Tax Articles

Rules on Material Related Party Transactions

By: Atty. Kara Louisse B. Eramis

IT is not a secret that several tycoons control our country. These tycoons have established many companies, and almost all of these companies have dealings with each other. The Securities and Exchange Commission (SEC) wants transparency in these dealings, that’s why it issued SEC Memorandum Circular 10, which contains the rules on material related party transactions (RPT) for publicly listed companies (PLC).

As defined under the Circular, related party transactions are transfer of resources, services or obligations between a reporting PLC and a related party, regardless of whether a price is charged.

As a rule, related party transactions are allowed. However, when the transaction amounts to 10 percent or higher of company’s total assets, it shall be considered as material related transactions covered under the rules. And compliance to these rules shall be mandatory for all publicly listed companies.

As a requirement, all existing PLCs are required to submit to the Commission a policy on material RPTs within six months from the effectivity of Material RPT Rules, which was on April 27, 2019. And those listed after the effectivity of the rules are required to submit after six months from the date of listing. Also, an advisement report on material RPTs shall be filed within three days after the execution date of transaction. Further, PLCs are required to disclose in the company’s Integrated Annual Corporate Governance Report (I-ACGR) the summary of material related party transactions entered into during the reporting year. It is also important to note that under this rule, SEC imposed certain penalties for non/late filing of or incomplete/incorrect signature in the material related party transaction policy. There will be a basic penalty amounting to P10,000 and a monthly penalty of P1,000. This monthly penalty shall continue to accrue until the material RPT policy is submitted to the SEC.

SEC also provides penalties to non/late filing of or incomplete/incorrect advisement report. On the first offense, the company shall only be reprimanded. However, on the second to third violation, there shall be an appropriate monetary penalty imposed. And in case of continued nonpayment of the assessed and/or failure to comply with the requirement within a period of 15 days, after notice and hearing, shall be a sufficient ground for the Commission to resort to the remedy provided under the Revised Corporation Code.

Moreover, the PLC must take note that a violation for the same offense for the fourth time is a ground for the suspension/revocation of the erring company’s registration or secondary license. Hence, PLCs must religiously comply with these requirements; otherwise, their business operations will be greatly affected by possible closure or suspension of operations. PLCs should not disregard these rules especially if their business operations involve related party transactions.

In addition to the grounds provided under the Revised Corporation Code, an interested director or officer of a corporation shall be disqualified from being a director, trustee or officer of any other corporation on the basis of a final judgment rendered by the Court for committing abusive material RPTs. This disqualification shall be for a period of at least one year or more, depending on the decision of the Commission. 

Note that these penalties imposed by the SEC is without prejudice to the administrative penalties that may be imposed by the Commission and as may be provided by the Revised Corporation Code, Securities Regulation Code and other related laws.

I understand that the SEC wants transparency, and that is why it established these rules. But the other government entity that will be most interested with the data that the SEC will be able to collate in the implementation of this Circular is the Bureau of Internal Revenue (BIR). The BIR has been struggling on how to implement transfer pricing rules. But with this data, the BIR will be equipped with reliable information on how to trace and uncover all material related party transactions that until today have remained hidden.