New BIR Form 1709 issued for Related Party Transactions

Business transactions are getting more complex between domestic and foreign corporations in the Philippines. Because of this, many companies here in the Philippines are taking advantage of the loopholes of the tax system in related party transactions. One way to do that is by reporting the unreasonable prices that affect the tax base in reporting the taxes. To minimize or evade taxes, a person or entity may set a company from those countries with fewer taxes or with haven taxes. Read 9 Amazing Tax-Free Countries Everyone Should Envy.

As to address this issue, the government must monitor any related party transactions to ensure the proper pricing to ensure the correct amount of tax base. This regulation requires the taxpayer to disclose any related transactions on domestic and foreign transactions. Read on how to register your online business properly.

“Through the years, transactions around the world have become more complex and have been subject to abuse by taxpayers with intent to evade taxes by concluding transactions between them at unreasonable prices, thus eroding the tax base. Undeniably, this usually happens between related parties,” Bureau of Internal Revenue

Related Party Transactions Philippines

A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is chargedIAS 24

. These revenue regulations issued clear guidelines to avoid any abuse on the tax base. The government will conduct a proper examination of the related party transactions to validate the income and expenses declared.

Classification of Related Parties

 Revenue Regulations 19-2020 includes the following rules on determining whether a person or entity is related. Any person who has control or joint control, significant influence, or a member of the reporting entity’s key management personnel or a parent of the reporting entity is a related party.

NOTE: This regulation also highlighted that parents or grandparents could not be automatically a related party.

Any company or entity is related to a reporting entity if both are members of the same group. It could mean that each parent and subsidiary is related furthermore if the entity is an associate or a joint venture of the related entity also if the entity is a post-employment benefit plan for the benefit of other related entities. Lastly, the entity is related if any member of a group provides key management personnel services to the reporting entity or the reporting entity’s parent.

Related Party Transactions Policy

Assuming that a person or entity is in related parties, a person or entity must also be interested in knowing the transactions that should be disclosed or reported in the New BIR Form 1709. Here are the following list transactions that the regulations mentioned.

  • Transfer of research and development
  • Transfer under license agreements
  • Sales or purchase of finished or unfinished goods
  • Purchase or sales of property and other assets
  • Receiving or rendering services
  • Commitments to do something if a particular event occurs or doesn’t occur in the future, including executory contracts
  • Payment of liabilities on behalf of the entity or by the entity on behalf of that related party
  • Transfer under finance arrangements, including equity contributions in cash or kind and loans.

Details BIR Form 1709 Per Category

In filing the BIR Form 1709, the person or entity must disclose the details to any related party transactions. These disclosures are made separately per category. There are seven categories in this form, 1709.

  1. With Parents
  2. Transactions with Entities with Joint control or significant over the entity
  3. Subsidiaries
  4. Associates
  5. Joint ventures in which the entity is a Joint venture
  6. Key Management of the Entity or its Parent
  7. Other Related Parties

Within the details per category, it must include the amount of the transactions. The number of outstanding balances, including commitments and their terms and conditions and the nature of the consideration provided in a settlement, is necessary. Provisions of doubtful accounts related to the amount of outstanding balances are also needed. Any expenses incurred during the period in respect of bad debts or uncollectible accounts due from related parties.

Aside from the above information, here are other information needed in filing this new form 1709.

  • Business Overview of the ultimate parent company. It includes the profit of the multinational group of which the taxpayer belongs, including the names, address, legal status, and country of tax residence of each related party with whom intra-group transactions have been entered into by the taxpayer and lastly the ownership linkages among them.
  • Functional profile of the taxpayer. A full description of the taxpayer’s business and the industry in which it operates and of the entity of any related parties in which the transaction occurred.
  • Changes in the functional profile of the taxpayer
  • Change in the ownership structures of the taxpayer
  • Details of business restructuring during the year or the last five years
  • Pending tax Treaty Relief Application with the BIR or with the tax authority of other
  • Advance Pricing Agreement (APA) with your related parties

Guidelines in Filing BIR Form 1709

Here are the following procedures and guidelines that a person or entity should know.

  1. Individual tax returns are accompanied by the accomplished new BIR Form 1709.
  2. Make sure to leave no spaces be left unanswered.

Related Party Transactions Disclosure in Filing BIR Form 1709

  • A true certified copy of advance Pricing Agreement, if any
  • Withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the Bureau of Internal Revenue (BIR).
  • A true certified copy of the relevant contracts or proof of transaction
  • Evidence of payment of foreign taxes or ruling duly issued by the foreign tax authority
  • Any transfer pricing documentation

Finally, this RR 19-2020 is issued to avoid abuse by the taxpayers to evade taxes by setting unreasonable prices for any related party transactions, both domestic and foreign. If you haven’t get your tin number, click here to know-how.

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