What are Related Party Transactions?
A Related Party Transaction refers to the transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. In other words, it simply refers to transactions between a reporting entity and a related party. As provided under Section 4 of Revenue Regulations No. 19-2020, in determining whether a person or entity is a related party, the following shall be considered:
- A person or a close member of that person’s family is related to a reporting entity if that person:
- has control or joint control of the reporting entity;
- Has significant influence over the reporting entity; or
- is a member of the key management personnel or 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:
- The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
- One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
- Both entities are joint ventures of the same third party.
- One entity is a joint venture of a third entity and the other entities an associate of the third entity.
- The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
- The entity is controlled or jointly controlled by a person identified in (1).
- A person identified in (1.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).
- The entity, or any member of a group of which it is a part. provides key management personnel services to the reporting entity or to the parent of the reporting entity.
Note that, under Section 3 of the same RR, a “close member of the family of a person” has been defined as family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and includes (1) that person’s children and spouse or domestic partner; (2) children of that person’s spouse or domestic partner; and (3) dependents of that person or that person’s spouse or domestic partner. But this list is not exhaustive and does not preclude other family members from being considered as “close members of the family of a person.” Other family members, including parents or grandparents, could qualify as close members of the family depending on the assessment of specific facts and circumstances.
What specific transactions are considered Related Party Transactions?
Related party transactions include, but are not limited to, the following:
- purchases or sales of goods (finished or unfinished);
- purchases or sales of property and other assets;
- rendering or receiving of services;
- transfers of research and development;
- transfers under license agreements;
- transfers under finance arrangements (including loans and equity contributions in cash or in kind);
- provision of guarantees or collateral;
- commitments to do something if a particular event occurs or does not occur in the future, including executory contracts, i.e., contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent (recognized and unrecognized); and
- settlement of liabilities on behalf of the entity or by the entity on behalf of that related party
What are the requirements for disclosures connected to Related Party Transactions?
The commercial transactions around the world have become more compounded in recent years, stemming from increased opportunities for abuse by taxpayers with an intent to evade taxes. The Philippine Accounting Standards (PAS) 24 – Related Party Disclosures earlier required companies to disclose, in the annual accounts, where transactions have been conducted between a reporting company and parties related to the reporting company. Thus, consistent with the objectives of PAS 24, RR 19-2020 requires taxpayers, who may be a reporting entity or a related party, to observe the following requirements:
- The required disclosures on transactions and outstanding balances shall be made separately for each of the following categories:
- entities with joint control or significant influence over the entity
- joint ventures in which the entity is a joint venturer
- key management personnel of the entity or its parent
- other related parties
- For each of the said category, the following information shall be provided:
- the amount of the transactions
- the amount of outstanding balances, including commitments, and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received
- provisions for doubtful debts related to the amount of outstanding balances
- the expense recognized during the period in respect of bad or doubtful debts due from related parties
Not knowing whether their transaction is a related party transaction and, thereafter failing to comply with the required disclosures could be detrimental for businesses. Thus, business owners and CEOs should know how to properly treat their transactions. Unintentionally failing to consider certain transactions as related party transactions is one of the main causes that can lead to a BIR audit. The Executive Tax Management Program of the Asian Consulting Group will help CEOs and business owners learn how to properly deal with these kinds of transactions as well as educate themselves on game-changing strategies to handle BIR audits without compromises. Join the program through this link or scan the QR code.