Taxwise Or Otherwise

Transfer pricing (TP) is one of the areas which produce tax issues for multinational companies. The Bureau of Internal Revenue (BIR) has released rules and fairly new issuances covering related-party transactions and enforcing the arm’s length principle as a way of determining transfer prices of associated enterprises, as it is applied internationally.

A transfer price is the price charged for goods and/or services between associated enterprises that should be at par with those between unrelated parties. The statutory rule on TP is found in Section 50 of the Tax Code which allows the BIR to adjust, allocate, or apportion revenues and expenses of related parties to prevent tax evasion or to clearly reflect the amount of income earned by each party.

In 2013, the BIR issued Revenue Regulations (RR) No. 2-2013 (Philippine TP Regulations) which provides guidelines in applying the arm’s-length principle for cross-border and domestic transactions between associated enterprises. The concept of TP under the regulation is that it should be contemporaneous, such that associated enterprises must consider the arm’s-length principle at the time they develop or implement any related party arrangement, or whenever they review such arrangements when preparing tax returns. Hence, there is a requirement to substantiate transfer prices and maintain contemporaneous TP documentation every year when filing tax returns.

In 2019, the BIR issued Revenue Audit Memorandum Order No. 1-2019 (TP Audit Guidelines) which provides standardized audit procedures and techniques in the audit of taxpayers with related party and/or intra-firm transactions. Based on this, the BIR may perform adjustments during a tax audit to reflect the appropriate arm’s-length price or rate for a taxpayer’s related party transaction in case it is not compliant with the arm’s-length principle or in absence of TP documentation. Further, taxpayers are given only a five-day period to submit TP-related documents upon request of the BIR examiner during an audit.

Recently, the BIR issued its newest guidance in the form of RR No. 19-2020, which reinforces the TP rules by prescribing the use of the new BIR Form No. 1709 or Information Return on Related Party Transactions (Domestic and/or Foreign). This new form replaces the old BIR Form 1702-H or the Information Return on Transactions with Related Foreign Persons (series of 1992).

The new regulation aims to ensure proper disclosures of related party transactions and compliance with the arm’s-length principle so as to protect the tax base by effectively implementing Philippine Accounting Standards (PAS) 24 on Related Party Disclosures, for tax purposes. The PAS defines related party relationships that are required to be disclosed in financial statements. Such disclosure is necessary to draw attention to the possibility that a company’s financial position and profit or loss may have been affected by its existing related party transactions and outstanding balances with these related parties.

To complement the financial reporting disclosures under PAS 24, the tax regulation requires the submission of BIR Form No. 1709 and its supporting documents as an attachment to the annual income tax return for the current and subsequent taxable years. TP documentation is one of the supporting documents to BIR Form No. 1709, which becomes an integral part of the annual income tax return. Hence, RR No. 19-2020 enforces the contemporaneous requirement of maintaining TP documentation under the Philippine TP Regulations since it is now required to be submitted with the annual income tax return.

Moreover, the taxpayer is required to supply detailed information on the nature of the transactions and the affected accounts, a brief business overview of the ultimate parent and the multinational group to which the taxpayer belongs, a brief functional profile and the industry in which it operates, among others. All information requested must be provided. In the event that one or some portions are not applicable, such facts must be stated.

It is worthy to note that the information requested in the new BIR Form is the same as those that the BIR expects to find in TP documentation as listed in the Philippine TP Regulations. Thus, filling out the new BIR Form should be a straightforward task when there is a readily available document in place.

Other supporting documents include a certified true copy of the relevant contracts or proof of the transaction, withholding tax return and 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 a certified true copy of any Advance Pricing Agreement.

Any violation of the provisions of the new regulation are subject to penalties provided under Section 250 of the Tax Code which covers failures to file certain information returns, as well as other pertinent provisions of the Tax Code. RR No. 19-2020 will take effect on 25 July 2020.

With this new regulation, having adequate and contemporaneous TP documentation has become more important than ever, as it puts a taxpayer in good stead in terms of supporting and defending its pricing arrangements. Given these recent issuances, it is apparent that the BIR is intensifying efforts on TP issues. Further, it seems safe to assume that the new regulation is another way for the BIR to generate new sources of revenue since the current COVID-19 emergency has greatly affected tax collections for the year.

Thus, it is prudent to mitigate any TP-related risk which comes with deficiency tax liabilities and penalties by preparing TP documentation which complies with existing TP rules and regulations ahead of time or just in time for the filing of the annual income tax return, so that in the event of an audit, those TP documents are available upon the BIR’s request.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Crystabelle Cruz Lucas is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 8845-2728