Transfer pricing determination
Crowe Vietnam consolidates relevant regulations and frequently asked questions on transfer pricing determination, helping you stay updated with the latest information and changes, and ensuring accurate tax compliance.
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1. What is transfer pricing determination (for the purpose of defining tax obligations)? What is transfer pricing? Does transfer pricing violate the law? What are some specific cases?
1. What is related party transaction pricing (for tax purposes)?
Enterprises have transactions with unrelated parties (also known as independent parties) and transactions with related parties (also known as related party transactions) (See the definition of these transaction types in Article 5, Decree 132/2020/ND-CP).
Due to the nature of transactions with related parties, enterprises can choose their own transaction prices. Therefore, enterprises tend to choose prices that they believe will help them minimize the tax payable by all related parties, thanks to differences in tax rates among them.
Because of this issue, to prevent tax erosion, tax regulations often require enterprises to declare related party transactions according to prescribed forms and exclude factors that reduce tax obligations due to related party control or influence. This is to determine tax obligations for related party transactions to be equivalent to independent transactions under similar conditions. In other words, enterprises must **_determine the price of related party transactions in a way that is equivalent to independent transactions under similar conditions_**, and then use this as a basis to make appropriate adjustments (if there are differences) to the prices shown on official transaction documents for tax calculation. If the enterprise can prove that the transaction price falls within the range of prices for independent transactions, no further adjustments will be made, and therefore no additional tax will arise. Thus, enterprises often try to build their documentation and pricing policies with related parties to optimize tax obligations while still demonstrating comparability with independent transactions to avoid unforeseen penalties and additional taxes.
Despite these regulations, in many practical cases, both enterprises and tax authorities find it difficult to agree on the equivalent independent transaction price due to the influence of many related factors and conditions. Both sides try their best to protect their own interests.
Note:
- Methods for comparing and determining the price of related party transactions are presented in Articles 13, 14, 15 of Decree 132/2020/ND-CP.
- Tax obligations related to related party transactions currently only include corporate income tax. Related regulations do not yet cover other types of taxes.
2. What is transfer pricing? Is transfer pricing illegal?
“Transfer pricing” is not clearly defined in relevant regulations; however, based on related contexts, “transfer pricing” is understood as the act of intentionally failing to declare or declaring prices of related party transactions in a manner not equivalent to independent transactions to evade or avoid tax.
With the above understanding, “transfer pricing” is a violation of tax law, and therefore, if discovered, it will be subject to tax assessment by the tax authorities (See Article 20 of Decree 132/2020/ND-CP).
3. Common transfer pricing methods?
- Inflating the price of fixed assets when contributing capital for investment: Foreign investors contribute capital to domestic enterprises (FDI enterprises) using outdated machinery, equipment, or fully depreciated assets, but their prices are pushed up far higher than their actual value. By valuing fixed assets higher than their actual worth, foreign investors inflate capital contributions, causing revenue loss for the budget; simultaneously, the increased depreciation of fixed assets leads to higher product costs, resulting in reduced profits or losses, thus requiring the enterprise to pay little or no corporate income tax (“CIT”) in Vietnam.
- Inflating the price of imported raw materials: FDI enterprises purchase raw materials from related parties at prices higher than market prices, increasing production input costs, thereby reducing profits or incurring losses.
- Receiving transfers of intangible assets/services: Foreign investors, when investing in subsidiaries, often transfer certain intangible assets/provide certain services such as: technology transfer, know-how, copyrights, provision of general management services, purchasing support, quality control, IT support, etc. FDI enterprises can engage in transfer pricing by overvaluing transferred intangible assets/provided services.
- Receiving loans with high interest rates: Another common form is FDI enterprises receiving loans from related parties with interest rates exceeding normal regulations.
- Reducing sales prices: FDI enterprises can also engage in transfer pricing by applying sales prices to related parties that are much lower than sales prices to unrelated parties, thereby reducing profits and corresponding taxes.
- Reverse profit shifting (from abroad to Vietnam) by a part of domestic FDI enterprises enjoying significant CIT rate incentives and CIT exemption/reduction periods;
- Transfer pricing between domestic enterprises with related party relationships and enjoying different CIT incentive levels.
4. Typical transfer pricing cases?
Adidas
Adidas AG is a multinational company founded in 1948 in Germany, operating in the design and manufacture of sports equipment.
Adidas products arrived in Vietnam very early, from 1993, and it wasn’t until 2009 that an Adidas subsidiary was established in Vietnam.
Many arguments suggest that Adidas Vietnam registered its business activities in Vietnam as a wholesale distributor but, in practice, incurred retailer expenses, raising suspicions that this was Adidas’s method of transfer pricing through related party transactions between the parent company and its subsidiaries within the Adidas group to avoid income tax in Vietnam.
Specifically, according to the head of the Ho Chi Minh City Tax Department, Adidas Vietnam operated under a business registration license for wholesale distribution, but the company’s expense list showed many expenses typical of a retail business, such as costs for supporting retail outlets, international marketing fees, regional management fees, purchasing commissions, and notably, Adidas Vietnam was not a manufacturer but incurred royalty fees.
In fact, Adidas Vietnam paid Adidas AG a royalty fee of 6% and an international marketing fee of 4% of net revenue for products sold and the value of licensed products.
Additionally, Adidas Vietnam also had to pay a purchasing commission to Adidas International Trading B.V. at a rate of 8.25% of the value of each transaction.
Furthermore, according to the Southeast Asia service agreement between Adidas Singapore and Adidas Vietnam, Adidas Singapore and its local subsidiaries, including Adidas Vietnam, provided certain services and agreed on the collection of related fees.
The incurrence of too many intermediate input costs led to an unreasonable increase in the import price of Adidas products in the Vietnamese market, causing Adidas Vietnam to consistently report losses and therefore not have to pay corporate income tax.
Metro Vietnam
Metro Vietnam began operations in Vietnam in early 2002 with an initial capital of 120 million USD, of which the legal capital was 36 million USD.
After approximately 12 years of operation (2002-2013), Metro Vietnam changed its business license 6 times, increasing its total investment capital in Metro Vietnam to over 301 million USD by May 2013.
Notably, during this period, Metro Vietnam continuously declared losses, with accumulated losses reaching 1,657 billion USD, and only in 2010 did it report a profit of 173 billion VND.
Despite these losses, Metro Vietnam continued to open 19 more retail outlets nationwide. Based on these results, tax inspection authorities intervened and identified transfer pricing behavior, subsequently requiring Metro Vietnam to adjust its losses, reduce deductions, and collect back taxes amounting to over 500 billion VND. They also determined that Metro Vietnam had made profits in 2010 and 2011, totaling 234.8 billion VND.
Among these, the largest loss adjustment was related to franchise fees, expenses unrelated to Metro Vietnam’s business activities, provisions for inventory devaluation, provisions for bad debts, etc., totaling up to 335 billion VND.
The adjustment of contractor tax on salary reimbursement payments made to Metro Cash & Carry Germany for foreign employees working at Metro Vietnam amounted to approximately 62 billion VND; the reduction of input VAT for advertising, marketing, and promotional support received from suppliers amounted to 110 billion VND.
Due to the excessively large and unreasonable expenses recorded in Metro Vietnam’s costs, especially the franchise fees, the company continuously reported losses for decades.
According to data from the General Department of Taxation, during the period of 2002-2013, the franchise fees that Metro Vietnam had to pay to its parent company in Germany amounted to 731 billion VND.
In addition, salary, bonus, and allowance costs for the board of directors and foreign experts paid to individuals through Metro Cash & Carry GmbH (MCC) in Germany were also very significant, reaching 699 billion VND.
According to the General Department of Taxation, these were related party transactions used by Metro Vietnam for transfer pricing.Keangnam
Keangnam Vina is a real estate company with 100% Korean capital. Entering Vietnam in July 2007, Keangnam Vina signed a turnkey contract with Keangnam Enterprise – a subsidiary of the Keangnam Group in Korea, acting as the EPC general contractor.
The total value of the contract amounted to 871 million USD. Keangnam Enterprise’s role not only included surveying, designing, providing equipment and machinery, and constructing the project but also providing financial consulting services and arranging loans for Keangnam Vina.
In 2008, the financial consulting fee paid by Keangnam Vina to Keangnam Enterprise amounted to 30 million USD, the loan arrangement service fee reached 20 million USD, and consulting fees for advertising, land use rights, and investment licenses also reached several million USD.
Due to these expenses, Keangnam Vina continuously reported losses and thus did not pay corporate income tax. This loss, of course, was converted into profit for Keangnam Enterprise in Korea. Meanwhile, Keangnam Enterprise only had to pay contractor tax to Vietnam at a much lower tax rate compared to Vietnam’s corporate income tax.
Keangnam Vina’s operational status after 5 years showed that the company always declared losses. According to tax authorities’ data, by 2011, when the Keangnam Hanoi Landmark building began operations, the company’s revenue reached over 5,200 billion VND, but the company reported a loss of up to 140 billion VND.
From this situation, Vietnamese tax authorities conducted an inspection and identified Keangnam Vina’s transfer pricing behavior.
After the inspection, the tax authorities required the exclusion of all unreasonable input costs. Many unreasonably arranged construction cost of goods sold were forced to be adjusted. Therefore, the total value of the EPC contract decreased from 871 million USD to only 699 million USD.
The inspection results forced Keangnam Vina to admit its transfer pricing behavior and adjust prices by up to 1,220 billion VND. Not only that, Keangnam Vina was also subject to back taxes for corporate income tax amounting to 95.2 billion VND due to profit adjustments for the period of 2007-2011.
Starbucks
Starbucks Corporation (UK) used high-interest loan agreements and high royalty payments to shift profits to a related company in the Netherlands. In the UK, Starbucks continuously expanded and rapidly developed its store network. By 2012, Starbucks UK had over 700 stores across the island nation, and cumulative total revenue after 14 years of business in the UK amounted to over 3 billion GBP (4.8 billion USD). However, thanks to transfer pricing, consistently reporting losses, the total tax paid by the company in 14 years was only 8.6 million GBP (13.7 million USD). According to BBC News, with the UK corporate income tax rate at 28%, the UK Government should have collected approximately 840 million GBP in tax from Starbucks, but in reality, it only collected slightly more than 1% of that amount.
e.Bay
Another typical transfer pricing case in the UK is the e.Bay Group. The group’s revenue in 2010 was 789 million GBP, with an estimated profit of approximately 181 million GBP. Also according to BBC News, with the UK corporate income tax rate at 28%, e.Bay should have paid approximately 51 million GBP in tax. However, e.Bay employed transfer pricing schemes to reduce its profit to 4.3 million GBP, so it only had to pay approximately 1.2 million GBP in tax in 2010. Compared to its actual profit, e.Bay only paid tax at 0.66% of its profit, a very low rate compared to the UK’s corporate income tax. However, the UK tax authorities had to accept this because e.Bay’s pricing, accounting, and tax payment activities were all considered “fully compliant with tax regulations.”
Facebook is facing a lawsuit from the Internal Revenue Service (IRS). The lawsuit has gone to court in San Francisco, and the crux of the case is a 2010 agreement between Facebook and a subsidiary located in Ireland. The IRS accuses Facebook of intentionally undervaluing the intellectual property it sold to its subsidiary, thereby evading billions of dollars in taxes.
Before going public, Facebook valued the assets at 6.5 billion USD, but according to the IRS, the assets were worth up to 21 billion USD. If the IRS wins the lawsuit in court, it is estimated that Facebook will have to pay an additional 9 billion USD in taxes, late payment interest, and penalties.
Ireland has a lower corporate tax rate than the United States, so this move helps reduce the tax burden for the multinational company. Besides Facebook, many other tech giants, including Google and Amazon, have also chosen Ireland as a “tax haven.” By selling intellectual property rights to “puppet” branches abroad, tech companies seek to shift profits to countries with extremely low tax rates like Ireland.
2. What regulations must businesses comply with regarding related-party transactions? What cases are exempt? What challenges do businesses in Vietnam face in complying with current transfer pricing regulations?
What must enterprises comply with regarding related party transactions arising in the period?
Compliance requirements for enterprises recording related party transactions are summarized below. For the period from 2010 – 2016, compliance requirements were regulated by Circular 66/2020/TT-BTC (“Circular 66”).
From 2017, enterprises comply with the requirements in Decree 20/2017/ND-CP (“Decree 20”) and Circular 41/2017/TT-BTC (“Circular 41”).
In November 2020, the Government issued Decree 132/2020/ND-CP (“Decree 132”) replacing Decree 20 on tax administration for enterprises with related party transactions. Decree 132 took effect from December 20, 2020. Accordingly, from 2020 onwards, compliance requirements will be implemented according to Decree 132.
| Compliance Content | Decree 132 | Decree 20 and Circular 41 | Circular 66 |
|---|---|---|---|
| Application Period | From 2020 onwards | 2017 – 2019 | 2010 – 2016 |
| Related Party Transaction Information Declaration Form | Enterprises need to prepare 03 declarations related to related party transactions, including: • Form No. 01: Information on related party relationships and related party transactions • Form No. 02: List of information and documents to be provided in the Local File • Form No. 03: List of information and documents to be provided in the Master File | Enterprises need to prepare 04 declarations related to related party transactions, including: • Form No. 01: Information on related party relationships and related party transactions • Form No. 02: List of information and documents to be provided in the Local File • Form No. 03: List of information and documents to be provided in the Master File • Form No. 04(*): Country-by-Country Report Information Declaration (*) Specifically, Form No. 04 only applies to ultimate parent companies in Vietnam with consolidated revenue exceeding 18,000 billion VND and operating in multiple countries. | Enterprises need to prepare Form GCN-01/QLT. For the period 2013 – 2016, Enterprises need to prepare Form 03-7/TNDN (as stipulated in Circular 156/2013/TT-BTC) to replace Form GCN-01/QLT. |
| Deadline for submitting related party transaction information declaration | Submitted together with the corporate income tax (“CIT”) finalization declaration (no later than the last day of the 3rd month from the end of the financial year). | Submitted together with the corporate income tax (“CIT”) finalization declaration (no later than the 90th day from the end of the financial year). | |
| Transfer Pricing Documentation | Taxpayers are responsible for keeping and providing Transfer Pricing Documentation, which includes information, documents, data, and vouchers: • Information on related party relationships and related party transactions according to Form No. 01; • Local File – prepared as required in Form No. 02 • Master File – prepared as required in Form No. 03 • Country-by-Country Report (“CbCR”)(**) (**) For the ultimate parent company in Vietnam, if the consolidated revenue of the entire group for the year exceeds 18,000 billion VND, a CbCR must be prepared with a submission deadline of 12 months from the end of the ultimate parent company’s financial year. | Transfer pricing documentation must be prepared before the annual CIT finalization declaration and must be kept and presented upon request for information from the Tax Authority. Transfer pricing documentation includes: • Local File – prepared as required in Form No. 02 • Master File – prepared as required in Form No. 03 • Copy of the Country-by-Country Report of the Ultimate Parent Company (***) (***) In case the Ultimate Parent Company is not required to prepare a Country-by-Country Report under the regulations of its home country; the Company in Vietnam prepares an explanatory letter stating the reason. | Transfer pricing documentation with contents stipulated in Article 7, Circular 66. |
| Deadline for providing documentation to the tax authority | • During inspection: no clear deadline specified; • Pre-inspection consultation: 30 working days; 1 extension of 15 working days. | • During inspection: 15 working days; • Pre-inspection consultation: 30 working days; 1 extension of 15 working days. | Within 30 working days; may be extended once for no more than 30 days from the expiration date. |
Cases exempt from the obligation to prepare related party transaction declaration forms and transfer pricing documentation?
Decree 132 (and previously Decree 20) also provides for certain cases where enterprises will be exempt from the obligation to prepare related party transaction information declarations or transfer pricing documentation. Specifically as follows.
Exemption from declaring transfer pricing in Section III, Section IV of Form No. 01 and exemption from preparing Transfer Pricing Documentation, provided ALL of the following conditions are met:
- Only transactions with **related parties that are corporate income tax payers in Vietnam**;
- Applying **the same corporate income tax rate** as the taxpayer and **neither party benefits from corporate income tax incentives** during the tax period.
Note:
- The basis for exemption must be declared in Section I, Section II of Form No. 01 of the Appendix issued with Decree 20.
- According to guidance in some official letters from tax departments, if the conditions for exemption from declaring Section III, Section IV of Form No. 01 are met, the enterprise is simultaneously exempt from preparing Transfer Pricing Documentation.
Exemption from Transfer Pricing Documentation, provided 01 OF 03 cases is met:
- Total revenue generated in the tax period is **under 50 billion VND** and the total value of all related party transactions arising in the tax period is **under 30 billion VND**;
- Or, has entered into an **Advance Pricing Arrangement (“APA”)** and submitted annual reports in accordance with APA legal regulations;
- **Distribution (from 5%);**
- **Manufacturing (from 10%);**
- **Processing (from 15%).**Or, has revenue **under 200 billion VND** and conducts business with **simple functions**, as well as achieving a **net profit margin before interest and corporate income tax on revenue**, including the following sectors:
Note:
- Transfer pricing must be declared according to Form No. 01.
Difficulties for Vietnamese enterprises in complying with current transfer pricing regulations?
**_Lack of detailed guiding official letters:_**
Compared to other tax areas (Corporate Income Tax (“CIT”), Personal Income Tax (“PIT”), etc.), the system of transfer pricing compliance regulations is quite simple, consisting of the two aforementioned Decrees and one Circular. Official guiding documents on transfer pricing are also relatively limited compared to other areas and usually only focus on answering principal issues.
Therefore, enterprises often face many difficulties in understanding and applying transfer pricing regulations in their operations, as well as in identifying and fulfilling compliance requirements as stipulated by law.
**_Some differences in compliance requirements with international practices:_**
In cases where taxpayers do not satisfy the conditions for exemption from compliance requirements stipulated in Decree 132, in addition to the related party transaction information declaration submitted with the annual tax finalization declaration, taxpayers will have to prepare Transfer Pricing Documentation (“TP Documentation”) (including Master File (“MF”), Local File (“LF”), and Country-by-Country Report (“CbCR”)).
The content of these three documents/reports, as stipulated in Decree 132, is consistent with OECD recommendations in BEPS actions. However, some differences still exist, causing difficulties for taxpayers in the compliance process as follows:
| Document | Regulations in Vietnam | International Practice |
|---|---|---|
| CbCR | • If the taxpayer is the ultimate parent company in Vietnam with consolidated global revenue in the tax period of 18,000 billion VND or more, the taxpayer needs to prepare a CbCR according to Form No. 04 issued with Decree 132. • In other cases (not the ultimate parent company in Vietnam), the taxpayer needs to provide the CbCR to the tax authority, unless the ultimate parent company (or the entity designated by the parent company to submit the CbCR on its behalf) is established in a country that has an international tax agreement with Vietnam, has signed an agreement with the competent authority of Vietnam, and has an automatic information exchange mechanism, the tax authority will automatically exchange information with the foreign tax authority. | • Taxpayers who are ultimate parent companies and record global consolidated revenue exceeding a minimum threshold (e.g., Japan is 100 billion Yen; South Korea is 1 trillion won, etc.), need to prepare a CbCR according to the prescribed form. • Taxpayers who are not ultimate parent companies typically only need to notify the tax authority, without needing to store and submit a copy of the ultimate parent company’s CbCR as required by the tax authority. |
| Master File | • No specific exemption cases are stipulated. • Accordingly, taxpayers need to prepare the MF even if the Group is not required to prepare it under foreign regulations. | • Applies to groups that meet certain conditions. For example: – In Japan, it applies to groups with consolidated revenue of 100 billion Yen or more; – In South Korea, it applies to groups with consolidated revenue of 100 billion won or more and cross-border related party transaction value of 50 billion won or more, etc. |
**_Timeframe for preparing Transfer Pricing Documentation:_**
Taxpayers are responsible for keeping and providing Transfer Pricing Documentation when requested by the tax authority.
Enterprises must provide the Documentation to the tax authority promptly **in case of inspection (no specific deadline stated)**; and **30 working days, with a maximum extension of 15 working days if there is a legitimate reason – in case of pre-inspection consultation**.
Compared to other countries worldwide, the deadline for preparing and submitting TP Documentation in Vietnam is relatively short. In other countries, this deadline is usually **5 to 12 months from the end of the financial year.**
For example:
- In Japan, taxpayers must submit the LF to the tax authority **within 45 days of being requested**, while the MF and CbCR must be submitted via the electronic filing system **within 12 months from the end of the financial year**.
- In South Korea, **within 12 months**, taxpayers must submit all three types of TP Documentation to the tax authority via the electronic filing system.
The difference in the deadline for preparing TP Documentation can cause difficulties for taxpayers (especially FDI enterprises) in contacting their groups and ultimate parent companies to obtain MF and CbCR documents. If the group or parent company cannot prepare these documents in time according to Vietnam’s compliance deadline, the enterprise in Vietnam may have to consider preparing these documents themselves, which would incur additional time and costs.
3. If a business violates transfer pricing regulations, what penalties and consequences may apply? What should businesses do when notified by the tax authority of a transfer pricing audit, compliance assessment, or detection of transfer pricing violations? If disputes arise with the tax authority regarding the understanding and application of transfer pricing regulations, what should businesses do?
What penalties can enterprises face if they violate tax regulations related to related party transactions?
Clause 3, Article 12 of Decree 20/2017/ND-CP stipulates as follows:
“The tax authority has the right to assess the price; profit margin; profit allocation ratio used for tax declaration, assess taxable income or the corporate income tax payable for taxpayers with related party transactions in the tax period based on information, data, and assessment analysis of the Tax Authority, in cases where taxpayers commit violations of laws on transfer pricing as follows:
a) The taxpayer fails to declare, declares incomplete information, or fails to submit Form No. 01 in the Appendix issued with this Decree;
b) The taxpayer provides incomplete information for the transfer pricing documentation stipulated in Form No. 02, Form No. 03 in the Appendix issued with this Decree or fails to present the transfer pricing documentation and the data, vouchers, and documents used as a basis for comparative analysis and pricing in the transfer pricing documentation as requested by the Tax Authority within the time limit stipulated in this Decree;
c) The taxpayer uses dishonest or inaccurate information about independent transactions for comparative analysis and declaration of transfer pricing or relies on illegal, invalid, or unidentified origin documents, data, and vouchers to determine the price, profit margin, or profit allocation ratio applied to related party transactions;
d) The taxpayer violates the provisions on transfer pricing in Article 11 of this Decree _(regarding cases where taxpayers are exempt from declaring, exempt from preparing transfer pricing documentation)_”
Similarly, Clause 3, Article 20 of Decree 132/2020/ND-CP stipulates as follows:
“The tax authority has the right to assess the price; profit margin; profit allocation ratio; taxable income or the corporate income tax payable for taxpayers who fail to comply with regulations on declaring and determining related party transactions; fail to provide or provide incomplete information and data for declaring transfer pricing in the following cases:
a) The taxpayer fails to declare, declares incomplete information, or fails to submit Appendix I issued with this Decree;
b) The taxpayer provides incomplete information for the transfer pricing documentation stipulated in Appendix II, Appendix III issued with this Decree or fails to present the transfer pricing documentation and the data, vouchers, and documents used as a basis for analysis, comparison, and pricing in the transfer pricing documentation as requested by the Tax Authority within the time limit stipulated in this Decree. Information in the transfer pricing documentation is considered material if this information affects the results of the analysis for selecting comparable independent comparables; the transfer pricing method or the results of adjusting the price, profit margin, profit allocation ratio of the taxpayer;
c) The taxpayer uses dishonest or inaccurate information about independent transactions for analysis, comparison, and declaration of transfer pricing or relies on illegal, invalid, or unidentified origin documents, data, and vouchers to determine the price, profit margin, or profit allocation ratio applied to related party transactions;
d) The taxpayer violates the provisions on transfer pricing in Article 19 of this Decree;
đ) The database used for tax assessment shall comply with the provisions of Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019.”
In cases of tax authority assessment, enterprises may be subject to tax arrears, reduced losses, or increased taxable income adjustments.
At the same time, enterprises may also incur the following additional penalties (according to the Law on Tax Administration):
- Late payment interest: 0.03% / day of late payment (or 0.05%; 0.07% / day of late payment, depending on the period);
- Under-declaration: 20% of the under-declared tax amount;
- Tax fraud / tax evasion: one to three times the amount of tax arrears.
Along with penalties, enterprises may also suffer reputational damage in the market and be included in the Tax Authority’s list of high-risk enterprises for transfer pricing, leading to more frequent tax inspections/audits.
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What should an enterprise do when notified that the tax authority will conduct a transfer pricing inspection, assess compliance, and detect any transfer pricing activities (if any)?
- Review all relevant tax declarations and promptly supplement any missing declarations. Missing or incorrect declarations compared to the documentation will be a basis for the tax authority to assess tax.
- Review all accounting books and vouchers to ensure they are prepared and stored fully, accurately, and in accordance with accounting regulations. If accounting books contain many material errors, it will also be a basis for the tax authority to assess tax.
- Collect all vouchers, documents, and records as required in Decree 20/2017/ND-CP and Decree 132/2020/ND-CP (from the corporate income tax period of 2020) to help explain data and provide it to the tax authority when requested.
- Enterprises should prepare explanation strategies for important and complex matters. They should communicate with the parent company (if any) to get maximum assistance. Additionally, they should research similar enterprises that have been previously inspected for further reference.
- If the enterprise does not feel fully confident about the above matters, it should hire a professional consulting firm to conduct an independent review for useful recommendations. Furthermore, regarding the difficulties enterprises face in preparing related documents, professional consulting firms may have the necessary knowledge, experience, and resources to help the company handle them appropriately and in a timely manner before the tax authority’s arrival. The enterprise can request the consulting firm to assist in explaining the tax authority’s questions and arguments during the tax authority’s inspection/audit at the enterprise.
Thorough preparation before the tax authority’s inspection will help enterprises minimize unnecessary losses due to basic compliance shortcomings, and help enterprises focus on truly important and complex issues to achieve the highest effectiveness in explaining and persuading the tax authority.
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What should an enterprise do if there is a dispute with the tax authority regarding the interpretation and application of regulations related to related party transactions?
Due to the complex nature of tax inspections/audits related to related party transactions, it is highly likely that tax officers may have arguments/conclusions that are inconsistent with the enterprise’s views. If the enterprise does not agree, it needs to have an appropriate response strategy to protect its legitimate interests. Below are some recommendations for enterprises to consider:
- For issues where the enterprise believes the tax authority is misunderstanding or incompletely understanding the enterprise’s operations, the enterprise needs to provide full relevant documents and explanations to help the tax officer understand correctly and thoroughly.
- For issues where the enterprise believes the tax officer is misinterpreting the spirit of the tax regulations, the enterprise should send an official letter to the higher-level tax authority for clarification (if direct explanations are unconvincing).
- For issues where the enterprise believes it depends on objective data and there is insufficient basis to clearly support either party’s argument, the enterprise should negotiate with the tax authority to find an optimal compromise solution between both parties.
- If the enterprise finds that it does not have sufficient resources to implement the above strategies, it should hire a consulting firm for assistance. Professional consulting firms will often have the appropriate knowledge, experience, and resources to handle these matters better.
- The last resort is for the enterprise to file a lawsuit in court for public arbitration (if the issue has a truly material impact on the enterprise’s financial and operational aspects).
1. Decree 132/2020/ND-CP dated November 5, 2020, stipulating tax administration for enterprises with related party transactions, effective from December 20, 2020, and applicable from the 2020 corporate income tax period. (See details here)
2. Decree 68/2020/ND-CP amending and supplementing Clause 3, Article 8 of Decree 20/2017/ND-CP dated February 24, 2017, of the government stipulating tax administration for enterprises with related party transactions, expired from the effective date of Decree 132/2020/ND-CP. (See details here)
3. Decree 20/2017/ND-CP dated February 24, 2017, stipulating tax administration for enterprises with related party transactions, effective from May 1, 2017, and expired from the effective date of Decree 132/2020/ND-CP. (See details here)
4. Circular 41/2017/TT-BTC dated April 28, 2017, guiding the implementation of some articles of Decree 20/2017/ND-CP dated February 24, 2017, of the government stipulating tax administration for enterprises with related party transactions. (See details here)