Kudos to all taxpayers and their finance teams who successfully finalized and filed their income tax returns (ITRs) on time! To all accountants, you deserve hearty congratulations for a job well done. Take a much-deserved break to recharge and relax.
However, when you return to work and regain your energy and enthusiasm, I would like to remind all finance teams about some important transfer pricing reminders post-ITR filing.
FILING OF RELATED PARTY TRANSACTION FORM
The filing of the Related Party Transaction Form or RPT Form (BIR Form No. 1709), is mandatory for those taxpayers enumerated in Revenue Regulations (RR) No. 34-2020. The form is due for filing on April 30th for taxpayers based on the calendar year, which is the same deadline as the submission of the attachment to the ITR. So, mark your calendars to avoid the penalty of P1,000 for late filing.
I wish to emphasize the importance of performing an annual verification to determine whether taxpayers qualify as one of those required to file the RPT Form. Circumstances from previous years may no longer be applicable in the current and succeeding years, making this annual verification crucial.
For example, a taxpayer who was not classified as a large taxpayer last year was not required to file the RPT Form. However, if they are now registered as a large taxpayer this year, they are required to file the RPT Form for the current year. Similarly, a taxpayer who was not enjoying tax incentives last year did not have to file the form but if they are now enjoying tax incentives this year, they must file the form for the current year.
Another example is a taxpayer who reported net operating losses on the ITR for the immediately preceding two consecutive years. If, after finalizing the ITR, the taxpayer reported another net loss for the current taxable year, they are required to file the RPT Form for the current year.
Additionally, if a related party has transactions with another related party that is required to file the RPT Form, the former is also required to file.
ADDITIONAL NOTES TO FINANCIAL STATEMENTS DISCLOSURE
Taxpayers not required to file the RPT form are required to disclose in the Notes to Financial Statements that they are not covered by the requirements and procedures for related party transactions.
TRANSFER PRICING DOCUMENTATION
The preparation and maintenance of transfer pricing documentation (TPD) are mandatory for those taxpayers required to file the RPT Form and meet the conditions set forth in RR No. 34-2020. However, the Bureau of Internal Revenue (BIR) highlighted that nothing prevents any taxpayer from preparing a TPD and presenting the same during a tax audit to prove that its related party transactions were conducted at arm’s length. Though it is not required for some taxpayers to prepare a TPD, they still need to reasonably assess and prove whether their dealings with related parties adhere to the arm’s length principle. After all, the burden of proof rests upon the taxpayer.
The TPD prepared by the taxpayer should be contemporaneous, meaning it should have been prepared prior to or at the time of the transaction or no later than the time of completing and filing the tax return for the taxable year in which the transaction takes place, as it ensures the integrity of the taxpayer’s income tax position.
For taxpayers who have completed their TPD, great job! For those who are required to prepare one but have not started yet, it’s not too late to comply. Remember, the TPD must be submitted to the BIR within 30 calendar days upon receipt of a request during a tax audit (subject to a non-extendable period of 30 days based on meritorious grounds). Ensure that you have your TPD ready, as well as the relevant documents, before the BIR conducts its tax audit to avoid any compliance issues.
UPDATING THE TPD
Over time, as businesses conduct their operations, various internal and external factors that were considered in preparing the TPD in the previous year may change or become irrelevant in the current year and subsequent years.
Changes in internal factors include shifts in business strategy, operations, development, acquisition, or transfer of intangible assets, and business restructuring, among others. On the other hand, changes in external factors include amendments to laws and regulations, shifts in economic conditions, changes in trade policies between countries, evolving industry practices and standards, and technological advancements, among others.
As a result of these changes, the current TPD needs to be updated. Therefore, taxpayers should occasionally revisit their current TPD and reassess whether it needs updating.
Moreover, updating the benchmarking analysis on an annual basis is necessary because the availability and relevance of comparable companies or transactions can change over time, and regular updates help identify the most appropriate comparables and ensure that the analysis is based on the most recent and relevant data. Keeping the benchmarking study up to date helps mitigate the risk of transfer pricing adjustments and penalties during tax audits.
ALIGNING THE CONTRACT WITH ACTUAL CONDUCT
It’s crucial that the contracts or agreements between related parties, which serve as the basis for preparing the TPD, align with the actual conduct of the parties.
If the BIR identifies inconsistencies between the terms of the contract and the actual conduct during its review, it may disregard and re-characterize the controlled transaction. This can occur if the economic substance of a transaction differs from its form or if the arrangements deviate from what independent parties would adopt in a commercially rational manner, thereby impeding the BIR from determining an appropriate transfer price.
What the taxpayers may do is to conduct regular internal audits and reviews of all related party transactions to ensure that the terms of the contracts accurately reflect the actual conduct and economic substance of the transactions. Additionally, update any agreement promptly to reflect changes in business practices or circumstances.
Another to-do list item is to regularly review and update your transfer pricing policies to ensure they reflect current business operations and economic conditions.
Although the ITR season has concluded, monitoring compliance, especially for transfer pricing, should be a continuous and proactive process, not just performed at year’s end. Regular reviews ensure that taxpayers meet reporting requirements and that the documentation in the TPD aligns with existing transfer pricing rules and regulations.
Let’s Talk TP is an offshoot of Let’s Talk Tax, 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.
Christian Derick D. Villafranca is a senior manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
business.development@ph.gt.com