The issue of related-party transactions (Commonly known as Transfer Pricing) is increasingly being noticed and reviewed by tax authorities every year as well as carefully checking this content when finalizing taxes. This problem used to be common in foreign-invested enterprises.
However, at present, with current regulations on tax administration for related-party transactions, ordinary transactions of enterprises, seemingly unrelated to the actual transfer pricing, are subject to the management of tax authorities. regulations on related-party transactions. For example: An enterprise that borrows capital from a commercial bank to serve its business or has a transaction to borrow money from a person with a family relationship or the owner of the business who is also a legal representative, is a In related transactions, it is necessary to declare related transactions.
Tax authorities have the right to fix prices; profit margin; taxable income or payable CIT amount for taxpayers who do not comply with regulations on declaration and identification of related-party transactions. In the case of being fixed by the Tax Authority, it may lead to the business being tax arrears, reducing losses or increasing taxable income. At the same time, businesses may be subject to other related fines.
The following article is a guide to help businesses understand the regulations on related-party transactions for enterprises operating in Vietnam and be able to fulfill their obligations in the event of an associated transaction.
Understanding Affiliate Transactions #
1. What is Affiliate Transaction?
Affiliate transaction (Transfer pricing) refers to businesses that have an affiliate relationship "intentionally adjusting prices" for the prices of goods and services bought and sold between affiliated businesses.
This is the link transaction definition that is closest to the nature of the associated transaction.
In official terms and legal regulations, the word "Affiliate transaction" is used. The word "transfer pricing" is not clearly defined in the relevant regulations, however, based on its nature, the word "transfer pricing" is used frequently, especially for enterprises with foreign elements. Transfer Pricing.
2. What is an affiliate transaction?
Linkage transactions are transactions "not at the usual 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 tax payable to the state.
Affiliate transactions are almost all possible transaction types between related parties. Affiliate transactions that are regulated by law 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.
3. Affiliate transaction example
a. 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.
b. 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...
c. Transfer pricing through service providers
Transfer pricing through service provision, marketing, advertising, management consulting, support... but in fact such service is not incurred.
d. Expenses allocated by parent company to subsidiaries
The expenses that the parent company allocates to the subsidiary, the payments on behalf of the group are often not transparent, and the services provided are not proven.
e. Paying for trademarks and copyrights
Paying for trademarks, copyrights, training costs, training does not prove reasonable.
f.Paying loan interest to affiliated parties
Paying interest to related parties higher than the interest rate of commercial banks or lending interest-free loans in order to transfer profits back to the associates for loss or tax incentives (tax exemption, reduction, corporate income tax rate) short).
g. Trade with companies with favorable tax rates
Transactions with companies that have favorable tax rates compared to the rest (for example, buying and selling tax-free software).
Determine yes/no associated transaction #
1. General principles to determine whether there is an associated transaction or not
Identifying related party transactions is based on having transactions with parties that have the following relationships:
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.
2. The parties having an association relationship in (a) and (b) above are specified as follows:
The following checklist determines whether the enterprise has associated transactions or not (Applicable from 2020 onwards):
| Case | Affiliate relationship | Yes / No |
|---|---|---|
| a | One enterprise holds, directly or indirectly, at least 25% of the equity of the other enterprise; | |
| b | Both businesses have at least 25% of the owner's equity held 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 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; | |
| đ | An enterprise appoints a member of the executive board or holds control of another enterprise provided that the number of members appointed by the first firm accounts for more than 50% of the total number of executive board members. or take control of a second firm; or a member appointed by the first firm has authority to decide the financial or business policies of the second firm; | |
| e | Two businesses that have more than 50% of the board members or have a member of the board of directors who has the power to decide on financial policies or business activities is appointed by a third party; | |
| g | 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; | |
| h | The two business establishments have the relationship of head office and permanent establishment or are permanent establishments of the same foreign organization or individual; | |
| i | Enterprises are controlled by an individual through his / her capital contribution to that enterprise or directly participate in operating the business; | |
| 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 of transferring or receiving the transfer of contributed capital of at least 25% of the contributed capital of the enterprise's owner 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. |
Risks for businesses when there are associated transactions #
1. Risks encountered if enterprises do not make declarations for related-party transactions
Tax authorities have the right to fix prices; profit margin; profit allocation rate; 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.
2. Reduced deductible expenses for CIT calculation for enterprises having associated transactions
#1 – The costs of the associated transaction that are not suitable for the nature of the independent transaction or do not contribute to the generation of revenue or income for the taxpayer's production and business activities are not included in the deductible expenses. when determining taxable income for the period, including:
a) Expenses for payment to an associate who does not carry out any production or business activities related to the taxpayer's business lines, production and business activities; have no related rights and responsibilities with respect to the property, goods and services provided to the taxpayer;
b) Payment expenses for affiliated parties with production and business activities but the asset size, number of employees and production and business functions are not commensurate with the transaction value received by the affiliate. from taxpayers;
c) Expenses for payment to an associate who is a resident of a country or territory that does not collect corporate income tax, does not contribute to the generation of revenue or added value for production and business activities. of taxpayers.
#2- Service costs between the affiliated parties:
a) Except for the expenses specified at Point b of this Clause, the taxpayer is entitled to deduct service expenses from taxable expenses in the period if the following conditions are satisfied: The provided service is valid. commercial, financial, economic and directly serving production and business activities of taxpayers; services from identified affiliated parties provided under similar circumstances to which the independent parties paid for these services; Service fees are paid on the basis of the principle of independent transactions, and the method of calculating the associated transaction price or allocating service fees among the related parties must be uniformly applied throughout the group for this type of transaction. similar services and taxpayers must provide contracts, documents, invoices, and information on the group's calculation methods, allocation factors, and pricing policy for the service rendered.
In the case of related centers performing specialization functions and synergies of added value, taxpayers must determine the total value generated from these functions, determine the level of benefit distribution. The profit is consistent with the value of the associated parties after deducting (-) the corresponding service fee for the associated party to perform the function of coordinating and providing services of an independent transaction of similar nature. copper.
b) Service charges shall not be deducted when determining taxable income, including: Expenses arising from services provided only for the purpose of serving interests or creating value for other affiliated parties; service of shareholders' interests; duplication fee service provided by many parties for the same type of service, the value added for taxpayers cannot be determined; services are essentially the benefits that taxpayers receive as a member of a corporation and the costs associated with the affiliate for services provided by third parties through intermediaries are not closed. add value to the service.
#3- Total deductible interest expense when determining corporate income taxable income for enterprises having associated transactions:
a) Total interest expense after deducting deposit interest and loan interest arising in the period of taxpayers is deductible when determining taxable income of corporate income tax. does not exceed 30% of the total net profit from business activities in the period plus interest expense after deducting interest on deposits and lending interest incurred in the period plus depreciation expense incurred in the period of the taxpayer ( not exceed 30% EBITDA).
b) The portion of interest expense that is not deductible as prescribed at Point a of this Clause is carried over to the next tax period when determining the total deductible interest expense in case the total deductible interest expense of the period is determined. subsequent tax calculation is lower than the rate specified at Point a of this Clause. The period of transferring interest expenses shall not exceed 05 years from the year following the year in which the interest expense is not deductible;
FAQ - Questions about determining Affiliate Transactions #
Question:
The company is 100% domestic capital, all transactions are also in the country. In 2020, the office major repair investment company borrowed money from the president of 2 billion VND without interest, paid 1,5 billion VND in the year, so is this part of a related transaction? When finalizing, do I have to submit an appendix with the CIT finalization?
Reply:
Pursuant to Decree No. 132/2020/ND-CP, in case the President of the Company manages and controls the enterprise if the enterprise borrows from the President of the Company at least 10% of the contributed capital of the owner is determined It is determined that there is an affiliate relationship and the borrowing transaction between the Company and the President of the Company is an associated transaction. When finalizing CIT, declare related transaction information according to the provisions of Decree No. 132/2020/ND-CP.
March 11, 03 | Answer from the General Department of Taxation
Question:
In 2020, our company has borrowed capital from commercial banks to serve business activities with a rate of over 25% of equity. So is this a related transaction? Is the 25% rate according to Decree No. 132/2020/ND-CP calculated on the loan balance or on each loan?
Reply:
– Regarding the determination of related-party transactions: At Point d, 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. any form (including loans from third parties secured by the financial resources of the related party and financial transactions of a similar nature) provided that the loan amount is at least 25% of the contributed capital of the related party. the owner of the borrowing enterprise and accounts for more than 50% of the total value of medium and long-term debts of the borrowing enterprise.”
In case the Company borrows from a commercial bank with a ratio of more than 25% of equity and accounts for more than 50% of the total value of medium and long-term debts, it is determined to be related parties. Then the transaction arising between the two parties is an associated transaction.
– Regarding the determination of the rate of 25% on equity calculated on the total loan balance.
March 11, 03 | Answer from the General Department of Taxation
Question:
Is the business that borrows interest-free money from the director of the company a GDLK?
Reply:
According to the provisions of Decree No. 132/2020/ND-CP, then:
- In case the executive director controls the enterprise, if the enterprise borrows from the director of the company with at least 10% of the owner's contributed capital, it is determined to have a related relationship and the loan transaction is a related transaction. conclude.
March 11, 03
Question:
Is the business that rents the director's house as an office GDLK?
Reply:
According to the provisions of Decree No. 132/2020/ND-CP, then:
The rental transaction of the director as an office is not an associated transaction.
March 11, 03
Question:
In 2020, the business company has a loss, so it has to borrow money from the director to pay the expenses in the period (the director is the person hired by the business owner to manage), is this transaction a related transaction? Are not? If it is an associated transaction, how is it declared?
Reply:
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% contributed capital of the enterprise 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 from the executive director, controlling the Company with a loan or loan amount of at least 10% of the owner's contributed capital, it is determined to have an associated relationship and transaction. Borrowing money between the Company and the director is an associated transaction.
In the fiscal year, if an enterprise has a related party transaction within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the price of the related party transaction. Taxpayers shall declare information about the association relationship and related-party transactions according to Appendix I, Appendix II and Appendix III issued together with Decree 132/2020/ND-CP and submit it together with the Decision Declaration. corporate income tax.
March 18, 03
Question:
The enterprise is a limited liability company with 2 capital contributors. The General Director accounted for 80% of contributed capital, the Deputy General Director accounted for 20% of the contributed capital. In 2020, due to lack of money for production and business, the company sometimes borrows money from the above two members at 2% interest rate and sometimes lends money to the above two members at an interest rate equal to the bank's interest rate at the current time. . The amount borrowed and borrowed by the two above members is greater than 0% of the charter capital (The loan amount has been paid off by the end of 2, the loan is still available). Ask:
1. Is the above transaction of borrowing and lending a related transaction?
2. At the end of the year, is it necessary to make an appendix to related-party transactions when making CIT finalization?
3. Borrowing money with 0% interest rate, will the above 2 members be subject to PIT fixed?
4. Does the company have to issue an invoice for the monthly interest earned by the two members above?
Reply:
1. At point l, clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulating
“l) The enterprise has transactions of transferring or receiving at least 25% contributed capital of the enterprise 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 from the General Director and Deputy General Director, controls the Company with a loan or loan amount of at least 10% of the owner's contributed capital, which is determined to be Linkage and borrowing transactions between the Company and the General Director and Deputy General Directors are related transactions.
2. In the fiscal year, if an enterprise has a related party transaction within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the price of the related party transaction and making declarations. declare information about the association relationship and associated transaction according to Appendix I, Appendix II, Appendix III issued together with Decree 132/2020/ND-CP and submit it together with the corporate income tax finalization declaration. .
3. If an individual lends money to the company with 0% interest, that individual will be assessed PIT.
It is recommended that enterprises study the above provisions and base them on the reality of their units to apply accordingly.
March 18, 03
Question:
1/ The company lacks capital, so it borrows interest-free money from the Director, is this transaction a related transaction? How is this transaction presented in the annual financial statements?
2/ Decree 132 of 2020 has the paragraph: "Total interest expense after deducting deposit interest and loan interest arising in the period of taxpayers is deductible when determining taxable income of corporate income not exceeding 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. “. Does that mean that the loan interest is controlled by 30%?
Reply:
The Company borrows from the Director (who is the executive and controls the Company) with a loan amount of at least 10% of the owner's contributed capital, then it is determined to have an association relationship and the borrowing transaction between the Company and the Company. with the Director of the Company is an associated transaction. When finalizing CIT, declare related transaction information according to the provisions of Decree No. 132/2020/ND-CP.
In the fiscal year, if an enterprise has a related party transaction within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the price of the related party transaction. Taxpayers shall declare information about the association relationship and related-party transactions according to Appendix I, Appendix II and Appendix III issued together with Decree 132/2020/ND-CP and submit it together with the Decision Declaration. corporate income tax.
Total deductible interest expense when determining taxable income is determined according to Point a, Clause 3, Article 16 of Decree 132/2020/ND-CP as follows:
“a) 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;”
March 18, 03
Question:
1/ Can a joint stock company with a lack of 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%?
2/ Is the above case considered a related transaction? If yes, how to apply?
Reply:
At point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
“l) The enterprise has transactions of transferring or receiving capital contribution of at least 25% of the capital contributed by the owner of the enterprise 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.
March 18, 03
Question:
Does the company borrow capital from commercial banks to serve business with more than 25% of equity according to ND 132. Is this transaction an associated transaction?
Reply:
At point d and point 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 financial transactions). of a 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.
March 18, 03
Answer from the General Department of Taxation
Note: It is necessary to distinguish between Equity and Contributed Capital. This question uses the word “25% equity” incorrectly.
Question:
Company A is a subsidiary of Company B, (A&B is an enterprise in Vietnam), Company B is a subsidiary of Company C in a foreign country, Company A borrows money from Company C, the loan transaction Is this an affiliate transaction? Is the deductible interest expense of company A limited to a maximum of 30% EBITDA?
Reply:
– At Points a and b, Clause 2, Article 132/2020/ND-CP stipulates:
“a) One enterprise holds directly or indirectly at least 25% of the contributed capital of the owner of the other enterprise;
b) Both enterprises have at least 25% of the owner's contributed capital held directly or indirectly by a third party;”
Therefore, in case company A is a subsidiary of company B (A&B is an enterprise in Vietnam), company B is a subsidiary of company C in a foreign country, if company A indirectly holds at least 25 % of contributed capital (through Company B) is identified as related parties. Then the loan transaction of company A with company C is an associated transaction and the total interest expense after deducting deposit interest and loan interest arising in the period of the taxpayer is deducted when determining income. subject to corporate income tax does not exceed 30% of the total net profit from business activities in the period plus interest expenses (after deducting interest on deposits and loan interests arising in the period) plus depreciation expenses incurred. born in the taxpayer's period.
March 18, 03
Question:
The company borrows from a bank to supplement its business operation capital, the bank's collateral is real estate in the name of the director, the amount of the bank loan is higher than the equity. So is it called a linked transaction and is it required to declare the associated transaction?
Reply:
In Clause 2, Article 1, Point d and Point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
"2. Associated transactions within the scope of this Decree are transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning goods and providing services; loans, loans, financial services, financial guarantees and other financial instruments; buy, sell, exchange, rent, lease, borrow, lend, transfer, transfer tangible assets, intangible assets and agree to buy, sell, use common resources such as assets, capital, labor activities, cost sharing among related parties, except business transactions for goods and services subject to the State's price adjustment scope in accordance with the law on prices.
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;
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 has a bank loan with a loan capital of at least 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. 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.
The Director's loan of real estate to the Company as collateral is not an associated transaction.
In the fiscal year, if the Company has related party transactions, it is obliged to declare and determine the price of related party transactions according to Decree No. 132/2020/ND-CP.
March 18, 03
Legal regulations on associated transactions #
Regulations on related-party transactions are arranged in chronological order of effect as follows:
