The Bureau of Internal Revenue recently issued Revenue Regulations (RR) No. 19-2020 introducing BIR Form No. 1709, replacing form no. 1702H series of 1992. BIR Form No. 1709 is also called Related Party Transaction (RPT) form.
Various issues and questions arose from different parties related to the issuance of the RR, prompting the BIR to issue Revenue Memorandum Circular (RMC) No. 76-2020 to clarify provisions on filing said form and its attachments. RMC No. 76-2020 is in a Q&A format and answers the frequently asked questions (FAQs) on the filing of the BIR Form No. 1709 and its attachments, and other related matters. What matters are clarified?
Below are the significant contents (answers to questions) of the RMC No. 76-2020:
Objective and coverage of BIR Form No. 1709
- The objective of BIR Form No. 1709 is to improve and strengthen BIR’s transfer pricing risk assessment and audit. It shall be used to monitor compliance with the transfer pricing documentation (TPD).
- The RPT Form is to be completed by Philippine taxpayers with RPT, regardless of amount and volume of transactions.
- Individuals who are considered related parties of the reporting entity are also required to submit the RPT Form in their individual capacities.
Note that RMC No. 76-2020 used the word “Philippine taxpayers” which means that freelancers, sole proprietors, partnerships and corporations are all required to complete the form if they have transactions with related parties.
Submission of BIR Form No. 1709
- The RPT Form is required to be submitted as an attachment to the Annual Income Tax Return (AITR) starting for fiscal year (FY) ending March 31, 2020, whether tentative or otherwise,
- Taxpayers who manually filed their AITR and submitted the attachments for FY ending March 31, 2020 prior to the effectivity of RR No. 19-2020 are still required to file and submit the RPT Form and its attachments.
- Taxpayers with FY ending March 31, 2020 are given 2 months from July 31, 2020 or until September 30, 2020 within which to prepare, file and submit the RPT Form and its required attachments.
- AITRs for calendar year (CY) 2019 or for FYs ending prior to March 31, 2020 are NOT covered by the new RPT Form requirement.
As this is an attachment to the tax return, it will follow the tax return filing/submission deadline.
Mode of filing and deadline of submission
- The RPT Form and its attachments shall be manually filed unless there is another revenue issuance mandating their electronic filing.
- The deadlines for submission of the RPT Form and its attachments are:
- Manual filers – within the statutory due date (April 15 for calendar year);
- eFPS filers – within 15 days from the statutory due date or actual date of electronic filing of the AITR, whichever comes later, with the RPT Form and its attachments to be submitted manually and stamped “received” at the revenue office where the taxpayer is registered.
- Non-filing of the RPT form and its required attachment is subject to the following penalties:
- Penalty of not less than
P1,000.00 but not more than P25,000.00 for failure to file the RPT Form and its attachments due to reasonable causes and not to willful neglect; Maximum penalty of P25,000.00 shall be imposed in case of repetition of such offense.
- Fine of not less than
P5,000.00 but not more than P10,000.00 and imprisonment of not less than 1 year but not more than 2 years to be imposed, upon conviction, on the partner, general manager, branch manager, treasurer, OIC and the employees responsible, in case of failure or negligence to produce the attachment after receiving valid summons to produce the same.
- Penalty of not less than
Contents of and attachments to the RPT Form
- If the RPT form is inadequate because there are a number of related parties, the taxpayer may use additional sheet/s if necessary or transpose the form into an Excel format, print a copy thereof, and attach it as an integral part of the RPT Form.
- All taxpayers with RPTs, regardless of amount and volume, are required to attach a TPD, local or otherwise, with the TPD indicating the date of its creation or preparation.
- The TPD to be submitted must be the documentation upon which the taxpayers relied to determine the transfer pricing prior to or at the time of undertaking the RPTs and must have been prepared not later than the filing due date of the tax return for the taxable year in which the transactions took place.
- The TPD need not be updated yearly if there are no significant changes in the business model, the factors, or conditions considered in drafting the TPD , and the nature of the RPT; in such a case, the old TP shall suffice.
- If the parent company has a TPD, which covers the transaction with subsidiaries, the subsidiaries can use such TPD if relied upon in determining the prices, but the local file is preferred since it provides a more detailed information relating to specific intercompany transactions.
- The TPD for the immediately preceding year may apply to subsequent RPTs if:
- The transaction covered by the past TPD is of the same type and undertaken with the same related party; and
- The taxpayer can prove that the same conditions apply, such as but not limited to: a) relationship between the taxpayer and its related party; b) conditions made or imposed between them, c) transfer pricing method/s used in the transaction; and d) arm’s length conditions.
- The enumeration of RPTs in RR No. 19-2020 is NOT exclusive. Thus, dividends and redemption of shares between and among related parties (either paid or payable, received or receivable), though not usually covered by a TPD, should be disclosed in the RPT Form; Prescribed supporting documents must be maintained for dividend payments.
- Formal written agreement/ contracts of cost-sharing arrangements are required to be submitted to prove that they are for legitimate expenses; this is in addition to documents (e.g. receipts, proofs of payment) needed to substantiate the expenses.
- All contracts, regardless of volume, are required to be attached; electronic copies may be submitted under certain conditions.
- The contracts to be attached to the RPT Form are those executed by the parties to substantiate the RPTs in the covered taxable year.
- Contracts executed in the previous year, but are still enforceable and applicable to the RPTs in the taxable year concerned, have to be attached.
- Any taxes paid to a foreign country by a Philippine taxpayer must be declared, and the proof of payment thereof attached to the RPT Form.
- If the taxpayer earned an income from its related party in a foreign country, but has yet to pay the tax thereon after the filing of the RPT Form, the taxpayer still has to declare in the RPT Form such income and indicate in the column for withholding taxes that it did not pay any tax thereon.
- If the taxpayer paid the corresponding tax after the filing of the RPT Form, the taxpayer must inform the tax examiner during audit of such fact and present the proof of payment thereof.
- The document showing payment of foreign taxes or copy of foreign ruling duly issued by the relevant foreign tax authority must be duly authenticated or apostilled.
- The Tax Treaty Relief Applications (TTRAs) to be indicated in the RPT Form must be those filed with the BIR ITAD relative to the income payments made by the Philippine taxpayer to its related party/ies.
- Since a non-stock and non-profit corporation is allowed to engage in activities conducted for profit without losing its tax-empty status for its non-profit activities, it is required to comply with RR No. 19-2020 if it has RPT.
- The Bank Secrecy Law cannot be used as legal basis not to submit the required documents.
In a previous hearing of a franchise license of a big television company, related party transactions had been one of the main topics, where regulators question the “tax avoidance” schemes. We are not sure whether this requirement is for the BIR to address similar situations. But their rationale in requiring this is that transactions around the world have become more complex and have been subject to abuse by taxpayers with intent to evade taxes by concluding transactions between them at unreasonable prices, thus eroding the tax base.
Related party relationships and transactions disclosures
RR No. 19-2020 added that in order to ensure that proper disclosures of related party transactions are made and that these transactions have been conducted at arm’s length so as to protect the tax base, there should be an effective implementation of Philippine Accounting Standards (PAS) 24, Related Party Disclosures, for tax purposes.
Note that related party relationships and transactions are required to be disclosed in the financial statements regardless of the reporting framework used. Even the Securities and Exchange Commission issued SEC Bulletin No. 13 that provides guidelines in disclosing these.
This additional requirement of the BIR to disclose related party transactions are somewhat redundant information already presented in the financial statements except for the required attachments of the transfer pricing documentations (TPDs) and contracts which are additional burden to taxpayers. Why not just require these documents during the tax audit?