantees
Use of Intangible Property
(ex: trademarks)
Cost-Sharing Arrangements
These are scrutinized to ensure that pricing reflects what would have been charged between unrelated parties, the “arm’s length principle.”
Transfer Pricing Documentation Requirements
Enterprises subject to transfer pricing regulations must maintain the following documentation, especially when filing BIR Form 1709:
Master File:
Group-wide structure, financials, intangibles, and overall transfer pricing policy.
Local File:
Specific to the Philippine entity, including functional analysis, comparability studies, and intercompany agreements.
Benchmarking Study:
Justifies the pricing using comparable transactions or entities.
Must be submitted with the Income Tax Return if the taxpayer meets the thresholds.
Failure to submit complete documentation may result in penalties, adjustments, or even assessments of tax deficiencies.
Strengthening Transfer Pricing Defensibility
For medium to large enterprises engaged in cross-border or intercompany transactions, building a defensible transfer pricing structure embeds consistency and traceability across business processes.
Key ways to enhance your defensibility before a BIR audit:
Use the most current and relevant data sources to establish arm’s-length pricing—especially when economic conditions shift.
By strengthening the defensibility of your transfer pricing framework, your organization is better positioned to respond proactively to queries and reduce exposure to adjustments, penalties, or reclassifications during BIR audits.
Common BIR Focus Areas During Audits
The BIR typically focuses on:
Mismatch
Between Form 1709 and audited FS
Significant Intercompany Service Charges
Or royalties
Sudden Changes
In profitability
Lack of Local Substance
Or economic benefit
Inadequate Benchmarking
Or outdated comparables
Absence
Of valid intercompany contracts
These red flags can trigger audit findings, adjustments, and interest or penalties.
Best Practices to Prepare for Audit
Companies can proactively reduce audit risks by implementing the following:
Update
Transfer pricing documentation annually
Conduct
A pre-audit readiness review with advisors
Align
Accounting entries with Form 1709 disclosures
Strengthen
Local substance through documentation and operational records
Review
And update intercompany contracts
Train
Finance teams on transfer pricing obligations and documentation handling
Early preparation avoids reactive responses and shows good faith to regulators.
For corporations with regional operations or affiliated entities, transfer pricing readiness is a key element of tax governance, reputation protection, and financial risk control.
Respond confidently during audits. Position & reduce exposure to costly assessments.
Align with OECD guidelines & expand inter-agency tax transparency measures.
