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Philippines: Related-party transaction Form No. 1709
Philippines: Guidance on completing related-party transaction Form No. 1709
The Bureau of Internal Revenue (BIR) issued guidance that aims to clarify issues regarding BIR Form No. 1709, "Information Return on Transactions with Related Party"—that is, the related-party transaction form that covers foreign and domestic related-party transactions and that is to be filed with the taxpayer's income tax return.
Revenue Regulations (RR) No. 19-2020 (8 July 2020) requires Form No. 1709 be attached to the annual income tax return, and provides that the submission of Form No. 1709 will follow the guidelines prescribed for the submission of the other required attachments to the annual income tax return (such as audited financial statements). However, there are a number of unanswered questions—for instance, whether Form No. 1709 is required for annual income tax returns covering tax years prior to the effective date of RR No. 19-2020 (which is 25 July 2020).
Revenue Memorandum Circular (RMC) No. 76-2020 explains that using information provided in the related-party transaction form and attachments, the BIR will be able to conduct a transfer pricing risk assessment and to make an informed decision at an early stage as to whether or not to conduct a thorough review or audit of a particular entity or transaction. According to the guidance, the BIR will be able to focus its audit resources on the most important transfer pricing issues.
Concerning the issue of which tax years are covered by the requirement for filing Form No. 1709, RMC No. 76-2020 states that taxpayers must file the form with their annual income tax returns for fiscal year ending 31 March 2020 and to all annual income tax returns that are filed after that date. Nevertheless, RMC No. 76-2020 provides for an extension of time to 30 September 2020 (from 30 July 2020) for corporations with a fiscal year ending 31 March 2020.
KPMG observation
The information required by Form No. 1709 may raise concerns on how the required information may inform the transfer pricing risk assessment. An underlying inquiry is how does the BIR intend to conduct a transfer pricing risk assessment? In other words, will the BIR merely consider the information on the form and attachments in making such an assessment? Thus, in contacting taxpayers regarding transfer pricing audits, do the tax authorities know in advance which related-party transaction to audit and it will perform the next steps starting with the functional analysis? Or in the alternative, when conducting transfer pricing audits, will the BIR still ask taxpayers the same questions raised in the form and possibly ask for copies of the duly-filed form and its attachments? Tax professionals expect this latter scenario may be likely because this is what is contemplated in the Transfer Pricing Audit Guidelines (RAMO No. 1-2019). Also, this is not to mention the BIR's practice during tax investigations of asking for taxpayer copies of documents even of those already filed with the BIR.
In this context, it may be worthwhile to evaluate if the following information is still relevant in a transfer pricing risk assessment:
Addresses of the foreign/local related parties
The taxpayer's identification numbers
The filing of tax treaty relief applications
Local or foreign taxes withheld
Provisions on doubtful accounts
Expenses recognized
Terms and conditions of the transactions
Redemption of shares
Compensation and benefits (including post-employment benefits) of the taxpayer's key management personnel
Likewise, the need to evaluate is also true for the following required attachments to Form No. 1709:
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
The objective of a transfer pricing risk assessment is to determine which related-party transactions could materially erode tax base and consequently reduce the income tax payments. With Form No. 1709 appearing to be the first step in a transfer pricing risk assessment, the inclusion of the above enumerated information and attachments may be more than what is necessary.
In the early 1990s, the BIR already had prescribed a similar form—although only for foreign related-party transactions, Form No. 1702 H, "Information Return on Transactions with Related Foreign Persons." This long-forgotten form was just one page, listing different possible types of transactions with foreign related parties. On this form, all taxpayers had to do was to write the total amounts per type of related-party transaction and the country(s) of residence of the related parties. Even at only one page, this form still allowed any BIR examiner to see at a glance what were the material related-party transactions.
Taxpayers may be apprehensive over the effort needed to compile the attachments to Form No. 1709. Aside from the attachments mentioned above, Form No. 1709 requires the transfer pricing documentation and an advanced pricing agreement (APA), if any, to be attached. In instances when the foreign withholding taxes have not yet been remitted to the foreign tax office, the copy of the taxpayer's tax residency certificate issued by the BIR's International Tax Affairs Division and submitted to the foreign tax office need to be submitted.
For many taxpayers, these documents may be voluminous. Some documents may have to comply with certain formalities. Form No. 1709 requires the contracts and the APAs (if any) to be certified true copies. In the case of foreign withholding taxes, the proof of payment must be duly authenticated.
However, for documents that are not yet existing (for instance, purchase orders evidencing intercompany sales/purchases of good) RMC No. 76-20202 expressly requires a written contract of sale. For taxpayers without any transfer pricing documentation for the tax year, a prior year's documentation or any applicable documentation prepared by the group will suffice. But for taxpayers that have not yet prepared any documentation at all, they will have to make sure that one is prepared.
Especially for the initial year of compliance, taxpayers need to consider drafting a detailed plan for complying with RR No.19-2020. Specifically, the plan would include:
Preparing a list to see which documents available/existing and which unit are (in the Philippines or abroad) in the organization has custody of the documents
The timeline for the compilation of attachments—certain efficiencies may be achieved by having during the tax year a continuing process of monitoring the transactions and turnover of documents to the person in charge of preparing Form No. 1709
The timeline for preparation of Form No. 1709
Read an August 2020 report prepared by the KPMG member firm in the Philippines
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