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Circular 117/2005/TT-BTC provides guidance on determining market prices in business transactions between related parties.

Based on the Corporate Income Tax Law No. 09/2003/QH11 dated June 17, 2003;
Based on Decree No. 164/2003/ND-CP dated December 22, 2003 of the Government detailing the implementation of the Law on Corporate Income Tax;
Based on Government Decree No. 77/2003/ND-CP dated July 1, 2003, regulating the functions, tasks, powers, and organizational structure of the Ministry of Finance;

 

THE FINANCIAL
******		 SOCIAL REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
********
Number: 117 / 2005 / TT-BTC Hanoi, date 19 month 12 year 2005 

CIRCULARS

GUIDELINES FOR DETERMINING MARKET PRICES IN BUSINESS TRANSACTIONS BETWEEN RELATED PARTIES

The Ministry of Finance provides guidance on the implementation of regulations regarding the determination of market prices in business transactions between related parties as a basis for declaring and determining the corporate income tax obligations of business establishments as follows:

A. GENERAL PROVISIONS

I. Subjects and scope of application:

  1. Applicable entities: Organizations and individuals producing and trading goods and services (hereinafter collectively referred to as business establishments) that conduct part or all of their business activities in Vietnam and have business transactions with related parties are obligated to declare and determine their corporate income tax obligations in Vietnam.
  2. Scope of application: Transactions involving the purchase, sale, exchange, lease, rental, transfer, or assignment of goods and services in the course of business (collectively referred to as business transactions) between related parties.

II. Areas where this does not apply:

Business transactions conducted between businesses in Vietnam and related parties concerning products subject to state price regulation under the Price Ordinance issued on December 25, 2001, or any legal documents amending, supplementing, or replacing this Ordinance.

III. Explanation of terms:

  1. "Market price" refers to the price of a product determined by objective agreement in a business transaction in the market between unrelated parties (also known as independent parties).
  2. "Product" is a general term used to refer to goods and services that are the objects of business transactions.
  3. "Purchase price" and "selling price" are terms commonly used to refer to the price in transactions involving the purchase, sale, exchange, lease, rental, transfer, or assignment of products.
  4. Parties are considered to be "related" (hereinafter referred to collectively as "related parties") when:

4.1. One party directly or indirectly participates in the management, control, capital contribution, or investment in any form in the other party.

4.2. Parties that are directly or indirectly subject to the management, control, capital contribution, or investment in any form by another party.

4.3. Parties that directly or indirectly participate in the management, control, capital contribution, or investment in any form in another party.

 

Generally, two businesses will be considered related in a tax period if, during that period:

a) One business entity directly or indirectly holds at least 20% of the share capital or total assets of the other business entity; or

b) Both businesses have at least 20% of their share capital or total assets held directly or indirectly by one business or a third party; or

c) A business entity is the largest shareholder, directly or indirectly holding shares worth at least 10% of the share capital or total assets of another business entity; or

d) A business entity guarantees or provides a loan to another business entity in any form, provided that the loan accounts for more than 50% of the total value of the borrowing business entity's medium and long-term debts; or

e) A business entity designates a member of the executive or supervisory board of another business entity, provided that the number of members designated by the first business entity exceeds 50% of the total number of members of the executive or supervisory board of the second business entity; or a member designated by the first business entity has the authority to decide on the financial or operational policies of the second business entity; or

f) Two businesses share more than 50% of their management board members or share a management board member with the authority to make decisions on financial or operational policies designated by a third party; or

g) Two business establishments that are operated or controlled vRegarding personnel, finance, and business operations by individuals who are members of the same family in the following relationships: husband and wife; parents and children (regardless of whether they are biological or adopted children, or daughters-in-law and sons-in-law); siblings with the same parents (regardless of whether they are biological or adoptive parents); grandparents and grandchildren with blood relations; aunts, uncles, cousins, and nieces/nephews with blood relations; or

h) Two business establishments have a head office and permanent establishment relationship, or both are permanent establishments of a foreign organization or individual; or

i) A business entity that manufactures or sells products using intangible assets and/or intellectual property rights of another business entity, provided that the costs incurred for using those intangible assets and/or intellectual property rights exceed 50% of the cost of goods sold (or production cost) of the product; or

j) A business entity directly or indirectly supplies more than 50% of the total value of raw materials, supplies, or input products (excluding depreciation costs for fixed assets) used in the production or sale of related output products by another business entity; or

k) A business directly or indirectly controls more than 50% of the sales volume (by product category) of another business; or

l) Two businesses have a business cooperation agreement based on a contract.

  1. "Related-party transactions" are business transactions between related parties.
  2. "Standardized transaction" refers to a business transaction between parties that are not related within the framework of normal business practices.
  3. "Material differences" are differences in information and/or data that have a significant or substantial impact on the price of a product.

Example 1: Company V is a 100% foreign-owned enterprise in Province X, Vietnam, with 2 transactions:

  • Sell ​​2.000 products to independent enterprise A at a selling price equal to the total cost (Z) plus (+) 6%Z, with delivery terms at enterprise V; and
  • 2.000 products are sold to the parent company at a price of Z + 6%Z, with delivery terms in country H at CIF price. Simultaneously, the parent company agrees to guarantee a loan for enterprise V from bank N. In reality, this credit guarantee is unsecured (meaning no guarantee fee is charged).

In the above transactions:

– Differences in delivery terms related to transportation and insurance costs from Province X to Country H have a significant impact on the selling price and are therefore considered material differences.

– Differences in credit guarantees that do not require payment should be considered as not materially different.

  1. "Market price range" is a set of values ​​for price levels, gross profit margins, or return on investment of a product, determined from selected independent transactions for comparison, depending on the regulations governing market pricing methods.
  2. "Tax authority database" refers to information and data related to determining the tax obligations of taxpayers, collected, analyzed, stored, updated, and managed by the tax authority from various sources.

B. GUIDELINES FOR DETERMINING MARKET PRICES IN RELATED TRANSACTIONS

The product prices in related-party transactions as stipulated in this Circular are determined according to market prices based on a comparison of the equivalence between related-party transactions and independent transactions (hereinafter referred to as comparative analysis) to select the most appropriate pricing method.

I. Comparative Analysis

  1. Rule

1.1. Comparison between related-party transactions refers to a comparison between related-party transactions and independent transactions, or a comparison between businesses engaging in related-party transactions and businesses engaging in independent transactions. This comparison is based on the selection and analysis of data, documents, and records related to independent and related-party transactions occurring within the same period, ensuring reliability for use in tax declaration and calculation purposes, in accordance with legal regulations on accounting, statistics, and taxation.

Example 2: Company A is a subsidiary of multinational company H, and Company B is an independent business both retailing HX brand motorcycles in the year 2xxx. The comparison can be made in one of two ways:

– Compare the motorcycle purchase transaction of company A with a similar transaction of company B.

– Compare company A with company B in terms of their motorcycle retail business operations.

1.2. The independent transaction selected for comparison is one chosen from independent transactions with characteristics and transaction context (hereinafter collectively referred to as transaction conditions) equivalent to the related-party transaction. In this case, the product prices in the independent transactions selected for comparison will be considered the basis for determining the product prices in the related-party transaction according to the pricing methods stipulated in Section II, Part B of this Circular.

1.3. When comparing related-party transactions with independent transactions, the terms and conditions of the transactions selected for comparison do not necessarily have to be exactly the same, but must ensure equivalence, without material differences affecting the product price. If the terms and conditions of the related-party transaction and the independent transaction have material differences, the business entity must reflect these material differences in monetary value as a basis for adjusting and eliminating the material differences. The determination of equivalence when comparing related-party transactions and the elimination of differences are stipulated in Clause 2, Section I, Part B of this Circular.

1.4. Comparisons between related-party transactions and independent transactions are made on a transaction-by-transaction basis for each individual product type. However, in cases where transactions cannot be separable or separating each transaction by product type is impractical for business, the business may combine several of the following transactions into a single transaction:

1.4.1. Transactions that are closely related and interdependent, such as transactions based on contracts for the supply of goods and services, where the service is an inseparable part of the goods supply contract; and transactions of a sequential nature, such as the supply or granting of the right to use intangible assets associated with the supply of raw materials and semi-finished products for the production and processing of finished products.

1.4.2. Transactions involving products that share the same production process, use the same main raw materials, or belong to the same group or category according to the classification criteria for goods and services specified in the Statistical List of Goods and Services issued by competent State management agencies, when conducting a comparative analysis of the functional performance of business establishments.

Example 3: Commercial enterprise A – an affiliate of multinational corporation X abroad – wholesales household electrical appliances including irons, electric stoves, and ovens in Vietnam. Assume A conducts this business with the same function of wholesale, along with providing warranty services. Although these items may be manufactured by affiliates in different countries and sold to A, they are grouped together under the category of household heating equipment (according to Vietnamese statistical standards). Therefore, after analyzing and comparing the functional aspects of the business, the transaction values ​​of these three product types can be combined to apply the most appropriate pricing method.

1.4.3. Small-scale business transactions that, when combined, form a complete transaction.

1.4.4. Independent and related-party transactions conducted by a business entity where the related revenue or expenses cannot be reasonably allocated to each type of transaction. In this case, the combined transaction is considered a related-party transaction, and the price of the products in the combined transaction will be the highest price of one of the related products.

Example 4: Business A has 2 contracts:

  • Contract 1: Providing quality control services with an affiliated company, Company B; and
  • hợp Option 2: Providing quality control services and patent licensing to independent company C, where the revenue from patent licensing is five times higher than the revenue from quality control services based on the product unit price.

Assume that quality control services under contract 1 and 2 are eligible for comparison.

– If business entity A does not separate the revenue (or expenses) related to the execution of these two contracts (including three separate transactions for two types of products), then the entire revenue of business entity A is considered revenue from related-party transactions, and depending on the regulations of each method of determining market price as stipulated in this Circular, the business entity must recalculate the revenue corresponding to the highest price of the product, which is the copyright.

– If business A separates the revenue (or expenses) related to the execution of these two contracts, then the revenue earned from contract 1 will correspond to the price of the service provided under contract 2.

1.5. When selecting independent transactions for comparison, the business entity prefers to select its own independent transactions provided that these independent transactions are not created or restructured from related-party transactions.

Example 5: Company M, based overseas, establishes a manufacturing enterprise A in Vietnam. Suppose company A has 2 transactions:

  • Selling 2.000 products to independent customer A1 at a price of 10.000 VND/product under a contract directly negotiated and signed by company A under its normal business conditions;
  • The company sells 2.000 products to independent customer M1 at a price of 0,4 USD/product under a contract directly negotiated and signed by parent company M with the customer, and company A is designated to deliver the goods to customer M1. The sales proceeds are paid directly by company M or by customer M1 to company A.

Thus, transaction (i) is considered an independent transaction of enterprise A itself; transaction (ii) is not considered an independent transaction of enterprise A itself because although the product is shipped from enterprise A and sent to customer M1, the two parties are not related, but the parent company is involved in and controls the negotiation, signing of the contract, and payment.

1.6. The minimum number of independent transactions selected for comparison after comparative analysis and adjustment for material differences is as follows:

1.6.1. One transaction – in the case where the independent transaction and the related transaction are not different, or are different but the business has sufficient information and data to eliminate all such differences; or

1.6.2.03 Transactions – in cases where independent and related-party transactions differ but the business has sufficient information and data to eliminate all material differences; or

1.6.3.04 Transactions – In cases where independent and related-party transactions differ but the business only has information and data to eliminate most material differences, further elimination of differences will be carried out according to the guidelines on standard market price margins in point 1.2, clause 1, section II, part B of this Circular.

This regulation is not mandatory in cases where the enterprise applies the profit separation method, the first calculation method as guided in point 2.5.2.1, clause 2, section II, part B of this Circular.

1.7. In cases where a business entity cannot select an independent transaction for comparison according to the principles from points 1.1 to 1.6 of clause 1, section II, part B above, due to the unique and specific nature of the related-party transaction, the business entity must explain the reason and follow the guidance in section III, part B of this Circular.

  1. Comparative analysis and elimination of differences

2.1. When comparing the selected independent transaction with the related-party transaction, the business entity must perform an analysis and evaluation of the influencing factors and adjust for material differences (if any) to clarify equivalence according to the following four factors (hereinafter referred to as the four influencing factors):

2.1.1. Product characteristics: These include characteristics that primarily influence the price of a product. The main factors reflecting product characteristics include:

  1. Product category (describing the product's characteristics as tangible goods, copyrights, technological know-how, or services, etc.) and physical characteristics of the product (component materials, mechanical, physical, chemical properties, etc.);
  2. Product quality and brand name;
  3. The nature of product transfer (for example, buying/selling with or without conditions such as exclusive distribution rights, licensing, brand franchising, etc.).

Example 6: Company A is an independent business specializing in the production of various types of cotton towels (100% cotton fiber). The wholesale price (excluding VAT) for a 30 cm x 70 cm face towel of type A is 15.000 VND/piece.

Company M is a wholly foreign-owned subsidiary in Vietnam specializing in the production of various types of cotton towels (100% cotton) for sale (export) to its parent company abroad. The export price of a 32 cm x 70 cm, Grade A cotton towel (FOB price) is 0,7 USD/piece.

Assume that other factors reflecting the characteristics of both products are equivalent.

Therefore, the cotton towel products of company A and company M are considered to have equivalent product characteristics (a difference of 2 cm in towel width is considered non-material).

2.1.2. Business Function: This includes factors reflecting the profitability of the business's activities associated with the use of assets, capital, and related costs. When analyzing the business function (hereinafter referred to as "function"), the business must reflect the main functions in the relationship between the use of various types of assets, capital, costs, and risks associated with investing those assets, capital, and costs, and the ability to generate profits related to business transactions. The main functions of a business primarily include:

  1. Research and development;
  2. Product design and prototyping;
  3. Production, manufacturing, processing;
  4. Processing, assembling, and installing equipment;
  5. Distribution, circulation, marketing, advertising;
  6. Management and supply of materials;
  7. Transportation and delivery services, warehousing services;
  8. Providing professional services such as brokerage, consulting, training, accounting, auditing, human resource management, labor supply, and information gathering.

Example 7 (a): Company N is an affiliate in Vietnam of multinational company X; Company N conducts the business of manufacturing pharmaceuticals for domestic sale and for export to parent company X. Suppose, according to the report, Company N has manufactured drugs on a production line invested in by the company, the drugs are manufactured under license provided by a company within group X, the export and consumption volume is carried out according to signed contracts and has been stable since the beginning of the year; at the same time, Company N has conducted research and development of branded drugs and this research has failed, resulting in losses for the company.

However, an analysis of the "research and development" function reveals that the company does not utilize assets for this function (there is no research and development laboratory), the company's "research and development" department has only two employees and performs product quality control before distribution. In fact, during the year, Group X had a failed research and development project, but this was a project of the parent company, unrelated to Company N. Therefore, in reality, Company N does not perform the "research and development" function, and thus the risk of failure for Company N is nonexistent.

Thus, company N's production function is contract manufacturing, not bearing the risks of research and development, and therefore, functional comparisons will be made based on identifying an independent enterprise with a similar function to company N (if the independent enterprise has a research and development function, this difference must be excluded).

Example 7 (b): Following on from example 7 (a) above, suppose company N, in addition to its pharmaceutical manufacturing and trading activities, also provides import and distribution agency services for pharmaceuticals on behalf of its parent company in Vietnam. This agency service is not reflected in the functional analysis of company N and actually incurs costs for company N, but the parent company does not pay agency fees/commissions.

In reality, this agency activity is an additional function that Company N has performed, incurring costs and bearing the risks of the agency service business. However, due to the related-party relationship, Company N did not charge a commission to the parent company. Therefore, in this related-party transaction, Company N must charge a commission for the agency services to account for the increase in revenue according to the market pricing methods stipulated in this Circular.

Example 8 (a): Company M is a multinational company based abroad that wholesales mobile phones T according to international quality standards registered in Vietnam with Company A as an affiliated company and Company B as an independent company. A comparative analysis of the operational functions of companies A and B shows that:

  • Company A: distributes and retails mobile phones T, issues warranty cards for each phone sold, and directly provides warranty services.
  • Company B: distributes and retails mobile phones T, issues a warranty card for each phone sold but does not provide warranty service. Instead, it agrees to pay Company A $5 for each phone repaired by Company A during the warranty period.

Thus, the operational functions of company A and company B differ in terms of providing warranty services, with company A performing more functions, utilizing more resources, and having the potential to generate higher profits than company B.

Therefore, to ensure equivalence when comparing the functions of company A and company B, the product warranty function will be adjusted by excluding the actual costs (or revenues) associated with the performance of the warranty service by company A.

If the "warranty" function only occurs a few times with negligible (i.e., non-material) cost (or revenue) value, then this differential adjustment is not necessary.

Example 8(b): Following example 8(a) above, suppose Company A declares a loss due to high cost of goods sold and faces inventory risk and the T mobile phone becoming obsolete. In reality, Company A receives orders and deposits from customers before requesting Company M to ship the T mobile phones. The inventory tracking data for T mobile phones in the warehouse is at normal levels (e.g., inventory turnover – consumption is 10 days), and there is no documentation showing that customers placed orders but did not purchase due to obsolescence. Thus, the risk stated by Company A is fictitious, and the cost of T mobile phones purchased by Company A will be compared with the cost of T mobile phones purchased by Company B to determine the appropriate price (to be eligible for cost of goods sold deduction).

2.1.3. Contractual conditions when executing a transaction: These include provisions or agreements regarding the responsibilities and rights of the parties involved in a business transaction. Contractual conditions when executing a transaction (hereinafter referred to as "contractual conditions") mainly include:

  1. Quantity, terms of delivery or distribution of the product;
  2. Payment terms, conditions, and methods;
  3. Conditions for warranty, replacement, upgrade, repair, or adjustment of the product;
  4. Conditions regarding business privileges and product distribution;
  5. Other conditions that have an economic impact (e.g., support services, quality control consulting, user manuals, advertising support, promotions, etc.).

In all cases (whether or not there is a written contract), the basis for determining the contractual conditions is the factual events or financial and economic data that reflect the nature of the transaction.

2.1.4. Economic conditions at the time of the transaction: This includes factors related to market economic conditions at the time of the transaction that affect the price of the product. Economic conditions at the time of the transaction (hereinafter referred to as "economic conditions") mainly include:

  1. The size and geographical location of the market for producing or consuming the product;
  2. The timing and nature of market transactions (e.g., wholesale transactions, regular retail transactions, exclusive distribution, market segmentation by consumer group);
  3. The level of competition for the product in the market;
  4. Economic factors affecting production and business costs arise at the location where the transaction takes place (e.g., taxes, fees, financial incentives);
  5. The government's market regulation policy.

2.2. The order of priority when analyzing and comparing the four influencing factors mentioned in points 2.1.1 to 2.1.4 above is specifically defined for each pricing method mentioned in Section II, Part B of this Circular. During the analysis process, priority factors must be analyzed in detail; supplementary factors may not need to be analyzed in detail, but must ensure that their fundamental characteristics are adequately reflected.

Example 9: Suppose Company M Vietnam (a subsidiary of Company M International) specializes in trading a product X that meets the registered Class I quality standard in Vietnam. In 200x, the company selected an independent transaction A (between Company M Vietnam itself and an independent party) to compare with related-party transaction B (between Company M Vietnam and Company M International), and both transactions have a selling price of 3 USD. In this case, the analysis of the four factors influencing transactions A and B is performed as follows:

  • Product characteristics: similar (because both are products manufactured by Company M Vietnam);
  • Function: same (it's essentially Company M Vietnam)
  • Contract conditions: Assume that this aspect of the two transactions is the same except that the delivery condition in transaction A is at the warehouse of Company M Vietnam; in transaction B, the delivery is at port X - country Y, and the transportation cost from Vietnam to country Y is 0,5 USD/product, borne by Company M Vietnam.
  • Economic conditions: Assume this criterion does not affect the product price (for example, country Y has no price control policy for the business of product X, sales conditions are wholesale, import taxes and import procedures for product X in country Y are borne by the buyer).

Therefore, when performing a price comparison, it was found that transaction B was not priced equivalent to transaction A (there is a difference of 0,5 USD/product).

In this case, Company M Vietnam chose the most appropriate pricing method to ensure that the declared and taxed revenue from the sale of product X in transaction B is equivalent to 3,5 USD/product (instead of the old unit price of 3 USD).

2.3. After comparative analysis, the business entity identifies material differences in transaction conditions between related-party transactions and independent transactions. If there are no material differences, the provisions in point 2.4, paragraph 2, section I, part B below do not need to be applied.

2.4. In the event of material differences, the business entity must determine the monetary value of those material differences in order to make adjustments, which may be increased or decreased depending on the specific circumstances, in order to eliminate those material differences.

In cases where there are material differences in the operational functions of business establishments, adjustments shall be made according to the following principles:

  1. If expenses and/or revenues related to material functional differences are accounted for separately, adjustments are made on an itemized basis for each revenue and/or expense related to that material difference.
  2. If expenses and/or revenues related to material functional differences are accounted for collectively, adjustments are made on an allocation basis to determine the corresponding portion of expenses and/or revenues related to those material differences.

Example 10: Suppose there are two transactions between companies A and B, where both companies provide garment manufacturing services. Company A manufactures and delivers the products to its own warehouse, while company B manufactures and handles the export procedures for the products.

Thus, when comparing the product processing functions of A and B, we see that company B also performs the additional function of "export procedures". This difference will be separated by accounting for it separately or allocating it proportionally to the total costs or revenues generated from performing export procedures to ensure that the business efficiency of company A and company B, considering their product processing functions, is equivalent.

If company B only performs the function of "export processing" a few times at the request of customers, and the cost or revenue is insignificant (i.e., not material), then no adjustment for this difference is needed.

II. Methods for Determining Market Price

The methods for determining the market price of products in related-party transactions are specifically stipulated in point 2, section II, part B below, including:

  • The method of comparing prices of independent transactions;
  • Resale price method;
  • Cost plus profit method;
  • Profitability comparison method;
  • Profit splitting method.

Depending on the specific method mentioned above, the market price of a product can be calculated directly as the unit price or indirectly through the gross profit margin or the profit margin of the product. However, for indirect pricing methods, when determining business results for the purpose of declaring and calculating income tax, it is not necessary to calculate the specific unit price of the product.

  1. Principles for applying the market price determination method.

1.1. The most appropriate pricing method is the one selected from the five methods above that best suits the transaction conditions and has the most complete and reliable information, data, and figures for comparative analysis.

1.2. The business entity shall choose the most appropriate value from the standard market price range to use as the basis for adjusting the corresponding value of the related-party transaction. If the product price in the related-party transaction is not lower than this most appropriate value, the business entity is not required to make an adjustment.

  • The most appropriate value is the value that reflects the highest degree of equivalence in terms of transaction conditions between the independent transaction selected for comparison and the related transaction.

1.2.2 The standard market price range is:

  1. The values ​​are calculated from the independent transactions selected for comparison as stated in points 1.6.1 and 1.6.2 of section 1, item I, part B above;
  2. The values ​​fall within the first to third quartiles of the probability statistical calculation of quartiles, derived from the market price ranges of the independent transactions selected for comparison as stated in point 1.6.3, section 1, part I, section B above. (See Appendix 2-GCN/HTQT- Section C for the calculation of quartiles and percentiles.)

Example 11: Company V in Vietnam is a subsidiary specializing in manufacturing and processing products for its parent company and must pay royalties to another subsidiary within the group at an annual cost of N%/year on net revenue, with payments made four times a year. Suppose Company V selects 13 independent transactions to compare, with the royalty-to-net revenue ratios for these transactions being: 1; 1,25; 1,25; 1,5; 1,5; 1,75; 2; 2; 2; 2,25; 2,5; 2,75; 3. Assume the comparative analysis shows that material differences have been reasonably adjusted to eliminate discrepancies, except for payment terms which may affect the royalty value but lack sufficient information to convert them into monetary value for adjustment. Therefore, the business applies the quartile statistical function, selecting the first and third percentiles to determine the standard range as 1,5–2,25; the mean (median in the second percentile) of the standard range is 2.

  • Assuming that the royalty expense ratio to net revenue of enterprise V is 2,1%, then enterprise V does not need to adjust the declared figures for deductible royalty expenses when calculating corporate income tax.
  • Suppose the royalty expense ratio on net revenue of enterprise V is 4%, and enterprise V finds that the transaction with a royalty rate of 2% has the closest transaction conditions to its own transaction. Therefore, enterprise V adjusts the declared royalty expense for tax purposes to an equivalent rate of 2% (i.e., multiply net revenue by 2% to determine the royalty expense for tax purposes).

1.3. In cases where a business has applied market price determination methods as prescribed in this Circular, but during the year experiences force majeure events such as natural disasters or fires affecting production and business, or where purchase and sale prices are affected by State policies and regulations, the business may adjust prices for affected products according to the actual situation.

  1. Methods for determining market price

2.1. The method of comparing prices of independent transactions.

2.1.1. The method of comparing prices of independent transactions is based on the unit price of products in independent transactions to determine the unit price of products in related-party transactions when these transactions have equivalent trading conditions.

2.1.2. The unit price of a related-party transaction shall be compared with the most appropriate value within the standard market price range for the unit price of the product to adjust it in accordance with the principles stipulated in point 1.2, clause 1, section II, part B of this Circular.

2.1.3. For this method, when analyzing and comparing the four influencing criteria as guided in Section I, Part B of this Circular, the priority criteria are product characteristics and contract conditions, while the supplementary criteria are economic conditions and the functions of the business establishment.

2.1.4. The independent transaction price comparison method is applied under the following conditions:

  1. There are no material differences in transaction conditions between standalone and related-party transactions that significantly affect product prices; or
  2. In cases where there are material differences affecting product prices, but these differences have been eliminated in accordance with the guidelines in Section I, Part B of this Circular.

2.1.5. Key factors influencing product prices typically include:

  1. The physical characteristics, quality, and trademark of the product;
  2. Contractual terms and conditions for the supply and delivery of products (e.g., quantity (if applicable to price), delivery time, payment terms);
  3. The right to distribute and sell products affects their economic value.
  4. The market where the transaction takes place.

2.1.6. The method of comparing prices of independent transactions is often applied in the following cases:

  1. Individual transactions involving each type of commodity circulating in the market;
  2. Individual transactions relating to each type of service, copyright, and loan agreement;
  3. The business entity conducts both independent and related-party transactions involving the same type of product.

For example 12: Company V is a wholly owned subsidiary of foreign company S in Vietnam, operating in the textile and garment processing sector. In 200x, Company V had two transactions regarding the processing of trousers with product code 347 as follows:

 – Transaction 1: Processing 1.000 dozen pairs of trousers for parent company S at a price of 60 USD/dozen, with delivery terms at port X, Vietnam (company S will be responsible for export).

– Transaction 2: Processing 1.000 dozen pairs of trousers for company M in country N at a price of 100 USD/dozen, with delivery terms to city Y, country N.

Assume Company M is an unrelated company to Company V and Company S, and these two transactions are equivalent in terms of terms except for the significant difference that the shipping and insurance costs for sending goods from port X to city Y are $3 per dozen.

Comparing transaction 1 (related party transaction) with transaction 2 (independent party transaction) shows that transaction 1 does not accurately reflect the market price. Therefore, company V must adjust the revenue from the transaction with company S as follows: (100 USD – 3 USD) x 1.000 = 97.000 USD. Thus, the revenue that company V declared for tax purposes in 200x from the two transactions with company S and company M is 197.000 USD, of which the processing fee that company V declared received from company S is 97.000 USD instead of 60.000 USD.

2.2. Resale Price Method

2.2.1. The method of determining resale price is based on the resale price (or selling price) of the product sold by the business to an independent party to determine the purchase price (cost) of that product from the related party.

2.2.2. The purchase price of products from related parties is determined based on the price of the products sold in independent transactions minus (-) gross profit minus (-) other costs included in the purchase price of the products (if any) (e.g., import tax, customs fees, insurance costs, international shipping costs).

2.2.2.1. Gross profit is calculated as the ratio of gross profit margin to the selling price (net revenue) and the selling price (net revenue), reflecting the value of the business base earned to cover operating costs and achieve a reasonable profit margin. The gross profit margin on the selling price (net revenue) is determined by dividing the difference between the selling price (net revenue) and the cost of goods purchased by the selling price (net revenue).

2.2.2.2. In cases where a business entity acts as a distribution agent but does not own the product and receives a commission as a percentage (%) of the product's selling price, that percentage is considered the gross profit margin on the selling price (net revenue)..

(See Appendix 2-GCN/HTQT- Section B.1 for the formula for determining market price using the resale price method).

2.2.3. The gross profit margin on the selling price (net revenue) of related-party transactions is compared to the most appropriate value within the standard market price range based on the gross profit margin to adjust it in accordance with the principles stipulated in point 1.2, clause 1, section II, part B of this Circular.

2.2.4. For this method, when analyzing and comparing the four influencing criteria as guided in Section I, Part B of this Circular, the priority criterion is the business's operational function, and the supporting criteria are contract conditions, product characteristics, and economic conditions.

2.2.5. The resale price method is applied under the following conditions:

  1. There are no material differences in transaction conditions between independent and related-party transactions that significantly affect the gross profit margin on sales (net revenue); or
  2. In cases where there are material differences affecting the gross profit margin on selling price (net revenue), but these differences have been eliminated in accordance with the guidelines in Section I, Part B of this Circular.

2.2.6. Key factors affecting the gross profit margin on selling price (net revenue) typically include:

  1. These costs reflect the functions of the business (e.g., exclusive distribution agency, implementation of advertising and promotional programs, warranty services, etc.);
  2. The type, size, volume, and turnaround time of products purchased for resale, and the nature of the transaction in the market (e.g., wholesale, retail, etc.)
  3. The accounting method (i.e., ensuring that the components of gross profit and revenue from related-party and independent transactions are equivalent or that the same accounting standards are applied).

2.2.7. The resale price method is often applied to transactions involving simple service provision and distribution trade products with short turnaround times from purchase to sale and minimal seasonal fluctuations. Furthermore, the product does not undergo any processing, assembly, or alteration of its properties or brand name before being sold to significantly increase its value.

Example 13: Company V is a joint venture of foreign company H in Vietnam, distributing watches supplied by company H. In 200x, company H delivered 1.000 watches to company V and required company V to pay USD 330.000 (including CIF price + import taxes and fees already paid by company H). At the end of the year, company V's net revenue from selling all these watches to consumers in Vietnam was USD 400.000.

Company T is an independent business in Vietnam engaged in the distribution of watches. The financial statements or corporate income tax return for the year 200x of Company T contain the following data:

  • Net revenue: 000 USD
  • Cost of goods sold: 000 USD

Let's assume company T is eligible to be selected for comparison of gross profit margin with company V. Then the gross profit margin is determined as follows:

[(500.000 – 400.000)/500.000] x 100% = 20%

Company V will have to declare the deductible expenses for purchasing watches from Company H (for related-party transactions) as follows:

[400.000 USD – (400.000 USD x 20%)] = 320.000 USD

Therefore, company V is only allowed to deduct reasonable expenses from the cost of goods sold (the entire cost of purchasing the watches from company H) of USD 320.000 instead of having to pay USD 330.000 (as required by company H). (If it is necessary to calculate the FOB price of the watches sold by company H to company V, take the total cost of goods sold of USD 320.000 minus (-) expenses incurred after the FOB export stage such as taxes, import fees, domestic transportation costs, international shipping and insurance costs).

The gross profit earned by company V (USD 400.000 – USD 320.000 = USD 80.000) is used to cover selling and general administrative expenses and to achieve a reasonable profit margin from the watch trading business.

If company H provides sales consulting services and requires company V to pay these costs (which are accounted for as selling expenses), then this transaction must be separated and one of the transaction pricing methods stipulated in this Circular must be applied to determine the deductible reasonable cost for sales consulting services.

2.3. Cost-plus method

2.3.1. The cost-plus method is based on the cost (or production cost) of a product to determine its selling price to related parties.

2.3.2. The selling price of the product to the affiliated party is determined by taking the cost price (or production cost) of the product plus (+) gross profit.

2.3.2.1. Gross profit is calculated as the ratio of gross profit to cost of goods sold (or cost of production) and cost of goods sold (or cost of production), reflecting a reasonable profit level corresponding to the business's operational function and market conditions. The gross profit margin on cost of goods sold (or cost of production) is determined by dividing the net revenue and cost of goods sold (or cost of production) by the cost of goods sold (or cost of production). The cost of goods sold (or cost of production) includes direct and indirect production costs and excludes financial operating costs (e.g., royalties, interest on loans, etc.). If the business cannot separately account for cost of goods sold (or cost of production), selling expenses, and general administrative expenses, the cost of goods sold (or cost of production) used as the basis for calculating gross profit will include all these expenses.

2.3.2.2. In cases where a business entity acts as a product purchasing agent but does not own the product and receives a commission fee as a percentage (%) of the product purchasing cost, that percentage is considered the gross profit margin on the cost of goods sold.

(See Appendix 2-GCN/HTQT, Section B.2 for the formula for determining market price using the cost plus profit method).

2.3.3. The gross profit margin on the cost of goods sold (or cost of production) of related-party transactions shall be compared with the most appropriate value within the standard market price range of the gross profit margin on the cost of goods sold (or cost of production) to adjust it in accordance with the principles stipulated in point 1.2, clause 1, section II, part B of this Circular.

2.3.4. For this method, when analyzing and comparing the four influencing criteria as guided in Section I, Part B of this Circular, the priority criterion is the business's operational function, and the supporting criteria are contract conditions, product characteristics, and economic conditions.

2.3.5. The cost-plus method is applied under the following conditions:

  1. There are no material differences in transaction conditions between independent and related-party transactions that significantly affect the gross profit margin on cost of goods sold (or cost of production); or
  2. In cases where there are material differences affecting the gross profit margin on cost of goods sold (or cost of production), but these differences have been eliminated in accordance with the guidelines in Section I, Part B of this Circular.

2.3.6. Key factors affecting the gross profit margin on cost of goods sold (or cost of production) typically include:

  1. Costs reflect the operational functions of the business (e.g., contract manufacturing, research and development of new products, the proportion of product value added relative to the scale of business investment);
  2. Contractual obligations (e.g., product delivery deadlines, quality control costs, warehousing, storage, payment terms);
  3. The accounting method (i.e., ensuring that the constituent elements in the cost of goods sold (or cost of production) of related-party transactions and independent transactions are equivalent or that the same accounting standards are applied).

2.3.7. The cost-plus method is commonly applied in the following cases:

  1. Transactions related to the production, assembly, manufacturing, and processing of products for sale to related parties;
  2. Transactions between affiliated parties involving joint venture contracts, business cooperation contracts for the production, assembly, manufacturing, or processing of products, or agreements on the supply of production inputs and the purchase of output products;
  3. Transactions involving the provision of services to related parties.

Example 14: Company A in Vietnam is a subsidiary of Group T, manufacturing shoes for export. The parent company is responsible for supplying raw materials, quality control technicians, transportation costs, and international insurance. Company A is paid a processing fee per unit of product and bears all costs incurred during the manufacturing process according to the samples and codes provided by the parent company.

The accounting data for company A is as follows:

– Net revenue (processing fees): 15 billion VND

Cost of goods sold: 13 billion VND

– Selling expenses and administrative expenses: 1,8 billion VND.

At the same time, there are several other independent businesses that also manufacture shoes on a contract basis for foreign organizations and individuals, and the contract fee is calculated as follows: contract fee = total cost (= cost of goods sold + business management expenses + selling expenses) plus (+) 7% of total cost. Let's assume this independent transaction qualifies for comparison.

Company A must declare its revenue from shoe manufacturing activities as follows:

Revenue from related-party transactions = (13 billion + 1,8 billion) + [7% x (13 billion + 1,8 billion)] = 15,836 billion VND.

Therefore, company A must declare revenue of VND 15,836 billion (instead of the old figure of VND 15 billion).

2.3.8. The cost-plus method can be applied to redetermine the cost of goods sold (or cost of production) with related-party transactions of a business based on the selling price of the product determined at market price and the gross profit margin on the cost of goods sold (or cost of production).

Example 15: Company V in Vietnam is a wholly owned subsidiary of multinational company P, specializing in the production of household detergents. The raw materials (soap base and other detergent chemicals) are supplied by a subsidiary company Y. Company V's sales volume in 200x was 100 tons, of which:

– Transaction 1: 60 tons were delivered to another member company of the P group at an FOB price of USD 650/ton.

– Transaction 2: The remaining 40 tons were sold to a domestic supermarket at a price of 700 USD/ton, excluding VAT.

The company's accounting records for the period show the following figures:

– Net revenue: $67.000

– Total cost: 65.000 USD

Assuming transactions 1 and 2 qualify for the independent market price comparison method applied by enterprise V, and the gross profit margin on total cost for independent enterprises operating in the household detergent manufacturing industry is 15%, enterprise V will declare revenue and expenses for corporate income tax calculation as follows:

– Adjust the selling price in related-party transactions to match the selling price in independent transactions:

700 USD x 60 tons = 42.000 USD

      – Re-determine net revenue:

            42.000 USD + 700 USD x 40 tons = 70.000 USD

– Adjusting the total cost – (related to related-party transactions):

= [(42.000 USD + (700 USD x 40 tons)]/ (1 + 0,15) = 60,870 USD.

Therefore, company V will have to declare and pay taxes based on net revenue of USD 70.000 (instead of the old figure of USD 67.000) and total cost of goods sold of USD 60,870 (instead of the old figure of USD 65.000).

2.4. Profitability Comparison Method

2.4.1. The profit comparison method is based on the profit margin of products in independent transactions selected for comparison as a basis for determining the profit margin of products in related-party transactions when these transactions have equivalent trading conditions.

2.4.2. Profitability ratios are calculated as net profit (income) before corporate income tax divided by net revenue, expenses, or assets of business operations as stipulated by accounting and financial reporting regulations. Net profit (income) before corporate income tax may include (+) interest expense or depreciation of fixed assets to determine the efficiency of production and business before paying these expenses. Commonly used profitability ratios include:

2.4.2.1. The ratio of net income before corporate income tax to net revenue from production and business activities.

 

Example 16: Enterprise L is a business with investment capital from two foreign companies, N and S, operating in Vietnam in the field of manufacturing and assembling 4-seater cars under the N and S brands. The N brand is sold to independent parties, while the S brand is sold entirely to Enterprise L1, a wholly owned subsidiary of Enterprise L. Simultaneously, Enterprise L1 provides Enterprise L with a loan, and the interest on this loan, calculated at market interest rates, is USD 100. In 200x, Enterprise L's accounting records are as follows:

  • Net revenue from the sale of N-brand automobiles: $18.000 (this is a separate transaction)
  • Net profit before tax from the sale of N-brand automobiles: $2.000
  • Net revenue from the sale of S-brand automobiles: USD 000 (related party transaction)
  • Net profit before tax from the sale of S-brand automobiles: $1.800

The net profit margin before tax on sales of car brand N is: 2.000/18.000 x 100% = 11,1%

The net profit margin before tax on sales of S-brand cars is: 1.800/25.000 x 100% = 7,2%

Assuming the material differences between the two sales transactions for vehicles N and S have been adjusted so that the transaction with company L1 achieves a net profit margin before tax and interest on sales of 11,1%, minus interest expense of USD 100. Therefore, company L must declare the net profit before tax on sales of vehicle S as follows:

Net profit from selling car S: 25.000 x 11,1% = 2.775 USD

Increased costs (due to adjusted interest payments from the transaction with company L1):

100 USD

Results regarding net profit from automobile manufacturing and sales operations:

2.000 + (2.775 – 100) = 4.675 USD

(replacing the old figure in the accounting records which was 3.800 USD (2.000 + 1.800))

2.4.2.2. Net income before corporate income tax to total operating expenses.

Example 17: Company AVN is a subsidiary of company ANB, acting as a forwarding service agent for ANB. Company B is an independent company specializing in forwarding services (for multiple independent clients). The revenue and expense figures for AVN and B are as follows:

  AVN B
total cost 1.500 2.000
total revenue 1.650 2.500

Assume B qualifies to be selected for comparison with AVN based on the ratio of net income before tax to total expenses. Performing the calculation of the ratio, then:

  • The return on total costs for AVN = (1.650 – 1.500) / 1.500 = 10%
  • The return on total costs for B = (2.500 – 2.000) : 2.000 = 25%

Therefore, company AVN must declare profits from related-party transactions based on a return on total costs corresponding to the 25% rate of company B.

2.4.2.3. Net income before corporate income tax on assets of production and business activities. This ratio is used in cases where the business has fixed assets accounting for a significant proportion of total investment capital (for example, businesses in the manufacturing industry, mining industry).

Asset value is the average of the beginning and ending balances, including fixed and current assets, excluding assets used for investment activities, joint ventures, and other partnerships (e.g., purchasing government bonds, purchasing shares).

Example 18:

– N is a subsidiary in Vietnam of the P Group, specializing in the production of rice wine. The parent company supplies most of the input factors and buys all of the output. In 200x, company N had a net return on assets of 3%.

– V is an independent company specializing in the production of various beverages, including workshops for producing rice wine, beer, and other carbonated drinks. In 200x, company V had a return on assets of 7%, with the net return on assets of the rice wine production workshop being 7,5%.

Assuming V qualifies to be compared with N based on the net pre-tax return on assets, N would have to adjust its taxable income to a net return on assets of 7,5%.

2.4.3. Businesses may choose one of the above-mentioned profit margins to compare the profit margin of related-party transactions with independent transactions and may use one or more other profit margins stipulated in the financial reporting regulations to supplement the verification of the accuracy of the chosen margin. The choice of profit margin, calculated on revenue, expenses, or assets, depends on the economic nature of the transaction. (See Appendix 2-GCN/HTQT, section B.3 for formulas to calculate the rate of return for applying the comparative profit method).

Example 19:

– Assuming a business has related-party transactions at the product sales stage, the profit margin on revenue is not used because the revenue figures from related-party transactions are subject to market price adjustments.

 – Assuming the business provides services, the return on assets ratio is not used.

2.4.4. The return on related-party transactions is compared to the most appropriate value within the standard market price range for return on equity to be adjusted in accordance with the principles stipulated in point 1.2, section II, part B of this Circular.

2.4.5. For this method, when analyzing and comparing the four influencing criteria as guided in Section I, Part B of this Circular, the priority criterion is the business's operational function, and the supporting criteria are contract conditions, product characteristics, and economic conditions.

2.4.6. The profit comparison method is applied under the following conditions:

  1. There are no material differences in trading conditions between independent and related-party transactions that significantly affect the rate of return; or
  2. In cases where there are material differences affecting the rate of return, but these differences have been eliminated in accordance with the guidelines in Section I, Part B of this Circular.

2.4.7. Key factors affecting the rate of return typically include:

  1. Factors related to assets, capital, and costs used to perform the main function of the business establishment (for example, production and processing using machinery invested by the business establishment has the potential to generate higher profits compared to production and processing using machinery borrowed from another establishment for processing);
  2. The nature of the industry, product group, and production or consumption stages (e.g., finished products made from raw materials or semi-finished products);
  3. The accounting method and cost structure of the product (for example, the product is in an accelerated depreciation phase compared to normal depreciation).

2.4.8. The comparative profit method is considered an extension of the resale price method and the cost plus profit method. Therefore, the comparative profit method is often widely applied in cases as stated in points 2.2.7 and 2.3.7 of clause 2, section II, part B of this Circular.

2.5. Profit Separation Method

2.5.1. The profit separation method is based on the profit derived from a combined related-party transaction carried out by multiple related businesses (or parties) to determine the appropriate profit for each related business (or party) in the same way that independent parties would distribute profits in equivalent independent transactions.

A comprehensive related-party transaction involving multiple related businesses (or parties) is a unique transaction encompassing numerous closely related-party transactions concerning proprietary products or closed-loop related-party transactions between related parties.

2.5.2. There are two methods for calculating profit separation:

2.5.2.1. Method 1: Profit allocation to each related party based on capital contribution (cost); accordingly, the profit of each business entity (or party) participating in the transaction is determined based on the allocation of the total profit obtained from the combined related-party transaction according to the ratio of capital (cost) used in the related-party transaction of that business entity in the total investment capital to produce the final product. (See Appendix 2-GCN/HTQT, Section B.4 regarding the formula for profit allocation based on capital contribution ratio).

Example 20: Company A in Vietnam and company B abroad are member companies of Group T, producing electronic products. A and B participate in the production of a new product, a liquid crystal display (LCD) television. A is responsible for designing and manufacturing the casing and picture tube, which B then assembles with other components (installing circuits, electronic chips, etc.) invented and manufactured by B. The finished product is then sold to C, an independent distributor, for $550 USD. The total cost of the product supplied by A to B is $300 USD. B incurs further production costs of $150 USD.

– The profit allocated to A is calculated as follows: [(550 – (300 + 150)) : 450] x 300 = 66,66 USD

2.5.2.2. The second calculation: Profits are divided in two steps as follows:

2.5.2.2.1. Step one: basic profit distributionEach business entity (or party) involved in a related-party transaction receives a basic share of the profit corresponding to its operational functions. This basic share reflects the total profit value of the related-party transaction that the business entity earns from performing its operational functions and does not take into account specific and unique factors (e.g., exclusive ownership or use of intangible assets or intellectual property rights).

The basic profit margin is calculated based on the gross profit margin or the corresponding profit margin that best fits within the standard market price range, according to the gross profit margin or profit margin guidelines in points 2.2, 2.3, and 2.4 of clause 2, section II, part B of this Circular.

2.5.2.2.2. Step two: distributing the surplus profit.Each business entity (or party) participating in the related-party transaction receives a further portion of the additional profit corresponding to its contribution to the total additional profit (i.e., total profit earned minus (-) total basic profit distributed in the first step) of the combined related-party transaction. This additional profit reflects the profit of the combined related-party transaction that the business entity earns in addition to the basic profit due to specific and unique factors.

The excess profit of each business entity is calculated by multiplying the total excess profit earned from combined related-party transactions by (x) the proportion of each business entity's contribution of the following costs or assets:

  1. product research and development costs; or
  2. The value (after depreciation) of intangible assets or intellectual property rights used in the production and sale of products.

Research and development costs or the value of intangible assets and intellectual property rights must be determined on the basis of market price (according to the methods prescribed in this Circular) or the actual cost contributed by each party in accordance with the accounting principles for costs or assets.

Example 21: Companies H and M are two companies within the same group that manufacture mobile phones. H manufactures component assemblies, and M assembles and installs complete software for sale to independent distributors. The accounting data of companies H and M related to related-party transactions in mobile phone manufacturing is as follows:

  H M
Net revenue 200 500
Cost of goods sold includes:    
-       Cost of purchasing raw materials 100 200
-       Production costs 50 150
Research and development (R&D) costs 30 50
Selling and general administrative expenses 10 50
Profit 10 50

How to calculate the profit of H and M using the profit splitting method:

Step 1: basic profit distribution

– Recalculate the consolidated business performance report figures:

   
Net revenue 500
Cost of goods sold 300
Research and development (R&D) costs 80
Selling and general administrative expenses 60
Profit 60

– Let's assume that the profit margin on cost of H is determined to be 10% and M is 8% according to the guidelines in point 2.3, section II, part B of this Circular.

-Calculate the profit of H and M using the formula:

     

Profit = Profit margin x Cost

Cost of goods sold = Cost of goods sold + R&D expenses + Selling and administrative expenses

H's profit = 10% x (100 + 50 + 30 + 10) = 19;

Profit of M = 8% x (300 + 80 + 60 - 190) = 20

The surplus profit after dividing the basic profit is: 60 – 19 – 20 = 21

Step 2: Profit sharing is based on the proportion of R&D cost contributions.

– Calculate the proportion of R&D cost contribution from each party:

+ H = 30/80 x 100% = 37,5%;

M = 62,5%

– Calculate the profit margin for H and M:

+ H: 21 x 37,5% = 8,87

+ M: 21 – 8,87 = 12,13

Conclusion:

– H declared the profit earned from related-party transactions as: 19 + 8,87 = 27,87 instead of the old figure of 10; and

– M declared the profit earned from related-party transactions as: 20 + 12,13 = 32,13 instead of the old figure of 50.

2.5.3. For this method, when analyzing and comparing the four influencing factors as guided in Section I, Part B of this Circular, the application conditions shall be carried out in accordance with the regulations for the resale price method, the cost plus profit method, or the comparative profit method, depending on the specific case, in accordance with the guidance in point 2.5.2.2.1, clause 2, Section II, Part B above.

2.5.4. The profit separation method is often applied in cases where related parties jointly participate in the research and development of new products or the development of proprietary intangible assets, or in transactions within the transitional production and business process between related parties, from raw materials to the final product for distribution, involving the ownership or use of unique intellectual property rights.

III. Regulations on determining market prices in certain special cases

In cases where, due to the specific or unique nature of the related-party transaction, the business entity cannot select an independent transaction for comparison according to the guidelines in points 1.1 to 1.6, clause 1, section I, part B of this Circular and the market price determination methods stated in section II, part B of this Circular, the business entity must explain the reasons (including information on the business operations of the business entity) and implement one of the following measures:

  1. Comprehensive measures

1.1. Expand the scope of selection of independent transactions (or business establishments) to include national economic sectors (according to the List of National Economic Sectors issued by competent State management agencies) different from the sector in which the business establishment operates, provided that the business establishments conducting those independent transactions have equivalent functions; perform an analysis of 4 influencing factors and eliminate material differences based on the economic factors used in the sector to objectively reflect the effectiveness of investment and business, economic growth, or product added value. The number of independent transactions or business establishments selected for comparison must be at least 5 (five);

1.2. Determine the market price range according to the calculation methods of the most appropriate price determination method specified in Section II, Part B of this Circular; use the quartile statistical function or similar statistical functions (e.g., percentile function) to determine the standard market price range and the appropriate average value (or median value) derived from the market price range. (See Appendix 2-GCN/HTQT, Section C.2 for the formula and instructions for using the percentile function).

1.3. If the product price, gross profit margin, or net profit margin in a related-party transaction is not lower than this median value, the business entity is not required to make adjustments to the related-party transaction. If the product price, gross profit margin, or net profit margin in a related-party transaction is lower than this median value, the business entity shall make adjustments to the most appropriate value within the standard market price range, but not lower than the median value reflecting the corresponding price, gross profit, or net profit.

1.4. Depending on the specific case, the business establishment may use a combination of pricing methods as stipulated in Section II, Part B of this Circular.See example 15) or apply two pricing methods simultaneously to support the verification of the accuracy and objectivity of the price, gross profit margin, or net profit margin of a product in related-party transactions.

1.5. Specifically for the profit separation method, the second calculation method, the guidelines in points 1.1 to 1.3 of clause 1, section III, part B above are considered the basis for adjusting the basic profit; the business entity shall continue to distribute the excess profit according to the guidelines in point 2.5.2.2.2, clause 2, section II, part B of this Circular.

      Example 22: Company X manufactures electronic integrated circuits for export, with all products going to its parent company abroad at a selling price (revenue) equal to 1,1 times the total cost. Assume that in this manufacturing sector, there are no transactions or independent businesses selected for comparison within the electronics manufacturing sub-sector (according to point 1.4.2, section I, part B) with a profit margin on revenue of 30% (this figure is calculated from 10 businesses in the electronics manufacturing sub-sector). Assume that an analysis of the economic indicators reflecting the investment efficiency of the sub-sector shows that a profit margin on revenue of 30% is consistent with Company X's actual operations (i.e., there are no material differences to adjust).

      Therefore, company X can check its pricing to ensure it achieves a 30% profit margin on revenue, or use the profit margin on revenue to recalculate the profit margin on total costs for comparison and adjustment. (The recalculation can be determined as follows: Profit/Revenue = (Revenue – Costs)/Revenue = 0,3 => Revenue = 1,429 times Costs).

  1. Measures for utilizing data across periods.

Businesses applying market-valued related-party transactions, as guided by this Circular, between periods (not exceeding 5 years from the date the related-party transaction occurred), shall prepare a comparative analysis of the four influencing factors between transactions, adjust for material differences, and use objective factors to adjust economic values ​​over time (e.g., average price increase rate, interest rate, inflation rate, economic growth) to determine the appropriate product price, gross profit margin, or return on investment for related-party transactions arising during the period for which corporate income tax is declared.

Example 23: Company A is a 100% foreign-invested enterprise and the only enterprise in Vietnam that mines and processes metal ore X for export. In 2xx1, the company conducted both related-party and independent transactions. For related-party transactions, Company A applied the independent transaction price comparison method and determined the unit price of the product to be 800 USD/ton of ore with a metal X content of 35%.

Assume that in 2xx2, company A exported 100% of its products to its parent company (no independent transactions for comparison); the international market price of metal ore X in 2xx2 increased by 20% compared to 2xx1; other factors affecting the product price (metal content, delivery terms, payment, etc.) remained unchanged.

Therefore, company A declares its tax for the year 2xx2 based on revenue from the sale of metal ore X at a unit price not lower than 960 USD/ton.

 

IV. Maintaining and providing data and documents on market price determination methods.

  1. Select data and documents

1.1. The data, documents, and materials used as a basis for comparative analysis must clearly state their origin so that the tax authorities can check and verify them. Businesses may use information and data from the following sources:

  1. Information and data are publicly disclosed or provided upon request by state agencies, departments, research institutes, associations, and specialized international organizations recognized and responsible by the State;
  2. Information and data confirmed or publicly disclosed by organizations and individuals operating in independent service sectors that are licensed to operate (for example: independent auditing agencies, registration and quality inspection agencies, organizations classifying and evaluating the reputation of businesses);
  3. Financial reports and annual or periodic investment reports of companies listed on the stock market are publicly disclosed in accordance with the regulations and operating rules of the stock market;
  4. The business entity is responsible for providing and submitting all data, documents, and records related to business transactions for tax declaration purposes.

Data, documents, and materials originating from unofficial or unknown sources are for reference purposes only.

1.2. When selecting transactions for comparative analysis and calculating gross profit margins or profitability ratios, businesses must reflect data in a comparable format over a period of at least three consecutive financial years. For businesses with less than three financial years of operation or those with seasonal business activities that do not occur throughout the year, the time limit is determined accordingly by the relevant monthly, quarterly, or seasonal period.

1.3. When calculating relative numbers (e.g., percentage figures) from absolute numbers, businesses should round the numbers to the third decimal place. If the relative number is derived from published data without accompanying absolute numbers and does not follow the rounding principle above, then the published data should be used.

Example 24:

 – The absolute figure used to calculate the gross profit margin is 5,2856%, and this relative figure is rounded to 5,286%.

- The announced economic growth figure of 7,8% is not rounded.

      – The published interest rate of 4,9854% is rounded to 4,985%.

  1. Request for retention and provision of information, documents, and certificates.

2.1. Businesses with related-party transactions have the obligation and responsibility to retain and present information, documents, and records as a basis for applying the market price determination method of products in related-party transactions upon request from tax authorities during inspections and audits. Information, documents, and records related to production, business activities, and the market price determination method of related-party transactions must be prepared at the time the related-party transactions occur, updated throughout the transaction process, and retained in accordance with regulations on document and accounting record retention as prescribed by law on accounting, statistics, and taxation.

2.2. When settling corporate income tax, business establishments are responsible for declaring related-party transactions using form GCN-01/TNDN as prescribed in Appendix 1-GCN/HTQT issued with this Circular. The deadline for submitting Appendix GCN-01/HTQT is the same as the deadline for submitting the corporate income tax return.

2.3. Businesses are obligated to create and maintain records containing information, documents, and certificates related to related-party transactions as follows.

2.3.1. General information about the business and its partners:

  1. Information about the relationship between the affiliated parties and the business entity;
  2. Documents and updated reports on development, operation, and control strategies among affiliated parties; policies for establishing transaction prices for each product group in accordance with the overall direction of the affiliated parties and the business entity;
  3. Documents and reports on development processes, business strategies, projects, investment plans, and production and business activities; regulations and procedures regarding financial reporting and internal control of the business entity and its related parties involved in the transaction;
  4. The document describes the organizational structure and operational functions of the business entity and the related parties involved in the transaction.

2.3.2. Information about the business's transactions:

  1. Transaction diagrams and transaction description documents include information about the parties involved in the transaction, the sequence and procedures for payment, product transfer, etc.;
  2. The document describes the characteristics and technical specifications of the product; a detailed breakdown of unit costs (or production costs), product selling prices, total quantity of products manufactured, sold, and consumed during the period (detailed by related-party and independent transactions (if any)); and the quantity of each product.
  3. Information, documents, and records regarding the negotiation, signing, execution, and settlement of economic contracts/agreements related to the transaction (typically including: product description, location of transactions, transaction form, transaction value, payment terms, payment documents, execution time, meeting minutes or management directives on the negotiation, signing, and execution of the transaction);
  4. Information, documents, and records related to the economic conditions of the market when related-party transactions occur that affect the method of determining transaction prices (e.g., fluctuations in foreign exchange rates, government policies affecting transaction prices, financial incentives, etc.).

2.3.3. Information on methods for determining market price:

  1. Policies for establishing purchase, sale, or exchange prices for products by businesses, procedures for controlling and approving prices, and price lists for products sold in consumer markets;
  2. The information, documents, and evidence supporting the selection and application of the most appropriate pricing method in related-party transactions of a business entity include information, data, and documents used for comparative analysis, adjustment of material differences, transaction price calculations according to the pricing method applied by the business entity, and explanations of the reasons for choosing that method.
  3. Other information, documents, and records for reference purposes related to the selection and application of pricing methods in related-party transactions (if any).

2.4. Upon request from the tax authority, the business establishment is obligated to provide information, documents, and certificates within no more than 30 working days from the date of receiving the written request from the tax authority. If the business establishment has a legitimate reason, this deadline may be extended once for no more than 30 days from the original expiration date.

2.5. Information, documents, and certificates provided by the business establishment to the tax authorities must be in writing, either originals or copies as prescribed by law on notarization and certification. If the business establishment uses electronic documents, the provision of these documents shall be carried out in accordance with the Accounting Law and related guiding documents on electronic documents.

Information, documents, and certificates in foreign languages ​​must be translated into Vietnamese and notarized or certified in accordance with current regulations. If notarization is not required by law, the business entity is responsible for the accuracy of the translation.

 

C. RIGHTS AND OBLIGATIONS OF TAXPAYERS;

RESPONSIBILITIES OF THE TAX AUTHORITY AND OTHER REGULATIONS

1. Rights and obligations of business establishments: In addition to fulfilling the rights and obligations stipulated by tax laws in tax regulations and in this Circular, business establishments also have the following rights and obligations:

1.1. Have the right to request the tax authorities to keep confidential the information provided to them for the purpose of determining market prices in business transactions between related parties for tax calculation purposes;

1.2. The entity is obligated to provide all necessary data, documents, and evidence to demonstrate the selection and application of the most appropriate pricing method for the related-party transaction.

2. Responsibilities and powers of the tax authority

2.1. Maintain confidentiality of information provided by businesses related to determining market prices in business transactions between related parties for tax calculation purposes as stipulated in this Circular when such information does not originate from publicly available sources. The provision of confidential information of taxpayers to relevant state agencies shall be carried out in accordance with the provisions of the law.

2.2. Determining the price used for tax declaration, determining taxable income or the amount of income tax payable (collectively referred to as "tax assessment") for businesses with related-party transactions in the following cases:

  1. Businesses rely on illegal, invalid, or unverified documents, data, and records to determine prices, gross profit margins, or other profit margins applicable to related-party transactions.
  2. A business creates a fraudulent independent transaction or rearranges a related-party transaction into an independent transaction in order to use this transaction as the independent transaction of choice for comparison.
  3. Businesses that fail to declare or declare incompletely Appendix GCN-01/HTQT for related-party transactions arising in the corporate income tax year; and fail to comply with the deadline for providing information, data, and documents to substantiate the declaration and accounting of market prices for related-party transactions.
  4. The tax authorities suspect that the business establishment is not applying or is intentionally applying incorrectly the regulations in this Circular, and the business establishment fails to provide proof within a maximum period of 90 days from the date of receiving the notification from the tax authorities.

2.3. The General Department of Taxation, based on information from the tax declarations of related-party transactions and the tax authority's database, will provide guidance on tax assessment according to the following principles:

  1. In cases where a business establishment fully complies with accounting regulations and invoicing procedures, the determination of revenue, expenses, or taxable income to determine tax obligations shall be carried out according to market pricing methods as stipulated in Clause 2, Section II and Section III, Part B of this Circular, based on the price level, gross profit margin, or other profitability ratios determined by the tax authority in accordance with each case or business sector.
  2. In other cases, tax assessment is carried out based on the tax authority's database in accordance with regulations on tax assessment for businesses that have not fully complied with accounting, invoicing and documentation regulations or regulations on handling tax violations.
  3. In cases where tax assessment involves a benchmark market price range, the most appropriate value for determining the price, gross profit margin, or other profitability ratios applicable to the related-party transaction being assessed is a value no lower than the average of the benchmark market price range determined by the tax authority.

2.4. The General Department of Taxation shall provide guidance on the inspection and auditing of business establishments to ensure compliance with the provisions of this Circular.

3. Handling violations and resolving complaints

3.1. Businesses, organizations, tax officials, and other individuals who violate the guidelines in this Circular will be subject to penalties according to the law, depending on the nature and severity of the violation.

3.2. Businesses have the right to file complaints within the time limits, complaint procedures, and complaint resolution authority as stipulated in the law on complaints and other relevant legal provisions. While awaiting complaint resolution, businesses must still strictly comply with the tax authority's decision regarding tax payment and penalties (if any).

If a business entity is a resident of Vietnam and/or of a country that has signed a Double Taxation Avoidance Agreement with Vietnam, and its income falls within the scope of the Agreement, it may file a complaint in accordance with the provisions of the Agreement.

4. Organization of implementation

4.1. This Circular shall take effect 15 days after its publication in the Official Gazette.

4.2. During the implementation of this Circular, if any difficulties arise, businesses, agencies, and individuals are requested to report them to the Ministry of Finance for timely consideration and resolution.

Recipients:
– Central Party Office;
– Vice President of the National Assembly, Vice President of the Republic;
– Supreme People's Procuratorate;
– Supreme People's Court;
– Ministries, ministerial-level agencies, and other agencies under the Government;
– Central agencies of mass organizations;
– People's Committees, Departments of Finance, and Tax Departments of provinces and centrally-administered cities;
– Department of Document Verification – Ministry of Justice;
- Announcement;
– General Departments, Departments, Divisions, Institutes, and agencies directly under the Ministry;
– General Director of the Corporation in Ho Chi Minh City;
– Save: VT, TCT (VT, HTQT).		 Minister of Finance
DEPUTYTruong Chi Trung
APPENDIX 1 - CERTIFICATE/INTERNATIONAL COOPERATION  
            Form GCN-01/TNDN
    Socialist Republic of Vietnam (Issued together with Circular No. 117/2005/TT-BTC)
December 19, 2005
    Independence - Freedom - Happiness
           
INFORMATION ABOUT RELATED TRANSACTIONS  
   
 
         
  Tax code:          
  Name of the contractor:          
  Office address:          
  District/County:     Province/City:  
  Phone:     Fax:   Email:
PART A. INFORMATION ON RELATED TRANSACTION VALUE Unit of measurement: Vietnamese Dong  
             
STT Targets Revenue, other income Treatment cost Affiliate
Name
deal		 Country
resident
(1) (2) (3) (4) (5) (6)
I Total revenue and other income (expenses) arising from business operations.        
II Total revenue and other income (expenses) arising from joint venture activities.        
  Inside          
1 Products, goods          
2 Services            
  Inside          
2.1 Research and development          
2.2 Advertising, marketing          
2.3 Business management and consulting, training        
2.4 Other services          
3 Financial activities          
3.1 Royalties and similar fees        
3.2 Interest expense, interest on loans          
3.3 Exchange rate differences on realized trade receivables and payables.        
3.4 Property leasing          
4 Other income (expenses)          
4.1 Debt forgiveness            
               
PART B. INFORMATION ON THE METHOD OF DETERMINING THE PRICE      
               
STT Method Transactions subject to *
(7) (8) (9)
1 Independent market price comparison method  
2 Resale price method  
3 Cost plus profit method  
4 The method of comparing returns.  
5 Income separation method  
6 Another method          
               
SECTION FOR TAX AUTHORIZATIONS We hereby declare that the above information is accurate, complete, and clear, and we assume full legal responsibility for the accuracy of this information.
……………, date…… month…… year 200…
Legal representative of the business establishment
(Signature, seal, full name and title)		  
Notice:
– Businesses are requested to carefully read the Guidelines for declaring information on related-party transactions to ensure that all figures recorded in this declaration form are complete and accurate.
– Leave blank any columns that have no data.
– * Record the code/symbol of the transaction in section A. For example: if method (1) is applied to transaction 3.2, then record 3.2 in the first line of column (9)		  
                       
INSTRUCTIONS FOR COMPLETING THE DECLARATION

FORM GCN-01/TNDN: INFORMATION ON RELATED PARTY TRANSACTIONS

The content and methods for recording data in the indicators on Form GCN-01/TNDN- Transfer Price Information are as follows:

 

PART A. INFORMATION ON RELATED TRANSACTION VALUE

  1. Total revenue and other income generated from business operations:

Column (3) – “Revenue, other income”

The figures recorded in this item are based on the cumulative credit balances of the reporting year in the detailed accounting records of Account 511 – “Revenue from sales and services”, Account 515 – “Revenue from financial activities” and Account 711 – “Other income”.

In cases where revenue deductions related to trade discounts, sales price reductions, or returned goods arise, the revenue for the reporting year is determined by the net value (net revenue) (=) {revenue earned minus (-) revenue deductions}.

Column (4) – “Cost”

The figures recorded in this item are based on the cumulative debit balances for the reporting year in the detailed accounting records of Account 632 - Cost of Goods Sold, Account 635 - Financial Expenses, Account 641 - Selling Expenses, Account 642 - Administrative Expenses, Account 811 - Other Expenses, and other related accounts (if any). These expenses have been reduced by expense deductions and are used to determine the business results for the reporting year.

  1. Total revenue and other income generated from associated activities:

Column (3) – “Revenue, other income”

The figures recorded in this indicator are based on the cumulative credit balances of the reporting year in the detailed accounting records of Account 511 – “Revenue from sales and services”, Account 515 – “Revenue from financial activities” and Account 711 – “Other income” opened for each related party customer.

In cases where revenue deductions related to trade discounts, sales price reductions, or returned goods arise, the revenue for the reporting year is determined by the net value (net revenue) (=) {revenue earned minus (-) revenue deductions}.

Column (4) – “Cost”

The figures recorded in this indicator are based on the cumulative debit balances for the reporting year in the detailed accounting records of Account 632 - Cost of Goods Sold, Account 635 - Financial Expenses, Account 641 - Selling Expenses, Account 642 - Administrative Expenses, Account 811 - Other Expenses, and other related accounts (if any) opened in detail for each related party seller. The expenses related to these related party transactions have been reduced by expense deductions and are used to determine the business results for the reporting year.

  1. Products, goods

This indicator reflects the value of products and goods purchased from or sold to affiliated enterprises. recorded as an expense or sales revenue In the reporting year, this includes details of the item "Net Revenue from Sales and Services Provided" (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance), or the item "Cost of Goods Sold" (Code 11 - Cost of Goods Sold of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded in the "Products and Goods" section (Section 1)

– Column (3) “Revenue, other income”: This reflects the total revenue realized during the fiscal year for associated businesses from the sale of products and goods; based on the cumulative credit balances of the reporting year recorded in the detailed accounting ledger of Account 511 - "Revenue from sales of goods and services" (Level 2 accounts 5111 - "Revenue from sales of goods" and 5112 - "Revenue from sales of finished products") opened for each associated customer during the reporting year.

In cases where revenue deductions related to trade discounts, sales price reductions, and returned goods arise, the revenue from the sale of finished goods and merchandise to associated companies during the reporting year is determined by the net value: Total cumulative revenue from the sale of products and goods after deductions (-) the cumulative amount of revenue deductions (if any) incurred during the reporting year, including trade discounts, sales price reductions, and returned goods. The data on revenue deductions from sales to associated companies is taken from the detailed accounting records of Account 521 – Trade Discounts; Account 531 – Returned Goods; and Account 532 – Sales Price Reductions of related-party transactions.

– Column (4) “Costs”: This reflects the total amount payable to affiliated businesses for the purchase of raw materials, supplies, and goods from those affiliated businesses. It has been recorded as a cost of goods sold to determine the business results. During the reporting period, data is taken from the total value of raw materials, supplies, and goods debited in the detailed accounting ledger under Account 152 “Raw Materials and Supplies” or Account 156 “Goods” or Account 155 “Finished Goods” and other related accounts that have been paid or are due to the seller, which is an affiliated enterprise, and have been used in the production and business process, and accounted for in Account 632 “Cost of Goods Sold”, Account 635 – Financial Expenses, Account 641 – Selling Expenses, Account 642 – Administrative Expenses in the reporting year.

  1. Services

This indicator reflects the value of services purchased from or sold to affiliated businesses. recorded as an expense or revenue In the reporting year, this includes details of the item "Net Revenue from Sales and Services" (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance), or of the items "Cost of Goods Sold" (Code 11 - Cost of Goods Sold, Account 635 - Financial Expenses, Account (Code 23), Account 641 - Selling Expenses (Code 24), Account 642 - Business Management Expenses (Code 25) in the reporting year of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented). (according to Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

The data to be recorded under the "Services" indicator (Section 2) must reflect in detail the types of services in sections 2.1, 2.2, 2.3, and 2.4 in the corresponding "Revenue, Other Income" and "Expenses" columns.

– Column (3) “Revenue, other income”: This reflects the total revenue realized during the fiscal year for the associated business providing services; based on the cumulative credit balance of the reporting year recorded in the detailed accounting ledger of Account 511 - "Revenue from sales and provision of services" (Level 2 Account 5113 - "Revenue from provision of services") opened for each associated customer during the reporting year.

In cases where service revenue deductions related to trade discounts and sales price reductions arise, the revenue from providing services to related enterprises in the reporting year is determined by the net value: Total cumulative revenue from providing services after deductions (-) cumulative revenue deductions (if any) incurred in the reporting year, including trade discounts and sales price reductions. The data on service revenue deductions provided to related enterprises is taken from the detailed accounting records of Account 521 – Trade Discounts; Account 532 – Sales Price Reductions of related-party transactions.

– Column (4) “Costs”: Reflects the total amount payable to the affiliated enterprise for the purchase of services provided by the affiliated enterprise. It has been recorded as a cost of goods sold to determine the business results. During the reporting period, data is taken from the total value of services provided, debited in the detailed accounting ledger of the relevant account, paid or payable to the supplier (an affiliated enterprise), used in the production and business process, and accounted for in Account 632 "Cost of Goods Sold", Account 635 "Financial Expenses", Account 641 "Selling Expenses", and Account 642 "Administrative Expenses" during the reporting year.

In which:

2.1. Research and Development

This indicator reflects the revenue from providing services to affiliated enterprises, or the value of services received from affiliated enterprises for research and development activities in the reporting year. It is a detail of the item "Net Revenue from Sales and Services" (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or a detail of the item "Enterprise Management Expenses" (Code 25 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded under the "Research and Development" indicator (Section 2.1):

– Column (3)“Revenue, other income”This is the total revenue from providing research and development services to affiliated enterprises during the reporting year; based on the cumulative credit balance recorded in the detailed accounting ledger of Account 511 “Revenue from sales and services” (Level 2 Account 5113 – Revenue from services provided) opened for affiliated enterprises regarding revenue from research and development activities during the reporting year. Or based on the net revenue from these services provided to affiliated enterprises if there are any revenue deductions.

– Column (4) “Cost” This is the total value of research and development services that the enterprise has purchased from affiliated enterprises during the reporting year; based on the cumulative debit balance in the detailed accounting ledger of Account 642 "Enterprise Management Expenses" for research and development expenses purchased from affiliated enterprises during the reporting year.

2.2. Advertising and Marketing

This indicator reflects the revenue from providing services to affiliated businesses, or the value of services received from affiliated businesses for advertising and marketing activities in the reporting year. It is a detail of the item "Net Revenue from Sales and Services" (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or of the item "Selling Expenses" (Code 24 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded under the "Advertising and Marketing" item (Section 2.2):

– Column (3) “Revenue, other income” This is the total revenue from providing advertising and marketing services to affiliated businesses during the reporting year; based on the cumulative credit balance recorded in the detailed accounting ledger of Account 511 “Revenue from sales and services” (Level 2 Account 5113 – Revenue from services provided) opened for affiliated businesses regarding advertising and marketing revenue during the reporting year. Or based on the net revenue from these services provided to affiliated businesses if there are any revenue deductions.

– Column (4) “Cost” This is the total value of advertising and marketing services that the enterprise has purchased from affiliated enterprises during the reporting year; based on the cumulative debit balance in the detailed accounting ledger of Account 641 "Selling Expenses" for advertising and marketing expenses purchased from affiliated enterprises during the reporting year.

2.3. Business management, consulting, and training

This indicator reflects revenue from providing services to affiliated businesses, or the value of services received from affiliated businesses for management or consulting and training activities during the reporting year. It is a detail of the "Net Revenue from Sales and Services" item (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or a detail of the "Business Management Expenses" item (Code 25 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance). (October 9, 2002, by the Organizing Committee).

Data to be recorded under the indicator “Business Management and Training Management” (Section 2.3):

– Column (3) “Revenue, other income” This is the total revenue from providing management and training consulting services to affiliated businesses during the reporting year; based on the cumulative credit balance recorded in the detailed accounting ledger of Account 511 “Revenue from sales and services” (Level 2 Account 5113 – Revenue from services provided) opened for affiliated businesses regarding revenue from management and training consulting activities during the reporting year. Or based on the net revenue from these services provided to affiliated businesses if there are any revenue deductions.

– Column (4) “Cost” This is the total value of management fees and training consulting fees that the enterprise has purchased from affiliated enterprises during the reporting year; based on the cumulative debit balance in the detailed accounting ledger of Account 642 "Enterprise Management Expenses" for management and training consulting fees purchased from affiliated enterprises during the reporting year.

2.4. Other services

This indicator reflects revenue from providing services to affiliated enterprises, or the value of services received from affiliated enterprises for performing services other than those mentioned in sections 2.1, 2.2, and 2.3 in the reporting year. It is a detail of the item "Net Revenue from Sales and Services" (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000, and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002, of the Ministry of Finance) or of the item "Enterprise Management Expenses" (Code 25 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000, and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002, of the Ministry of Finance) (October 9, 2002, by the Organizing Committee).

Data to be recorded under the "Other Services" item (Section 2.4):

– Column (3) “Revenue, other income” This is the total revenue from providing other services to the affiliated enterprise during the reporting year; based on the cumulative amount of credit entries in the detailed accounting ledger of Account 511 “Revenue from sales and provision of services” (Level 2 Account 5113 – Revenue from provision of services) opened for the affiliated enterprise regarding revenue from other services during the reporting year. Or based on the net revenue from this service provided to the affiliated enterprise if there are any revenue deductions.

– Column (4) “Cost” This is the total value of other services that the enterprise has purchased from affiliated enterprises during the reporting year; based on the cumulative debit balances in the detailed accounting records of Account 632 "Cost of Goods Sold", Account 641 "Selling Expenses", Account 642 "Administrative Expenses" and other related accounts for other services purchased from affiliated enterprises during the reporting year.

  1. Financial activities

This indicator reflects financial income from associated companies, or financial expenses provided by associated companies from activities such as licensing and similar services; borrowing or lending during the reporting year, as detailed under the item Net Revenue from Sales and Services (Code 10 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance). or of the Financial Expenses item (Code 22), and the Business Management Expenses item (Code 25 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

The figures to be recorded in the "Financial Activities" item (Section 3) are the sums of items 3.1, 3.2, and 3.3 in the "Revenue, Other Income" column and the "Expenses" column, respectively.

3.1. Royalties and similar fees

This indicator reflects revenue from royalties and similar services provided to affiliated businesses, or the value of services received from affiliated businesses regarding royalties and similar services during the reporting period. It is a detail of the Financial Operating Revenue item (Code 11 of Form B-02DN - Business Operating Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or a detail of the Financial Expenses item (Code 12 of Form B-02DN - Business Operating Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded under the item “Royalties and similar fees” (Section 3.1):

– Column (3) “Revenue, other income” This refers to financial operating revenue from royalties and similar fees for the reporting year for associated businesses; based on the cumulative credit entries in the detailed accounting records of Account 515 "Financial Operating Revenue" for the reporting year. Or based on the net revenue from these royalties provided to associated businesses if there are any revenue deductions.

– Column (4) “Cost” This is the total value of royalties and similar items that the enterprise has purchased from affiliated enterprises and has depreciated, or recognized in full, or allocated to production and business expenses in the reporting year; Based on the cumulative debit balances in the detailed accounting records of Account 632 "Cost of Goods Sold", Account 642 "Business Management Expenses" and other related accounts regarding royalties and similar items purchased from affiliated enterprises and recognized as expenses, the business results for the reporting year are determined.

3.2. Interest on deposits and loans:

This indicator reflects the revenue from interest and loans from associated businesses, or interest payable to associated businesses during the reporting year, as detailed under the Financial Activities Revenue item (Code 11 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or as detailed under the Financial Expenses item (Code 12 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded in the "Interest on deposits and loans" item (Section 3.2):

– Column (3) “Revenue, other income” This is the total value of interest payment transactions on loans; the credit amount recorded in the detailed accounting ledger of Account 515 – “Financial Activities Revenue” opened for affiliated enterprises borrowing money during the reporting period.

3.3. Interest on loans

This indicator reflects the total amount payable to related parties for interest on loans taken out by related parties, and is a detail of the "Interest Payable" item (Code 23 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded in the "Interest on Loans" item (Section 3.3):

- Column (4) “Cost” This is the total interest expense payable on borrowed funds during the reporting year, taken from the debit entries for interest expenses recorded in the detailed accounting ledger of Account 635 - "Financial Expenses" opened for affiliated enterprises lending money during the reporting period.

  1. Other income

4.1. Debt forgiveness

This indicator reflects the extraordinary income resulting from debt write-offs by affiliated enterprises or the extraordinary expenses resulting from debt write-offs by affiliated enterprises during the reporting period. It is a detail of the "Other Income" item (Code 31 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance) or the "Business Management Expenses" item (Code 25 of Form B-02DN - Business Performance Results issued under Decision No. 167/2000/QD-BTC dated October 25, 2000 and amended and supplemented by Circular No. 89/2002/TT-BTC dated October 9, 2002 of the Ministry of Finance).

Data to be recorded under the "Debt Write-off" item (Section 4.1):

– Column (3) “Revenue, other income” This is the value of the debt written off by the affiliated company for the business; it is taken from the credit entry in the detailed accounting ledger of Account 711 - "Other Income" opened for the affiliated company to write off the debt during the reporting period.

– Column (4) “Cost” This is the value of the debt that the enterprise writes off for the affiliated entity, taken from the debit entry in the detailed accounting ledger of Account 642 "Enterprise Management Expenses" opened for the affiliated enterprise whose debt is written off during the reporting period.

 

PART B. INFORMATION ON METHODS OF DETERMINING PRICE

Column (9) “Applicable transactions”: Record the code/symbol of the transaction in section A. For example: if method (1) is applied to transaction 3.2, then record 3.2 in the first line of column (9) “Applicable transactions”

APPENDIX 2 - CERTIFICATE/INTERNATIONAL COOPERATION  

SOME REFERENCE RECIPES FOR

APPLYING THE MARKET PRICE DETERMINATION METHOD

(Issued together with Circular No. 117/2005/TT-BTC dated December 19, 2005)

  1. PRINCIPLES FOR APPLYING THE FORMULAS:

The formulas presented in this Appendix reflect the most basic calculation methods applied based on accounting data in accordance with Vietnamese accounting standards. While performing comparative analysis and adjusting for differences, businesses may add (+) or subtract (-) certain components of revenue, expenses, or assets in the denominator or numerator of the calculation formula, but must ensure that the components in the numerator and denominator of the formula for calculating the ratio of related-party transactions are similar to the components in the numerator and denominator of the formula for calculating the ratio of the independent transaction selected for comparison. The added or subtracted components must be clearly accounted for in accordance with the accounting regulations.

For example: Suppose company A is an affiliated company and company B is an independent company, with the following accounting data used for comparison of ratios:

  A B
Net revenue 800 900
Cost of goods sold 550 600
Cost of sales   60
General administrative expenses   100
Selling and general administrative expenses (general accounting) 150  
Interest expense 50 0
Revenues 50 140

      Assuming we need to compare the ratios related to the cost of goods sold and gross profit, the gross profit values ​​(calculated as net revenue – cost of goods sold) of A and B are not significantly different, so we can use the basic formula to calculate them.

      Suppose we need to compare the rate of return (business efficiency) between A and B. Due to the difference in interest expenses that A has to pay on borrowed money, the rate of return is calculated differently.

Regarding net profit margin on revenue, businesses can adjust the calculation of the net profit margin before paying interest expenses as follows:

– Net profit margin/revenue before interest expense of A:

 (50 + 50): 800 x 100% = 12,5%

– Net profit margin/revenue before interest expense for B:

 140: 900 x 100% = 15,556%

  1. FORMULAS FOR CALCULATING RATE OF MONEY ACCORDING TO EACH PRICING METHOD:
  2. Resale price method

The purchase price from related-party transactions is determined based on the following formula:

Purchase price = [Dt – (Dt xtd)] – Ck

In which:

  1. Dt: net revenue;
  2. Ck: Other costs related to the purchase of the product (e.g., shipping costs, taxes, import fees, etc.) incurred outside the scope of related-party transactions.
  3. tdThe gross profit margin on revenue is determined by the following formula:

Net revenue – Cost of goods sold

Gross profit margin = ———————————————— x 100%

on revenue Net revenue

  1. Cost plus profit method

2.1. The selling price of a product in a related-party transaction is determined based on the following formula:

Selling price = Z + (Z xtc)

In which:

  1. Z: The cost of goods sold (or production cost) of the product being sold includes direct and indirect production costs;

Where necessary, to ensure the equivalence of accounting figures between the selected independent transaction for comparison and the related-party transaction:

Z = Cost of Goods Sold + Selling Expenses + Administrative Expenses

  1. tcThe gross profit margin on the cost of goods sold is calculated using the following formula:

Net revenue – Z

Gross profit margin on cost of goods sold = ————————– x 100%

Z

2.2. How to recalculate Z based on the cost plus profit method in cases where revenue has already been reflected at market prices:

Net revenue

Z = —————————

1 + tc

  1. Profitability comparison method

3.1. Formula for calculating the ratio of net income before corporate income tax to revenue:

EBT Rate = EBT/Dt x 100%

In which:

  1. EBT: Net income from business operations before corporate income tax. Where necessary to ensure accounting equivalence between the selected independent transaction for comparison and the related-party transaction, EBT may include interest expense or depreciation expense.
  2. Dt: Net revenue from business operations.

3.2. Formula for calculating the ratio of net income before tax from business operations to total business operating expenses:

Net income

Net income ratio = ————————- x 100%

on cost Total cost

In which:

  1. Net income = net revenue – total expenses.
  2. Total cost: This refers to all reasonable deductible expenses. Where necessary to ensure accounting equivalence between the independent transaction selected for comparison and the related-party transaction, the total cost may exclude consumption taxes (e.g., value-added tax, excise tax).

3.4. The formula for calculating the net income (before tax) return on assets is as follows:

Net income

Net income ratio = ——————————————– x 100%

Before tax on assets used to generate income.

In which:

  1. Assets used to generate income typically include assets used in production and business operations, encompassing both fixed and current assets. Asset figures are calculated as the average of the beginning and ending balances.
  2. The numerator of the above calculation excludes income from investment activities (e.g., income received from a business investment in a joint venture or partnership). Similarly, the denominator of the calculation excludes the value of assets used for investment activities (e.g., capital contributions to joint ventures or partnerships).
  3. Profit Separation Method

Formula for allocating profits according to capital contribution ratio:

Profit allocated to Total Profit / Equity Contribution

business establishment = ———————— x business establishment

Total investment capital

In which:

  1. Capital contribution: includes capital in the form of money, services, and other assets that can be converted into monetary value.
  2. Total investment capital: the total amount of capital contributed by all parties involved in the transaction.
  3. Total profit: profit (loss) before corporate income tax generated from related-party transactions.
  4. HOW TO CALCULATE QUARTERS AND HUNDRED ARTICLES
  5. How to calculate the quartile (to determine the standard market price range):

1.1. Formula:

Q1-1

Q1=XQ1 min  + hQ1        

fQ1

Q3-1

Q3= XQ3 min + hQ3

fQ3

In which:

Q1 – The lowest (min) value of the standard market price range (first quartile)
Q3 – The highest (max) value of the standard market price range (third quartile)
XQ1 min, XQ3 min – The lower limit of the quartile set
hQ1, hQ3 – Interquartile range
SQ1-1 – Cumulative frequency of standing groups
SQ3-1 – Before the quartile group
fQ1, FQ3 – Frequency of the quartile group

To determine quartiles, we usually use the method of adding up the frequencies. The first quartile is the variable corresponding to a cumulative frequency equal to 1/4 of the sum of the frequencies, i.e.: (∑fi)/4. The third quartile is the variable corresponding to a cumulative frequency equal to ¾ of the sum of the frequencies, i.e.: (3*∑fi) / 4

with ∑fi is the sum of the frequencies: ∑fi = f1+f2+f3+…….+fn

1.2. Illustrative examples

For example: In 200x, company A selected independent companies for comparison with the following net return on assets figures: 1; 1.25; 1.25; 1.5; 1.5; 1.75; 2; 2; 2; 2.25; 2.5; 2.75; 3

We can determine the confidence interval for the above values ​​as follows:

1.2.1. Calculation method without using Excel:

– Create a summary table:

Profit margint on property Frequency of the ratios (fi) Accumulated frequency  
1 f1=1 1 f1
1.25 f2=2 3 f1+f2
1.5 f3=2 5 f1+f2+f3
1.75 f4=1 6 f1+f2+f3+f4
2 f5=3 9 f1+f2+f3+f4+f5
2.25 f6=1 10 f1+f2+f3+f4+f5+f6
2.5 f7=1 11 f1+f2+f3+f4+f5+f6+f7
2.75 f8=1 12 f1+f2+f3+f4+f5+f6+f7+f8
3 f9=1 13 f1+f2+f3+f4+f5+f6+f7+f8+f9
Total (∑fi) 13    

 – Determine the confidence interval:

=> The first quartile is the ratio corresponding to the cumulative frequency of 13/4 = 3.25, which is equal to 1.5 (3 < 3.25 < 5).

=> The third quartile is the ratio corresponding to the cumulative frequency of 3*13/4 = 9.75, which is equal to 2.25 (9 < 9.75 < 10).

Thus, the confidence interval for the above ratio is approximately (1.5; 2.25).

1.2.2. Calculation method using the Quartile function in Microsoft Excel

+ Create a calculation range in Excel consisting of cells containing the specified rate values ​​(this could be a column or a row).

+ Move to a different region and execute the Quartile command to find the corresponding percentiles. The command syntax is as follows:

QUARTILE (Area to be calculated, parameter)

  • Area to be calculated: It is the region containing rate values.
  • Parameters: Percentile values: take the corresponding values ​​1, 2, 3, 4

=> The first quartile is the value of the QUARTILE function with parameter equal to 1.

=> The third quartile is the value of the QUARTILE function with parameter 3.

A confidence interval is the range of values ​​between the first and third quartiles.

For example: We also have data similar to the example in Part 1:

  A B C
1 The ratio value found Determine the quartile
2 1 First quartile = QUARTILE (A2: A4,1)
3 1.25 Third quartile = QUARTILE (A2: A4,3)
4 1.25 Median = QUARTILE (A2: A4,2)
5 1.5    
6 1.5    
7 1.75    
8 2    
9 2    
10 2    
11 2.25    
12 2.5    
13 2.75    
14 3    

From that, we can determine the confidence interval of the ratio values ​​as the range between the first and third quartiles: (1.5;2.25), median: 2

  1. How to calculate percentiles (using the Percentile function in Excel)

2.1. Calculation method

+ Create a calculation range in Excel consisting of cells containing the specified rate values ​​(this could be a column or a row).

+ Move to a different region and execute the Quartile command to find the corresponding percentiles. The command syntax is as follows:

PERCENTILE (Area to be calculated, parameter)

  • Area to be calculated: It is the region containing rate values.
  • Parameters: Equivalent quartile values: take corresponding values ​​of 0.25, 0.5, 0.75. In this case: the median value is the value corresponding to the parameter equal to 0.5.

=> The first quartile is the value of the PERCENTILE function with parameter equal to 0.25

=> The third quartile is the value of the PERCENTILE function with parameter equal to 0.75

A confidence interval is the range of values ​​between the first and third quartiles.

2.2. Illustrative examples

For example: We also have data similar to the example in Part 1:

  A B C
1 The ratio value found Determine the quartile
2 1 First quartile = PERCENTILE (A2: A4,0.25)
3 1.25 Third quartile = PERCENTILE (A2: A4,0.75)
4 1.25 Median = PERCENTILE (A2: A4,0.5)
5 1.5    
6 1.5    
7 1.75    
8 2    
9 2    
10 2    
11 2.25    
12 2.5    
13 2.75    
14 3    

From that, we can determine the confidence interval of the ratio values ​​as the range between the first and third quartiles: (1.5;2.25.) and the median: 2

 

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Circular 117/2005/TT-BTC provides guidance on determining market prices in business transactions between related parties.
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