Related-party transactions (transfer pricing) – Part 4: Guidance on declarations and documentation

14/05/2021
Hanh Nguyen

Based on Decree 132/2020/CP-ND dated November 5, 2020, regulating tax management for enterprises with related-party transactions, it outlines the cases exempt from declaration, filing of transfer pricing reports, and other related-party transactions.

1. Cases where taxpayers are exempt from filing or preparing transfer pricing declarations and related-party transaction documents.

1.1. Only sections I and II of Appendix I are required.

Taxpayers are exempt from declaring transfer pricing under sections III and IV of Appendix I issued with this Decree, and are exempt from preparing transfer pricing documentation, but must declare the grounds for exemption under sections I and II of Appendix I issued with this Decree in the following cases:

Only transactions with related parties that are subject to corporate income tax in Vietnam occur, and
Apply the same corporate income tax rate as the taxpayer, and
Neither party is entitled to corporate income tax incentives during the tax period.

1.2. Only include indicators I to IV in Appendix I.

Taxpayers are responsible for declaring and determining transfer pricing according to Appendix I issued with this Decree, but are exempt from preparing a Transfer Pricing Documentation File in the following cases:

Taxpayers who have related-party transactions but whose total revenue for the tax period is less than VND 50 billion and whose total value of all related-party transactions during the tax period is less than VND 30 billion;
Taxpayers who have signed a Pre-Agreement on Pricing Methods shall submit annual reports in accordance with the law on Pre-Agreements on Pricing Methods. For related-party transactions not covered by the Pre-Agreement on Pricing Methods, taxpayers are responsible for declaring and determining the transfer pricing in accordance with Article 18 of this Decree;
Taxpayers engaged in business with simple functions, not generating revenue or expenses from the exploitation or use of intangible assets, and with revenue under 200 billion VND, shall apply the net profit margin before deducting interest expenses and corporate income tax (excluding the difference between revenue and expenses of financial activities) on net revenue, including the following sectors:
- Distribution: 5% or more;
- Production: 10% or more;
- Processing: 15% or more.

2. Time of submission of transfer pricing documents

The Related-Party Transaction Declaration is submitted along with the annual Corporate Income Tax Return. Therefore, the deadline for submitting the Related-Party Transaction Declaration is no later than the last day of the third month following the end of the calendar year.

The transfer pricing documentation must be prepared before the annual corporate income tax return filing and must be retained and presented upon request from the Tax Authority. When the Tax Authority conducts an audit or inspection of the taxpayer, the deadline for providing the transfer pricing documentation, as stipulated in the Law on Inspection, begins from the date of receiving the request for information.

Taxpayers are responsible for providing complete and accurate information and documents in the Transfer Pricing Documentation File when requested by the Tax Authority during the consultation process prior to inspection or audit as stipulated in Article 20 of this Decree. The deadline for providing the Transfer Pricing Documentation File is no more than 30 working days from the date of receiving the request from the Tax Authority. In cases where the taxpayer has a legitimate reason, the deadline for providing the Transfer Pricing Documentation File may be extended once for no more than 15 working days from the expiration date.

3. Penalties for failure to submit transfer pricing documents.

According to the Law on Tax Administration, penalties include: a fine of 10% to 20% of the amount of tax to be collected, depending on the tax period, along with late payment interest (0,05%/day to 0,07%/day on the amount of tax to be collected (0,03%/day for the period from July 1, 2016) or a penalty for tax evasion (from one to three times the amount of tax to be collected), depending on the nature and circumstances of the violation.

However, the biggest risk for businesses that do not prepare related-party transaction records or prepare them in a non-compliant manner is that the amount of tax to be collected will be based on the tax authority's assessment as stipulated below, which is essentially unfavorable to the taxpayer. Along with penalties, the business may also suffer damage to its reputation in the market and be placed on the tax authority's list of high-risk businesses for transfer pricing, leading to more frequent tax audits/inspections.

4. How to prepare transfer pricing declarations and documents.

Details are specified in the Appendices according to current regulations (from the tax year 2020 onwards, according to Decree 132/2020/CP-ND dated November 5, 2020).

5. What to do when notified that the tax authorities will conduct an audit of related-party transactions?

Review all relevant tax returns and promptly supplement any missing returns. Missing returns or incorrect declarations will be the basis for the tax authorities to assess the tax liability.
Review all accounting books and documents to ensure they are prepared and stored completely, accurately, and in accordance with accounting regulations. If the accounting books contain significant errors, this will also serve as a basis for the tax authorities to assess taxes.
Collect all documents, records, and files as required by Decree 20/2017/ND-CP and Decree 132/2020/ND-CP (from the corporate income tax period of 2020) to help explain data and provide them to the tax authorities when requested.
Businesses should prepare strategies for explaining important and complex issues. They should consult with their parent company (if applicable) to obtain maximum support. Additionally, they should research similar businesses that have been audited previously for further reference.
If a business feels unsure about the above information, it should hire a professional consulting firm to conduct an independent audit and provide helpful recommendations. Furthermore, for difficulties in preparing relevant documents, professional consulting firms may possess the necessary knowledge, experience, and resources to assist the business in handling them appropriately and on time before the tax authorities arrive. Businesses can also request the consulting firm's support in explaining and clarifying the tax authorities' questions and arguments during the tax audit/inspection process.

Thorough preparation before a tax audit will help businesses minimize unnecessary losses due to fundamental compliance deficiencies, and allow them to focus on truly important and complex issues to maximize effectiveness when explaining and persuading the tax authorities.

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