Common problems with related transaction records and transfer pricing

Commission costs: purchase commission and sales commission

1. The parent company introduces customers to the company in Vietnam to sell goods and then the company in Vietnam must pay a commission to the related company (parent company, Group company). The question is whether this cost is deductible when calculating corporate income tax. If so, how much is it and what documents and records need to be declared and prepared so that they have complete records when inspected.

2. The parent company introduces suppliers and supports the company in Vietnam in finding sources of goods. The question is whether this cost is deductible when calculating corporate income tax. What documents need to be declared and prepared so that they have complete records when inspected.

Transfer pricing inspection

1. Currently, businesses are concerned about whether or not to prepare transfer pricing documents because they have to pay a fee for the service but do not know whether it will be accepted by the tax authority, and moreover, whether their company is subject to inspection or not? So how to minimize risks and achieve high results in this case?

Losses for more than 3 years or negative losses in equity but still operating and increasing revenue, increasing scale.
Business efficiency is insignificant but there is always funding from loans from associated companies, parent companies or capital contributors.
The company has only one customer or a few customers for many consecutive years, often selling products at only production costs excluding management costs and sales costs.
The same goods and services in the enterprise but the domestic market price is higher than the export price.
The company must pay the supplier of goods or must collect from customers who have been affiliated for many years without paying debts but still have transactions.
The origin of goods involves 3 or more different countries.

2. Currently, group companies and companies that have transactions with related parties, these transactions are adjusted in purchase price and selling price to optimize the calculation of tax payable. So what are the common cases currently used in affiliated transactions to minimize tax payable:

Transfer pricing through capital investment in assets and purchase of fixed assets at high prices.
Transfer pricing through purchasing raw materials at prices higher than normal wholesale prices.
Transfer pricing through lending or borrowing.
Transfer pricing through product warranty, product franchise on cross-border revenue.
Transfer pricing through training and contractor linkages.
Transfer pricing through domestically produced products that are exported, imported, and then sold domestically under the name of another company in the relationship.

3. Currently, businesses are very vague about the documents that need to be prepared for the tax authorities, and do not know clearly why they need to be prepared. You can refer to the following:

* Identification of related parties

a) One enterprise directly or indirectly holds at least 25% of the equity of the other enterprise;

b) Both enterprises have at least 25% of the equity held directly or indirectly by a third party;

c) One enterprise is the largest shareholder in terms of equity of the other enterprise, directly or indirectly holding at least 10% of the total shares of the other enterprise;

d) One enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured by the financial resources of the related party and financial transactions of a similar nature) provided that the loan amount is at least 25% of the equity of the borrowing enterprise and accounts for more than 50% of the total value of the medium- and long-term debts of the borrowing enterprise;
d) An enterprise appoints a member of the executive board or a controlling entity of another enterprise provided that the number of members appointed by the first enterprise accounts for more than 50% of the total number of members of the executive board or a controlling entity of the second enterprise; or a member appointed by the first enterprise has the right to decide on the financial policies or business activities of the second enterprise;

e) Two enterprises have more than 50% of the members of the executive board or have the same member of the executive board having the right to decide on the financial policies or business activities appointed by a third party;

…….
(To have the above information, it is necessary to have a diagram of the capital model, relationships, and transactions of the companies in which the company and the leader, the relative of the company leader have a relationship)

** Identify related transactions:

Buy raw materials…
Buy fixed assets
Buy goods
Pay commission
Borrow
Sell fixed assets
Sell raw materials
Sell goods, finished products
Receive commission
Lend
….

** * Identify independent transactions in the company:

Buy raw materials…
Buy fixed assets
Buy goods
Pay commission
Borrow
Sell fixed assets
Sell raw materials
Sell goods, finished products
Receive commission
Lend
….

**** Learn to determine the applicable method

1. Method of comparing the price of related transactions with the price of independent transactions (abbreviated as the method of comparing independent transaction prices).
2. Method of comparing profit margins: This method is divided into 3 methods:

Method of comparing the gross profit margin on revenue (resale price method).
Method of comparing the gross profit margin on cost price (cost plus profit method).
Method of comparing the net profit margin.

3. Method of allocating profits among related parties”

***** Collect documents, analyze information, explain price basis…

Prepare documents according to legal regulations
Details attached

***** Re-calculate prices, costs, revenue, data sources

Re-calculated value revenue
Re-calculated value costs
…………..
Additional tax payment………
******* File storage:

Market price report containing full information according to regulations (Forms 01, 02, 03).
Note that in some cases, the forms have required information and some are exempted.”

Comparative data sources

Currently, there are many different opinions about data sources and the transparency of non-existent data, and in Vietnam, this issue is not clear, so the inspection from the tax authority and the objections of enterprises are very general, specifically, there are the following sources of agency data:

1. Data sources within the enterprise, of the group, member companies

2. Independent external data sources, from another company that the company collects from sources such as purchasing data, taking from websites, and in other forms…

3. Sources from state agencies, tax authority databases: Tax authority databases are used in risk management and transfer pricing determination for cases of violations of the provisions in Clause 3, Article 12 of this Decree.

Cases of non-deductible cost risks in related party transactions

1. Related party transactions are not consistent with the nature of independent transactions and do not contribute to generating revenue and income for taxpayers:

The related party’s activities are not related to the taxpayer
The costs paid to the related party are not commensurate with the transaction value
The related party has no rights or responsibilities related to the products in the transaction

The related party’s country does not collect corporate income tax, the related party does not create added value for the taxpayer.

2. Related party transactions on services

The service only serves the interests of the related party
The service only serves the interests of the related party’s shareholders
The service is duplicated for many related parties, the added value for the taxpayer is not determined
The taxpayer is a member of the group who shares the benefits
The added value compared to the value of the service purchased from a third party but rearranged through the related party’s intermediary.”

3. Interest expense

Interest expense incurred during the period > 20% (Net profit before interest and depreciation).

Penalties in cases prescribed in connection with the preparation of transfer pricing records

The most important issue is how much money will be fined and how will the fine be calculated so that the company can decide whether to prepare transfer pricing records or not?

According to regulations:
a) Tax authorities have the right to determine the price; profit margin; profit allocation ratio used for tax declaration and calculation, determine taxable income or corporate income tax payable for taxpayers who have related-party transactions during the tax period based on information, data and analysis and assessment of the Tax authorities, in cases where taxpayers commit the following violations of the law on determining transfer pricing:
Taxpayers do not declare, do not declare fully information or do not submit Form No. 01 in the Appendix issued with this Decree;
b) Taxpayers do not provide complete information in the Transfer Pricing Document prescribed in Form No. 02 and Form No. 03 in the Appendix issued with this Decree or do not present the Transfer Pricing Document and data, vouchers and documents used as the basis for comparative analysis and price determination in the Transfer Pricing Document upon request of the Tax Authority within the time limit prescribed in this Decree;

c) Taxpayers use dishonest or untrue information on independent transactions to analyze comparatively and declare transfer pricing or rely on illegal, invalid documents, data and vouchers or do not clearly state the origin to determine the price, profit margin or profit allocation ratio applicable to the transfer pricing;

d) Taxpayers violate the provisions on transfer pricing determination in Article 11 of this Decree.

In some countries, when transfer pricing is determined to lead to an unhealthy price competition environment, the State will punish transfer pricing by imposing a fine on price behavior and applying a special tax rate to the enterprise within a certain period of time from the time of discovery (Corporate income tax rate, import and export tax, mandatory fees).

In case the tax authority adjusts or fixes the price, profit margin, profit allocation ratio of the taxpayer, the adjusted or fixed value is the median value of the standard independent transaction value range.

Solution

Companies need to understand their company’s transactions and transactions with transfer pricing risks to prepare documents to avoid additional collection as well as explain appropriately to the tax authority. Contact us for a more detailed discussion on the Company’s situation.

The struggle to prove which data source is suitable for your business is a vital issue in protecting data in transfer pricing documents. We also know that currently there is no agency in Vietnam that stands up to independently assert the protection of business interests regarding data. In addition, the tax authority provides a ratio, a general figure for the management purpose of the tax authority. Of course, the tax authority has its own way of arguing, and each company has its own characteristics that cannot be exactly the same as another company, so the company also has its own way of arguing. Therefore, harmonizing the interests of the tax authority and the business is the hinge of finding a common solution for all parties, but it must comply with current regulations. Regulations are sometimes not applied in practice in enough cases, and in reality, they are amended many times…………..Contact us for a more detailed discussion of the Company’s situation.

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