The main objective of a benchmarking analysis in a Transfer Pricing Documentation (TPD) is to determine the arm’s length range of price or return.
In our previous article “BIR transfer pricing audits - the next wave?”, we have looked into Revenue Audit Memorandum Order (RAMO) No. 1-19 which is the current regulation set by the Bureau of Internal Revenue (BIR) when it comes to Transfer Pricing (TP) audits. The RAMO explained in detail how will the BIR conduct its audit of related party transactions.
If transfer pricing documentation (TPD) were a movie, the benchmarking analysis would be the plot. A well-crafted plot bears weight on the quality of a movie as much as a well-prepared benchmarking analysis bears weight on the quality of a TPD.
The Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) have expressed a shared goal to increase taxes collected as a percentage of GDP of 14.6% in 2022 to 17.1% by 2028. They confidently expect to meet this goal as it will be driven primarily by economic growth and by offering taxpayers convenience through tax digitalization programs. While it is accurate to claim that the BIR will derive more revenues with a stronger economy and by providing more convenient avenues for taxpayers to pay their dues, taxpayers know well what this means – an upsurge of BIR assessments across all industries.
With all the continued merriments and celebrations spilled over, from the Christmas holidays to other celebrations such as the feast of the Black Nazarene, Sinulog Festival, and the Chinese New Year, it is finally the last day of January 2023. Accountants and auditors alike would surely be thankful that January, for what seemed like an eternity, is over. Finally, a fraction of the tax season is over, and we survived so far. But it doesn’t stop there. Before we get tied up with the finalization of audited financial statements and income tax returns for the year thus ended, it is equally important to focus on the reportorial requirements of taxpayers in terms of transfer pricing (TP).
Another year is dawning, and the countdown has begun. As the days go by and we take the first step in faith towards the new year, we hope everyone can reflect and truly say that it was indeed a year of intense growth. Since I am a believer that the new year is neither an end nor a beginning but a going-on, I wish to take everyone back and recall the previous Let’s Talk Transfer Pricing (TP) articles that were published throughout the year so we may welcome 2023 with proper guidance.
The Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines provide five methodologies that are widely used and accepted by almost all tax authorities in determining transfer prices. These include three traditional transaction methods – comparable uncontrolled price (CUP) method, resale price method (RPM), and cost-plus method (CPM); and two transactional profit methods – transactional net margin method (TNMM) and profit split method (PSM).
In our last article on the fundamentals of entity characterization in transfer pricing documentation (TPD), we highlighted the concept that our knowledge of the nature of a particular business determines the entity characterization and in turn, the entity characterization influences the direction and tone of the TPD as well as setting the direction in having a meaningful comparison of the price or level of income of the entity in a controlled transaction against the price or level of return from similar independent transactions.
