Determination of costs for assessment of taxes on enterprises engaged in related-party transactions in Vietnam

Determination of costs for assessment of taxes on enterprises engaged in related-party transactions in Vietnam (Internet image)

Regarding this issue, LawNet would like to answer as follows:

1. Determination of costs for assessment of taxes on enterprises engaged in related-party transactions in Vietnam

According to Article 16 of Decree 132/2020/ND-CP, it stipulates the determination of costs for assessment of taxes on enterprises engaged in related-party transactions in Vietnam as follows:

- Costs of related-party transactions which neither match the substance of arm's length transactions nor contribute to creating operating sales or income of a taxpayer shall not be charged as deductible costs upon determination of the income subject to the corporate income tax within a specified taxable period, including:

+ Costs of payments to a related parties that does not perform any business or production activity relating to a taxpayer’s industries or business lines; that do not have any associated rights and responsibilities to assets, commodities and services provided to the taxpayer;

+ Costs of payments to a related party that performs business or production activities, but has the scale of assets, number of employees and operating functions incommensurate with the transactional value that this related party has obtained from a taxpayer;

+ Costs of payment to a related party that is a resident entity within a country or territory that does not collect the corporate income tax, and that does not contribute to creating sales or added value for the business and production activities of a taxpayer.

- Service charges of related parties:

+ Except for payments referred to in point b of this clause, a taxpayer can deduct their service charges from taxable costs within a specified taxable period when meeting the following requirements: services rendered have commercial, financial and economic value and are directly used in their business and production activities; services rendered by related parties are confirmed as already supplied only in the same conditions under which unrelated parties are charged for these services;

The arm's length principle and transfer pricing method or the method of allocation of service charges between related parties must be applied in unison within the entire group to payment of charges of similar services of which the taxpayer must provide a contract, evidencing documents, invoices and information concerning the method of calculation, factors of allocation and pricing policies of the group.

In case where there is a connection with centers performing specialized functions and synergies in creating the added value for the group, a taxpayer must determine the total value created from these functions and identify the level of profit allocation proportionate to the value of participation by related parties from which relevant service charges paid to related parties to perform coordination or service supply functions in arm’s length transactions of same or similar nature have been deducted.

+ Service charges that are not deducted from taxable income encompass costs arising from services rendered for the sole purpose of providing other related parties with benefits or values; services rendered to provide benefits for shareholders of related parties; services of which costs are repeatedly charged due to multiple related parties render the same services, or in which the added value offered to a taxpayer is not specified; services which are, in nature, benefits obtained by a taxpayer as a member of a corporation and costs that a related party adds to third-party services rendered through a related intermediary without adding any value to these services.

- Total loan interest cost is deducted in case of determining the income subject to corporate income tax of the enterprise engaged in related-party transactions:

+ Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% more than the net profit generated from business activities within the taxable period plus loan interest costs arising after deducting deposit interests and lending interests arising within the taxable period plus depreciation/amortization expenses arising within that period of a taxpayer;

+ The portion of loan interest cost which is non-deductible as prescribed in point a of this clause is carried forward to the next taxable period for the determination of total loan interest cost deductible if total loan interest cost deductible in the next taxable period is lower than the amount prescribed in point a of this clause.

The loan interest costs may be carried forward for a maximum consecutive period of 05 years, counting from the year following the year in which non-deductible loan interest costs arise;

+ The provision in Point a of this Clause shall not apply to loans of taxpayers that are credit institutions as defined in the Law on Credit Institutions; insurance companies as defined in Law on Insurance Business; ODA loans and concessional loans of the Government which are granted to enterprises in the on-lending form; loans intended for implementing national target programs (including new rural area development programs and sustainable poverty reduction programs); loans invested in programs or projects for implementation of State social welfare policies (e.g. resettlement housing, worker or student housing and social housing, and other social welfare projects or programs);

+ Taxpayers must declare the rate of loan interest costs arising within a specific taxable period according to Form No. I enclosed with Decree 132/2020/ND-CP.

2. Databases used for declaration, determination and management of transfer prices in Vietnam

Databases used for declaration, determination and management of transfer prices is as follows:

- Databases used for declaration, determination and management of transfer prices, including:

+ Commercial database contains financial and economic information and data that data businesses acquire, collect, standardize, archive, update and provide via their access support software, manage using tools and applications which are readily programmed, provide utilities supporting users in searching, accessing and using financial and economic data of foreign and domestic enterprises operating in Vietnam, and arranged according to business industries and sectors, geographical regions or search criteria meeting other demands to serve the purposes of comparison and determination of comparables in the process of declaration and management of transfer prices;

+ Corporate information or data publicly released on stock exchanges;

+ Information or data available on domestic and international commodity or service exchanges;

+ Information made available to the public by ministries or sectoral administrations, or other official sources.

- Transfer price management databases of tax authorities, including:

+ The database referred to in clause 1 of Article 17 of Decree 132/2020/ND-CP;

+ Information or data exchanged with counterparty tax authorities as provided in clause 7 of Article 4 of Decree 132/2020/ND-CP;

+ Information made available to tax authorities by ministries or sectoral administrations;

+ Risk management databases of tax authorities.

- Analysis and selection of independent comparables for analysis and determination of the arm's length range shall be subject to the principles of comparability analysis and the transfer pricing methods referred to herein, and must conform to the priority order in selecting comparison data as listed hereunder:

+ Internal comparables of taxpayers;

+ Resident comparables residing within taxpayers’ countries or territories;

+ Comparables from other regional states where sectoral conditions and economic growth levels are comparable.

With regard to foreign comparables operating in different geographical markets, it shall be necessary to analyze the comparability, quantitative and qualitative material differences referred to in Article 9 and 10 of Decree 132/2020/ND-CP.

Nguyen Ngoc Que Anh

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