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Affiliate transactions (transfer pricing) – Part 3: Classification of associated transactions and the principle that the substance determines the form

Updated at 18/06/2022 - 02:41 pm

Associated parties (according to Decree 132/2020 / ND-CP) #

Parties that have an affiliated relationship (hereinafter referred to as "a party") are parties with a relationship in one of the following cases:

a) A party participates directly or indirectly in the administration, control, capital contribution or investment in the other party;

b) The parties are directly or indirectly under the control, control, capital contribution or investment of another party.

The above related parties are specified as follows:

a) An enterprise directly or indirectly holds at least 25% of the capital contributed by the owner of the other enterprise;

b) Both enterprises have at least 25% of the owner's capital contributed directly or indirectly by a third party;

c) An enterprise is the largest shareholder in terms of the owner's equity and holds directly or indirectly at least 10% of the total shares of the other enterprise;

d) An enterprise borrows or lends to another business in any form (including loans from third parties guaranteed from the party's financial resources and financial transactions available). similar nature) provided that the loan amount is at least equal to 25% of the owner's equity of the borrowing enterprise and accounts for more than 50% of the total value of medium and long-term debts of the borrowing enterprise;

d) An enterprise appoints a member of the board of directors to manage or take control of another enterprise provided that the number of members appointed by the first enterprise accounts for more than 50% of the total members of the board of directors. operating or taking control of the second business; or a member designated by the first enterprise has the right to determine the financial or business operations of the second enterprise;

e) Two enterprises with more than 50% of members of the board of directors or a board member have the right to decide on the financial policies or business activities designated by a third party;

g) Two enterprises are operated or controlled by personnel, finance and business activities by individuals in one of the spousal relationships; biological parents, adoptive parents, stepfather, stepmother, mother-in-law, parents-in-law; natural children, adopted children, stepchildren of wife or husband, daughter-in-law, son-in-law; siblings, siblings of the same parent, sibling of the same parent, brother, sister, half sister, brother-in-law, brother-in-law, sister-in-law, sister-in-law of the same parent or the same parent, same mother of different father; paternal grandparents, maternal grandparents; grandchildren, grandchildren; aunt, uncle, uncle, uncle and nephew;

h) Two business establishments having a head office and a permanent establishment or a permanent establishment of a foreign organization or individual;

i) Enterprises are controlled by an individual through his / her capital contribution to that enterprise or directly participate in the management of the enterprise;

k) Other cases in which the enterprise is subject to the actual management, control and decision on the production and business activities of the other enterprise;

l) The enterprise has transactions to transfer or receive the transfer of contributed capital of at least 25% of the contributed capital of the owner of the enterprise in the tax period; to borrow or lend at least 10% of the owner's equity at the time of the transactions in the tax period with the operator or controller of an enterprise or with an individual in a relationship as prescribed in point g this clause.

Classify transactions by activity #

Business activities: Buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, transferring machinery, equipment, goods, providing services;

Financial activities: Borrowing, lending, financial services, financial guarantee and other financial companies;

Activities related to the right to use: Buying, selling, exchanging, renting, leasing, borrowing, lending, transferring or transferring tangible and intangible assets;

Synergistic activities between related parties: Agreements on common use of resources such as synergies, cooperation in exploitation and use of human resources, cost sharing among related parties.

Some cases are often missed when self-determination #

Companies and affiliates

Official Letter No. 5695 / CT-TTHT dated June 19, 6 of Ho Chi Minh City Tax Department: In case the Company establishes another independent accounting branch, it is calculated that the Company participates directly or indirectly in the administration, control, capital contribution or investment in a branch, the transactions arising between the Company and the branch are associated transactions.

The Branch and the Company make a declaration of associated transactions together with the corporate income tax finalization declaration as prescribed.

Control of individuals through capital contribution

One or more businesses are controlled by an individual either through his / her capital contribution to that enterprise or directly participating in operating the business.

Official Letter No. 46426 / CT-TTHT dated July 10, 7 of Hanoi Tax Department:

In case the Company is controlled by an individual through his / her capital contribution to the Company or directly participates in the management of the Company, the Company shall be considered as related parties and any arising transactions including loan, loan) between related parties in the process of production and business is an associated transaction in accordance with the provisions of the Decree.

Official Letter No. 43637 / CT-TTHT dated June 28, 6 of Hanoi Tax Department:

Where individual A's Company is under the control of an individual through his / her capital contribution to the Company or directly participates in the management of the Company, it shall be considered as affiliated parties according to instructions. in the Decree.

Definition of the principle that essence determines form #

Currently, many countries around the world have applied the tax calculation principle on the basis of the nature of the transaction to decide the form. The application of the tax calculation principle on the basis of the transactional nature determines the form in the determination of taxpayers' tax obligations is one of the new points that are highly appreciated by experts.

The principle of "Nature of formality" is the principle to analyze the business activities of taxpayers to determine the nature of the associated transaction as a basis for comparison with equivalent independent transactions, ensure that the associated transactions properly reflect the nature of trade, economics and finance shall be conducted between the parties without affiliation, not to allow these affiliated relations to distort tax obligations to state budget of taxpayers. This principle is based on the data, the actual implementation of transactions between affiliates to compare with independent transactions in similar conditions, regardless of the form of the transaction shown in the contract or document. between parties with affiliation. The determination of the nature of economic, financial and commercial relations of associated transactions is made based on comparison and comparison with independent conditional transactions.

Independent comparables are independent transactions between unrelated parties or an independent transaction is selected on the basis of analysis, comparison, and identification of similar comparables. to determine the price, profit rate and profit distribution ratio in order to determine taxpayers' tax obligations to pay to the state budget, to ensure compliance with the Law on Tax Administration and the Law on Corporate Income Tax. Karma.

The tax authority that manages, checks and inspects the transfer pricing of taxpayers according to the principle of independent transaction and the nature of operation and transaction shall decide tax obligations corresponding to the value generated from the nature of transactions, production and business activities of taxpayers, not recognizing associated transactions that do not follow the principles of independent transactions, reduce the enterprises' tax obligations to the state budget and transfer pricing to determine the correct tax liability.

Expenses of associated transactions that are inconsistent with the nature of the independent transaction or do not contribute to generating revenue or income for taxpayers' production and business activities shall not be included in deductible expenses when determined. income subject to corporate income tax in the period.

Principles of application #

The arising costs must be consistent with the nature of independent transactions or contribute to the creation of revenue and added value for production and business activities.

Based on the collection of information, determining the nature of associated transactions, economic relations, financial trade in contracts or documents, agreements, the tax authority will analyze the reality of production activities. business, functions of the taxpayer through real-time comparison and contracts, documents, agreements). Thereby, redefine transactions and risks according to the principle of independent trading and the essential principle determines the form.

The tax authority will impose tax in case the enterprise performs the transactions that are not in accordance with the economic nature or the actual arising; Enterprises having associated transactions fail to comply with the provisions on the obligation to declare and provide information according to tax administration regulations.

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