RELATED PARTY TRANSACTION OVERVIEW

1. What is Affiliate Trading?

Affiliate transaction means a transaction arising between related parties in the process of production and business, including: Transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring delivery, transfer of goods, provision of services; loans, loans, financial services, financial guarantees and other financial instruments; buy, sell, exchange, rent, lease, borrow, lend, transfer, transfer tangible assets, intangible assets and agree to buy, sell, use common resources such as assets, capital, labor activities, cost sharing among related parties, except business transactions for goods and services subject to the State’s price adjustment scope in accordance with the provisions of the law on prices.

2. Some definitions worth noting

“Independent comparables” are independent transactions between unrelated parties or enterprises performing independent transactions selected on the basis of analysis, comparison and identification of comparables. similarity to determine the price, profit rate, profit distribution ratio in order to determine the tax obligations payable to the state budget of taxpayers, ensuring compliance with the provisions of the Law on Tax Administration and the Law on Taxation. enter business.

A “material difference” is a difference in price-forming factors that has an important or significant effect on the price levels, profit margins and profit distribution ratios of the parties to a transaction.

“Independent transaction value range” means a set of values ​​of the price, profit rate or profit distribution ratio of independent comparables selected by the Tax Authority or the taxpayer on the basis of collected database. Values belonging to this set have similar confidence levels. In case of necessity, apply statistical probability method to determine the range of standard independent transaction values and median values that are representative, universal, and common in order to increase the reliability of the set of data. independent comparator.

“Standard Independent Transaction Range” is the set of values from the 35th to the 75th percentile; The median of the standard independent transaction range is the 50th percentile value according to the statistical probability function.

3. Subjects using the reporting service of related transactions

Organizations that produce and trade in goods and services (hereinafter referred to as taxpayers) are corporate income tax payers that have transactions with related parties according to current regulations.

The parties that have an associated relationship (hereinafter referred to as the “affiliated party”) who need the advisory service of preparing a report on associated transactions are the parties that have a relationship in one of the following cases:

a) One party participates directly or indirectly in the management, control, capital contribution or investment in the other party;

b) The parties are directly or indirectly subject to the management, control, capital contribution or investment of another party.

And is specified as follows:

a) One enterprise holds directly or indirectly at least 25% of the contributed capital of the owner of the other enterprise;

b) Both enterprises have at least 25% of the owner’s contributed capital held directly or indirectly by a third party;

c) One enterprise is the largest shareholder in terms of the owner’s capital contribution and holds directly or indirectly at least 10% of the total shares of the other enterprise;

d) An enterprise guarantees or lends to another enterprise a loan of any kind (including loans from third parties secured from the financial resources of an associated party and financial transactions of a similar) provided that the loan amount is at least 25% of the contributed capital of the owner of the borrowing enterprise and accounts for more than 50% of the total value of medium and long-term debts of the borrowing enterprise;

đ) An enterprise appoints a member of the management board to operate or take control of another enterprise provided that the number of members appointed by the first enterprise accounts for more than 50% of the total number of members of the executive management board. or take control of a second enterprise; or a member appointed by the first enterprise has the power to decide the financial policies or business activities of the second enterprise;

e) Two enterprises with more than 50% members of the management board or the same member of the management board with the right to decide on financial policies or business activities are appointed by a third party;

g) Two businesses that are operated or controlled in terms of human resources, finance and business operations by individuals in one of the husband and wife relationships; natural parents, adoptive parents, stepfather, stepmother, parents-in-law, parents-in-law; natural, adopted, step-child of a spouse, daughter-in-law, son-in-law; brother, sister, half-brother, half-brother, half-brother, half-brother, brother-in-law, brother-in-law, sister-in-law, sister-in-law of the person of the same parent or half-brother, with a different mother; paternal grandparents, maternal grandparents; grandson, grandchild; aunt, uncle, uncle, aunt and nephew;

h) Two business establishments having the relationship between head office and permanent establishment or both are permanent establishments of foreign organizations and individuals;

i) Enterprises controlled by an individual through the individual’s capital contribution to that enterprise or directly participating in the management of the enterprise;

k) Other cases in which the enterprise is subject to the actual operation, control and decision on production and business activities of the other enterprise;

l) The enterprise has transactions of transferring or receiving at least 25% of the contributed capital of the enterprise’s owner in the tax period; Borrowing or lending at least 10% of the owner’s contributed capital at the time of a transaction in the tax period with an individual who runs or controls the business or with an individual in a relationship as prescribed in Clause 1 of this Article. point g of this clause.

4. Affiliate transaction records

Taxpayers are responsible for keeping and providing the associated transaction price determination dossier, which includes information, documents, data and vouchers, including:

• Information about the affiliate relationship and related transaction according to Appendix I;
• National file means information about related party transactions, policies and methods of determining prices for related transactions, which are made and kept at the taxpayer’s office according to the list of information and documents. specified in Appendix II;
• The global profile is information on the multinational corporation’s business activities, its associated transaction pricing policies and methods globally, and its income distribution and distribution policies. activities and functions in the value chain of the corporation according to the list of information and documents specified in Appendix III;
• The Transnational Profit Report of the Supreme Parent Company according to Appendix IV.

In which, Appendix I must be prepared and submitted at the same time of declaration and finalization of corporate income tax. The dossier includes the report on associated transactions and the remaining 3 appendices kept at the enterprise. Present at the request of the tax authority to provide information. When the tax authority conducts inspection and examination of taxpayers. The time limit for providing Affiliate Transaction Reports does not exceed 15 working days.

5. Principles when making related transaction reports

Some of the principles and regulations for reporting include:

• Analysis and comparison of related-party transactions performed according to the principle that the nature of operations and transactions determines tax obligations to determine the nature of related-party transactions: The nature of transactions is compared between legal contracts or documents. documents, transaction agreements of the parties associated with the actual implementation of the parties. The nature of the transaction is determined by the method of collecting information, evidence, data about the transaction and risks of the related parties in the actual production and business activities.
• Analysis and comparison of associated transactions with independent transactions: The basis for comparing contracts, documents, agreements and economic, commercial and financial relations in related transactions of taxpayers is data, actual transaction performance between related parties for comparison with business decisions that can be accepted by independent parties under similar conditions. Analysis and comparison must ensure the similarity between an enterprise performing an independent transaction and an enterprise having an associated transaction or an independent transaction with an associated transaction. price; profit rate or profit distribution ratio between parties. In case there is a differentiating factor that materially affects the price level; profit margin or profit distribution ratio, must be analyzed, identified and adjusted to eliminate such material difference.
• Consider the entire process of developing, maintaining, protecting and exploiting intangible assets.

The application of these principles will help tax authorities not recognize, or reclassify related transactions in case these transactions reduce taxable income or tax liability of the enterprise.

6. Fees are not deducted for affiliate transactions

Costs of related party transactions that are not suitable for the nature of independent transactions or do not contribute to the generation of revenue or income for taxpayers’ production and business activities shall not be included in deductible expenses when determining income subject to corporate income tax in the period, including:

• Expenses for payment to affiliates who do not carry out any production or business activities related to the taxpayer’s lines of business, production and business activities; have no related rights and responsibilities for the property, goods and services provided to the taxpayer;
• Expenses for payment to an associate who has production and business activities but the scale of assets, number of employees and production and business functions are not commensurate with the transaction value received by the related party from the associate. taxpayer;
• Expenses for payment to an associate who are residents of a country or territory that do not collect corporate income tax, do not contribute to revenue, or add value to their production and business activities. taxpayer.

7. Cases exempted from declaration and preparation of related transaction records

Taxpayers are exempted from declaration and determination of related-party transaction prices in Sections III and IV of Appendix I, and exempted from making transfer pricing documents in case only transactions with related parties are involved. corporate income tax taxpayers in Vietnam, apply the same corporate income tax rate as the taxpayer and neither party is entitled to corporate income tax incentives in the tax period, but must declare the basis exemptions in Section I, Section II in Appendix I.

Taxpayers are responsible for declaring and determining transfer pricing prices according to Appendix I, but they are exempted from making transfer pricing dossiers in the following cases:

• Taxpayers have associated transactions but the total revenue generated in the tax period is less than VND 50 billion and the total value of all related transactions arising in the tax period is less than VND 30 billion;
• Taxpayers who have signed a pre-agreement on the method of determining the taxable price shall submit the annual report in accordance with the law on the pre-agreement on the method of determining the taxable price;
• Taxpayers conduct business with simple functions, do not generate revenue or expenses from the exploitation and use of intangible assets, have a turnover of less than VND 200 billion, apply a net profit margin of less than VND 200 billion. minus interest expense and corporate income tax (excluding the difference between revenue and expenses of financial activities) from net revenue, including the following areas:

– Distribution: From 5% or more;

– Production: From 10% or more;

– Processing: From 15% or more.

8. Methods of determining associated transaction prices

Enterprises may choose one of the following methods of determining transfer pricing:

• Method of comparing associated transaction prices with independent transaction prices
• Method of comparing the rate of profit of the taxpayer with the rate of profit of the independent comparator:

• • Method of comparing gross profit to sales ratio.
  • Comparative method of gross profit on cost of goods (cost plus interest method).
  • Method of comparing net profit margin.

• Methods of distributing profits among affiliated parties.

9. Important components of the associated transaction profiling service

Consists of 6 basic parts:

• Overview of the Group and the company under consideration;
• Affiliate transaction overview;
• Industry analysis;
• Functional analysis;
• Select an appropriate method of determining market prices;
• Economic Analysis or Comparative Analysis (the most important part of the Report).

10. Assessment and prevention of transfer pricing risk

Risk assessment subject to inspection on transfer pricing

Enterprises with the following characteristics are considered to be at high risk of transfer pricing:

• Annual revenue growth but continuous loss over the years, sudden decrease in profit;
• Enterprises in the same industry operate effectively, but enterprises operate inefficiently and suffer losses;
• Enterprises have associated transactions but do not submit the declaration of associated transactions;
• Enterprises with associated transaction value accounting for a large proportion of revenue or expenses;
• Affiliates operating in countries with lower CIT rates than Vietnam;
• Have sensitive affiliate transactions (pay royalties, pay management fees, franchise fees, pay high-interest loans);

In case the enterprise is subject to high risk, in order to limit the risk and proactively identify the causes to explain to the authorities, the enterprise should seek the support/consultation of specialized auditing firms. providing consulting services on reporting related transactions.

Hedging against transfer pricing risk

• Enterprises must regularly update the situation of the market, industry, their competitors in terms of growth, finance, purchase and sale prices of goods, etc.
• Join associations in your industry self to gather industry information;
• Any new associated transaction must have an estimate of its impact on profits for the year, if a significant reduction in profits as a result of such an associated transaction would result in a substantial increase in the risk;
• Do not attempt to transfer pricing. A company with no transfer pricing intentions and operating for profit is always less risky than a company with transfer pricing intentions.