05 Aug Related-Party Transactions – What You Need To Know
What is a Related-Party Transactions ?
“Related-party transactions” are transactions arising between parties having related-party relationships during their production and business process, including purchase, sale, exchange, hire and rent with(out) rental fee for, transfer, and assignment, of machinery, equipment, and commodities, and providing services; borrowing, lending, financial service, financial guarantee, and other financial instruments; purchase, sale, exchange, hire and rent with(out) rental fee for, transfer and assignment of tangible assets, intangible assets, and agreement on joint use of resources such as synergies and cooperations in utilization of human resources; sharing of costs between related parties.
Taxpayers engaged in transfer pricing must make declaration of their related-party transactions; eliminate factors causing reduction in tax obligations that are controlled or affected by related-party relationships in order to define tax obligations imposed on related-party transactions which are comparable to independent transactions having the same requirements.
Based on the principles applied to transactions between independent parties which do not have any related-party relationship in tax treaties in force in Vietnam, the Tax authorities should manage, check and inspect prices of related-party transactions performed by taxpayers in order to refuse to recognize related-party transactions reducing tax obligations of enterprises to the state budget and make adjustment to the prices of related-party transactions so as to correctly define tax obligations.
Related parties are parties having relationships where
A party participates directly or indirectly in the management, control or equity of the other, or puts investment in the other or Parties participate directly or indirectly in the common management, control, or the capital of or put investment in, other parties. The related parties referred shall be subject to the following specific provisions:
- An enterprise participates directly or indirectly in at least 25% of equity of the other enterprise.
- Both enterprises own at least 25% of equity in which a third party participates directly or indirectly.
- An enterprise is the shareholder who has the greatest ownership of equity of the other enterprise or participates directly or indirectly in at least 10% of total share capital of the other enterprise.
- An enterprise guarantees or offers another enterprise a loan under any form to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise.
- An enterprise appoints a member of the executive board responsible for the leadership or control of another enterprise provided the number of members appointed by the former accounts for more than 50% of total number of members of the executive board responsible for the leadership or control of the latter, or a member appointed by the former has the right to decide financial policies or business activities of the latter.
- Both enterprises appoint more than 50% of membership of the executive board or have one member of the executive board authorized to decide financial policies or business activities who is appointed by a third party.
- Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle, and nibling.
- Both business entities have transactions, either between their head offices and permanent establishments or between permanent establishments of overseas entities or individuals.
- One or more enterprises is/are put under control of one individual through either his/her capital participation into that enterprise or his direct involvement in administration of that enterprise;
- In other cases where an enterprise is in reality under management of, or control of decision on, business activities of the other enterprise.
Obligations of taxpayers in declaration and determination of transfer prices
Taxpayers engaged in the transfer pricing shall be held responsible for declaring and determining transfer prices, and shall be exempted from taking on obligations to pay corporate income tax within the territory of Vietnam.
Taxpayers engaged in the transfer pricing shall be held responsible for declaring information about related-party relationships and transactions and submitting it together with the corporate income tax finalization return.
Taxpayers shall be responsible for retaining and providing the related-party transactions pricing documentation package, including Local file, Master file Country-by-Country report.
Transfer pricing documentation package must be prepared before the time of filing corporate income tax finalization returns each year, and must be stored and presented to meet the demand for information requested by tax authorities. When a tax authority carries out transfer pricing audit, the time limit for provision of the transfer pricing documentation package shall not exceed 15 working days from the date of receipt of request from provision of information.
Safe harbor for transfer pricing documentation
- A taxpayer shall be exempted from the transfer pricing documentation requirements referred if it is engaged in a related-party transactions with an entity that must pays corporate income tax within the territory of Vietnam, is subject to the same corporate income tax rate as applied to the taxpayer, and where neither of them is not offered the corporate income tax incentive within a specified tax period, but shall be required to provide bases for such exemption.
- The taxpayer shall be responsible for declaration of transfer pricing information but shall be exempted from the transfer pricing documentation in the following circumstances:
+ Taxpayer is engaged in the transfer pricing but the total revenue arising within a specified tax period is less than VND 50 billion and the total value of the related-party transactions arising within a specified tax period does not exceed VND 30 billion.
+ Taxpayer already entering into Advance Pricing Agreement (APA) has submitted the annual report in accordance with legislation on Advance Pricing Agreement. For those related party transactions which are not covered by the APA, taxpayers are obliged to comply with the aforesaid transfer pricing documentation requirements.
+ Taxpayer performing business activities by exercising routine functions, neither generating any revenue nor incurring any cost from operation or use of intangible assets, generating sales of less than VND 200 billion, as well as applying the ratio of net operating profit before loan interest and corporate income tax relative to sales revenue, engages in related-party transactions in the following sectors: Distribution: At least 5%; Manufacturing: At least 10%; Toll manufacturing: At least 15%. Where taxpayer does not comply with the profit margins stipulated in this point, the aforesaid transfer pricing documentation shall be required.
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