Due to overlooked errors in local and global taxation laws, some multinational enterprises have tried reducing the tax payments between their related business entities to make the most out of their net income as part of one organization. This activity could result in tax leakages. As such, Transfer Pricing was established.
What is Transfer Pricing?
Transfer pricing (TP) or transfer cost is a term in accounting and taxation that refers to the establishment of prices on goods, and services exchanged between affiliates, subsidiaries, and other legal entities owned or operated by the same parent company. This applies to both domestic and or international transfers. The entities are referred to as related parties.
Transfer Pricing Then and Now
The Transfer Pricing Guidelines were issued by the Bureau of Internal Revenue (BIR) last 2013 through Revenue Regulations (RR) No. 2-2013. The regulation requires taxpayers (businesses) to show that their transfer prices are consistent with the arm’s length principle (ALP) by preparing sufficient and contemporaneous transfer pricing documentation (TPD).
In 2019, the BIR issued the Transfer Pricing Audit Guidelines under Revenue Audit Memorandum Order (RAMO) No. 1-2019. The guidelines were based on the arm’s length practices under the Organisation for Economic Co-Operation and Development (OECD) Transfer Pricing Guidelines. The arm’s length prices were set on related party transactions that are not aligned with the arm’s length principles.
The next couple of years saw numerous issuances of BIR on transfer pricing amidst the pandemic, which transitioned transfer pricing from compliance to enforcement. From 2020 to 2021, the BIR proposed rules on disclosing related party transactions and submitting a transfer pricing form for taxpayers. The disclosures will allow the BIR to discern the taxpayers with related party transactions and enable them to know which are subject to transfer pricing audits.
This year, 2022, new regulations on Mutual Agreement Procedures (MAP) allow local taxpayers to settle disputes when there are variances in the interpretation or application of tax treaties. An instance where the taxpayer may need MAP guidance is when a taxpayer is subjected to additional taxes in one country because of a transfer pricing adjustment from a transaction with a related party in another country.
Related Party Transactions (RPT Form)
In 2020, the BIR required taxpayers (businesses) to submit the Information Return on Related Party Transactions or BIR Form No. 1709, a.k.a. RPT Form. All transactions among related parties that result in the transfer of resources, services, or obligations, regardless of their arrangement (with cost-recovery, cost-sharing, or recharging) and irrespective of the amount, should be fully disclosed in the RPT Form. Along with the RPT Form, supporting documents, including the Transfer Pricing Document (TPD), should be attached to the Annual Income Tax Return (AITR).
Who Should Submit the RPT Form?
Taxpayers who meet all three conditions below will be required to submit an RPT:
- Those that are under any of the following categories:
- Large taxpayers
- Taxpayers enjoying tax incentives
- Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years
- A related party that has transactions with (a), (b), or (c)
- Those who have transactions with a domestic or foreign-related party during the concerned taxable period
- Those required to file an Annual Income Tax Return (AITR)
Who Should Not Submit the RPT Form?
- Taxpayers operating within the economic zone but subject to regular corporate income tax
- Regional or area headquarters and representative offices of foreign companies that are not allowed by law to derive income from the Philippines
- Entities subject to regular corporate income tax as a whole but have transactions subject to preferential tax rates under tax treaties or the Tax Code, as amended
- International carriers if they are subject to tax based on their Gross Philippine Billings or gross revenues
- International carriers that are exempt from tax under the tax treaty
- Post-employment benefit plan if the RPTs consist only of contributions from its sponsor employers
- Taxpayers who are exempt from income tax under Section 30 or similar provisions of the Tax Code
- Entities who did not meet the conditions set in the enumeration of who are required to submit the RPT Form
- Entities are required to file a short-period return as initially required by law or existing revenue issuances due for filing in 2020, even if the deadline for filing was extended to 2021.
Penalties for Non-Filing of BIR Form 1709 and Corresponding TPD Attachment
- A penalty of not less than P1,000 but not more than P25,000 shall be imposed on a taxpayer for failure to file BIR Form 1709 (RPT Form) and the corresponding TPD attachment for reasonable causes and not due to willful neglect.
- A repetition of the failure to file BIR Form 1709 or RPT Form will cause a maximum penalty of P25,000 to be imposed on the taxpayer.
- If, after receiving a valid summons to produce the requirement, the taxpayer still fails or neglects to submit the required form and its corresponding attachment, the corporate officers responsible will face a fine of not less than P5,000 but not more than P10,000. The corporate officers shall also face imprisonment of not less than one (1) year but not more than two (2) years.
- For transactions that the BIR has found to be not within arm’s length, a twenty-five percent (25%) surcharge or fifty percent (50%) in fraud cases and twelve percent (12%) interest per annum on the basic deficiency tax due will be imposed. A compromise penalty of up to P50,000 may also be imposed.
Who Should Prepare a Transfer Pricing Document (TPD)?
Entities who are required to submit the RPT Form and meet any of the following requirements should prepare a Transfer Pricing Document (TPD):
- Annual gross sales/revenue for the taxable subject period beyond One Hundred Fifty Million Pesos (P150,000,000), and if the total amount of RPTs with foreign and domestic related parties exceeds Ninety Million Pesos (P90,000,000).
- Sale of tangible goods concerning the same related party exceeding Sixty Million Pesos (60,000,000) within the taxable year
- Service transaction, payment of interest, utilization of intangible goods, or other related party transaction concerning the same related party beyond Fifteen Million Pesos (P15,000,000) within the taxable year
- If the TPD was required to be prepared during the immediately preceding taxable period or surpass items 1, 2, or 3 above.
Who Should Not Prepare a TPD?
Taxpayers not required to file the RPT form are also not required to prepare a TPD. However, any taxpayer may prepare a TPD if he wishes to do so. Taxpayers should note that the law requires a taxpayer to submit sufficient evidence that shows that their RPTs were conducted at arm’s length.
The Next Step for Businesses
After the BIR issued recent MAP regulations, taxpaying companies expect the release of the Advance Pricing Arrangement (APA) regulations soon. An APA determines a set of criteria to define transfer pricing for transactions over a fixed duration.
Transfer pricing audits are expected to gain traction in the Philippines as related party disclosures are submitted. As BIR prepares its e-Invoicing system implementation, taxpaying companies should sync their related party transactions with their transfer pricing regulations. Additionally, taxpayers should manage their transfer pricing risks by preparing contemporaneous transfer pricing documentation.
Do You Offer Assistance For Properly Filing These Documents?
Yes, we do offer professional help to get this done correctly. It’s very important to have these documents filed correctly and on time. The BIR has signaled that they intend to start cracking down on companies that engage in transfer pricing, and if you do not have a good team doing this for you, your business could be subject to a very thorough audit by the BIR, potentially leading to hefty fines.
With our team of accounting and taxation experts, we are readily able to assist you in the preparation of your enterprise’s BIR form 1709, master file, local file, and country-by-country reporting requirements.