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In a recent article, we wrote about the new BIR Requirements relating to Related-Party Transactions and Transfer Pricing Documents in the Philippines.
This was largely concerned with the introduction of a new BIR Form – BIR Form 1709 under Revenue Regulation No. 19 of 2020.
The BIR has now, however, released new requirements, rules and procedures for submitting BIR Form 1709. These rules and procedures clarify the categories of taxpayer who are required to prepare and file BIR Form 1709 and as well as the materiality thresholds for submitting Transfer Pricing Documentation.
Find out below what these new Revenue Regulations mean for businesses and taxpayers in the Philippines!
Contents
Revenue Regulation No. 34 of 2020
BIR Revenue Regulation No.34 of 2020, entitled “Prescribing the Guidelines and Procedures for the Submission of BIR Form No. 1709, Transfer Pricing Documentation (TPD) and other Supporting Documents, Amending for this Purpose the Pertinent Provisions of Revenue Regulations (RR) Nos. 19-2020 and 21-2002, as amended by RR No. 15-2010”, is dated 18 December 2020 and stamped by the BIR on 21 December 2020.
Why Was RR. No.34 of 2020 Introduced?
According to the BIR, there are two key reasons for requiring taxpayers in the Philippines to submit BIR Form 1709, as follows:
- Related-Party Transactions – It provides the BIR with a mechanism to verify that taxpayers are actually reporting their Related-Party Transactions and ensuring that arm’s length pricing is being applied.
- Transfer Pricing – It enables the BIR to improve and strengthen its ability to perform transfer pricing risk assessments and audits. RR. No. 34 of 2020 provides that the information gathered by the BIR from Form 1709 will be used by the BIR to determine if a detailed review/audit of a particular entity or transaction is necessary.
In short, RR. No. 34 of 2020 aims to clarify:
- The categories of taxpayer that are required to file BIR Form 1709;
- The materiality thresholds requiring such taxpayers to file Transfer Pricing Documentation;
- Additional disclosure documents for Related-Party Transactions.
Related-Party Transactions
BIR Form 1709 is primarily concerned with Related-Parties and Related-Party Transactions.
For a list of definitions for these terms (as well as many other related terms) feel free to check out our recent analysis of the new requirements for filing BIR Form 1709 in the Philippines.
Which Taxpayers Are Required To File BIR Form 1709?
RR. No. 34 of 2020 clarifies the categories of taxpayer in the Philippines that are required to prepare and file BIR Form 1709.
Remember! The filing of BIR Form 1709 should be processed when filing the Annual Income Tax Return, also known as the AITR, by the relevant taxpayer.
RR. No.34 of 2020 provides that the following taxpayers are required to file and submit BIR Form 1709:
- Large Taxpayers in the Philippines;
- Taxpayers that are entitled to incentives. This might include companies receiving incentives from the Board of Investments in the Philippines (BOI), companies registered under PEZA or other economic zone incentive schemes or companies benefitting from Income Tax Holidays or companies who might have applied for a preferential income tax rate;
- Taxpayers who have reported net operating losses for the current taxable year and the two preceding tax years;
- A Related-Party that has entered into transactions with any of the taxpayer categories listed at 1-3 above. Key Management Personnel are not required to file and submit BIR Form 1709. BIR Form 1709 does not need to include a transaction between a reporting entity/parent company and Key Management Personnel. For the definitions of “Related-Party” and “Key Management Personnel” (as defined under RR No. 19-2020), check out our recent article on Related-Party Transactions and BIR Form 1709.
When is RR No.34 of 2020 Effective?
RR. No. 34 of 2020 is effective immediately from its publication in a newspaper of general circulation in the Philippines. The Regulations were published in the Philippine Star on 23 December 2020.
Transfer Pricing Documentation under BIR Form No. 1709
When submitting BIR Form No. 1709, relevant taxpayers are also required to provide various details, information and documentation. For example, this might include a business overview of the parent company or a functional profile of the business and industry of the taxpayer.
Revenue Regulation No. 19 of 2020 also requires taxpayers to submit, with BIR Form 1709, “any transfer pricing documentation” as well as any other supporting documentation.
RR. No. 34 of 2020 now clarifies which taxpayers are required to submit Transfer Pricing Documentation. Transfer Pricing Documentation is only required to be submitted by a) the taxpayers outlined in the above categories (see Section 5 of this article) and b) who meet the following criteria or materiality thresholds:
- Taxpayers with annual gross sales/revenue for the relevant taxable period which exceed PHP150,000,000 and the total value of related party transactions (including both foreign and domestic related parties) exceeds PHP90,000,000. The following should be considered when computing the threshold:
- Amounts received and/or receivable from related parties or paid and/or payable to related parties during the tax year but excluding compensation paid to Key Management Personnel, dividends and branch profit remittances;
- Outstanding balances of loans and non-trade amounts due from or to all related parties. Note: Related party transactions that are covered by an Advance Pricing Agreement do not need not be disclosed in BIR Form 1709, but should be included in the computation of the aggregate value of related party transactions.
- Related party transactions that meet the following materiality threshold:
- For Sale of Goods, the aggregate value exceeds PHP60,000,000 within the same tax year;
- For Service Transactions, payment of interest, utilization of intangible goods or other related party transactions, the aggregate value exceeds PHP15,000,000 within the same tax year;
- If there was a requirement to submit Transfer Pricing Documentation during the immediately preceding tax period as a result of exceeding the thresholds contained in either (a) or (b) above.
Note: RR. No. 34 of 2020 provides that Transfer Pricing Documentation (and other supporting documents as set out in Section 6 of RR No. 19-2020 – see here) are no longer required to be attached to BIR Form 1709. Documents should now be submitted to the BIR within 30 calendar days from receipt of request by the BIR, under a duly issued Letter of Authority covering all Internal Revenue Taxes (AITR) (in certain circumstances, this time period can be extended).
Additional Disclosure Requirements for Related Party Transactions
RR No. 34 of 2020 provides that, in addition to the disclosure requirements provided under previous BIR issuances (e.g. RR No. 21-2002, as amended by RR No. 15-2010), taxpayers who do not fall into any of the categories listed above (See Above Section: Which Taxpayers are required to File BIR Form 1709?) , must include a statement in the “Notes to the Financial Statements” that they are not covered by the requirements and procedures for Related Party Transactions as required under RR No. 34 of 2020.
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