taxes

[Ask the Tax Whiz] Are related party transactions taxable?

Mon Abrea
[Ask the Tax Whiz] Are related party transactions taxable?
The Philippine Tax Whiz explains what related party transactions are, including compliance requirements for filing the new BIR Form No. 1709

How do we determine whether a person or entity is a related party? What are considered as related party transactions? What are the required disclosures or information to be reported?

Pursuant to Revenue Regulations No. 19-2020, in determining whether a person or entity is a related party, the following rules shall be considered:

(a) a person or a close member of that person’s family is related to a reporting entity if that person
(i) has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) 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);
(ii) 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);
(iii) both entities are joint ventures of the same third party;
(iv) one entity is a joint venture of a third party and the other entity is an associate of the third entity;
(v) 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;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or a parent of the entity);
(viii) the entity, or any member of a group which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

Related party transactions include, but are not limited to, the following:

  1. purchases or sales of goods (finished or unfinished)
  2. purchases or sales of property and other assets
  3. rendering or receiving of services
  4. leases
  5. transfers of research and development
  6. transfers under license agreements
  7. transfers under finance arrangements (including loans and equity contributions in cash or in kind)
  8. provision of guarantees or collateral
  9. 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)
  10. settlement of liabilities on behalf of the entity or by the entity on behalf of that related party

The following requirements shall be observed by the taxpayer, who may either be a reporting entity or a related party:

  1. The required disclosures on transactions and outstanding balances shall be made separately for each of the following categories:
    • the parent
    • entities with joint control or significant influence over the entity
    • subsidiaries
    • associates
    • joint ventures in which the entity is a joint venture
    • key management personnel of the entity or its parent
    • other related parties
  2. For each category, the following information shall be provided:
    • the amount of the transaction
    • the amount of the 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 with respect to bad or doubtful debts due from related parties

Who is required to file Bureau of Internal Revenue (BIR) Form No. 1709 or the related party transactions (RPT) form? Are individual taxpayers also required to file this form? When is the deadline for submission of the form and its attachments?

Taxpayers with related party transactions, regardless of the amount and volume, must file BIR Form No. 1709.

Even individual taxpayers who are considered related parties of a reporting company are required to submit the RPT form.

Based on Revenue Memorandum Circular No. 76-2020, for manual filers, the RPT form and its required attachments must be submitted together with the annual income tax return (AITR) and other required attachments at the Large Taxpayers (LT) Division/revenue district office (RDO) where the taxpayer is registered, on or before the statutory due date.

For eFPS filers, the hard copy of the RPT form and its required attachments must be submitted manually and stamped “Received” at the LT Division/RDO where the taxpayer is registered within 15 days from the statutory due date or actual date of electronic filing of the AITR, whichever comes later.

We’re a subsidiary. Given that our parent company has a transfer pricing document already, can we use that? What is the required TPD? Should the TPD be updated yearly?

Yes, you can use the TPD, provided that you relied on that document to determine the transfer prices.

The required TPD must be the documentation which the taxpayers relied on to determine the transfer pricing prior to or at the time of the transaction, or after the transaction but not later than the date of filing of the tax return for the fiscal/calendar year in which the transaction took place. The TPD has to be updated if there are significant changes in the business model, the factors or conditions considered in drafting the TPD, and the nature of the RPTs. If there are none, the old TP shall suffice.

What are the consequences for non-filing of the RPT form and its required attachments?

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 attachments – due to reasonable cause and not to willful neglect – pursuant to Section 250 of the tax code.

If such an offense is repeated, the maximum penalty of P25,000 would be imposed, pursuant to Section 274 of the tax code.

Stay out of trouble with the BIR. Get an Annual Tax Health Check now by emailing us at consult@acg.ph or calling +639063159230. Join the Executive Tax Management Program of the Asian Consulting Group to manage your taxes without stress and unnecessary penalties, interests, and compromises. Register now through this link or visit www.acg.ph for more information. – Rappler.com

Mon Abrea, CPA, MBA, is the co-chair of the Paying Taxes-EODB Task Force. With the TaxWhizPH mobile app as his brainchild, he was recognized as one of the Outstanding Young Persons of the World, an Asia CEO Young Leader, and one of the Ten Outstanding Young Men of the Philippines because of his tax advocacy and expertise. Currently, he is the chairman and CEO of the Asian Consulting Group and trustee of the Center for Strategic Reforms of the Philippines – the advocacy partner of the Bureau of Internal Revenue, Department of Trade and Industry, and Anti-Red Tape Authority on ease of doing business and tax reform. Visit www.acg.ph for more information or email him at mon@acg.ph and download the TaxWhizPH app for free if you have tax questions.