Our Company is Losing Money – Are We Automatically a Transfer Pricing Risk?

By: Joanne Lesley C. Padilla

"Ultimately, losses do not automatically mean a company has a transfer pricing problem. What matters is whether the outcome is commercially reasonable, economically consistent, and aligned with the company’s actual functions and risks. In today’s transfer pricing environment, the strongest defense is not simply showing that a company falls within a benchmark range but demonstrating that the overall business result still makes sense when viewed against commercial reality."

From a taxpayer’s perspective, transfer pricing compliance can be extremely burdensome, especially during periods of financial difficulty. The assumption is almost automatic.

“If we are losing money, the BIR will think our transfer pricing is wrong.”

At the same time, many taxpayers carry a different frustration altogether:

“Our business is already struggling financially. Why are we still being asked to comply with transfer pricing requirements? Isn’t it too much to expect businesses to bear the brunt of economic uncertainty, with little to no government support, and still comply with transfer pricing requirements on top of other tax obligations?"

From a business perspective, the concern is understandable. Companies dealing with declining revenues, rising costs, operational disruptions, or difficult market conditions often view transfer pricing compliance as an additional burden at the worst possible time. After all, transfer pricing is commonly associated with profit shifting and tax avoidance. If no profits exist, taxpayers naturally question why extensive documentation and benchmarking are still necessary.

Yet in practice, losses do not make transfer pricing irrelevant. In many cases, they attract even greater scrutiny.

Transfer pricing fundamentally revolves around one question:

“Are profits and losses being allocated where value creation and economic risks actually reside?”

Why Losses Trigger Transfer Pricing Scrutiny

Recall that under RR No. 34-2020, a taxpayer that reports net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years is required to accomplish and file an RPT Form detailing the intercompany transactions in which the taxpayer is involved. From this requirement alone, we get the perspective of BIR to treat recurring losses as a major red flag.

In both cross-border and domestic transactions, if one entity – whether it be a subsidiary or an affiliate – is consistently incurring losses while its related parties remain profitable, tax authorities begin to ask:

• Is the entity undercompensated?
• Are excessive costs being charged to the entity?
• Is the entity bearing risks without appropriate returns?
• Are profits being shifted elsewhere within the group?

This is particularly evident in cases involving limited-risk entities such as routine service providers, contract manufacturers, captive support centers, and limited-risk distributors. Because these entities generally perform routine functions and lack the entrepreneurial profile or financial capacity to assume significant risks, they are typically expected to earn stable, positive returns. Accordingly, consistent losses may indicate that the entity is assuming risks that are not commensurate with the functions it is purported to perform. Where this pattern arises between a domestic entity and foreign associated enterprises, it may also raise concerns regarding potential profit shifting.

But Losses Alone Do Not Prove Transfer Pricing Problems

Although recurring losses certainly raise a major red flag, as no independent enterprise under normal circumstances would tolerate continuous losses indefinitely, this is not definitive proof of profit shifting. Independent businesses can and do incur losses for legitimate commercial reasons, including economic downturns, extraordinary disruptions (such as the Covid-19 pandemic or natural disasters), significant R&D expenses to develop new products, aggressive market penetration strategies, and expansion, among others.

The arm’s length principle does not guarantee profits. It only requires that related-party arrangements reflect what independent parties might reasonably agree to under similar circumstances.

In some situations, even independent entities may temporarily accept losses to preserve long-term business relationships or maintain market presence.

The Real Risk: When the Facts Do Not Match the Story.

Transfer pricing disputes often arise not from losses per se, but from losses that appear inconsistent with an entity’s characterization and functional profile. In such cases, substance takes precedence over narrative. For example, a full-fledged entrepreneur that assumes market and inventory risks may reasonably incur losses during difficult periods; however, a purportedly “limited-risk” entity that continues to absorb significant losses year after year may warrant closer examination.

This emphasizes an important reality in transfer pricing:

Tax authorities are generally less concerned with the mere existence of losses than with whether the losses align with the entity’s economic reality and actual conduct. Increasingly, tax authorities look beyond transfer pricing reports and benchmark ranges to evaluate:

• what functions the entity actually performs,
• what risks it genuinely assumes,
• and whether the outcome makes commercial sense under the circumstances.

A company may technically fall outside a benchmark range and still have a defensible position if it can clearly explain:

• why the losses occurred,
• how industry conditions affected operations,
• whether comparable independent companies experienced similar difficulties,
• and why the outcome remains commercially reasonable.

The challenge becomes even more pronounced in the Philippines, where reliable local comparables are often limited. Companies frequently rely on regional benchmarking sets that may not fully capture local market conditions, inefficiencies, or economic disruptions. As a result, taxpayers and tax authorities may interpret the same losses very differently depending on the transfer pricing method used, the comparables selected, and the characterization of the local entity.

This is what makes transfer pricing inherently judgment-driven. Two professionals can review the same facts and still arrive at different conclusions.

The frustration many taxpayers feel is therefore understandable. But from the government’s perspective, transfer pricing rules are not designed solely for profitable companies. They are intended to ensure that profits and losses are allocated consistently with where economic activities and risks actually exist. If losses can freely accumulate in one jurisdiction while profits remain protected elsewhere within the group, the integrity of the tax system becomes difficult to maintain.

Ultimately, losses do not automatically mean a company has a transfer pricing problem. What matters is whether the outcome is commercially reasonable, economically consistent, and aligned with the company’s actual functions and risks. In today’s transfer pricing environment, the strongest defense is not simply showing that a company falls within a benchmark range, but demonstrating that the overall business result still makes sense when viewed against commercial reality.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 310.