THE BUREAU of Internal Revenue’s (BIR) Revenue Regulations (RR) and other issuances on transfer pricing (TP) are relatively evolving. In 2013, the BIR issued RR No. 2-2013 which outlines Philippine transfer pricing regulations and the guidelines in applying the arm’s length principle for cross-border and domestic transactions between related parties.
In 2019, the BIR issued Revenue Audit Memorandum Order No. 1-2019 on TP Audit Guidelines. The Memorandum Order standardized audit procedures and techniques in the audit of taxpayers with related party and/or intra-firm transactions. And recently, the BIR issued its latest guidance through RR No. 19-2020, as amended by RR No. 34-2020 and Revenue Memorandum Circular (RMC) No. 54-2021, which reinforces TP rules by requiring the use of the new BIR Form No. 1709 for reporting related party transactions during a specific taxable period.
What is BIR Form No. 1709 (RPT Form)?
It is an information return on transactions with related parties, whether international or domestic. It shall be filed as an attachment to the annual income tax return (AITR). This BIR form shall contain the detailed nature of related party transactions, as well as how the taxpayer’s accounts are affected, the business overview of the ultimate parent company, and the details of the business and industry of the taxpayer and related parties. The purpose of requiring taxpayers to submit the RPT Form is to allow the BIR to assess transfer pricing risks.
Who are required to file BIR Form No. 1709?
A taxpayer is required to file the RPT Form if the following conditions are present:
1. The taxpayer is required to file an annual income tax return;
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; or
b. Taxpayers enjoying tax incentives (i.e., entities registered with the Board of Investments and economic zone enterprises, those enjoying income tax holiday, or those subject to preferential income tax rate; or
c. Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years; or
d. A related party that has transactions with (a), (b), or (c).
What are considered as related party transactions relevant to this form?
A related-party transaction is a transaction that occurs between related parties and involves the transfer of resources, services, or obligations between parties.
A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the reporting entity):
- A person or a close member of that person’s family is related to a reporting entity if that person:
a. Has control or joint control over the reporting entity; or
b. Has significant influence over the reporting entity; or
c. Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
- An entity is related to a reporting entity if any of the following conditions applies:
a. The entity and the reporting entity are members of the same group;
b. One entity is an associate or joint venture of the other entity;
c. Both entities are joint ventures of the same third party;
d. One entity is a joint venture of a third entity and other entity is an associate of the third entity;
e. The entity is a post-employment defined benefit plan for employees of either reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employees are also related to the reporting entity;
f. The entity is controlled or jointly controlled by a person identified in (a);
g. A person identified in (a) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); or
h. The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or the parent of the reporting entity.
How to file the RPT Form and when should it be filed?
The taxpayer has the following options in filing the RPT Form:
- File it manually in the Revenue District Office where the taxpayer is registered; or
- File it electronically through the Electronic Audited Financial Statements (eAFS) system.
Pursuant to RMC No. 44-2021, the deadline for the submission of the RPT Form are as follows:
- Manual Filer Taxpayers
a. eAFS Facility/Manual without tax payable - 15 days from statutory due date of filing the AITR, or electronic date of filing of the AITR, whichever comes later
b. Manual with payable - Statutory deadline for filing of AITR
- Electronic Filer Taxpayers
a. eAFS Facility & Manual with or without tax payable- 15 days from statutory due date of filing the AITR, or electronic date of filing of the AITR, whichever comes later.
What is the effect of failure to supply material information?
If the taxpayer fails to provide any material information (e.g., details of the related parties and related party transactions, etc.), the BIR will consider the RPT Form as not duly filed and the maximum amount of P25,000 as a penalty for failure to file such information return will be imposed.
With the implementation of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act and calendar year-end compliance reports, complying with such requirements may seem an additional burden for taxpayers. However, it is important to remember that following such regulations helps in mitigating TP-related risks that come with possible deficiencies, tax liabilities, and penalties.