Business Mirror

Atty. Irwin Nidea, Jr. discusses the new regulation on transfer pricing: what entities are required to comply with the documentary requirements and the possibility of the public being misled that those not covered need not transact at arm’s length with related parties.

Transfer Pricing Thresholds

By Atty. Irwin C. Nidea Jr.

It is beneficial for any government to hear the concerns of its people and address them accordingly. A government’s willingness to adapt and adjust will result in a mutually beneficial result. This is true in the recent issuance of transfer pricing guidelines (RR 34-2020) by the BIR and the Department of Finance, wherein the cries of small and medium taxpayers were heard.

First, transfer pricing documentation is no longer required to be submitted together with the Income Tax Return (ITR). But taxpayers must be ready to produce the said documentation within 30 days from the receipt of a Letter of Authority covering all internal revenue taxes. This will give the taxpayer more time to prepare and collate all needed documents. This will also avoid unnecessary submissions that will have no use for the BIR. The decision not to require the submission of the TP documentation unless required is both economical and efficient for the government and the taxpayer. It is worth noting though that the LOA need not be exclusively issued for transfer pricing. Receipt by a taxpayer of a regular LOA on all internal revenue taxes is sufficient to trigger the mandatory submission of the TP documentation.

Second, there is now a threshold - finally. The previous issuance requires all companies with related party transactions to submit BIR Form 1709. There was no distinction between a small enterprise and a multinational corporation. That is why it is a very good news that the government has finally agreed to limit the persons covered by the requirement. It is not cost efficient for the taxpayer and the government to require the submission of BIR Form 1709 for a P100 peso transaction. Now, only the following are required to submit BIR Form 1709 together with the ITR: a. Large Taxpayers; b. Taxpayers enjoying tax incentives; c. Taxpayers reporting net operating losses for the current taxable year and the immediately preceding 2 taxable years; c. A related party with transactions with those enumerated above. By limiting the required persons to submit BIR Form 1709, the BIR will be able to focus on taxpayers with substantial transactions. It will also unburden small and medium enterprises from incurring additional compliance cost that they can barely afford.

Third, only the following entities are required to submit not only BIR Form 1709 but Transfer Pricing Documentation: a. Companies with annual gross revenue exceeding P150,000,000.00 and total amount of related party transactions with foreign and domestic related parties exceed P90,000,000.00; or b. Aggregate amount of related party transactions that involve sale of tangible goods exceed P60,000,000.00; c. Service transaction, payment of interest, utilization of intangible goods, or other related party transaction exceed P15,000,000.00. Submission of Transfer Pricing Documentation is also required if during the immediately preceding taxable period, the above thresholds were exceeded.

Fourth, taxpayers who are not required to submit BIR Form 1709 must disclose this fact in the Notes to the Financial Statements. A simplified Form 1709 was also issued. It has the following changes: a. Key Management Personnel are no longer required to submit BIR Form 1709; b. Replaced disclosure of related party transactions based on category of relationship (i.e. parent, joint control or significant influence, subsidiaries, associates, and joint ventures) with that based on the kind of transaction (i.e. sale/purchase of goods and services, loans to/from, and other related party transactions).

RR 34-2020 is a welcome development for small and medium enterprises. Small family corporations no longer need to comply with the submission of BIR Form 1709 and TP documentation. But everyone must remember that it is not an immunity from compliance of the transfer pricing rules. All companies, small or large, must still transact at arm’s length. You may not be the BIR’s priority because you are not required to file BIR Form 1709 or TP documentation, but if you do not transact with a related party at arm’s length, the long arm of the law may still catch up on you.