Businesses must determine whether or not they have related-party transactions during the fiscal year and declare information about these transactions to the tax authorities within the same deadline as submitting the annual tax return.
Failure to comply with the above regulations puts businesses at risk of being fined or having their tax liability assessed.
Transfer pricing is not a new concept; it is used by most foreign-invested enterprises to reduce corporate income tax payable in Vietnam. Currently, transfer pricing also occurs in Vietnamese enterprises through related-party transactions.
Misunderstanding and incorrect identification of whether a business has related-party transactions or signs of transfer pricing will expose businesses to significant tax risks.
These are also the entities that the Tax authorities are tightening management measures on in the future, controlling related-party transactions and combating tax evasion in the coming period.
What is an affiliated party?
Related parties (hereinafter referred to as "related parties") are parties that have a relationship falling under one of the following categories:
a) One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party;
b) The parties are directly or indirectly subject to the management, control, capital contribution, or investment of another party.
For example:
Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse; biological parents, adoptive parents, stepfather, stepmother, parents-in-law; biological children, adopted children, stepchildren of the spouse, daughter-in-law, son-in-law; siblings with the same parents, half-siblings, half-siblings; brother-in-law, sister-in-law, daughter-in-law, son-in-law of a person with the same parents or half-siblings; paternal grandparents; grandchildren; aunts, uncles, and nieces/nephews.
A business that guarantees or lends capital to another business in any form (including third-party loans secured by related-party financing and similar financial transactions) provided that the loan amount is at least 25% of the owner's equity of the borrowing business and accounts for more than 50% of the total value of the borrowing business's medium and long-term debts;
What are affiliate transactions?
Related-party transactions are transactions that are "not based on the normal market price," where related parties have applied measures or changed pricing policies to goods and services in order to alter the intrinsic value of goods or services and assets transferred between members of a group or affiliated entity (related parties) with the aim of minimizing the amount of tax payable to the state.
Affiliate transactions are buy and sell transactions, exchange, rent, lease, borrowlending, transferring, assigning goods, providing services; lending, lending, financial services, financial guarantees and other financial instruments; buying, selling, exchanging, leasing, renting, borrowing, lending, transferring, assigning tangible and intangible assets and agreements for buying and selling, sharing resources such as assetscapital, labor, cost sharing between related parties, except for business transactions involving goods and services subject to state price regulation, which are carried out in accordance with the law on pricing.
What are the consequences for a business if it fails to declare related-party transactions?
When a business has transactions with related parties during a period, interest expense for that period will be capped according to the ratio of EBITDA. EBITDA is the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period. Therefore, businesses may make errors when preparing their corporate income tax return if they do not exclude interest expense as stipulated in Decree 132/2020/ND-CP, leading to underpayment of corporate income tax if applicable.
Specifically, the total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer.
According to this Decree, the Tax Authority has the right to determine the price; profit margin; profit allocation ratio; taxable income or the amount of corporate income tax payable for taxpayers who do not comply with regulations on declaring and determining related-party transactions; or who do not provide or provide incomplete information and data for declaring and determining the price of related-party transactions.
Furthermore, in addition to the documentation and explanations provided by the business, the tax authorities also base their decision on the nature of the transaction to determine whether it is a related-party transaction or shows signs of transfer pricing, rather than relying solely on the documentation (the nature determines the form), thereby controlling related-party transactions.
Based on the information and evidence gathered, the tax authorities will collect any outstanding taxes and impose administrative penalties on businesses, such as for late filing of tax returns, as well as any applicable late payment interest.
Add Your Tooltip Text Here
What should businesses do?
- Understand and be familiar with current regulations affecting the business during its operations, especially regarding related-party transactions and transfer pricing.
- Regularly monitor and list related parties, as well as the business's transactions with related parties that occurred during the period.
- Monitor the EBITDA control ratios, interest expenses, and most importantly, the true nature of related-party transactions.
- Prepare related-party transaction documentation to demonstrate the transaction prices during the period to the Tax authorities.
- Prepare the required appendices on related-party transactions and submit them to the Tax authorities within the same deadline as the company's annual tax return.
- The accounting department is requested to have a thorough understanding of related-party transactions, review transactions with related parties, and plan and execute the submission process in accordance with current regulations.
EXPERTIS solutions for businesses
EXPERTIS provides services for preparing related-party transaction declaration appendices and documentation for businesses. We have experience providing this service to foreign-invested enterprises (FDI). Leveraging this advantage, EXPERTIS uses clear and easy-to-understand communication and consultation methods, transforming complex terminology into easily understandable concepts for businesses.
See more: Declaration of related-party transactions for businesses in Vietnam
For detailed information about the services we offer, please contact EXPERTIS's Consulting Department for prompt assistance.