The sensitivities of the new RPT Information Return
With the drive for more transparency on related party arrangements, tax authorities worldwide have been increasing their focus on transfer pricing (TP). In the Philippines, the Bureau of Internal Revenue (BIR) has also been taking strides to strengthen its rules regarding Related-Party Transactions (RPT).
To improve the TP risk assessment and audit of taxpayers, the BIR has issued Revenue Regulations (RR) No. 19-2020, requiring the submission of a three-page Information Return on Related Party Transactions or RPT Form (BIR Form No. 1709), to be attached, together with supporting documents, to the Annual Income Tax Return (AITR). This form will help the BIR monitor taxpayer compliance with the TP documentation requirement prescribed by the TP Regulations, which the BIR issued in 2013. More importantly, the BIR will use the data gathered from the forms to select which taxpayers to prioritize for TP audits given its limited resources.
RPT FORM FILING
The RPT Form requires a granular disclosure by Philippine taxpayers, corporations and individuals alike, of all RPTs, whether international or domestic. While the filing of the RPT form is also intended to implement Philippine Accounting Standards (PAS) 24 on Related-Party Disclosures, more details, especially on the taxation aspect of income paid or received from related parties, need to be supplied in the form and its attachments as compared to the disclosure for financial reporting purposes. Thus, taxpayers must prepare the form judiciously, and merely reproducing the related-party disclosures in their financial statements may not be sufficient to comply with the requirements under RR No. 19-2020.
There is no threshold, either in terms of amount or volume, on the RPTs that should be disclosed. As the term “related parties” under PAS 24 is a broad concept, taxpayers must also take extra care to determine their relationships with other entities to ensure that all transactions with those considered as “related parties” are properly reported, and that disclosures are consistent among the entities involved in the transactions. In ascertaining whether a person or entity is a related party, the substance of relationships between entities shall be considered and not merely the legal form.
INFORMATION DISCLOSURE
Bearing in mind that one of the objectives of the RPT Form is to ensure that taxpayers are reporting their true taxable income, questions are thus raised on the level of information that may be disclosed on related-party transactions. Of particular note is the disclosure on transfer under financial arrangements, such as equity contributions. As clarified by the BIR in its Revenue Memorandum Circular (RMC) No. 76-2020, dividends and redemption of shares between and among related parties, though not usually covered by a TP documentation, should likewise be disclosed in the RPT Form. However, investments in another entity do not affect the income or expense of either the investee or investor. Hence, there is no possibility of erosion of the tax base which the BIR intends to guard against by the submission of this RPT Form.
Companies are also required to disclose in detail transactions with each member of their key management personnel even if these pertain only to salaries received during the covered year. These officers are correspondingly required to submit the RPT Form in their individual capacities. An issue to take note of is the disclosure of sensitive information, such as the names and addresses of these officers. However, the BIR emphasized that the power of the Commissioner of Internal Revenue to obtain the necessary information to ascertain the correctness of any return, or in determining the liability of any person for any internal revenue tax, or in evaluating tax compliance serves as an exception to the Data Privacy Act (DPA).
In addition to the RPT Form, taxpayers also need to submit a certified true copy of the relevant contracts or proof of transactions, withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR, proof of payment of foreign taxes, certified true copy of advance pricing agreement (if any), and any transfer pricing documentation.
CONTRACTS AND OTHER DOCUMENTS
Contracts are deemed the primary proof of the transactions with related parties. Other documents such as receipts and invoices are considered corroborating evidence only. Hence, all contracts executed by the parties to substantiate the RPTs in the covered taxable year have to be attached to the RPT Form. In case of voluminous contracts and documents, electronic copies may be submitted under certain conditions.
It is important to note that the RMC specifically mentions certain RPTs that should be covered by a formal written contract. Agreements on cost-sharing arrangements among members of a group of companies need to be submitted to prove that they are for legitimate expenses. This is in addition to documents (e.g. receipts, proof of payment) needed to substantiate the expenses. Moreover, contracts for the importation of goods or any equivalent genuine document must be submitted aside from other proof of transactions.
The TP documentation to be attached to the RPT Form should be the same documentation that the taxpayers relied upon to determine the transfer pricing prior to or at the time of undertaking the RPTs and must have been prepared contemporaneously — that is, not later than the filing due date of the tax return for the taxable year in which the transactions took place. The date of its preparation should also be indicated on the report so that the BIR can evaluate if the TP documentation was prepared contemporaneously. According to the BIR, requiring the submission of contemporaneous documentation ensures the integrity of the taxpayer’s position.
TRANSACTION DISCLOSURE
Again, since there is no threshold on the amount and volume of RPTs for purposes of the preparation of a TP documentation, a question is raised on whether all the transactions disclosed in the RPT Form should be covered by the TP documentation. As recognized in the RMC, there are RPTs that are not usually covered by a TP documentation such as dividends and redemption of shares. Transactions which do not have an impact on the revenue and taxable income of taxpayers, e.g. equity contributions, are usually not covered by TP documentation. It must be emphasized that the purpose of TP documentation is to demonstrate that the TP policies of a taxpayer are compliant with the arm’s-length principle, thereby ensuring that it is reporting its true taxable income.
Reference to the OECD TP Guidelines, which was largely adopted in the TP Regulations, may be made to determine the amount of transactions that must be included in the TP documentation. The OECD TP Guidelines suggests that a balance between the tax authority’s needs and taxpayers’ costs should be maintained in determining the scope and the extent of the information to be included in a TP documentation. Taxpayers should, thus, not be expected to go through such lengths that compliance costs for the preparation of documentation are disproportionate to the amount of tax revenue at risk or to the complexity of the transactions.
COMPLIANCE AND CONSISTENCY AMID COVID
With the COVID-19 pandemic, many companies will find it challenging to comply with this new RPT Form, faced as they are with the imposition of travel bans and lockdowns as well as the added pressures for workforce safety and well-being. Nonetheless, it would be imprudent to disregard this regulatory requirement. With the large amount of information that needs to be supplied, taxpayers must work closely with their related parties to ensure that transactions are disclosed in a consistent manner among the entities involved. Companies should also consider accelerating the digitization of their systems to more efficiently manage any information requested by the BIR.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Joyce A. Francisco is a Tax Senior Director of SGV & Co.
