March 2021

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
29 March 2021 Benjamin N. Villacorte

Sustainability reporting in the Philippines: Year One review

Today, as markets become more unstable, companies are obligated to create a sustainable business model and implement environmental and social initiatives that will benefit future generations as well as create long-term value for stakeholders.Now more than ever, organizations need to recognize the value of transparency in reporting by disclosing non-financial information through sustainability reports. Sustainability reporting is no longer just a nice-to-have program but has been elevated as a requirement for publicly listed companies (PLCs).GOVERNMENT MANDATE FOR SUSTAINABILITY REPORTSOn Feb. 18, 2019, the Securities and Exchange Commission (SEC) released Memorandum Circular (MC) No. 4, series of 2019, under the title Sustainability Reporting Guidelines for Publicly-Listed Companies, specifying the procedure for sustainability reporting in the Philippines. They require all PLCs to submit a sustainability report as part of their annual report each year.The Commission said this requirement will help companies assess and manage their contributions towards the attainment of the 2030 United Nations Sustainable Development Goals (UN SDGs) and the Philippine Development Plan 2017-2022 or Ambisyon Natin 2040.The first report was scheduled for submission in 2020, attached to the company’s 2019 Annual Report. For companies already producing sustainability reports in accordance with internationally-recognized frameworks and standards, their reports were considered sufficient compliance with the reporting requirement.The guidelines also mandate a “comply or explain” approach for the first three years upon implementation. This means that companies need to disclose specific non-financial information using a suggested SEC template or a standalone report attached to their Annual Reports. They can also provide explanations for required data that companies are unable to provide. Companies failing to adhere to the guidelines are subject to the penalty for Incomplete Annual Report provided under SEC MC No. 6, Series of 2015, Consolidated Scale of Fines.With the new regulation emphasizing the growing importance of non-financial disclosures, SGV conducted a review of how PLCs responded to the SEC requirement to publish sustainability reports and shared our findings in a study, Beyond the Bottom Line: Sustainability Reporting in the Philippines.The report reviewed 73 PLCs that submitted sustainability reports for the financial year ending Dec. 31, 2019, with the demographic based on the number of PLCs within an industry, information from industry briefings, and changes to local industry regulations. It also included nine listed holding firms that had been reporting on sustainability and non-financial information before the SEC requirement. The study was limited to publicly available information, such as the SEC sustainability templates appended to SEC Form 17-A, standalone sustainability reports, integrated reports and annual reports.The report also leveraged EY sector trends, the World Economic Forum’s Global Risks Report 2020 and SGV’s experience in supporting businesses in sustainability and non-financial reporting.WIDELY USED SUSTAINABILITY REPORTING STANDARDS AND PRACTICESKey findings from the study suggest that 64% out of the 73 companies reviewed used the reporting template provided by the SEC to ensure compliance on the first year. However, more organizations will likely transition to stand-alone or integrated reports moving forward. Of the PLCs assessed, 40% released stand-alone sustainability reports, while 30% disclosed sustainability information as part of their Annual Reports. Moreover, only a small percentage released Integrated Reports, which included financial and non-financial disclosures. These reporting formats are not mutually exclusive, as some PLCs disclosed their non-financial information using more than one reporting format.Among the PLCs submitting stand-alone reports, the most widely referenced or adopted sustainability reporting standard was the Global Reporting Initiative (GRI) Standards. Companies also used other frameworks or standards, like Sustainability Accounting Standards Board (SASB), Integrated Reporting (IR) Framework and Task Force on Climate-related Financial Disclosures (TCFD), to address other topics like climate change or industry-specific material sustainability topics.Further, only 11% of the PLCs obtained independent external assurance, all of which had limited assurance. Notably, obtaining assurance on non-financial information, while not required, is considered a global best practice. In fact, according to the EY Climate Change and Sustainability Services (CCaSS) investor survey, 75% of investors see independent assurance of a company’s processes and controls over sustainability reporting as “valuable” or “very valuable,” in addition to the 70% who say the same for non-financial and environmental, social, and governance (ESG) performance measures.ADDITIONAL INSIGHTS ON SUSTAINABILITY REPORTING PRACTICESAnother significant outcome observed was the focus on the UN SDGs, with 77% of the sustainability disclosures linked to the SDGs, and 45 PLCs using the SDGs to inform about their sustainability strategy, materiality assessment process and/or material sustainability issues. Incorporating the SDGs in a company’s sustainability strategies ensures that their products, services and programs contribute to attaining the global sustainability goals.Moreover, 60% established the scope and boundary of their reports while only 52% disclosed their materiality assessment process, or the method used to determine the sustainability issues material to the company and their stakeholders. Material sustainability issues are the key focus areas addressed by a company and relevant information or plans in these areas are included in its sustainability report. Stakeholder engagement is an important part of the materiality assessment process to demonstrate that companies listen to their stakeholders and address their concerns.Meanwhile, only 32% disclosed having sustainability governance in place, which is not surprising since sustainability reporting is relatively new to the country. However, as sustainability issues continue to take center stage in developing business strategies, business leaders should consider having a member of management spearhead sustainability within the organization.On specific disclosures, Occupational Health and Safety (OHS) was the most disclosed topic by PLCs, while the least discussed were environmental topics. This presents an area for improvement for PLCs as they will not be able to fully address their ESG impacts, risks and opportunities without measuring or reporting on environmental topics.REITERATING THE SIGNIFICANCE OF NON-FINANCIAL REPORTINGThe report reveals that the first year of reporting focused more on compliance. However, it still met the objective of creating awareness and inclusion of sustainability on the board and management agenda. Due to the impact caused by the pandemic, it is very likely that the 2020 sustainability reports will heavily focus on health and safety, with pandemic response programs such as Department of Labor and Employment (DoLE)-mandated safety protocols, testing and vaccinations getting reported as part of ESG concerns. We also expect more robust disclosures on climate-related matters such as decarbonization, baselining energy consumption and air and greenhouse gas emissions.In addition, PLCs can improve their reporting on topics such as waste management to address pressing global concerns; resource management, specifically of materials and water, since unhampered consumption is not sustainable; and the protection and rehabilitation of biodiversity and ecosystems affected by operations to minimize negative environmental impact. Another area which may be improved further is social issues, particularly privacy and data security, after the pandemic rapidly shifted professional communications into the digital space.After the initial year of compliance with the new SEC requirement, PLCs will hopefully realize the significance of non-financial reporting and develop strategies that incorporate global and national development goals. By measuring and addressing their current sustainability impacts, risks and opportunities, they can help create long-term value for stakeholders, and at the same time, ensure a sustainable future for generations to come.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a Partner and Yna Altea D. Antipala is a Senior Associate from the Climate Change and Sustainability Services team of SGV & Co.

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22 March 2021 Edison U. Ortiz

Revisiting the Tax Sparing rule

In 1974, legislators recognized the importance of attracting foreign investment and provided a reduced tax rate for dividends received by non-resident foreign corporations (NRFCs) from domestic corporations. Instead of the regular corporate income tax rate of 30%, a 15% rate was imposed on dividends received. This was subject to the condition that the country in which the NRFC is domiciled shall allow credit against the tax due from the NRFC taxes paid in the Philippines. The credit is equivalent to a particular amount representing the difference between the regular corporate income tax rate and the reduced 15% tax rate.This preferential tax rate is still present in the current Tax Code and is popularly known as the “tax sparing rule”. Based on rulings previously issued by the BIR and subject to future changes in their tax laws, foreign tax jurisdictions such as the US, Switzerland, Luxembourg, the Cayman Islands, Cook Islands, and Bermuda were determined to have tax rules that either allow the “deemed paid” tax credit or exempt the dividends from income tax.   CURRENT TAX CODE PROVISION AND IMPLEMENTING GUIDELINESThe current Tax Code provides that an NRFC may avail of this reduced tax rate if its country of domicile allows a minimum “deemed paid” tax credit amount equivalent to 15%, representing the difference between the 30% current regular income tax rate and the reduced 15% tax rate. It also means that the exemption from taxes allowed by the NRFC’s country of domicile is sufficient to apply the 15% reduced tax rate.In 2016, the Bureau of Internal Revenue (BIR) issued guidelines on how to avail of this 15% preferential rate through Revenue Memorandum Order (RMO) No. 27-2016. However, RMO No. 27-2016 did not gain any traction and was eventually suspended by Revenue Memorandum Circular (RMC) No. 69-2016. The only viable option for taxpayers then was to request a confirmatory ruling from the BIR’s Law and Legislative Division. Even so, the release of confirmatory rulings took time due to the volume of taxpayer requests filed with the BIR covering issues other than the tax sparing provision. Essentially, the guidelines in the processing of requests for rulings did not provide the rules that would allow domestic corporations to declare and remit the dividends due to NRFCs prior to the release of the confirmatory ruling.      Fast forward to late 2020, when the BIR issued RMO No. 46-2020 on Dec. 23, which sought to finally provide clarity to the claim of the 15% tax on intercorporate dividends. According to this RMO, the domestic corporation acting as a withholding agent may remit the dividends outright and apply thereon the reduced rate of 15% upon the submission of a specific BIR form and the required attachments.CONFIRMATION OF ENTITLEMENTSeemingly stemming from the policy of easing doing business in the Philippines, the RMO allows domestic corporations paying the dividends to apply the reduced rate of 15% without first securing a ruling from the BIR. Instead of a confirmatory ruling, the BIR issues a certification verifying the entitlement. In case of a denial, the BIR shall issue a ruling containing the factual and legal bases that led to such denial of the request for confirmation. This denial can eventually be subject to an appeal to the Department of Finance.Should there be an existing tax treaty between the Philippines and the country of domicile of the NRFC, there is an option to apply for either the reduced 15% rate under the Tax Code or the preferential rate under the applicable tax treaty.This RMO also emphasized that holders of Philippine Depositary Receipts (PDRs) may likewise be considered shareholders for the purpose of availing of the reduced 15% tax rate provided that the PDR is coupled with a right to purchase the underlying shares and that the right can be legally exercised without violating any foreign equity ownership restrictions and nationalization laws.THE FUNDAMENTALS AND POSITIVE BUSINESS IMPACTFor NRFCs that have been consistently claiming the 15% reduced rate, it is essential to be acquainted with the list of documentary requirements for submission to the BIR International Tax Affairs Division (ITAD).For prospective foreign investors and NRFCs expecting to receive dividends from domestic corporations, a careful analysis should be made to determine whether to invoke the 15% reduced rate under the Tax Code or to avail of the preferential rate under an existing tax treaty.For domestic corporations acting as withholding tax agents, it shall likewise be prudent to maintain copies of the filed request for confirmation and its attachments for documentation purposes which will be useful during BIR audits.This RMO can aid businesses through the timely repatriation of dividends to foreign investors to address these investors’ cash flows and other cash requirements. The outright claim of the preferential rate shall likewise result in the possible reduction in administrative costs concomitant with the prior rules which necessitated companies to secure confirmatory rulings. Owing to the streamlined processes brought by this RMO, the simplified procedures make it easier for companies to internally integrate the function of compliance oversight. The RMO provides further influential impact by removing uncertainties and promoting a sense of security to foreign investors due to the uniform rules and procedures in availing of the 15% rate.NRFCs should likewise keep an eye on the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE. This measure may lead to a further reduction in the minimum “deemed paid” tax credit to avail of the 15% reduced rate due to the proposed reduction in the regular corporate income tax rate. Moreover, with the intent to repeal the rules on Improperly Accumulated Earnings Tax (IAET), companies will have more flexibility in deciding whether to declare the earnings as dividends, utilize the same for future projects, or simply retain them. This makes the process much easier for those who opt to declare dividends under the tax sparing rule.EASE OF DOING BUSINESSWith the issuance of the RMO, companies may take comfort in the fact that there is consistency and uniformity in the documentary requirements in availing of the 15% preferential rate.At the end of the day, while it has taken decades to finally gain clarity on the proper application of the tax sparing rule, we can see that the government’s focus on enhancing the ease of doing business is well and truly being addressed. It is particularly crucial at this challenging time to ease the burden of compliance with tax law, and for companies to better boost investor confidence in our country’s economic and business landscape.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Edison U. Ortiz is a Tax Senior Director of SGV & Co.

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15 March 2021 Joanne P. Lansangan

VAT refunds during the pandemic

The COVID-19 pandemic has forced businesses to explore new ways to improve their cash flow. One of the ways is to tap the government for VAT refunds. This recourse is available to taxpayers with unutilized input VAT attributable to zero-rated transactions and is governed by a process which was recently streamlined by the Bureau of Internal Revenue (BIR).In the past, we have heard about taxpayers who expressed reluctance to file VAT refund claims in view of the numerous documentary requirements and costs associated with the filing. Those who have actually filed faced difficulties in retrieving documents, whether internally or from outside sources, such as required certifications from various government agencies and foreign jurisdictions.To reduce the burden of the VAT refund process, the BIR issued Revenue Memorandum Order (RMO) No. 47-2020, which took effect on Jan. 19, 2021, in response to the appeal of taxpayer-claimants who, due to the COVID-19 pandemic, faced difficulty complying with the documentary requirements under the old rules, and in compliance with Republic Act (RA) No. 11032, otherwise known as the “Ease of Doing Business and Efficient Government Service Delivery Act of 2018.”The changes introduced by the RMO, coupled with the legal mandate to adopt simplified requirements, are meant to encourage reluctant taxpayers to file VAT refund claims and recover the tax they are rightfully due. If granted a refund, taxpayers can tap into a new cash flow stream that would help them sustain day-to-day operations.NON-SUBMISSION OF PHOTOCOPIES OF SALES INVOICES/RECEIPTSAmong the notable amendments under this RMO is the removal of the requirement to submit photocopies of sales invoices or receipts for both purchases and sales of goods or services, which used to be the bulk of the documents needed upon filing. Instead, the submission of the photocopies was replaced by the submission of the originals for verification, together with corresponding scanned copies stored in a memory device. This change is believed by some to be cost and environment-friendly, and it eliminates the need for the BIR officers to conduct fieldwork at the taxpayer’s place of business, just to stamp each original document with the phrase “VAT Refund Claimed.” With all the geographical considerations and localized lockdowns, the change in the rule effectively considers the health and safety of both the BIR officers and the claimants-in-charge.NON-SUBMISSION OF CONSULARIZED DOCUMENTSThe requirement to submit consularized or apostilled certificates of foreign registration, incorporation or association of non-resident foreign corporations (NRFCs) was likewise removed. This amendment hopes to address the dilemma of taxpayer-claimants whose VAT refund applications are hampered due to the delay in processing and delivery of foreign documents to the Philippines. The revised checklist only requires the submission of an original copy of a certification from the Securities and Exchange Commission (SEC) stating that the NRFC is not registered to do business in the Philippines.In any case, it would still be advisable for taxpayers to secure a consularized or apostilled document in anticipation of a possible appeal in court. Until such time that jurisprudence eliminates such requirements, taxpayer-claimants are not yet fully off the hook in securing consularized or apostilled documents abroad.OTHER RELAXED REQUIREMENTSThe RMO likewise removed other documents from the revised checklist, particularly those which are already accessible to the BIR from its own records (i.e., Annual Registration Fee, Authority to Print, Permit to Use Computerized Accounting System, and schedule of big-ticket purchases classified per supplier). Nevertheless, for big-ticket items, BIR officers are still required to check for authenticity and correctness by accessing the BIR’s Information System.The RMO also compressed four separate sworn statements/declarations (i.e., amount of sales declared; affidavit of non-forum shopping; completeness and authenticity of documents submitted; and Taxpayer’s Profile) into one Taxpayer Attestation.The RMO also removed the documents which were previously required to be certified as true copies by the issuing government agencies. The RMO recognized that certain government-issued documents contain embedded “quick-response” (QR) codes which can be verified electronically or online.FIXED 90-DAY PROCESSING PERIODWhile previous BIR issuances provided that the 90-day period commences from the date of submission of the official receipts or invoices and other documents in support of the application, RMO 47-2020 emphasized that the start of the 90-day period is from the actual filing of the application with complete documents duly received by the processing office.The RMO intends to eliminate the possibility of having the reckoning date moved or adjusted by a BIR handling officer by simply requesting for additional documents outside of the checklist.CLARIFYING THE EXCLUSIVE VENUE FOR DIRECT EXPORTERSWith respect to venue, RMO No. 47-2020 expressly states that only the VAT Credit Audit Division (VCAD) may receive claims of direct exporters, to the exclusion of the Revenue District Office (RDO) or the Large Taxpayers Audit Division (LTAD). This clarifies previous BIR issuances (RMC No. 17-2018 and RMO 47-2019), which may be interpreted by some direct exporters to mean that they have the option of filing the VAT refund application at the RDO or LTAD.Though the pandemic has somehow disrupted the “should be” order of VAT refund filings, it has also given the tax authorities an opportunity to rethink and streamline the VAT refund process. The RMO seeks to address the challenges faced by both BIR officers and taxpayers who find themselves standing as players in a pandemic where claims must still be filed and processed accordingly.This RMO is a welcome development, and its implementation will ultimately redound to the benefit of all involved. As we continue to respond to challenges in this new world of uncertainty, taxpayers must continue to be on the lookout for further enhancements in government processes — including the VAT refunds — and take advantage of the benefits from such changes.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Joanne P. Lansangan is a Tax Associate Director of SGV & Co.

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08 March 2021 Maria Vivian C. Ruiz

A better working world where #SheBelongs

Today, as we celebrate International Women’s Day, we continue to recognize that women’s advancement is an economic imperative for increased prosperity, stronger communities and a key factor in building a better working world. Women all over the globe continue to demonstrate their crucial role in keeping the wheels of society turning, as well as breaking down traditional gender stereotypes.SGV & Co., as a member firm of EY Global, will be initiating a series of activation campaigns and communications that focus on women empowerment and appreciation in line with an EY global campaign that rallies the advancement of women in the workplace. We wholeheartedly support EY’s timely message that gender equality is not a problem that needs to be solved, but a solution to the most complex challenges faced by businesses and society. The key campaign narrative articulates the vital importance of making sure that #SheBelongs across all levels of an organization and is closely involved in decisions, design and execution of value-creation operations.In line with our long-standing value of meritocracy, SGV has always recognized the importance of advancing women and institutionalizing gender equality in the workplace. Not only is this part of our environmental, social, and governance (ESG) agenda, but it is also in alignment with our purpose of inclusively nurturing leaders, regardless of gender. Moreover, it is an integral element of our focus on sustainable development, aligning with the UN Sustainable Development Goals (UN SDGs).EQUAL OPPORTUNITY, REGARDLESS OF GENDERThis parity-based culture has been embedded in the firm since its earliest years. SGV was one of the earliest Philippine companies to admit a woman into the partnership, Linda Villanueva, in 1961 and one of the first to elect a woman chair and managing partner, Gloria Tan-Climaco, in 1992.As of the beginning of FY 2020, women comprised 60% of our people, exhibiting a strong gender diversity across the talent pipeline. It is proof that SGV provides the necessary policies and support to foster a secure working environment where women can thrive as they pursue their careers. As of Jan. 1, 2021, the gender statistics within the firm saw women comprising 47% of the leadership and 49% of the partnership. Our dynamic female partners rose through the ranks on their own merit and deliver valuable contributions to the firm. They possess a deep understanding of the career journey for women in SGV and are in the position to mentor more future women leaders in the organization.As proof of its commitment to close the corporate gender gap and promote diversity and inclusiveness (D&I) in the workplace, SGV was the first EY member firm and the first professional services firm in Southeast Asia to obtain the Economic Dividends for Gender Equality (EDGE) Assess-level certification through the Philippine Business Coalition for Women Empowerment (PBCWE) in 2018. EDGE is the leading global assessment methodology and business certification standard for gender equality. It measures where organizations stand in terms of gender balance across their pipeline, pay equity, effectiveness of policies and practices to ensure equitable career flows, as well as inclusiveness in their culture.ADVANCING WOMEN BEYOND THE FIRMSGV is also an active supporter of various organizations that focus on advancing D&I and gender equality.The firm celebrates women in its programs, such as when Socorro Ramos, the founder and general manager of National Bookstore became the first woman to win the prestigious Entrepreneur of the Year Philippines (EOYP) in 2004. She was followed by Natividad Cheng, chairperson and CEO of Multiflex RNC Philippines, Inc. (Uratex), who won Entrepreneur of the Year Philippines in 2017. The EOYP program also dedicates a category to recognizing outstanding woman entrepreneurs.In addition, EY has the Entrepreneurial Winning Women (EWW) program, which identifies ambitious women entrepreneurs from around the world whose businesses show potential to scale. This customized executive leadership program provides them with the resources they need to achieve their full potential. This includes an elite global network of high-growth companies led by women, where participants can expand their knowledge with the latest executive dialogues and research about business practices and strategies.SGV Senior Adviser, Ambassador Delia D. Albert, is also an exemplary woman leader, with a career that includes being the first female diplomat to serve as Secretary of Foreign Affairs in the Philippines and the ASEAN region. Spurred by her concern for the welfare of the thousands of overseas Filipino women workers, she initiated a resolution to promote and protect these women’s rights at the Geneva Commission on Human Rights in 2004.SGV & Co. is also a founding member of the PBCWE, which was launched in 2017 through a partnership between the Philippine Women’s Economic Network (PhilWEN) and Investing in Women, an initiative of the Australian government. The coalition is made up of influential businesses that are large employers who will take appropriate steps to improve gender equality in their own workplaces and influence other businesses to become better employers of women. SGV alumna-partner Ma. Aurora D. Geotina-Garcia is the chair of PhilWEN and co-chair of PBCWE.ENSURING THAT #SHEBELONGSCelebrating the economic, political and social achievements of women around the world allows us to drive discussion around initiatives that accelerate gender equality and promote inclusion. We cannot wait for years to close the economic gender gap, and every small action taken now can make a difference towards positive and meaningful change.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Maria Vivian C. Ruiz is the Vice Chair and Deputy Managing Partner of SGV & Co.

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01 March 2021 Auresana B. Ines

Narrowing the scope for transfer pricing reporting

COVID-19 (coronavirus disease 2019) has taken the world by storm, with the pandemic requiring unprecedented community quarantines, lockdowns, and business disruption.With the objective of reducing costs and tempering negative operating results, taxpayers have been reevaluating discrepancies between forecast and actual operating results and reviewed contractual arrangements and supply chain processes. Particularly for taxpayers engaged in related-party transactions, it was imperative to review the current business model, allocation of risks, and cost reimbursement or sharing arrangements.Because of this, taxpayers who are engaged in related party transactions (RPTs) were taken aback when Revenue Regulations (RR) 19-2020 were issued. RR 19-2020 requires the submission of BIR Form 1709 (or the RPT Form) and supporting documents which include contemporaneous transfer pricing documentation (TPD). Taxpayer concerns include the cost, logistics and manpower required to prepare the RPT Form and supporting documents.However, taxpayers required to file the RPT Form and to prepare TPDs were provided some relief when Revenue Regulations 34-2020 were issued. The RR streamlined the guidelines and procedures for submitting the RPT Form and TPD, helping narrow the scope in determining the taxpayers who are mandated to prepare the RPT Form and TPD.TAXPAYERS REQUIRED TO PREPARE AND SUBMIT THE RPT FORMAs opposed to previous regulations, the new regulations limited the requirement for preparing and submitting the RPT Form only to selected taxpayers. These include: (a) large taxpayers, or those who have been officially classified and notified to be as such by the BIR; (b) taxpayers enjoying tax incentives, such as an income tax holiday and a preferential income tax rate; (c) taxpayers incurring net operating losses for three consecutive years, including the current year; and (d) taxpayers who are engaged in RPTs with taxpayers falling under the first three classifications.Earlier regulations have stated that the RPT Form aims to effectively implement Philippine Accounting Standards 24 on the disclosure of RPTs. Given this objective, all RPTs, regardless of amount and volume, were required to be disclosed in the RPT Form.However, the new regulations now exclude payments of compensation and benefits to key management personnel (KMP) among the RPTs to be reported. Dividends and branch profit remittances have also been excluded from the reportable RPTs. Moreover, KMPs are no longer required to submit the RPT Form.The new 1709 Form requires taxpayers to confirm if they prepared TPD in the format prescribed under the TP regulations.MATERIALITY THRESHOLDS FOR SUBMITTING TPDSThe previous regulations provide for the simultaneous submission of the RPT Form and TPD. Under the new regulations, only the taxpayers who are required to file the RPT Form and who meet certain materiality thresholds are mandated to prepare TPD. These thresholds include:• Annual gross sales revenue for the subject taxable period in excess of P150,000,000.00 and the total amount of RPTs with foreign and domestic related parties in excess of P90,000,000.00. In this particular instance, both thresholds must have been breached;• RPT involving sale of tangible goods in the aggregate amount exceeding P60,000,000.00 within the taxable year; and• RPT involving service transaction, payment of interest, utilization of intangible goods or other RPTs in the aggregate amount exceeding P15,000,000.00 within the taxable year.When required to prepare TPD during the immediately preceding taxpayer year for exceeding the given thresholds, a taxpayer shall also be required to prepare a TPD for the current year.Although mandated to prepare a TPD, taxpayers who are covered by the TPD requirement are now required to submit their TPD within 30 calendar days from receiving a request from the BIR Commissioner or his duly authorized representatives, subject to a non-extendible period of 30 calendar days based on meritorious grounds.TAXPAYERS WHO DO NOT MEET THE MATERIALITY THRESHOLDSWhile only a selected group of taxpayers is now required to prepare and file the RPT Form, a question arises on whether there is still a need to prepare a TPD for those who do not meet such thresholds.To answer this question, we have to consider the legal basis of all the TP-related issuances: Section 50 of the Tax Code, granting the Commissioner the power to distribute or allocate income and expenses from intercompany transactions to clearly reflect the income of the related parties.Such power, if exercised by the Commissioner, does not make a distinction on the taxpayers who can be subject to the redistribution of income or reallocation of expenses. Thus, there still appears to be a requirement to ensure that intercompany transactions clearly reflect the income of related parties. This requirement can be satisfied by providing a justification, whether in the form of a TPD or any alternative documentation, that RPTs have been entered on an arm’s length basis.We also have to consider that financial reporting standards have evolved through the years. Under current accounting standards, all taxpayers are required to disclose in their financial statements, their assumptions and estimates in determining uncertain tax treatment. With respect to RPTs, it is still prudent to have a contemporaneous TPD or any alternative documentation which supports the basis for intercompany pricing policies. Maintaining a contemporaneous TPD or any alternative documentation therefore minimizes, if not eliminates, uncertain tax positions that have to be disclosed in the financial statements.Thus, taxpayers who do not meet the materiality thresholds and are therefore not required to prepare and submit a TPD should still ensure that there is some justification, whether through a TPD or otherwise, that their transfer pricing practices are conducted on an arm’s length basis.Without such justification, a taxpayer faces the possibility that the basis of its pricing policies for its RPTs may be questioned by the BIR during an audit. A possible TP adjustment may be issued, resulting in a deficiency tax assessment against the taxpayer.In addition, the lack of justification may lead regulators to question the reasonableness of the company’s tax position as reflected in its financial statements due to the uncertain tax position of its pricing practices with its related parties.NEXT STEPS FOR TAXPAYERS NOT MANDATED TO PREPARE TPDConcerned taxpayers should immediately focus on complying with the minimum requirements of preparing and submitting their RPT Form on time. It should be emphasized that no further extension on the submission of the RPT Form has been provided in RR 34-2020.After submitting their RPT Forms, taxpayers should proceed to collate copies of the agreements and other proof of transactions, proof of withholding and remittance of consequent taxes as well as TPD.Since tax examination usually begins with the BIR’s review of tax returns and financial statements, taxpayers should ensure the consistency of figures disclosed in the financial statements and RPT Form. The nature, transaction and outstanding balances should be updated to align with supporting documents. If the taxpayer is not mandated to submit Form 1709 and prepare a TPD, such must also be disclosed in the financial statements.It is hoped that narrowing transfer pricing reporting to select taxpayers will further encourage compliance. This is particularly key since the taxable year 2020 is the first compliance period, and the objective of the requirement to submit the RPT Form is to improve and strengthen the BIR’s transfer pricing risk assessment and audit.By this time, taxpayers should hav already been discussing the appropriate disclosures in their financial statements, finalizing the details to be disclosed in the RPT Form, and preparing the supporting documents, including the TPD.This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Auresana B. Ines is a Tax Senior Manager of SGV & Co.

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