As we push toward economic globalization, corporate interconnectedness and interdependence expansively become the norm to stimulate and maintain viability among businesses. Consequently, this global modernization carries more complex transactions brought about by increasing cross-border trade of goods and services, international movement of capital, and exponential advancement of technology. On top of this, the acceleration of worldwide economic and financial trade extensively generates adjunct income which a state’s taxing authority may find difficult to keep track as international transactions may not always be conducted at arm’s length.
For this reason, the Bureau of Internal Revenue (BIR) strengthened its power to assess and collect national internal revenue taxes through the issuance of Revenue Regulations (RR) No. 19-2020. The subject issuance requires all Philippine taxpayers with related party transactions (RPT), regardless of the amount and volume of transactions, to complete and attach BIR Form No. 1709 and its supporting documents with the Annual Income Tax Returns. To understand clearly, RR No. 19-2020 defines related party transaction as “the transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.”
Moreover, said RR safeguards the tax base from abuse or concealment of RPTs, owing to the innate intricacy of acquiring information beyond the range of the taxing authority, by requiring proper disclosures of RPTs in the relevant BIR form. This also affords an effective implementation of Philippine Accounting Standards (PAS) 24, Related Party Disclosures which directs entities to make general disclosures of RPTs in its notes to audited financial statements without necessarily specifying the name of related parties.
Diverging from said accounting standard, RR No. 19-2020 requires taxpayers to fully disclose all its RPTs as can be gleaned from the information to be supplied in BIR Form No. 1709.
Part II of said form necessitates the disclosure of : (a) registered name of the related party, its address in the country of tax residence and Taxpayer Identification Number; (b) a summary of RPTs per nature of transaction; (c) the amount of tax paid in the foreign country on all types of income received abroad, and the amount of tax withheld on income payments to foreign related parties; and (d) a declaration whether or not the taxpayer availed of benefits under the treaty to justify the application of tax exemption or preferential tax treatment.
This disclosure enables the BIR and taxpayers alike to appropriately monitor the relevant accrual of income and incurrence of expense with the corresponding taxes withheld arising from RPTs, both foreign and domestic in nature. In addition, Part II (A) together with Part IV (F) of BIR Form No. 1709 provide an effective tracking measure as it cover applicable tax treaty benefits and Tax Treaty Relief Application (TTRA) filed with the International Tax Affairs Division (ITAD) in relation to income payments made by the Philippine taxpayer to foreign related parties.
On the other hand, Part III of BIR Form No. 1709 requires the disclosure of detailed RPTs per category. In connection to categorization, Revenue Memorandum Circular (RMC) No. 76-2020 clarifies that the enumeration of RPTs in RR No. 19-2020 is not exclusive. For this purpose, secondment arrangements, declaration of dividends, and redemption of shares are considered RPTs which must be disclosed in BIR form.
With the detailed disclosures in mind, concerns may arise as regards data privacy rules. This issue is addressed by same RMC which explains that among the exceptions to the Data Privacy Act of 2012 is the power of the Commissioner of Internal Revenue (CIR) to obtain the necessary information to ascertain the correctness of any return, or to determine the liability of any person for any internal revenue tax, or to evaluate tax compliance as stated in Section 5(b) of the Tax Code. Further, as to the risk of revelation of information by revenue officers to the public, the circular offers that officers have the inherent responsibility and obligation to ensure the confidentiality of information acquired from the exercise of their public function in addition to the punishment under Section 270 of the Tax Code for unlawful divulgence of trade secrets.
In line with this, specifics to be provided in the form and required attachments may sideswipe the Bank Secrecy Law. With this is mind, the BIR clarifies that it does not look into the amount of deposits or bank statements rather RR No. 19-2020 only requires the banks to fully disclose their RPTs upon which confidential information may be redacted or masked and to prove that the same were conducted at arm's length.
All in all, compliance with RR No. 19-2020 may bring up difficulties as to preparation and gathering of information for the submission of BIR Form No. 1709 and its attachments at the outset. However, if done within the bounds of law in relation to protection of sensitive and confidential information, this may serve as an efficient documentation of RPTs which one at the same time reinforces BIR’s power to assess and collect taxes as well as aids the taxpayer in its monitoring and record- keeping of taxes withheld and tax treaty benefits applied.
Miles M. Libres is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email firstname.lastname@example.org.