The Bureau of Internal Revenue (“BIR”) has, in recent months, stepped up the enforcement of transfer pricing rules and accelerated the pace of integrating transfer pricing examinations in the regular BIR audits.
Transfer pricing has long been identified by the BIR as one of its priority programs and plans. As a result, the BIR issued Revenue Regulations (“RR”) No. 02-2013 or the Philippine Transfer Pricing Regulations effective last February 2013.
In the BIR’s Strategic Plan for 2019-2023, the BIR expressly declared its intent to address transfer pricing issues, especially when it leads to base erosion and profit shifting (“BEPS”). The BIR has been working to institutionalize reporting requirements, organizational arrangements, Advance Pricing Agreements (“APA”), Mutual Agreement Procedures (“MAP”) and documentation requirements.
The BIR recently circulated the following issuances:
- Revenue Audit Memorandum Order (“RAMO”) No. 01-2019 or the “Transfer Pricing Audit Guidelines”
- Revenue Regulations (“RR”) No. 19-2020
- Revenue Memorandum Circular (“RMC”) No. 76-2020
RAMO No. 01-2019 or the Transfer Pricing Audit Guidelines
Six years after the issuance of the Philippine Transfer Pricing Guidelines, the BIR provides the standardized audit procedures and techniques in the audit of taxpayers with related party transactions and/or intra-firm transactions. This issuance does not only apply to corporations registered in the Philippines but is also applicable by analogy to transactions between permanent establishments (“PE”) and their head offices or other related branches. The memorandum order expressly mentioned that PEs are to be treated as separate and distinct enterprise from its head office or other related branches/subsidiaries for tax purposes.
Transfer pricing audits are conducted to test the compliance of taxpayers with related party transactions with the arm’s length principle. Following the guidelines laid down in RAMO No. 01-2019, revenue officers are required to prepare a report after an audit or investigation has been conducted. The report shall comply with all the reporting requirements specifically mentioned in the Transfer Pricing Audit Guidelines which include, but are not limited to, a functional analysis, economic analysis, a summary and conclusion and a critique of the taxpayer’s methodology and analysis for the transaction at issue.
Aside from the audit guidelines, RAMO No. 01-2019 also includes special chapters covering the special areas of business restructuring, intangible asset transactions, cost contribution arrangements (“CCA”), and interest payment transactions.
The RAMO includes annexes and forms that the taxpayers are required to complete and submit to the tax examiners during a tax audit. The BIR made it clear that transfer pricing audits are to be integrated in the regular tax audits.
RR No. 19-2020
To further strengthen the transfer pricing rules in the Philippines, the BIR required the submission of BIR Form No. 1709 or the Information Return on Related Party Transactions (Domestic and/or Foreign) (“RPT Form”), and its supporting documents. The form shall be completely and truthfully accomplished by the taxpayer or its authorized representative/s, and shall be attached to the annual Income Tax Return (“ITR”) for the current taxable year and subsequent years, making it an integral part of the latter.
Following the new requirements, taxpayers with related party transactions are likewise mandated to attach to the RPT Form the following documents:
- certified true copy of the relevant contracts or proof of transaction
- 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
- certified true copy of APAs, if any
- any transfer pricing documentation
All attachments to the ITR must be submitted by the taxpayers within 15 days from the statutory due date or actual filing date, whichever is later. Failure to comply with this requirement shall subject the taxpayers to the penalties of not less than PHP 1,000 but not more than PHP 25,000.
RMC No. 76-2020
The latest issuance of the BIR aimed to provide further details regarding the submission of the RPT Form, and its attachments pursuant to RR No. 19-2020. The relevant details provided in the memorandum circular are as follows:
Coverage and filing deadlines –
- The RPT Form is to be completed by Philippine taxpayers with related party transactions, regardless of the amount and volume of transactions. Individuals who are considered related parties of a reporting company are also required to submit the RPT Form in their individual capacities. Normally, these refers to the key management personnel of companies.
- Since RR No. 19-2020 took effect on 25 July 2020, the RPT Form is now required to be submitted as an attachment to the annual ITR for the fiscal year ending 31 March 2020, tentative or otherwise, irrespective of the date of filing of the said annual ITR and to all annual ITRs to be submitted after such date. Annual ITRs for the calendar year 2019 or fiscal year ending before 31 March 2020 are not covered by RR No. 19-2020.
- Considering the COVID-19 pandemic situation, taxpayers with the fiscal year ending 31 March 2020 are given until 30 September 2020 (a two-month extension) to prepare, file and submit the RPT Form and its required attachments.
Additional attachments –
- Contracts are the primary proofs of transactions, and principal and supplementary receipts only serve as supporting/corroborating evidence. All contracts are required to be attached, regardless of volume.
- Any taxes paid to a foreign country by a Philippine taxpayer must be declared and the proof of payment must be attached. This is to allow the BIR to compute the correct amount of foreign taxes to be credited against the tax due for the taxable year concerned. To be acceptable, such proof of payment issued by the relevant foreign tax authority must be duly authenticated and apostilled.
- A transfer pricing documentation, local or otherwise, shall be attached. A local file is nonetheless preferred.
- The documentation shall include the date of creation or preparation to ensure its applicability to the RPTs conducted in the taxable year concerned. The transfer pricing documentation must be prepared prior to or at the time of the transaction, or after the transaction but not later than the date of filing of the tax return for the fiscal/calendar year in which the transaction takes place.
Given these stringent additional requirements imposed by the BIR, it can be seen that the Philippine tax authorities are trying to put the Philippines at par with its neighboring countries when it comes to transfer pricing requirements and audit processes.
Jack Sheehan, DFDL Partner & Head of Regional Tax Practice, comments: “As noted above, the release of the further transfer pricing guidance and reporting forms by the BIR continues the trend of ensuring that MNC’s are setting and documenting their inter-company transaction in a contemporaneous manner – a requirement in a number of other Asia Pacific jurisdictions. As with other jurisdictions with these transfer pricing reporting requirements, this will likely lead to a greater level of transfer pricing audit and controversy for which MNCs will need to be prepared as early as possible.”
For any question on Philippine transfer pricing rules, please contact OS Law’s Head of Tax Services, Atty. Karen P. Ocampo (firstname.lastname@example.org) or the firm’s lead senior associate for transfer pricing, Atty. Abigael Demdam (email@example.com).
Get more information about OS Law’s client service team here.
The information provided here is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.