Published 5 November 2021, The Daily Tribune

In our previous column, we referred to Revenue Regulations 2-2013 which requires taxpayers to demonstrate that their transfer prices are consistent with the arm’s length principle through proper documentation. The main purpose of keeping adequate documentation is for taxpayers to be able to (i) defend their transfer pricing analysis, (ii) prevent transfer pricing adjustments arising from tax examinations, and (iii) support their applications for Mutual Agreement Procedure (which refers to the means through which tax administrations consult to resolve disputes regarding the application of double tax conventions).

In December 2020, the BIR issued Revenue Regulations 34-2020 (RR 34-2020) to streamline the guidelines for the submission of the documents relating to transfer pricing. In said regulations, the BIR required the following taxpayers to file and submit BIR Form 1709 (RPT Form) together with the Annual Income Tax Return:

  1. Large taxpayers;
  2. Taxpayers enjoying tax incentives, i.e. Board of Investments-registered and economic zone enterprises, those enjoying income tax holiday or subject to preferential income tax rate;
  3. Taxpayers reporting net operating losses for the current taxable year and the immediately preceding two (2) consecutive taxable years; and
  4. A related party of any entities falling under the abovementioned list.

Further, the BIR made it mandatory for the abovementioned taxpayers who meet the following requirements to prepare transfer pricing documentation as provided in RR 2-2013:

  1. Annual gross sales/revenue for the subject taxable period exceeding One Hundred Fifty Million Pesos (P150,000,000) and the total amount of related party transactions with foreign and domestic related parties exceeds Ninety Million Pesos (P90,000,000); or
  2. Related party transactions meeting the following materiality threshold:

a. If involving the sale of tangible goods in the aggregate amount exceeding Sixty Million Pesos (P60,000,000) within the taxable year;

b. If involving service transaction, payment of interest, utilization of intangible goods or other related party transaction in the aggregate amount exceeding Fifteen Million Pesos (P15,000,000) within the taxable year; or

3. If the TPD was required to be prepared during the immediately preceding taxable year for exceeding any of the thresholds above.

Although the transfer pricing documents and other supporting documents are not required to be submitted along with the RPT Form, taxpayers are required to submit the same to the BIR within thirty (30) calendar days upon request by the Commissioner or his/her duly authorized representatives.

Further, taxpayers who are not required to submit the RPT Form are nevertheless required to disclose in the Notes to the Financial Statements that they are not covered by the requirements and procedures for related party transactions under RR 34-2020.

In Revenue Memorandum Circular 54-2021, which was recently issued on 27 April 2021, the BIR further clarified that taxpayers who are not mandated to file the RPT Form and to prepare the transfer pricing documents must still present sufficient evidence to prove that their related party transactions were conducted at arm’s length when subjected to audit.

To mitigate exposure on tax liabilities and penalties due to transfer pricing, taxpayers are enjoined to comply with these guidelines, particularly the preparation of contemporaneous transfer pricing documentation that will justify the transfer pricing arrangement of related parties.

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