Vietnam: Business risks analysis of the taxpayers who are enterprises having related-party transactions

According to the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, business risks analysis of the taxpayers who are enterprises having related-party transactions are specified as follows:

Operational functions, operating assets and risks arising from business activities of each contracting party, and operating assets and risks in relation to opportunity costs, economic conditions, and conditions of the whole industries or sectors, business lines and geographical positions of taxpayers, shall be analyzed to determine factors measuring the capability of gaining profit from business activities and practical situation of those business activities which these taxpayers have performed in connection with their functions and use of associated assets, capital, costs and expenses.

Comparability analysis results must reflect main functions in the relationship between, the use of assets, capital and opportunity costs as well as risks associated with the use of these assets, capital and opportunity costs for investment purposes, and the capability of gaining profit, which are performed by taxpayers in relation to their business transactions, specifically as follows:

- Certain main functions of the subsidiary in the entire value chain of a multinational enterprise group including the research and development function, e.g. contract-based research and development services, in-house research and development, technical and technological development and product design activities; the manufacturing function, e.g. in-house manufacturing, licensing manufacturing, contract manufacturing, toll manufacturing, assembling and installation of equipment; sale, purchase and management of raw materials and other activities; distribution, e.g. distribution on its own, limited risk distribution, commission agent, wholesale distribution, retail distribution; provision of support services, e.g. legal, accounting and finance, credit and collection, training and personnel management services; provision of transportation and warehousing services; brand development activities, e.g. marketing, advertising, publicity, market research and other functions within the value chain in the industry;

- Certain key financial assets of a subsidiary including intangible property, e.g. technical know-how, copyright, trade secrets, secret formulas, patents, intangible assets related to commercial and marketing activities, e.g. brands, brand building and identity systems, lists, figures and relationships with customers; tangible assets, e.g. plant, machinery and equipment; financial assets, rights and economic benefits created by these assets during the process of exploitation, use and transfer thereof;

- Certain major business risks including strategic risks or market risks arising from implementation of business strategies, e.g. market penetration, expansion or maintenance; risks associated with infrastructure or goods inventory; financial risks, e.g. credit risks, bad debt risks, foreign exchange risks; risks associated with transactions, e.g. risks arising from factors such as price and payment terms in commercial transactions; product risks arising from design, development and manufacturing of product, product quality management and after sales services; business risks associated with capital investments, the number of customers and force majeure risks.

Analysis of the taxpayer’s business risks in the entire value chain of the multinational group aims to determine material risks to the entire value chain of the industry, capability of controlling risks such as capability of making decisions on risk management and dealing with risks likely to arise in the reality, e.g. identification of major economic risks, assessment of degree of allocation and arrangement of risks specified in legally binding agreements or documents or arrangements of the taxpayers; analysis of functions of controlling and minimizing risks in legally binding agreements or documents or arrangements; examination and review of performance of these functions, bearing and allocation of risks of the taxpayer in reality. In case where there is any difference between the allocation of risks in legally binding agreements, documents or arrangements and that carried out in the reality, based on the results of risk analysis, tax authorities shall be accorded the authority to decide to re-allocate risks and adjust levels of price, profit margins and profit split ratios of taxpayers.

View more details at the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, effective from December 20, 2020.

Thuy Tram

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