The year 2020 is like no other. With a pandemic still raging, a volcanic eruption, explosions, wildfires, plane crashes, social unrest, tragic deaths, and many other unexpected events — each one of us is affected one way or another. The year is not yet over but it has dished out something out of the ordinary to each and every one of us.
For taxpayers in the Philippines, this year is remarkable, because of the issuance of Revenue Regulations (RR) No. 19-2020 by the Bureau of Internal Revenue (BIR). The revenue regulation requires taxpayers with related party transactions (RPT) to submit Information Return on Related Party Transactions (BIR Form No. 1709) or RPT Form, along with transfer pricing documentation (TPD) and other supporting documents, as an attachment to the annual income tax return (AITR).
Failure to comply by not submitting the accomplished RPT Form, TPD, and other supporting documents may result in fines and penalties on the part of the taxpayers. Also, the BIR may impose transfer pricing adjustments which could result in deficiency tax assessments in case a taxpayer is not be able to justify its transfer price through a TPD.
Admittedly, though, taxpayers may face challenges surrounding the preparation of TPD and submitting the RPT Form and its attachments.
First, some Philippine taxpayers may not be familiar enough with the transfer pricing rules or may not have enough experience in preparing TPD.
TPD is not just mechanical documentation. Under the BIR issuances, TPD should at least include statement of facts (organizational structure, nature of business of the taxpayer and its related parties, and nature of the covered controlled transactions), industry analysis, FAR (functions, assets, and risk) analysis, selection and application of transfer pricing method, search for comparable companies, benchmark analysis, and conclusion. With all these required contents, the preparation of TPD would require some substantial effort in data gathering and a great deal of analysis of the collected data.
In preparing TPD, a taxpayer should always keep in mind that, simply put, the objective is to determine the reasonable arm’s-length range from the most reliable information and support, that its RPTs are within the arm’s-length standard.
Taxpayers will also need to consider that the preparation of TPD entails some costs such as subscription fees for a commercial database to gather candidate comparable companies as well as securing the copies of their financial statements to be used in the analysis.
A second concern would be the deadline for the submission of the RPT Form and the TPD. The RPT Form, along with the TPD and other supporting documents, serves as one of the attachments to the AITR. eFPS filers have 15 days from the statutory due date or actual date of electronic filing of the AITR within which to submit the RPT Form, TPD, and other attachments.
The preparation of the RPT Form, TPD, and other attachments during the year-end closing, financial audit, and AITR filing season could take the stress for accountants and tax practitioners several notches higher. Thus, it will be advisable to start the preparations as early as possible. Most of the sections of the TPD can actually be prepared well in advance ahead of the year-end closing.
The completion of the other attachments to the RPT Form, aside from the TPD, will also not be easy. Under RR No. 19-2020, the attachments to the RPT Form, in addition to the TPD, are certified true copies of the relevant contracts or proof of transaction (regardless of volume), withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR, proof of payment of foreign taxes or ruling duly issued by the foreign tax authority where the other party is a resident, and certified true copy of advance pricing agreement, if any. The copies of the contracts and proof of transactions such as sales invoices, official receipts, delivery receipts, among others, could be challenging to collate. In this regard, taxpayers should ensure that the relevant documents are properly kept and maintained in a way that it would be easy to retrieve the documents supporting the RPTs.
Last, taxpayers should be reminded that the submission of the RPT Form, TPD, and other attachments, is applicable to Philippine taxpayers with RPTs regardless of the amount and volume of transactions. There is currently no threshold considered for RPTs. Thus, the submission is applicable even to small-sized taxpayers or to those with minimal RPTs. Hopefully, this is something that would be addressed in a tax issuance in the future. Besides, one of the objectives of requiring the submission of the RPT Form is for the BIR to be able to focus on the most important and significant transfer pricing issue.
It is understandable that taxpayers may feel anxious about the submission of the RPT Form, TPD, and other attachments considering all the efforts that will be exerted in order to comply with the requirement. However, taxpayers should rather accept the fact that the BIR is looking at RPTs now more than ever and that these requirements may be here to stay. As it was said, all things are ready, if our mind be so.
Most certainly, being aware of the rules, seeking help from experts, being prepared, and having the appropriate mindset, could blow your transfer pricing blues away.
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.
John Paulo D. Garcia is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.