[Ask The Tax Whiz] What are Related Party Transactions? (Part 2)

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What is the purpose for the submission of BIR Form No. 1709, Transfer Pricing Documentation (TPD) and other Supporting Documents?

According to Revenue Regulations No. 34-2020, the purpose of requiring taxpayers to submit BIR Form No. 1709 (RPT Form) is to allow the BIR to verify that taxpayers are reporting their related party transactions at arm’s length prices. It is also intended to improve and strengthen the Bureau’s transfer pricing risk assessment and audit functions. Most importantly, the information that will be gathered from the RPT Form and its attachments will be used by the BIR during the transfer pricing risk assessment to determine whether or not to conduct a thorough review/audit of a particular entity or transaction.

Who are required to file the BIR Form No. 1709 (RPT Form) and its attachments? 

Under Section 2 of Revenue Regulation No. 34-2020, the following are required to file and submit the RPT Form, together with the Annual Income Tax Return (AITR): 

1. Large Taxpayers;
2. Taxpayers enjoying tax incentives, i.e. Board of Investments (BOI) – registered and economic zone enterprises, those enjoying Income Tax Holiday (ITH) or subject to preferential income tax rate;
3. Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years; and 
4. A related party, as defined under Section 3 of Revenue Regulations (RR) No. 19- 2020, which has transactions with (1), (2) or (3). For this purpose, key management personnel (KMP), as defined under Section 3(7) of RR No. 19-2020, shall no longer be required to file and submit the RPT Form, nor shall there be any requirement to report any transaction between KMP and the reporting entity/parent company of the latter in the RPT Form.

What are the requirements for the submission of TPDs and Other Supporting Documents?

The preparation and submission of TPDs shall be mandatory for  taxpayers enumerated in Section 2 who meet the following materiality thresholds:

1. Annual gross sales/revenue for the subject taxable period exceeding One hundred fifty million pesos (P150,000,000.00) and the total amount of related party transactions with foreign and domestic related parties exceeds Ninety million pesos (P90,000,000.00);
2. Related party transactions meeting the following materiality thresholds:
   1. If involving sale of tangible goods in the aggregate amount exceeding Sixty million pesos (P60,000,000.00) within the taxable year;
   2. If involving service transaction, payment of interest, utilization of intangible goods or other related party transaction in the aggregate amount exceeding Fifteen million pesos (P15,000,000.00) with the taxable year; or
   3. If TPD was required to be prepared during the immediately preceding taxable period for exceeding either (1) or (2) above.

The TPDs and other supporting documents as set out in Section 6 of RR No. 19-2020 shall no longer be attached to the RPT Form but shall be submitted within thirty (30) calendar days upon receipt of request by the Commissioner or duly authorized representatives pursuant to a duly issued Letter of Authority (LOA).

Business owners or CEOs should know the repercussions of mistreating Related Party Transactions or the risks of being misguided on how to deal with such transactions. Business transactions are not all about third parties. Often overlooked are transactions with affiliates. The unintentional mistreatment of Related Party Transactions are one of the main reasons that will lead to BIR Audit. Thus, in order to avert this, CEOs and business owners must learn the proper guidelines to follow when it comes to related party transactions.

– Rappler.com