- What is transfer pricing?
- 7 common mistakes about affiliate transactions
- Transactions that are subject to transfer pricing documentation are often overlooked
- What businesses need to do when there is an associated transaction?
- Risks encountered if enterprises do not make declarations for related-party transactions
Transfer pricing is used by most foreign-invested enterprises to reduce CIT payable in Vietnam through transfer pricing tools. As a result, Vietnamese enterprises do not think that the regulations on transfer pricing are also targeted at them, or that Vietnamese enterprises are also subject to the regulations of transfer pricing. However, this is not the case, details are presented in the content below.
What is transfer pricing? #
Transfer pricing is understood as the application of measures, changes in price policy in transactions (linkage transactions) for goods, for the purpose of changing the inherent value of goods or services and assets are transferred between members of a corporation or an affiliated group (associated parties) not at the price specified in the market with the ultimate aim of reducing the amount of capital payable to the investor. water.
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.
See more details on regulations on affiliates and affiliate transactions in the article "Learn about transfer pricing - Part 3: Classification of associated transactions and the principle of nature that determines the form"
7 common mistakes about affiliate transactions #
1. Price moves through inputs
Increasing input costs too high compared to market prices through capital contribution of foreign parties such as assets, machinery and equipment, technology transfer when enterprises self-price high or input materials prices are high, making the price of raw materials more expensive. capital is higher than the selling price, leading to negative or very low profit of the business. For example, there are some cases such as: buying raw materials with the same corporation, importing components for cars, computers, electronic components for domestic production, etc.
2. Transfer pricing through output factors
Determine the selling price of products, goods and services for the parent company lower than the market price. For example, in some cases such as: processing prices, garment products, leather shoes, soft products, electronics...
3. Transfer pricing through service providers
Transfer pricing through service provision, marketing, advertising, management consulting, support... but in fact such service is not incurred.
4. Expenses allocated by parent company to subsidiaries
Expenses allocated by parent company to subsidiaries Household payments in the group are often not transparent, do not prove the service provided.
5. Paying for trademarks and copyrights
Payment of trademarks, copyrights, training and training expenses cannot be proved to be reasonable.
6. Paying loan interest to affiliated parties
High interest payment for affiliated parties interest rate than that of a commercial bank or interest-free lending in order to transfer profits to an associate with a loss or receive tax incentives (tax exemption, reduction, low corporate income tax rate).
7. Deal with companies with favorable tax rates
Deal with companies with favorable tax rates or companies based in “tax havens”.
Transactions that are subject to transfer pricing documentation are often overlooked #
Case 1: “Does the company borrow capital from a commercial bank to serve business with more than 25% of equity according to Decree 132. Is this transaction an associated transaction?”
General Department of Taxation replied on March 18, 03 on the website as follows:
“At points d and l, clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
d) An enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured from the related party's financial resources and related financial transactions). similar nature) provided that the loan amount is at least 25% of the contributed capital of the owners of the borrowing enterprise and accounts for more than 50% of the total value of medium and long-term debts of the borrowing enterprise.
Pursuant to the above provisions, if the Company has a bank loan with a loan amount greater than 25% of the contributed capital of the Company's owners and accounting for more than 50% of the total value of medium and long-term debts of the Company. then between the Company and the Bank is determined to have an association relationship. At that time, transactions arising between the enterprise and the bank are identified as related transactions.
Case 2: “In the year the company has a transaction to borrow money from the business owner who is also the legal representative with more than 10% of the equity
The General Department of Taxation has also based on points d and l, clause 2, Article 5 of Decree No. 132/2020/ND-CP to reply on March 18, 03 on the website as follows:
“In case the Company borrows money from the business owner who is also the legal representative to operate and control the business with an amount greater than 10% of equity, it is determined to have an association relationship. At that time, the loan transaction between the Company and the business owner is an associated transaction.”
Case 3: “Can a joint-stock company lacking working capital borrow from an individual - who is not a shareholder but someone who has a family relationship with a shareholder at an interest rate of 0%? Is the above case considered to have related transactions? If yes, how to apply?
The General Department of Taxation responded on March 18, 03 on its website as follows:
“At point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
- l) The enterprise has transactions of transferring or receiving at least 25% of the contributed capital of the enterprise's owner in the tax period; Borrowing or lending at least 10% of the owner's contributed capital at the time of transaction in the tax period with an individual who operates or controls the business or with an individual who is in a relationship as prescribed in Clause XNUMX of this Article. point g of this clause. "
Pursuant to the above provisions, in case the Company borrows money from an individual who has a family relationship with a shareholder (who is an executive or controls the business) with an amount greater than 10% of the equity Owner is determined to have an association relationship. At that time, the transaction of borrowing money between the Company and an individual who has a family relationship with the shareholder is an associated transaction.
Enterprises having related party transactions are obliged to declare and determine the price of related party transactions according to the provisions of Decree No. 132/2020/ND-CP.”
What businesses need to do when there is an associated transaction? #
Taxpayers whose related-party transactions fall within the scope of this Decree are responsible for declaring and determining the prices of the related-party transactions, without reducing their corporate income tax obligations to be paid in Vietnam as prescribed in Clause 132 of this Article. Decree 2020/05/ND-CP dated November 11, 2020.
Taxpayers whose related-party transactions fall within the scope of this Decree are responsible for declaring information on the related-party relationships and transactions according to Appendix I, Appendix II and Appendix III issued together with this Decree. this Decree and submit it within the same time limit as the corporate income tax finalization declaration.
Risks encountered if enterprises do not make declarations for related-party transactions #
Enterprises are likely to make mistakes when making CIT finalization declarations if they do not exclude loan 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, the tax authority also imposes administrative sanctions on enterprises such as late submission of declarations, as well as the accompanying penalty interest, if any.
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