Which costs are not be charged as deductible costs upon determination of the income subject to the CIT for enterprises engaged in related-party transactions within a taxable period in Vietnam?

Which costs are not be charged as deductible costs upon determination of the income subject to the CIT for enterprises engaged in related-party transactions within a taxable period in Vietnam?

Pursuant to Clause 1, Article 16 of Decree 132/2020/ND-CP, costs that are not be charged as deductible costs upon determination of the income subject to the CIT for enterprises engaged in related-party transactions within a taxable period include:

costs of related party transactions that do not align with the nature of independent transactions or do not contribute to generating revenue or income for the taxpayer's production and business activities are not deductible when determining corporate taxable income during the period, including:

- Payments to a related party that does not engage in any production or business activities related to the taxpayer’s industry, production, or business activities; does not have related rights or responsibilities concerning the assets, goods, or services provided to the taxpayer;

- Payments to a related party that engages in production or business activities but whose asset scale, number of employees, and business functions do not correspond to the value of transactions received from the taxpayer;

- Payments to a related party that is a resident of a country or territory that does not levy corporate income tax, and which does not contribute to generating revenue or added value for the taxpayer’s production and business activities.

Which costs are not be charged as deductible costs upon determination of the income subject to the CIT for enterprises engaged in related-party transactions within a taxable period in Vietnam? (Image from Internet)

What are regulations on handling of service costs between related parties in Vietnam?

Pursuant to Clause 2, Article 16 of Decree 132/2020/ND-CP, service costs between related parties are handled as follows:

- Except for costs specified at point b of this clause, taxpayers are entitled to deduct service costs for tax calculation in the period if the following conditions are met: The service provided has commercial, financial, or economic value and directly serves the taxpayer's production and business activities; services from related parties have been identified as provided under conditions comparable to independent parties paying for these services; service fees are paid on the basis of the arm’s length principle and transfer pricing methods or allocated service fee levels between related parties must be uniformly applied across the entire group for similar service types, and taxpayers must provide contracts, vouchers, invoices, and information regarding the pricing method, allocation factors, and pricing policies of the group for the provided service.

In cases involving centers performing specialized functions and synergistic value creation for the group, taxpayers must determine the total value created from these functions, and determine an appropriate profit allocation corresponding to the contribution value of the related parties after subtracting (-) equivalent service fees for related parties performing coordination functions and providing similar independent transactions services.

- Non-deductible service costs when determining taxable income include: costs arising from services provided solely for the benefit or value creation of other related parties; services serving the interests of the shareholders of the related party; duplicated service charges by multiple related parties providing the same type of service, where no added value is identified for the taxpayer; services essentially being benefits the taxpayer receives by being a member of a group, and costs that related parties add to services provided by third parties through related intermediaries do not add value to the service.

* In addition, the total interest cost deductible when determining taxable corporate income for enterprises with related party transactions:

- The total loan interest cost after subtracting deposit interest and loan interest incurred during the period of the taxpayer is deductible when determining taxable corporate income not exceeding 30% of the total net profit from business activities in the period plus loan interest cost after subtracting deposit interest and loan interest incurred during the period plus depreciation cost incurred during the period of the taxpayer;

- Interest costs not deductible as prescribed at point a of this clause may be carried over to the next taxation period when determining the total deductible interest cost if the deductible interest cost arising in the subsequent taxation period is less than the limit prescribed at point a of this clause.

The continuous loan interest cost carryover period is not to exceed 5 years from the year following the year in which non-deductible interest costs arise;

- The provisions of point a of this clause do not apply to loans of taxpayers who are credit institutions in accordance with the Law on Credit Institutions; insurance business organizations in accordance with the Law on Insurance Business; official development assistance (ODA) loans, preferential loans from the Government of Vietnam implemented under the method of the Government of Vietnam borrowing from abroad for relending to enterprises; loans for implementing national target programs (new rural development program and sustainable poverty reduction); loans for investment programs or projects implementing the State's social welfare policies (resettlement housing, worker housing, student housing, social housing, and other public welfare projects);

- Taxpayers declare the interest cost ratio in the tax period according to Appendix I issued with Decree 132/2020/ND-CP.

What kind of database is used for determining the transfer price of the taxpayer?

Pursuant to Clause 1, Article 17 of Decree 132/2020/ND-CP, determining the transfer price of the taxpayer requires the following database:

[1] Commercial database, which includes information, financial, and economic data collected, compiled, standardized, stored, updated, and provided by data business organizations via software that supports access, management with pre-programmed tools and applications, offering utilities for users to search, access, and use the financial and economic data of enterprises within and outside Vietnam by industry business, geographical area, or other search criteria as needed to serve comparison purposes, determine comparable entities in the declaration and management of transfer pricing;

[2] Information and data disclosed by enterprises publicly on the stock market;

[3] Information and data published on domestic and international commodity and service exchanges;

[4] Information disclosed by domestic ministries and central authorities or other official sources.