Do you recall the issuance of regulations and memorandum circulars by the Bureau of Internal Revenue (BIR) on another required attachment to the Annual Income Tax Return (AITR) during the height of the pandemic? This was the requirement to submit BIR Form No. 1709, the Information Return on Transactions with Related Party or simply Related Party Transaction (RPT) Form, and its supporting attachments.
As we enter the height of the AITR filing season, it is important to ensure that all required attachments are also complete and compliant. Unfortunately, even though we are already in the third year of implementation, some taxpayers are still not fully aware of the need to submit this BIR form. Below are some basic rules to remember.
Who is required to file BIR Form No. 1709?
Not all taxpayers are required to file the RPT Form. Hence, it is important to assess the status of the taxpayer to identify if it is covered by the requirement.
A taxpayer is required to file an RPT Form if the following conditions are present:
1. It is required to file an Annual Income Tax Return (AITR);
2. It has transactions with a domestic or foreign related party during the concerned taxable period; and
3. It falls under any of the following categories:
a. Large taxpayers
b. Taxpayers enjoying tax incentives, i.e., Board of Investments (BOl)-registered and economic zone enterprises, those enjoying Income Tax Holiday (ITH) or subject to a preferential income tax rate
c. Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years
d. A related party that has transactions with (a), (b) or (c) of the sub-criteria above.
On the other hand, if a taxpayer does not meet the conditions set forth during the taxable year, such a fact should be properly disclosed in its Notes to Financial Statements, as mentioned in Revenue Regulation (RR) No. 34-2020. Also, taxpayers are recommended to regularly monitor the above conditions as there are many factors that may affect the taxpayer’s current state of meeting them, hence requiring them to submit the RPT Form.
The RPT Form
The RPT Form is a three-page tax form that has sections for detailed information about the taxpayer, its foreign and domestic related parties, related party transactions, and other disclosures.
Most of the information required can be easily supplied. One required piece of information that taxpayers find difficult to answer is the question of whether the foreign related party has a permanent establishment (PE) in the Philippines. The Philippines have executed over 40 tax treaties, and majority of them defined PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Additionally, a PE can also be created due to the presence of a place of management; a branch; an office; a factory; a workshop; a mine, an oil, or gas well; building sites, construction or assembly projects that last for a defined period; the furnishing of services through the presence of employees, agents, or representatives in the Philippines for a defined number of days, depending on the extent or nature of activities pursued in the Philippines, among others. Taxpayers need to refer to applicable tax treaty in completing Part II of the form.
In Part III, a column is dedicated to the availability of treaty benefits granted to the taxpayers on the RPT. It prompts the taxpayers to secure their approved request for confirmation (RFC) or Tax Treaty Relief Application (TTRA), whichever is applicable, on the use of preferential rates on their disclosed RPT. A detailed description of the nature of RPT must also be indicated.
Note that the RFC with complete documentary requirements is a separate requirement of the BIR for cross-border transactions. It must be filed with the International Tax Affairs Division (ITAD) at any time after the close of the taxable year, except capital gains tax, but not later than the last day of the fourth month following the close of such a taxable year when the income is paid or becomes payable, or when the expense/asset is accrued or recorded in the books, whichever comes first.
Lastly, in Part IV of the form, the taxpayer must also provide the business overview of its ultimate and immediate parent/s; its functional profile and any change therewith; any change to its ownership structure or if it has undergone a business restructuring during the taxable year; if a transfer pricing documentation (TPD) has been prepared in relation to the RPT disclosed; details of any pending application for relief with the BIR, among others.
Note that all RPTs should be disclosed, regardless of their value. The form shall be completely and truthfully completed by the taxpayer or its authorized representative, with no required information left unanswered. For portions that are not applicable, such a fact must be stated.
The need for filing
The BIR clearly conveyed in RR No. 19-2020 that transactions around the world have become more complex through the years. Some transactions between related parties were structured to evade taxes, considering the different tax jurisdictions with different income tax rates and unreasonable transfer prices. Thus, the tax base in high tax jurisdictions is eroded and transferred to low tax jurisdictions. This ultimately leads to less tax collection by the tax authorities. In response to this worldwide dilemma, the BIR launched this requirement to gather information to perform transfer pricing risk assessment and eventually collect deficiency taxes, if any.
As the RPT Form also requires the disclosure of the amount of the transactions, the BIR can use these data to verify whether the RPTs are at arm’s length prices or not. This is why the taxpayer should be able to establish on its TPD that the transactions are within the arm’s length principle. Though the TPD is no longer required to be attached to the RPT Form, it should be made available during audit, according to Revenue Memorandum Circular No. 54-2021. Hence, the TPD should be prepared contemporaneously at the time of the occurrence of the transaction.
In addition, the Department of Finance (DOF) officials boldly announced last month that it would meet or exceed their P2.599 trillion target revenue collection through the BIR for the year 2023. All efforts to do so point toward digitalized taxpaying services and improving taxpayer services. Undoubtedly, it is expected that one way to hit this target is through tax assessments, which include deficiency taxes assessed due to transfer pricing issues with related parties.
Method of filing
Being an attachment to the AITR, the RPT Form and its supporting documents can be filed manually or through the BIR’s Electronic Audited Financial Statements (eAFS) System.
A penalty of not less than P1,000 but not more than P25,000 shall be imposed for failure to file the RPT Form and its supporting documents.
Aside from just meeting the deadline for submission of the RPT Form, taxpayers should carefully and accurately provide every information needed in the RPT Form. The BIR is continuously building its capability for transfer pricing assessments. Hence, taxpayers can expect that the BIR will be purposively evaluating the RPT forms and assessing whether the taxpayer is compliant with the RPT regulations.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 07 March 2023