The Covid-19 pandemic impacted countries and businesses around the world. In the Philippines lockdown measures in the form of community quarantines were imposed and many workers became unemployed. The Bayanihan to Heal as One Act (Bayanihan 1) was enacted on March 25, 2020 in response to the crisis. Included in the law’s measures were tax deferments, the non-payment of documentary stamp tax on certain loans, tax incentives for donors, and value-added tax (VAT) and duty exemptions on the importation of medical supplies and equipment used to battle Covid-19. As the law was only effective through June 24 of that year, officials worked to implement additional initiatives.

Bayanihan 2

Upon the expiry of Bayanihan 1, the government recognised the need to pass another legislative measure to facilitate rehabilitation and recovery. On September 11, 2020 Republic Act No. 11494, also known as the Bayanihan to Recover as One Act (Bayanihan 2), was passed. Notable provisions relating to taxes include:

• Movement of statutory deadlines: Similar to the Bayanihan 1, statutory deadlines relating to the filing and submission of any document or the payment of taxes, fees and other charges required by law, may be moved for taxpayers whose localities were under community quarantine.

The Department of Finance (DoF) issued Revenue Regulations (RR) No. 27-2020, which extended the deadline for filing VAT refund claims under Section 112 of the National Internal Revenue Code of 1997 (Tax Code). The 90-day mandatory processing time for VAT refund claims was also suspended. Other than the extension of VAT refund deadlines, the government did not extend any statutory deadline for the filing of tax returns after the effectivity of Bayanihan 1, considering that mobility restrictions in much of the country were already lifted.

• Tax exemption for certain income payments: The government provided tax exemptions for certain income payments made to public and private health workers. Implementing the provisions under Section 4 (h) and (f) of the law, the DoF through RR No. 29-2020 identified a special risk allowance given to public and private health workers, and actual hazard duty pay given to any person temporarily employed to support the health workforce. Additionally, compensation paid to public and private health workers who contracted Covid-19 in the line of duty, or died while fighting the virus, is excluded from gross income and not subject to income tax.

Moreover, retirement benefits received by retired officials and employees of private firms from June 5, 2020 to December 31, 2020 are exempt from income tax provided that there was a retirement plan duly registered with the Bureau of Internal Revenue (BIR). However, in the event said individual was re-employed by the same firm and its related parties within the succeeding 12-month period, this fact shall be considered as proof of non-retirement and will subject retirement benefits to income tax.

• Exemption from documentary stamp tax: Loan term extensions or credit restructuring for loans granted by covered institutions which fell due on or before December 31, 2020 shall be exempt from documentary stamp taxes. This is similar to the relief granted under Bayanihan 1. However, interbank loans and bank borrowings are still subject to documentary stamp tax under Sections 179, 195 and 198 of the Tax Code.

• Removal of stock transaction tax for IPO: Shares of stocks sold, bartered or otherwise exchanged through an initial public offering under Section 127 (B) of the Tax Code are now exempt from the stock transaction tax.

• Extended availment of the net operating loss carry over: Notwithstanding existing laws to the contrary, the net operating loss of an enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from gross income for the next five consecutive taxable years immediately following the year of such loss.

• Exemption from donor’s tax: From September 15, 2020 to December 19, 2020 the donation of personal computers, laptops, tablets or similar equipment appropriate for use in schools and for distribution to public schools regardless of level, including state universities, colleges and vocational institutions under the Technical Education and Skills Development Authority, are exempt from import duties and taxes, including the donor’s tax.

• Liberalisation of the grant of incentives: The government extended the grant of incentives to entities engaged in the manufacture or importation of critical equipment or supplies, including health care equipment and supplies. The exemption from import duties, taxes and other fees shall be determined by the Bureau of Customs and the BIR.

Transfer Pricing

As related party transactions have become more complex, transfer pricing issues have been raised by tax authorities. According to the UN’s “Practical Manual on Transfer Pricing for Developing Countries”, transfer pricing is generally defined as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises. In relation thereto, RR No. 19-2020 defines a “related party transaction” as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

As stated in RR No. 2-2013, a transfer price occurs between a taxpayer of a country with high income taxes and an associated enterprise in a country with low income taxes. Domestically, transfer pricing may occur where one associated enterprise entitled to income tax exemptions is used to allocate income away from a company subject to regular income taxes.

In the Philippines the commissioner of internal revenue is authorised to impute or allocate gross income or deductions between or among related organisations, trades or businesses to prevent tax evasion, or to reflect income of related parties. This authority is codified under Section 50 of the Tax Code. Although there is only one transfer pricing provision in the Tax Code, the BIR and the DoF released four issuances related to the law:

• RR No. 2-2013 provides for the application of the arm’s length principle for cross-border and domestic transactions between associated enterprises;

• Revenue Audit Memorandum Order (RAMO) No.

1-2019, which provides for transfer pricing guidelines, and standardised audit procedures and techniques in the conduct of audit of the taxpayers with related parties and/or intra-company transactions;

• RR No. 19-2020, which provides for the filing of the BIR Form No. 1709; and

• Revenue Memorandum Circular (RMC) No. 76-2020, which clarifies certain issues related to the filing of BIR Form No. 1709, also known as the related party transaction form, as well as its attachments. Notably, three of the four issuances on transfer pricing were released recently, between the third quarter of 2019 and 2020. These efforts highlight the BIR’s renewed and heightened interest in the enforcement of transfer pricing rules and guidelines.

Arm’s Length Principle

The arm’s length principle requires that a transaction with a related party be made under comparable conditions and circumstances as a transaction with an independent party. It is founded on the premise that where market forces drive the terms and conditions agreed upon an independent party transaction, the pricing of the transaction would reflect the true economic value of the contributions made by each entity in that transaction. This means that if two associated enterprises derive profits at levels above or below the comparable market level solely by reason of a special relationship between them, the profits will be deemed as non-arm’s length.

In such an event, tax authorities that adopt the arm’s length principle may make the necessary adjustments to the taxable profits of the related parties in their jurisdictions so as to reflect the true value that would otherwise be derived on an arm’s length basis. As stated in RAMO No. 1-2019, this principle stipulates that if the conditions in the transaction between related parties are the same as, or similar to, the conditions in a transaction between independent parties that are comparable, the price or profit in the related transactions must be the same, or similar to, the range of prices or profit in the transactions between the comparable independent parties.

Additionally, RR No. 2-2013 provides for different arm’s-length-pricing methodologies as follows:

• The comparable uncontrolled price method evaluates whether the amount charged in a controlled transaction is at arm’s length by reference to the amount charged in a comparable, uncontrolled transaction in similar circumstances. Any difference between the two prices may indicate that the conditions of the commercial and financial relations of the associated enterprises are not arm’s length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction.

• The resale price method is applied when a product that has been purchased from a related party is resold to an independent party. This seeks to value the functions performed by the reseller. The resale price method evaluates whether the amount charged in a controlled transaction is at arm’s length by reference to the gross profit margin realised in comparable uncontrolled transactions.

• The cost-plus method focuses on the gross mark-up obtained by a supplier who transfers property or provides services to a related purchaser. The method values the functions that are performed by the supplier. This method is most useful where semi-finished goods are sold between associated enterprises, or when the controlled transaction involves the provision of services.

• The profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction, or in controlled transactions that are appropriate to aggregate, by determining the division of profits or losses that independent enterprises would have expected to realise from engaging in the transaction or transactions.

• The transactional net margin method operates in a manner similar to the cost plus and resale price methods in that it uses the margin approach. This method examines the net profit margin relative to an appropriate base such as costs, sales or assets attained by the member of a group of controlled taxpayers from a controlled transaction.

Audit Guidelines

RAMO No. 1-2019 was issued by the BIR to provide standardised procedures for audits of taxpayers with related party and/or intra-firm transactions. The scope of the tax audit may include:

• Controlled transactions, including the sale, purchase, transfer and utilisation of tangible and intangible assets; the provision of intra-group services; interest payments and capitalisation between associated parties, where at least one party is chargeable to tax in the Philippines; and

• Transactions between a permanent establishment (PE) and its head office or other branches. For the transfer pricing audit, the PE will be treated as a separate and distinct enterprise from its head office and other related branches or subsidiaries. During the course of the audit, the following activities are performed by the tax authorities:

• The characteristics of the taxpayer’s business is determined, including related transactions;

• The transfer pricing method is selected; and

• The arm’s length principle is applied. Once the audit is finished the tax authorities will present their findings to the taxpayer. If the price or margin is not in accordance with transfer pricing regulations and the arm’s length principle, the authorities will distribute and impute the corresponding arm’s length price, margin or interest rate that would be subject to tax. Thereafter, the taxpayer will have the opportunity to refute the findings of the tax authorities.


To ensure the proper disclosures of related party transactions, RR No. 19-2020 mandated the submission of BIR Form No. 1709, or the information return on related-party transactions (RPT form). The RPT form shall be submitted upon the filing of the annual income tax return. Taxpayers whose fiscal year ends on March 31, April 30, June 30, July 31, August 31, September 30, October 31, November 30 or December 31, 2020 are required to submit the RPT form.

Also required is the submission of certified true copies of relevant contracts or proof of transaction; withholding tax returns and the corresponding proof of payment of taxes withheld and remitted to the BIR; proof of payment of foreign taxes or ruling duly issued by the foreign tax authority where the other party is a resident; a certified true copy of the advance pricing agreement, if any; and any transfer pricing documentation (TPD). TPD must be prepared prior to, or at the time of, the transaction or after the transaction, but not later than the date of filing of the tax return for the fiscal or calendar year in which the transaction takes place. TPD, however, need not be updated yearly if there are no significant changes in the business model, factors or conditions considered in drafting TPD and the nature of the related party transactions.

Through BIR Form 1709 the authorities aim to strengthen transfer pricing risk assessments and audits. Taxpayers who fail to file RPT and its attachments, due to reasonable cause and not to wilful neglect, shall be subject to a compromise penalty of between P1000 ($19.98) and P25,000 ($497). In the event of the repetition of such an offence, the maximum penalty shall be imposed. If after receiving valid summons to produce the attachments the taxpayer still fails or neglects to produce it, the partner, president, general manager, branch manager, treasurer, officer in charge or employees responsible for the violation may, upon conviction, also suffer imprisonment of not less than one year, but not more than two years, in addition to the fine.