VI What is a business with related transactions? Principles of tax management for businesses with related transactions under Decree 132? How to determine costs to calculate tax for businesses with related transactions? Through today’s article, let’s learn about this issue with Pham Consult!
What is a business with related transactions?
Related party transaction is a term used in the economic and financial fields to refer to transactions occurring between related parties. These related parties can be subsidiaries, parent companies, branches, parties with the same owner or parties with mutual control.
And in Clause 22, Article 3 of the Law on Tax Administration 2019 also explains: Related party transactions are transactions between related parties.
Accordingly, it can be understood that an enterprise with related party transactions is an enterprise that has transactions with parties that have related party relationships with that enterprise.
What are the principles of tax management for enterprises with related party transactions according to Decree 132?
Decree 132/2020/ND-CP stipulates tax management for enterprises with related party transactions. Accordingly:
– This Decree stipulates the principles, methods, and procedures for determining the factors forming the price of related party transactions; the rights and obligations of taxpayers in determining the price of related party transactions, and declaration procedures; Responsibilities of state agencies in tax management for taxpayers with related-party transactions.
– Related-party transactions within the scope of this Decree are transactions of purchase, sale, exchange, lease, rental, borrowing, lending, transfer, assignment of goods, provision of services; borrowing, lending, financial services, financial guarantees and other financial instruments; purchase, sale, exchange, lease, rental, borrowing, lending, transfer, assignment of tangible assets, intangible assets and agreements on purchase, sale, shared use of resources such as assets, capital, labor, cost sharing between related parties, except for business transactions for goods and services within the scope of State price adjustment implemented in accordance with the provisions of the law on prices.
The principles of tax management for enterprises with related-party transactions are specifically stipulated in Article 3 of Decree 132/2020/ND-CP as follows:
– Taxpayers with related-party transactions must eliminate factors that reduce tax obligations due to related-party relationships, which influence and influence them to declare and determine tax obligations for related-party transactions equivalent to independent transactions with the same conditions.
– Tax authorities manage, inspect and examine the transfer pricing of taxpayers according to the principle of independent transactions and the nature of the activities and transactions, which determine the tax liability corresponding to the value created from the nature of the transaction, production and business activities of taxpayers, do not recognize related transactions that do not follow the principle of independent transactions, reducing the tax liability of enterprises to the state budget and make adjustments to the price of such related transactions to correctly determine the tax liability prescribed by Decree 132/2020/ND-CP
How to determine costs to calculate tax for enterprises with related transactions?
Article 16 of Decree 132/2020/ND-CP provides guidance on how to determine costs for tax calculation for enterprises with related-party transactions, specifically as follows:
(1) Costs of related-party transactions that are not consistent with the nature of independent transactions or do not contribute to generating revenue or income for the taxpayer’s production and business activities shall not be included in deductible costs when determining taxable income for the period, including:
– Payment costs to related parties that do not perform any production or business activities related to the taxpayer’s industry, production and business activities; do not have related rights or responsibilities for assets, goods and services provided to the taxpayer;
– Payment costs to related parties that have production and business activities but the scale of assets, number of employees and production and business functions are not commensurate with the transaction value that the related party receives from the taxpayer;
– Payment expenses to related parties who are residents of a country or territory that does not collect corporate income tax, and do not contribute to generating revenue or added value for the taxpayer’s production and business activities.
(2) Service expenses between related parties:
– Except for the expenses specified in Point b, Clause 2, Article 16 of Decree 132/2020/ND-CP, taxpayers are allowed to deduct service expenses from taxable expenses in the period if they meet the following conditions:
+ The services provided have commercial, financial, economic value and directly serve the taxpayer’s production and business activities;
+ Services from related parties are determined to have been provided under similar circumstances and independent parties pay for these services;
+ Service fees are paid on the basis of the arm’s length principle and the method of calculating transfer pricing or allocating service fees between related parties must be applied consistently throughout the group for similar types of services and the taxpayer must provide contracts, documents, invoices and information on the calculation method, allocation factors and pricing policies of the group for the services provided.
In cases related to centers performing specialized functions and synergies to create added value of the group, the taxpayer must determine the total value created from these functions, determine the profit allocation level in accordance with the contribution value of the related parties after deducting (-) the corresponding service fee for the related party performing the coordination function, providing services of independent transactions of similar nature.
– Service costs that are not deductible when determining taxable income include:
+ Costs arising from services provided solely for the purpose of serving the interests or creating value for other related parties;
+ Services serving the interests of shareholders of the related party;
+ Duplicated fee services provided by multiple related parties for the same type of service, with no identifiable added value for the taxpayer;
+ Services are essentially benefits received by the taxpayer as a member of a group and the costs that the related party adds to the service provided by a third party through an intermediary of the related party that does not contribute additional value to the service.
(3) Total interest expenses deductible when determining taxable income for enterprises with related-party transactions:
– Total interest expenses after deducting deposit interest and loan interest arising in the period of the taxpayer that are deductible when determining taxable income for the enterprise shall not exceed 30% of the total net profit from business activities in the period plus interest expenses after deducting deposit interest and loan interest arising in the period plus depreciation expenses arising in the period of the taxpayer;
– The portion of interest expenses that are not deductible according to the provisions of Point a, Clause 3, Article 16 of Decree 132/2020/ND-CP shall be transferred to the next tax period when determining the total deductible interest expenses in case the total deductible interest expenses arising in the next tax period are lower than the level prescribed in Point a of this Clause. The period for transferring interest expenses calculated continuously shall not exceed 05 years from the year following the year in which the non-deductible interest expenses arise;
– The provisions at Point a, Clause 3, Article 16 of Decree 132/2020/ND-CP do not apply to loans of taxpayers being credit institutions under the Law on Credit Institutions; insurance business organizations under the Law on Insurance Business; official development assistance (ODA) loans, preferential loans of the Government implemented in the form of the Government borrowing from abroad to lend to enterprises; loans to implement national target programs (new rural areas and sustainable poverty reduction programs); loans to invest in programs and projects implementing the State’s social welfare policies (resettlement housing, housing for workers, students, social housing and other public welfare projects); – Taxpayers declare the interest expense ratio in the tax period according to Appendix I issued with this Decree.
+ Service fees are paid on the basis of the arm’s length principle and the method of calculating transfer pricing or allocating service fees between related parties must be applied consistently throughout the group for similar types of services and the taxpayer must provide contracts, documents, invoices and information on the calculation method, allocation factors and pricing policies of the group for the services provided.
In cases related to centers performing specialized functions and synergies to create added value of the group, the taxpayer must determine the total value created from these functions, determine the profit allocation level in accordance with the contribution value of the related parties after deducting (-) the corresponding service fee for the related party performing the coordination function, providing services of independent transactions of similar nature.
– Service costs that are not deductible when determining taxable income include:
+ Costs arising from services provided solely for the purpose of serving the interests or creating value for other related parties;
+ Services serving the interests of shareholders of the related party;
+ Duplicated fee services provided by multiple related parties for the same type of service, with no identifiable added value for the taxpayer;
+ Services are essentially benefits received by the taxpayer as a member of a group and the costs that the related party adds to the service provided by a third party through an intermediary of the related party that does not contribute additional value to the service.
(3) Total interest expenses deductible when determining taxable income for enterprises with related-party transactions:
– Total interest expenses after deducting deposit interest and loan interest arising in the period of the taxpayer that are deductible when determining taxable income for the enterprise shall not exceed 30% of the total net profit from business activities in the period plus interest expenses after deducting deposit interest and loan interest arising in the period plus depreciation expenses arising in the period of the taxpayer;
– The portion of interest expenses that are not deductible according to the provisions of Point a, Clause 3, Article 16 of Decree 132/2020/ND-CP shall be transferred to the next tax period when determining the total deductible interest expenses in case the total deductible interest expenses arising in the next tax period are lower than the level prescribed in Point a of this Clause. The period for transferring interest expenses calculated continuously shall not exceed 05 years from the year following the year in which the non-deductible interest expenses arise;
– The provisions at Point a, Clause 3, Article 16 of Decree 132/2020/ND-CP do not apply to loans of taxpayers being credit institutions under the Law on Credit Institutions; insurance business organizations under the Law on Insurance Business; official development assistance (ODA) loans, preferential loans of the Government implemented in the form of the Government borrowing from abroad to lend to enterprises; loans to implement national target programs (new rural areas and sustainable poverty reduction programs); loans to invest in programs and projects implementing the State’s social welfare policies (resettlement housing, housing for workers, students, social housing and other public welfare projects); – Taxpayers declare the interest expense ratio in the tax period according to Appendix I issued with this Decree.
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