Client Advisory Letter

Transfer pricing

Requiring the attachment of BIR Form No. 1709 to the annual income tax return

The BIR issued regulations implementing the use of the new tax form, BIR Form No. 1709 (Information Return on Related Party Transactions (International and/or Domestic) which replaces BIR Form No. 1702H (Information Return on Transactions with Related Foreign Persons). Issues arising from said regulations were subsequently addressed in RMC No. 76-2020.

The regulations and subsequent clarifications provide for the following:

• The ultimate objective of the regulations is to improve and strengthen the transfer pricing audit and risk assessment of the BIR through information gathering. It shall also be used to monitor compliance with transfer pricing documentation (TPD) requirements.
• The submission of BIR Form No. 1709 and supporting documents is required for taxpayers with related party transactions regardless of the amount and volume of transactions. Non-stock, non-profit corporations with related party transactions are also covered.
• Determination of related parties
  • A person or a close member of this person’s family is related to a reporting entity if said person:
    • has control or joint control of the reporting entity;
    • has significant influence over the reporting entity; or
    • is a member of the key management personnel or the reporting entity or a parent of the reporting entity.
  • An entity is related to a reporting entity if any of these conditions is present:
    • The entity and the reporting entity are members of the same group
    • One entity is an associate or joint venture of the other entity
    • Both entities are joint ventures of the same third party
    • One entity is a joint venture of a third entity and the other entity is an associate of the third entity
    • The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such plan, the sponsoring employers are also related to the reporting entity.
    • The entity is controlled or jointly controlled by a person identified in section “a” above
    • A person identified in section “a.1.” above has significant influence over the entity or is a member of the key management personnel of the entity or of a parent of the entity
    • The entity or any member of a group of which it is a part provides key management personnel services to the reporting entity or to the parent of the reporting entity
• In the determination of related parties, the substance of relationships between entities shall be taken into account and not merely the legal form.
• Related party transactions include, but are not limited to:
  • Purchases or sales of goods
  • Purchases or sales of property and other assets
  • Rendering or receiving of services
  • Leases
  • Transfers of research and development
  • Transfers under license agreements
  • Transfers under finance agreements (including loans and equity contributions in cash or in kind)
  • Provision of guarantees or collateral
  • Commitments to do something upon the occurrence or non-occurrence of a particular event, including executory contracts
  • Settlement of liabilities on behalf of the entity or by an entity on behalf of that related party
• Related party disclosures
  • Taxpayers should observe the following requirements:
    • The required disclosures on transactions and outstanding balances shall be made separately for each of the following categories:
      • the parent
      • entities with joint control or significant influence over the entity
      • subsidiaries
      • associates
      • joint ventures in which the entity is a member
      • key management personnel of the entity or its parent
      • other related parties
  • For each of the above categories, the following information shall be provided:
    • amount of the transactions
    • amount of outstanding balances, including commitments, and their terms and conditions, including whether they are secured, and the nature of consideration to be provided in settlement, and details of any guarantees given or received
    • provisions for doubtful debts related to the amount of outstanding balances
    • expense recognized during the period in respect of bad or doubtful debts due from related parties
• Procedures and guidelines in filling out BIR Form No. 1709
  • The nature of the transaction and accounts affected shall be described in detail.
  • Required disclosures for “business overview of the ultimate parent company” and “functional profile”
  • Required attachments
  • No spaces shall be left unanswered. If one or some portions are inapplicable, such fact shall be stated.
• The TPD submitted must be the documentation upon which taxpayer relied to determine transfer pricing prior to or at the time of the undertaking of the related party transaction. Hence, the BIR requires submission of the TPD prepared prior to or at the time of the transaction, or after the transaction but not later than the filing of the annual income tax return (AITR).
• BIR Form No. 1709 is a required attachment to the AITRs and applicable starting with AITRs covering the fiscal year (FY) ended 31 March 2020. In this relation, the 30 July 2020 deadline for submitting the attachments to AITRs for FY ended 31 March 2020 was extended to 30 September 2020.
• Whether or not the TPD has to be updated yearly will depend on whether there are significant changes in the business model, the factors or conditions considered in drafting the TPD, and the nature of the related party transactions. If there are none, the old TPD shall suffice.
• For 2020 filings, the TPD of the immediately preceding year may be attached if:
  • The transaction is of the same type and was undertaken with the same related party; and
  • The taxpayer can prove that the same conditions are squarely applicable to the related party transaction in the taxable year concerned.
• RR No. 19-2020 requires more details to be disclosed on related party transactions. Accordingly, taxpayers cannot generally rely on the PAS 24 disclosures in the AFS for purposes of preparing BIR Form No. 1709.
• Formal written cost-sharing arrangements, in addition to receipts, proofs of payment, etc., should be submitted to prove the legitimacy of expenses.
• All contracts are required to be attached regardless of volume. In lieu of hard copies, soft copies in Portable Data Format (PDF) may be submitted in accordance with the guidelines in “Q19” of RMC No. 76-2020.
• Taxes paid in a foreign country must be declared and proof of payment attached. If such have not yet been paid, the taxpayer must attach the relevant contract, proof of receipt of income and Tax Residency Certificate issued by the ITAD and submitted to the foreign country when tax treaty benefits were availed.
• Deadline for submission of BIR Form No. 1709
  • Manual filers – It must be manually submitted with the AITR to the concerned Large Taxpayers (LT) Division or Revenue District Office (RDO) on or before the statutory due date.
  • eFPS filers – It must be manually submitted to the concerned LT Division or RDO within fifteen (15) days from the statutory due date or actual date of filing, whichever comes later.
  • BIR Form No. 1709 shall be filed manually, whether the taxpayer is a manual or eFPS filer.
  • Consequences of non-filing of BIR Form No. 1709 and its required attachments
    • Penalty between PHP1,000 to PHP25,000 for failure due to reasonable cause and not to willful neglect
    • For second and subsequent offenses, the maximum penalty prescribed
    • If the taxpayer still fails to file after receiving summons, the partner, president, general manager, branch manager, treasurer, officer-in-charge and responsible employees shall be punished by fine and imprisonment.

(Revenue Regulations No. 19-2020, published 10 July 2020; and Revenue Memorandum Circular No. 76-2020, issued 29 July 2020)

Final call

Extending the deadline for registration of taxpayers conducting online businesses

Last June, RMC No. 60-2020 was issued to remind all persons doing business and earning income, specifically those using electronic platforms and media and other digital means, to ensure that their businesses are registered and that they are tax compliant. The BIR prescribed a 31 July 2020 deadline for registration (without penalty imposition).

The BIR extended this deadline to 31 August 2020. Newly registered taxpayers are again encouraged to voluntarily declare past transactions and pay corresponding taxes, which shall not be subject to penalties if paid on or before 31 August 2020.

Persons found doing business without complying with registration requirements or who did not declare past due/unpaid taxes shall be subject to applicable penalties.

(Revenue Memorandum Circular No. 75-2020, issued 29 July 2020)

Prescription freeze

Suspending the running of the Statute of Limitations for assessment and collection

In light of the COVID-19 pandemic, RMC No. 34-2020 was issued last March to suspend the running of the prescriptive periods for the right to assess and collect taxes from 16 March 2020 until the lifting of the state of national emergency and for sixty (60) days thereafter.

The CIR recently clarified the above period to mean the period starting 16 March 2020 until the lifting of the Enhanced Community Quarantine (ECQ) and for 60 days thereafter.

Note: The ECQ in Metro Manila was lifted on 15 May and downgraded to a Modified ECQ from 16 May to 31 May.

(Revenue Memorandum Circular Nos. 77-2020, 74-2020 and
34-2020, issued 22 and 30 July, and 30 March 2020)

Machine permits

Procedures for cancellation of permits to use CRMs, POS and other sales machines

The CIR issued revised guidelines and procedures for the cancellation of permits to use (PTUs) cash register machines (CRMs), point-of-sale (POS) machines and other similar sales machines generating invoices/receipts.

The guidelines and procedures include the following:

• The cancellation of the PTUs shall be processed by the concerned Revenue District Office (RDO)/Large Taxpayers (LT) office.
• The taxpayer shall file a written request for PTU cancellation within five days from the date the machine was last used/withdrawn from use.
• Required submissions as attachments to the request or to the assigned Revenue Officer (RO) at the time of machine inspection
• Actual inspection of the CRM/POS machines shall be mandatory in case of withdrawal from use or transfer to another branch.
• Non-payment of the penalties at the time of the request for PTU cancellation shall not be a ground for the non-issuance of the Cancellation Certificate.
• Upon approval of the Memo Report of the assigned RO, the Client Support Section shall cancel the PTU and the Machine Identification Number, and generate the Cancellation Certificate.
• The Cancellation Certificate must be issued within seven days from receipt of the letter-request of the taxpayer. If inspection is dispensed with, the Cancellation Certificate shall be issued within three working days from receipt of the complete requirements.
• The policies, requirements and procedures in RMC No. 72-2018 apply only to machines found during Post-Evaluation to have requested for PTU cancellation but have not been acted upon by the concerned LT Office/RDO. Otherwise, the provisions on PTU cancellation under RMC No. 69-2020 shall apply.

(Revenue Memorandum Circular No. 69-2020, issued 13 July 2020)

Islamic banks

Regulation of Islamic Banks by the Bangko Sentral ng Pilipinas

The BIR circulated Republic Act (RA) No. 11439 entitled “An Act Providing for the Regulation and Organization of Islamic Banks.” RA No. 11439 provides for, among others, the following:

• The Bangko Sentral ng Pilipinas (BSP) shall exercise regulatory powers and supervision over the operations of Islamic banks.
• Islamic banks shall be responsible for complying with Shari’ah principles and, for this purpose, shall constitute a Shari’ah advisory council.
• Islamic banks shall be licensed and regulated in the same manner as universal banks.
• The BSP, taking consideration the peculiar characteristics of Islamic banking, may:
  • formulate rules and regulations for the extension of financial facilities to Islamic banks for purposes provided in the New Central Bank Act; and
  • require Islamic banks to maintain reserves against their deposit accounts and funds held in trust or under investment accounts.
• The Government shall endeavor to achieve neutral tax treatment between Islamic banking transactions and equivalent conventional banking transactions within the Tax Code.

(Revenue Memorandum Circular No. 67-2020, issued 2 July 2020)

Cooperatives

Circularizing the law reorganizing and strengthening the CDA

The BIR circulated Republic Act (RA) No. 11364 which reorganizes and strengthens the Cooperative Development Authority (CDA), and repeals RA No. 6939. The salient features of RA No. 11364 include:

• The modification of the composition of the Board of Administrators wherein each director will represent a cooperative sector instead of a geographical region.
• The Board of Administrators will also function as a policy-making and adjudicating body.
• The CDA shall furnish the BIR, local government units and other concerned agencies a certified list of duly registered cooperatives for purposes of processing tax exemptions.

(Revenue Memorandum Circular No. 66-2020, issued 2 July 2020)

Game resumption

Tax clearance of POGO licensees and service providers resuming operations

The BIR issued “Revised Guidelines and Requirements for POGO Licensees and Service Providers” for purposes of processing applications for BIR clearance for the resumption of operations.

The guidelines are as follows:

• The Application Letter and all documents should be filed with the BIR POGO Task Force or submitted to the pogo.taskforce@bir.gov.ph.
• The Application Letter should indicate the company name, TIN, business address, and its authorized representative & his/her contact details. The monthly regulatory fees paid to PAGCOR in prior years should also be specified.
• For prompt processing, the submission of complete documentary requirements should be ensured.
• The submission of falsified or fraudulent documents shall result in the denial of the Application Letter.

The respective conditions and requirements are as follows:

Hard publication

Effectivity date of Republic Act No. 11467

The Secretary of Finance has opined that Republic Act (RA) No. 11467 (which increased certain excise tax rates) took effect on 27 January 2020 when it was published in a newspaper of general circulation. This is notwithstanding Section 15 thereof which provides that it will take effect on 1 January 2020 after its complete publication either in the Official Gazette or in a newspaper of general circulation.

The Secretary reasoned as follows:

• Generally, laws shall only have prospective effect.
• The retroactive application of higher excise tax rates under RA No. 11467 will be unjust.
• Tax laws must be interpreted strictly against the government and liberally in favor of the taxpayer.
• Publication of laws is essential to give effect to the principle that ignorance of the law excuses no one from compliance therewith.
• Publication through the website of the Official Gazette is not considered compliance with the publication requirement.

(Revenue Memorandum Circular No. 65-2020, issued 30 June 2020)

Drug imports

Issuance of ATRIG by the RDO having jurisdiction over the port of entry

The Authority to Release Imported Goods (ATRIG) shall be issued for all importations of VAT-exempt articles, including prescription drugs and medicines for diabetes, high cholesterol, hypertension, cancer, mental illness, tuberculosis, and kidney diseases. The ATRIG shall be issued in the Revenue District Office (RDO) having jurisdiction over the port of entry.

Said RDO shall process the ATRIG applications of manufacturers, distributors, wholesalers and retailers of drugs and medicines included in the "list of approved drugs and medicines" issued by the Department of Health. The policies, guidelines and procedures in RMO No. 35-2002 should be strictly followed and observed.

(Revenue Memorandum Order Nos. 25-2020 and 23-2020, issued 29 July and 15 July 2020)

Proper disposal

How to ensure the deductibility of assets declared as waste, obsolete or expired

The BIR has revised and updated the policies and guidelines for its inspection and supervision of the destruction/disposal of the inventories, machineries or equipment in relation to the determination of deductible expense for assets declared as waste or obsolete due to spoilage, deterioration, obsolescence, expiration, or other causes rendering the same unfit for sale or for use in production.

Said policies and guidelines include the following:

• The “Application for Destruction/Disposal of Goods/Assets” with complete requirements shall be filed with and processed by the concerned Large Taxpayers (LT) office or Revenue District Office (RDO) at least seven days before the proposed date of destruction/disposal.
• Generally, the date of destruction shall be scheduled on regular working days. It may be conducted on a weekend or on a non-working holiday upon prior BIR approval.
• The valuation for the inventory or assets to be disposed/destructed shall be actual cost. In the case of fixed assets, carrying book value shall be considered.
• Deduction of losses for income tax purposes arising from inventory destruction or disposal shall be allowed after witnessing in accordance with Revenue Memorandum Order No. 21-2020 and issuance of the “Certificate of Deductibility of Goods/Assets Destructed/Disposed.”
• The BIR shall issue the “Certificate of Deductibility of Goods/Assets Destructed/Disposed” within five days from the submission of complete documents (e.g., photos and videos, inventory count sheet, etc.) of destruction/disposal.

(Revenue Memorandum Order Nos. 21-2020, issued 10 July 2020)

Smoker’s code

New ATCs and modified ATC descriptions for excise taxes on tobacco products

The following Alphanumeric Tax Codes (ATCs) have been created: