Taxpayers with related-party transactions falling within the scope of the Government Decree on tax management of related-party transactions are responsible for declaring and determining the transfer pricing, without reducing their corporate income tax liability in Vietnam.
This article provides comprehensive guidance for businesses on how to file related-party transactions during a fiscal year, in accordance with legal regulations.
Instructions for declaring when a business has related-party transactions.
1. Responsibility for declaring related-party transactions
Taxpayers with related-party transactions falling within the scope of this Decree are responsible for... declaration, Determine the transfer pricing, which does not reduce the corporate income tax liability payable in Vietnam as stipulated in this Decree.
Taxpayers responsible for proving Conduct analysis, comparison, and selection of methods for determining transfer pricing in accordance with the provisions of this Decree when requested by the competent authority.
2. Documents for declaring related-party transactions (Appendices to related-party transactions)
Taxpayers with related-party transactions falling within the scope of this Decree are responsible for declaring information on related-party relationships and related-party transactions as follows: Appendix I, Appendix II, Appendix III issued together with this Decree and submitted together with the Corporate Income Tax Return.
3. Responsibility for maintaining and providing records of transfer pricing.
Taxpayers are responsible for keeping and providing this information. Transfer pricing documentation These include information, documents, data, and certificates such as:
a) Information on related party relationships and related party transactions according to Appendix I issued together with this Decree;
b) National records are information on related-party transactions, policies and methods for determining prices for related-party transactions, compiled and stored at the taxpayer's headquarters according to the list of information and documents specified in Appendix II issued together with this Decree;
c) Global records are information about the business operations of a multinational corporation, its policies and methods for determining transfer pricing globally, and its policies for allocating income and functions within the value chain, according to the list of information and documents specified in the regulations. Appendix III issued together with this Decree;
d) Country-by-country report of the ultimate parent company Appendix IV Issued together with this Decree. The country-by-country profit report of the ultimate parent company shall be prepared in accordance with the provisions of Clause 5, Article 18 of this Decree (When the ultimate parent company in Vietnam has consolidated global revenue of 18 trillion VND or more in the tax period; or when the taxpayer in Vietnam has an ultimate parent company abroad, the provisions of this Clause shall apply).
4. Timeframe for preparing Transfer Pricing Documentation
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.
The taxpayer must provide the tax authorities with the relevant documents and information regarding the determination of related-party transaction prices, as required by tax management laws. The data, documents, and materials used as the basis for analyzing, comparing, and determining related-party transaction prices must clearly state their origin. If the data from independent comparable entities is accounting data, the taxpayer is responsible for storing and providing it to the tax authorities in soft copy, in spreadsheet format.
5. Deadline for Submitting Related Party Transaction Declarations
The Related-Party Transaction Declaration form is submitted along with the annual Corporate Income Tax Return.
Therefore, the deadline for submitting the related-party transaction declaration is the last day of the third month following the end of the calendar year.
6. Deadline for providing Transfer Pricing Documentation when requested by the tax authorities (during inspections or audits)
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 is no more than 30 working days from the date of receiving the request from the Tax Authority. If the taxpayer has a valid reason, the deadline for providing the Transfer Pricing Documentation may be extended once for no more than 15 working days from the original deadline.
Penalties for failing to submit related-party transaction 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, businesses may also suffer damage to their market reputation and be placed on the tax authority's list of high-risk transfer pricing companies, leading to more frequent tax audits/inspections.
Cases exempt from declaring related-party transactions.
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.
The following are cases where taxpayers are exempt from declaring or preparing transfer pricing documents:
1. Businesses only need to complete sections I and II of Appendix I.
Taxpayers are exempt from declaring transfer pricing under sections III and IV of Appendix I (enterprises only need to complete sections I and II of Appendix I), and are exempt from preparing transfer pricing documentation but must declare the basis for exemption under sections I and II of Appendix I issued with this Decree if all three of the following conditions are met:
- Transactions only occur with related parties that are subject to corporate income tax in Vietnam, (and) apply the same corporate income tax rate as the taxpayer, and neither party enjoys any corporate income tax incentives during the tax period.
2. Complete Appendix I fully but are exempt from preparing the Transfer Pricing Documentation.
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:
a) 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;
b) Taxpayers who have signed a Pre-Agreement on the method of determining taxable prices shall submit annual reports in accordance with the law on Pre-Agreements on the method of determining taxable prices. For related-party transactions not covered by the Pre-Agreement on the method of determining taxable prices, the taxpayer is responsible for declaring and determining the transfer pricing in accordance with Article 18 of this Decree;
c) Taxpayers conducting business with simple functions, not generating revenue or expenses from the exploitation or use of intangible assets, with revenue under VND 200 billion, 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.
In cases where taxpayers track and account for revenue and expenses separately for each business segment, the net profit margin before deducting interest expenses and corporate income tax on net revenue corresponding to each segment shall be applied.
In cases where taxpayers can separately track and account for revenue but cannot separately track and account for the expenses incurred in each area of production and business activities, the expenses should be allocated proportionally to the revenue of each area to apply the net profit margin (before deducting interest expenses and corporate income tax) on net revenue corresponding to each area.
In cases where taxpayers cannot separately track and account for the revenue and expenses of each production and business activity to determine the net profit margin before deducting interest expenses and corporate income tax corresponding to each activity, the net profit margin before deducting interest expenses and corporate income tax on net revenue of the activity with the highest margin shall be applied.
If the taxpayer does not apply the net profit margin rate specified in this section, they must prepare a Transfer Pricing Documentation file in accordance with regulations.
FAQ - Questions about declaring related-party transactions
Question:
My unit had related-party transactions in 2020. The actual revenue for the year was VND 120 billion; the value of the related-party transactions was VND 1.7 billion. Therefore, is my unit exempt from the obligation to declare and submit documentation for determining the price of these related-party transactions?
Reply:
According to the provisions of point a, clause 2, Article 19: Taxpayers who have related-party transactions when meeting both conditions: (1) total revenue generated in the tax period is less than VND 50 billion and (2) total value of all related-party transactions generated in the tax period is less than VND 30 billion are exempt from preparing related-party transaction pricing documents.
In the year, the company's realized revenue was VND 120 billion; the value of related-party transactions was VND 1.7 billion. Therefore, the company is not exempt from preparing documentation for determining related-party transaction prices. The company must prepare such documentation.
March 11, 2021 | Response from the General Department of Taxation
Question:
According to Clause 5, Article 18 of Decree 132/2020/ND-CP regulating the obligation to submit the Country-by-Country Profit Report, our company has a parent company in Canada. We are unsure whether Canada and Vietnam have an agreement on an automatic information exchange mechanism. Therefore, are we required to submit the Country-by-Country Profit Report to the tax authorities, and what is the deadline for submission?
Reply:
Currently, Vietnam is in the process of exchanging information to sign agreements on the automatic exchange of information on cross-country profit reporting with other countries. To date, Vietnam and Canada have not signed such an agreement. Therefore, regarding obligations related to cross-country profit reporting, the Company complies with the provisions of points b, c, d, and e of Clause 5, Article 18 of Decree No. 132/2020/ND-CP. The deadline for submission to the Tax Authority is no later than 12 months after the end of the fiscal year of the parent company.
March 11, 2021 | Response from the General Department of Taxation
Question:
The company is 100% foreign-owned. During the construction process, interest expenses from the foreign parent company are incurred. Monthly, the company calculates and accounts for these interest expenses in account 241. My question is:
1. If the capital expenditure process is not yet completed during the fiscal year, does the company need to declare this interest expense as a related-party transaction, and if so, how should it be declared?
2. Next year, after the capitalization process is completed, the accrued interest expense will be capitalized into an asset and depreciated monthly. How should the company properly declare this capitalized interest expense in Appendix 01 of related-party transactions?
Reply:
1. During the fiscal year, if the capital expenditure process is not yet completed, and the Company incurs interest expense from its parent company abroad, the Company must declare the related-party borrowing transaction to determine the interest expense from the related party according to the comparative analysis principles and the method of determining the price of related-party transactions as stipulated in Decree No. 132/2020/ND-CP. This transaction is declared in line 2.4.2, section III, Appendix I attached to Decree No. 132/2020/ND-CP.
2. Interest expense from related parties that has been recalculated according to the principles and methods of determining transfer pricing and capitalized into assets during the construction process, will not need to be re-declared in subsequent years upon completion of the construction process, when the asset is put into use and monthly depreciation is calculated.
March 18, 2021 | Response from the General Department of Taxation
Question:
During the year, the company borrowed money from the director without interest. Is this considered a related-party transaction? If so, how should it be declared?
Reply:
If a company borrows from its Director (the person who manages and controls the company) at a rate of at least 10% of the owner's equity, it is considered an affiliated company, and the loan transaction between the company and its Director is an affiliated transaction. When settling corporate income tax, information on affiliated transactions must be declared in accordance with the provisions of Decree No. 132/2020/ND-CP.
During the fiscal year, if a business has related-party transactions falling within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the transfer pricing of these transactions. Taxpayers must declare information on related-party relationships and related-party transactions according to Appendix I, Appendix II, and Appendix III issued with Decree 132/2020/ND-CP and submit them together with the Corporate Income Tax Return.
March 18, 2021 | Response from the General Department of Taxation