Tax strictly controls associated transactions against transfer pricing: What should Vietnamese enterprises do?

Updated at 29/11/2022 - 11:13 am

  • Enterprises must determine whether or not there are related-party transactions in the fiscal year and declare information about the related-party transactions to the tax authorities within the same time limit for submitting the annual finalization.
  • Failure to comply with the above provisions, enterprises risk being fined or fixed the amount of tax payable.

Transfer pricing is not a new concept, used by most foreign-invested enterprises to reduce CIT payable in Vietnam. At present, transfer pricing also arises in Vietnamese enterprises through the forms of association and associated transactions. Incorrect perception and incorrect identification of the fact that their enterprises have incurred associated transactions, signs of transfer pricing, will make businesses bear a lot of tax risks. It is also the object that the Tax authority is tightening management measures in the future, controlling related transactions, and preventing tax loss in the near future. 

What is an affiliated party? #

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.

What is Affiliate Trading?

For example:

The two businesses are run or controlled by personnel, finances, and business operations by individuals in one of the spousal relationships; biological parents, adoptive parents, stepfather, stepmother, mother-in-law, father-in-law; natural children, adopted children, stepchildren of husband or wife, daughter-in-law, son-in-law; siblings, siblings of the same parent, sibling of the same parent, sibling, sister-in-law, brother-in-law, brother-in-law, sister-in-law, sister-in-law of the same parent, same mother of different father; paternal grandparents, maternal grandparents; grandchildren, grandchildren; aunt, uncle, uncle, uncle and nephew;

An enterprise guarantees or lends money to another enterprise of any kind (including third party loans secured from affiliated party finances and financial transactions of an nature in nature. similar) provided that the loan is at least 25% of the equity of the borrower enterprise and accounts for more than 50% of the total value of the medium and long-term liabilities of the borrower;

What is affiliate trading? #

Linkage transactions are transactions that are "not at the normal price applicable to the common market", which have been applied by the related parties with measures and changes in price policy for goods. , services for the purpose of changing the inherent value of goods or services and assets to be transferred between members of a corporation or an associated group (associated parties) for the purpose of minimizing the amount taxes to be paid to the state.

Affiliate transactions are transactions of buying and selling, exchange, rent, lease, borrow, lending, transferring, assigning goods, Service Provider; get a loan, loans, financial services, financial guarantees and other financial instruments; purchase, sale, exchange, rent, lease, borrow, lend, transfer, transfer tangible property, intangible property and agreement to buy, sell, share resources as assets, capital, labor, cost sharing between related parties, except for business transactions for goods and services subject to the State's price adjustment scope in accordance with the law on prices.

What does the business suffer if it does not declare associated transactions? #

When the enterprise has transactions with related parties during the period, the interest expense in the period will be controlled according to the ratio of EBITDA. In which, EBITDA is the total net profit from business activities in the period plus interest expense after deducting deposit interest and loan interest incurred in the period plus depreciation expense incurred in the period of the taxpayer. Therefore, enterprises are likely to make mistakes when making CIT finalization declarations if they do not exclude interest expenses as prescribed in Decree 132/2020/ND-CP, leading to underpayment of CIT if any.

Specifically, the total interest expense after deducting deposit interest and loan interest arising in the period of the taxpayer, which is deductible when determining taxable income, does not exceed 30% of the total net profit. from business activities in the period plus interest expense after deducting deposit interest and loan interest incurred in the period plus depreciation expense incurred in the period of the taxpayer.

Also according to this Decree, tax authorities have the right to fix prices; profit margin; profit allocation ratio; taxable income or corporate income tax payable for taxpayers who fail to comply with regulations on declaration and identification of related-party transactions; failed to provide or provided incomplete information and data to determine the associated transaction price.

In addition, in addition to the file, the explanation of the enterprise, the tax authority also depends on the nature of the transaction to decide whether it is an associated transaction, whether there is a sign of transfer pricing, or not. depends entirely on the profile (the nature determines the form), thereby controlling associated transactions.

Based on the collected information and basis, the tax authority collects the underpaid taxes, and at the same time imposes administrative penalties on enterprises such as late filing of declarations, as well as the accompanying late payment penalties. if.

Consequences if you do not submit declarations and associated transaction records
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Enterprises need to do? #

  • Learn and understand the current regulations affecting businesses in the course of business activities, especially on related-party transactions, transfer pricing.
  • Regularly monitor and list the associated parties as well as list the transactions of the enterprise with the associated party arising during the period.
  • Keep track of EBITDA control rates, interest expenses, and most of all, the intrinsic nature of the associated transaction type.
  • Make a file of related transactions to prove the transaction price in the period to the tax authority.
  • Prepare appendices on related-party transactions as prescribed and submit them to the tax office within the same time limit as the enterprise's deadline for submitting the annual settlement.
  • It is recommended that the accounting department master the expertise in related-party transactions, control transactions with related parties, and have a plan to prepare and submit submissions according to the requirements of current regulations.

Services of EXPERTIS - Solutions for businesses #

EXPERTIS provides the service of making declarations and associated transaction records for businesses. We have experience in providing this service to foreign invested companies (FDI). With that advantage, EXPERTIS has clear and understandable ways to convey and advise, making the confusing terms above become very understandable content for businesses.

See more articles Declare associated transactions for businesses in Vietnam for more detailed information about affiliate transactions.

For detailed advice on the services we provide, please contact the EXPERTIS Consulting Department for the earliest support.

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