Nearly a month ago, many taxpayers finally put an end to the longest tax season when they finally submitted their annual income tax returns (ITRs). Others, however, have to brace for the submission of a new set of attachments to the ITR. These refer to the Bureau of Internal Revenue (BIR) Form No. 1709 or the Information Return on Related Party Transactions (Domestic and/or Foreign) and its related attachments, as prescribed by Revenue Regulations (RR) No. 19-2020. RR No. 19-2020 requires not only the proper disclosure of related-party transactions, but also the documents that would support that these transactions have been conducted at arm’s length.
Now, on BIR Form No. 1709 and its related attachments, have you already tried to go over them? Below are some of the observations and related thoughts.
In BIR Form No. 1709, foreign and domestic transactions have separate sections, and there are portions categorizing the transactions with the parent company, subsidiaries, associates, and others.
The different sections in BIR Form No. 1709 make it easy for the Bureau to recompute the tax implications based on its evaluation and appreciation of the nature of the transactions. Thus, it is an important notice to taxpayers to revisit their compliance with withholding tax rules.
Normally, income payments to foreign related parties include interest, royalties, and dividends. For services rendered by foreign related parties outside the Philippines, it might be helpful to include in the description in the form that such services are rendered outside the Philippines if they are so, so that they are not automatically subject to withholding taxes in case of a BIR audit.
AVAILMENT OF TREATY BENEFITS
This portion of BIR Form No. 1709 reminds taxpayers that if they are investigated for their support for the availment, they should be able to present their documents.
For preferential treaty rates on transactions with nonresidents for interest, dividends, and royalties, it would be prudent for taxpayers to comply with the prescribed application for tax treaty relief or the Certificate of Residence for Tax Treaty Relief (CORTT) Form. The submission of the CORTT Form is within 30 days after paying the corresponding withholding taxes.
RELATED-PARTY TRANSACTIONS SUPPORTED WITH TRANSFER PRICING DOCUMENTATION
One of the attachments to BIR Form No. 1709 is TP documentation. In RR No. 2-2013, there are prescribed TP documentation details, such as, but are not limited to: (a) Organizational structure; (b) Nature of business/industry and market conditions; (c) Controlled transactions; (d) Assumption, strategies, policies; (e) Comparability and functional and risk analysis; and (f) Selection and application of the transfer pricing method, among others.
RR No. 2-2013 provides guidelines for applying the arm’s-length principle to cross-border and domestic transactions between associated enterprises to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such transactions. The guidelines help taxpayers in preparing their TP documentation.
FREQUENCY OF PREPARING TP DOCUMENTATION
How soon do taxpayers prepare TP documentation? Is it on a one-time basis, or is it on a yearly basis or every three years? In RR No. 2-2013, TP documentation should exist or is brought into existence at the time the associated enterprises develop or implement any arrangement that might raise transfer pricing issues or at the time the associated enterprises review these arrangements when preparing tax returns.
Now, as RR No. 19-2020 requires the annual submission of TP documentation as an attachment to BIR Form No. 1709, it would be prudent for taxpayers to revisit their TP documentation every year.
THRESHOLD OR MATERIALITY OF AMOUNTS TO BE DISCLOSED
In filling out BIR Form No. 1709, there could be questions about thresholds or a minimum transaction volume before these are required to be disclosed. There appears to be no specific threshold indicated in RR No. 19-2020, so this could mean that all transactions, without regard to the amount, are disclosed in the Form, unless a regulation or BIR issuance clarifies this.
These are just some of the observations and related thoughts while we look at BIR Form No. 1709 and attachments. In line with this development, we received informal feedback during our recent transfer pricing webinar that the BIR will issue very soon a related Revenue Memorandum Circular (RMC) to cover pertinent questions and details. It was said that the RMC will also clarify the covered taxpayers who should be complying with the submission of BIR Form No. 1709, which could include taxpayers with fiscal years ending March 31, 2020. Out of caution, such taxpayers should begin to prepare and comply with the requirements of BIR Form No. 1709. Needless to say, all taxpayers covered by RR No. 19-2020 should be ready.
Many taxpayers hope that the BIR will not only focus on thoroughly examining related-party transactions, but will also help taxpayers comply with BIR Form No. 1709 and its related attachments through clarifications in the forthcoming RMC.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Marie Fe F. Dangiwan is a senior manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.