In the context of globalization, foreign direct investment (FDI) enterprises frequently engage in internal transactions among affiliated parties within the same corporate group. However, these transactions carry the potential risk of transfer pricing, which could lead to tax revenue loss if not properly controlled.
Therefore, Decree No. 132/2020/NĐ-CP dated November 5, 2020, provides detailed regulations on tax administration for enterprises with related party transactions, aiming to ensure tax transparency and fair competition. DNP Viet Nam Law Firm would like to share some important notes for FDI enterprises when internal transactions arise.
1. What is a related party transaction?
According to Clause 22, Article 3 of the Law on Tax Administration 2019, a related party transaction is a transaction between parties that have a related party relationship.
According to Clause 1, Article 5 of Decree 132/2020/NĐ-CP, parties are considered to have a related party relationship if they fall into one of the following cases:
- One party directly or indirectly participates in the management, control, capital contribution, or investment in the other party.
- Both parties are directly or indirectly under the control, management, or investment of a third party.
2. How to determine a related party transaction:
2.1 Cases considered as having related party transactions:
Legal basis: Clause 2, Article 5 of Decree 132/2020/NĐ-CP
1. An enterprise directly or indirectly holds at least 25% of the capital contribution of another enterprise.
2. Both enterprises have at least 25% of their capital contribution held directly or indirectly by the same third party.
3. An enterprise is the largest shareholder and directly or indirectly holds at least 10% of the total shares of the other enterprise.
4. An enterprise guarantees or lends capital to another enterprise in any form, provided that:
5. The loan amount is at least equal to 25% of the borrowing enterprise’s contributed capital; and
6. The loan accounts for more than 50% of the total value of the medium- and long-term debts of the borrowing enterprise.
[…]
2.2 Types of related party transactions:
According to Clause 2, Article 1 of Decree 132/2020/NĐ-CP, related party transactions include:
- Transactions of buying, selling, exchanging, leasing, subleasing, lending, borrowing, transferring of goods, and provision of services.
- Lending, borrowing, financial services, financial guarantees, and other financial instruments.
- Transactions involving tangible and intangible assets including buying, selling, leasing, lending, transferring, and also agreements to share or jointly use resources such as assets, capital, labor, and cost-sharing between related parties.
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3. Taxpayer obligations in declaring and determining transfer prices of related party transactions:
Legal basis: Article 18 of Decree 132/2020/NĐ-CP
– Taxpayers involved in related party transactions are responsible for declaring and determining information related to the transfer prices without affecting the corporate income tax obligations in Vietnam.
– Additionally, taxpayers must declare information regarding related party relationships and related transactions using Appendix I, II, and III issued with this Decree and submit them along with the Corporate Income Tax Finalization Declaration.
– Taxpayers must retain and provide the Transfer Pricing Documentation (TPD) including relevant information, data, documents, and evidence.
– Compliance with submission deadlines: The Transfer Pricing Documentation must be prepared before the submission of the annual corporate income tax finalization and must be submitted upon request from the tax authority, within the prescribed timeframe.
– Responsibility regarding the Country-by-Country Report (CbCR):
- If the taxpayer is the ultimate parent company in Vietnam and has global consolidated revenue of VND 18,000 billion or more, it must prepare and submit the CbCR to the tax authority within 12 months after the end of the fiscal year.
- Suppose the taxpayer in Vietnam has a foreign ultimate parent company that is required to prepare a CbCR in its resident country. In that case, the taxpayer must submit the CbCR to the Vietnamese tax authority.
4. Cases where the taxpayer is exempted from declaring or preparing Transfer Pricing Documentation (TPD):
Legal basis: Article 19 of Decree 132/2020/NĐ-CP
4.1 Taxpayers exempted from declaring and preparing Transfer Pricing Documentation:
- Transactions arise only with related parties that are corporate income taxpayers in Vietnam.
- The related parties apply the same corporate income tax rate as the taxpayer, and neither party is entitled to tax incentives during the tax period.
4.2 Taxpayers required to declare but exempted from preparing Transfer Pricing Documentation:
– Enterprises:
- Annual revenue below VND 50 billion and total value of related transactions below VND 30 billion.
- Signed an Advance Pricing Agreement (APA) with the tax authority and fully comply with annual reporting requirements.
– Enterprises meeting all of the following criteria:
- Perform simple functions;
- Do not participate in the development of intangible assets;
- Have total revenue below VND 200 billion; and
- Achieve profit margins (EBIT/Revenue, excluding financial income and expenses) of at least 5% for distribution businesses, 10% for manufacturing businesses, and 15% for processing businesses.
Internal transactions are inevitable in the operation of FDI enterprises but are also a focal point of scrutiny by the Vietnamese tax authorities. Therefore, businesses must manage these transactions with transparency, in compliance with the current legal regulations, to minimize tax risks and ensure sustainable business operations.
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