REVENUE MEMORANDUM CIRCULAR NO. 54-2021 issued on April 27, 2021 clarifies certain provisions of Revenue Regulations (RR) No. 34-2020.
      A taxpayer is required to accomplish and file the Related Party Transaction (RPT) Form if the following conditions are present:
      a. It is required to file an Annual Income Tax Return (AITR);
      b. It has transactions with a domestic or foreign related party during the concerned taxable
       period; and
       c. It falls under any of the following categories:
           i. Large taxpayers
          ii. Taxpayers enjoying tax incentives, i.e. Board of Investments (BOl)-registered and economic              zone enterprises, those enjoying Income Tax Holiday (ITH) or subject to preferential Income                Tax rate
           iii. Taxpayers reporting net operating losses for the current taxable year and the immediately                preceding two (2) consecutive taxable years
           iv. A related party that has transactions with (i), (ii) or (iii). 
      Under RR No. 1-1998, a large taxpayer is a taxpayer who has been classified and duly notified by the Commissioner of Internal Revenue (CIR) for having satisfied any or a combination of set criteria as prescribed in the said Regulations or any amendatory regulations. Notification may be made via registered mail, publication, or any other mode of service. Therefore, a taxpayer who meets any of the set criteria but was not notified by the CIR cannot be considered a large taxpayer
      In determining whether a taxpayer is subject to preferential Income Tax rate, reference must be made to the provisions of the Tax Code or other special laws on how these taxpayers are taxed as a whole and not on a per transaction basis. Hence, a corporate taxpayer that is subject to regular corporate Income Tax but has transactions that are subject to preferential Income Tax rate under tax treaties or the Tax Code are not required to file an RPT Form, provided further that they do not fall
under Section 2(a), (c) and (d).
     Taxpayers referred to under Section 2(b) of RR No. 34-2020 include, but are not limited to, proprietary educational institutions and hospitals; and regional operating headquarters.
         International carriers, though subject to preferential rate under Section 28(A)(3) of the Tax Code or under the relevant tax treaty, are not required to file an RPT Form if they are either subject to tax based on their Gross Philippine Billings or gross revenues. The same rule applies to international carriers that are exempt from tax under the tax treaty or on the basis of reciprocity. On the other hand, international carriers that are subject to tax on their profits from sources within the Philippines are required to file an RPT Form
        A taxpayer operating within the economic zone subject to regular corporate Income Tax is not required to file an RPT Form because only those enjoying tax incentives with respect to Income Tax are required to file an RPT Form. However, if the taxpayer falls under Section 2(a), 2(c) or 2(d) of RR No. 34-2020, then it is required to file an RPT Form.     
      Taxpayers who are exempt from Income Tax under Section 30 or similar provisions of the Tax Code or special laws are not required to file an RPT Form. Also included in the classification of tax-exempt taxpayers are the regional or area headquarters and representative offices of foreign corporations that are not allowed by law to derive income from the Philippines. Post-employment benefit plans are also not required to file an RPT Form if their related party transactions consist only of the contributions from their sponsor employers 
       The net operating losses for Income Tax purposes should be the basis and not the amount reflected in the Audited Financial Statements. Under Section 34(D)(3) of the Tax Code, the term “net 2 operating loss” means the excess of allowable deductions over the gross income of the business in a taxable year. Allowable deductions refer to the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession.
         Registration fees, business permits and licenses and taxes, except those enumerated under Section 34(C)(1) of the Tax Code, are allowable deductions, and should therefore be considered in computing net operating losses. 
          Since the non-resident foreign related party is not required to file an RPT Form, the domestic party is likewise not required to file an RPT Form. To determine whether a taxpayer is required to file an RPT Form pursuant to Section 2(d) of RR No. 34-2020, the transacting taxpayer must verify first if its related party is required to file an RPT Form for falling under any of the categories cited above. 
          The materiality threshold is only relevant in determining who are required to prepare a Transfer Pricing Documentation (TPD). A taxpayer who is required to file an RPT Form must disclose all related party transactions irrespective of the amount. In filling out the RPT Form, similar transactions with the same related party must be aggregated, if possible. The TPD and other supporting documents shall no longer be attached to the RPT Form but shall instead be made available during audit.
          No less than the actual amounts of the related party transactions shall be declared in the RPT Form. Just like any other tax returns, the RPT Form likewise contains a perjury clause whereby the taxpayer or its duly authorized representative attests to the truthfulness of the facts stated therein. The filing of RPT Form shall only be mandatory for short period returns that are originally required by law or existing revenue issuances to be filed in 2021 and subsequent years
        Sections 2 and 3 of RR No. 34-2020 are interrelated. Section 2 enumerates the taxpayers who are required to file the RPT Form while Section 3 provides the conditions to be met by these taxpayers before they may be obliged to prepare a TPD. The enumeration under Section 2 is exclusive such that all taxpayers not included therein are not required to file the RPT Form. A taxpayer who is required under Section 2 to file the RPT Form shall only prepare its TPD if it satisfies any of the conditions set out under Section 3 of RR No. 34-2020. If the taxpayer is not required to file the RPT Form then it is not also mandated to prepare a TPD.
        Nothing prevents any taxpayer, however, from preparing a TPD and presenting the same during audit to prove that its related party transactions were conducted at arm’s length. Though not required to prepare a TPD under RR No. 34-2020, it still needs to reasonably assess and prove whether its dealings with related parties adhere to the arm’s length principle. After all, the burden of proof rests upon the taxpayer
        The preparation of a TPD shall be mandatory if the taxpayer meets any of the following conditions:
        a. Annual gross sales/revenue for the subject taxable period exceeding One Hundred Fifty                  Million Pesos (₱150,000,000) and the total amount of related party transactions with foreign                and domestic related parties exceeds Ninety Million Pesos (₱90,000,000)
         b. Sale of tangible goods involving the same related party exceeding Sixty Million Pesos
         (₱60,000,000) within the taxable year
          c. Service transaction, payment of interest, utilization of intangible goods or other related
          party  transaction involving the same related party exceeding Fifteen Million Pesos                                 (₱15,000,000.00) within the taxable year
         d. If TPD was required to be prepared during the immediately preceding taxable period for                   exceeding (a) to (c).
        The difference between the related party transactions under Section 3(a) refer to transactions involving all related parties in general, while those under Section 3(b) relate to transactions with a specific related party only
        The annual gross sales or revenue referred to under Section 3(a) of RR No. 34-2020 is the amount of gross sales/receipts/revenues/fees reported in the AITR, irrespective of the source and identity of the other party to the transaction, i.e., related or otherwise
        In computing the total amount of related party transactions with foreign and domestic related parties, the following items shall be totalled:
       i. Amounts received and/or receivable (trade receivables) from related parties duing the                      taxable year
       ii. Amounts paid and/or payable (trade payables) to related parties during the taxable year; and
       iii.Outstanding balances of loans and non-trade amounts due from/to all related parties                         (nontrade receivables and payables).
      Any compensation paid to key management personnel, dividends and branch profit remittances shall not be included in the computation. The share in the net income of an associate, etc. is akin to dividends and, therefore, is not required to be reported in the RPT Form
      The BIR requires the submission of a duly accomplished RPT Form. If the taxpayer fails to provide any material information (e.g. details of the related parties and related party transactions, etc.) the Bureau will regard the RPT Form as not duly filed and the penalty for failure to file such information return will be imposed.
      The RPT Form requires the amounts in foreign currency and its equivalent in the local currency. However, if several currencies were used for the related party transactions, and it seems impractical to indicate all of them in the RPT Form, their equivalent in the local currency should instead be disclosed. ln all cases, the exchange rates to be used should be the rate at the transaction date. The same rule applies to the preparation of a TPD
        Through the RPT Forms submitted, the BIR will conduct an initial transfer pricing risk assessment, identify the high-risk taxpayers and make an informed decision whether or not to conduct a transfer pricing audit of a particular entity or transaction. As to who will be subjected to transfer pricing audit will greatly depend on the results of such initial assessment. 
        This notwithstanding, the BIR still retains the right to conduct transfer pricing audit against taxpayers with related party transactions, irrespective of whether or not they are required to file the RPT Form and prepare a TPD. When subjected to audit, taxpayers who are not mandated to file the RPT Form and to prepare a TPD must still present sufficient evidence to prove that their related party transactions were conducted at arm’s length.
        In order for the related party transactions covered by an Advance Pricing Agreement (APA) to be exempt from disclosure in the RPT Form, it should be approved and accepted by the BIR in the form of a unilateral, bilateral or multilateral APA.
        The BIR is not obliged to accept any unilateral APAs entered into by a foreign taxpayer and the tax authority of the country of residence although it applies to an international transaction between such foreign taxpayer and its related party in the Philippines.
       Taxpayers who are not required to file an RPT Form and have already finalized their AFS for taxable year 2020 prior to the effectivity of RR No. 34-2020 are not expected to comply with the 4 mandate of Section 4 thereof and cannot, therefore, be penalized for non-disclosure. Section 4 only applies to the AFS that are required to be submitted after the effectivity of RR No.34-2020.
      RR No. 34-2020 took effect immediately after its publication in a newspaper of general circulation on December 23, 2020. The provisions thereof shall only apply to the RPT Forms that are required to be submitted after its effectivity.