Do reimbursements hide transfer pricing risks?

RECENTLY, a client approached us with a query: How can we defend our reimbursements in the event of a transfer pricing audit?

- Joanne Lesley Padilla

From a transfer pricing perspective, reimbursements are often deprioritized or excluded as a focal point of analysis. Historically, there have been several reasons for this. First, reimbursements are often immaterial in amount or are analyzed alongside more significant transactions (such as management services) rather than being assessed on a standalone basis. Second, they are commonly treated as pass-through costs—amounts incurred on behalf of arelated party and recharged without value addition. In such cases, a separate benchmarking analysis is typically not performed, especially when no profit element is embedded. Third, reimbursements at cost are generally not considered income; they are viewed as a return of capital that simply restores the paying entity to its original financial position.

The Shift: RMC No. 5-2024 and the Philippine reality

HOWEVER, the client’s concern is valid. Recent developments suggest that reimbursements are no longer automatically viewed as low-risk items in a transfer pricing context. BIR, interestingly, has a very different take on the treatment of reimbursables. RMC No. 5-2024 clarifies that reimbursable or allocable expenses charged by a foreign corporation may be viewed as part of the overall value or benefit received by the Philippine entity, particularly where such costs relate to services or activities performed for its benefit.

Moreover, the same issuance reflects the BIR’s broader position that economic benefits—such as cost savings or reductions in expenses—may be treated as taxable income, depending on the circumstances. While this principle is not limited to transfer pricing, it reinforces the idea that reimbursements cannot be evaluated purely based on form, and must instead be assessed in light of the underlying economic substance.