How to determine taxable price in related-party transactions in Vietnam?

What are cases of related-party transactions in Vietnam?

Pursuant to the provisions in Clause 1, Article 5 of Decree 132/2020/ND-CP, the following regulations apply:

Related Parties

1. Related parties (hereinafter referred to as "associated parties") are parties that have a relationship under one of the following circumstances:

a) One party directly or indirectly participates 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.

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Thus, based on the regulations mentioned above, an related-party transaction is established when:

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

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

How to determine taxable price in related-party transactions in Vietnam? (Image from the Internet)

What are the regulations regarding parties in related-party transactions in Vietnam?

Based on Clause 2, Article 5 of Decree 132/2020/ND-CP, the specific provisions for parties with related-party transactions are as follows:

- An enterprise holds directly or indirectly at least 25% of the owner's capital of another enterprise;

- Both enterprises have at least 25% of the owner's capital held directly or indirectly by a third party;

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

- One enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured by the financial sources of the associated party and similar financial transactions) on the condition that the loan amount is at least 25% of the owner's capital of the borrowing enterprise and accounts for over 50% of the total value of medium- and long-term debts of the borrowing enterprise;

- One enterprise appoints members of the management board or exercises control over another enterprise, provided the number of members appointed by the first enterprise constitutes more than 50% of the total members of the management board or control of the second enterprise; or a member appointed by the first enterprise has the authority to decide the financial or business policies of the second enterprise;

- Two enterprises have more than 50% of the members of the management board or share a member of the management board who has the authority to decide financial or business policies appointed by a third party;

- Two enterprises are operated or controlled in terms of personnel, finance, and business activities by individuals with one of the following relationships: husband, wife; biological parents, adoptive parents, father-in-law, mother-in-law; biological children, adopted children, stepchildren of the wife or husband, daughter-in-law, son-in-law; siblings with the same parents, siblings with the same father but different mothers, siblings with the same mother but different fathers, brothers-in-law, sisters-in-law of individuals with the same parents or the same father but different mothers, the same mother but different fathers; paternal or maternal grandparents; paternal or maternal grandchildren; aunts, uncles, and biological children;

- Two business establishments with a headquarters and a permanent establishment relationship, or being permanent establishments of a foreign organization or individual;

- Enterprises are controlled by an individual through their capital contribution to that enterprise or by directly participating in the management of the enterprise;

- Other cases where an enterprise is subject to the operation, control, or decision-making in practice concerning the production and business activities of another enterprise;

- Enterprises engage in transactions of transferring or receiving at least 25% of the owner’s capital in enterprises during the taxable period; loans or lending of at least 10% of the owner’s capital at the time the transaction arises during the taxable period with individuals managing or controlling the enterprise or with individuals within a relationship specified in Point g, Clause 2, Article 5 of Decree 132/2020/ND-CP.

How to determine taxable price in related-party transactions in Vietnam?

According to Clause 5, Article 42 of the Law on Tax Administration 2019, the principles of tax declaration and calculation are stipulated as follows:

Principles of tax declaration and calculation

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5. The principles of declaration and determination of taxable price for related-party transactions are regulated as follows:

a) Declare and determine the price of related-party transactions based on the principle of analysis and comparison with independent transactions and the principle that the essence of operations and transactions determines the tax obligation to define the tax obligation as in transactions between independent parties;

b) related-party transaction prices are adjusted according to independent transactions to declare and identify the payable tax amount following the principle of not reducing taxable income;

c) Taxpayers with small scale, low tax risk are exempt from implementing the provisions in point a, point b of this clause and are subject to a simplified mechanism in the declaration, determination of related-party transaction prices.

6. The principles of tax declaration for the advance agreement mechanism on the method of determining taxable price are regulated as follows:

a) The application of the advance agreement mechanism on the method of determining taxable price is implemented based on the proposal of the taxpayer, consensus between the tax authority and the taxpayer according to unilateral, bilateral, and multilateral agreements between the tax authority, taxpayer, and foreign tax authorities, relevant territories;

b) The application of the advance agreement mechanism on the method of determining taxable price must be based on taxpayer information, commercial database with verified legal assurance;

c) The application of the advance agreement mechanism on the method of determining taxable price must be approved by the Minister of Finance before implementation; for bilateral, multilateral agreements involving foreign tax authorities, implementation is in accordance with the law on international agreements and treaties.

Thus, the principle of determining the taxable price for related-party transactions is regulated as follows:

- Determine the price of related-party transactions according to the principle of analysis, comparison with independent transactions and the principle that the nature of operations and transactions determines the tax obligation to identify the tax obligation to be paid as in transactions between independent parties;

- related-party transaction prices are adjusted according to independent transactions to determine the payable tax amount according to the principle of not reducing taxable income;

- Taxpayers with small scale, low tax risk are exempt from implementing the provisions in point a, Clause 5, Article 42 of the Law on Tax Administration 2019, point b, Clause 5, Article 42 of the Law on Tax Administration 2019 of this clause and are subject to a simplified mechanism in determining related-party transaction prices.