With the growing need to expand operations in different fields and countries, businesses are increasingly expanding and developing their network and activities to create favorable conditions for their businesses around the world. This includes building a closed supplier eco-system. However, from tax administration perspective, transactions between enterprises in the same system or between enterprises that have capital control and management on each other are understood as related transactions. The regulation and supervision of tax authorities on these transactions are quite stringent.
To help businesses avoid tax risks when associated transactions arise, it is necessary to check if the records have complied with tax regulations and correctly assess what the real risks are. Let us identify tax risks in affiliate transactions through this article.
What is affiliate transaction?
According to Clause 2, Article 1 of ‘Decree 132/2020/ND-CP’, affiliate transactions are transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning goods, providing services, loans, financial services, financial guarantees, other financial instruments, transferring tangible assets more intangible assets, and agreements to buy, sell, or use common resources such as assets, capital, labor activities, and cost-sharing among related parties, except for business transactions in goods and services subject to the state’s price adjustment scope in accordance with the law on prices.
When reviewing corporate tax records, tax authorities pay special attention to transactions in which purchase and sale price is not consistent with the market price or lower than the cost price, or the price in signed contracts. Service providers who do not actually generate services, payment activities on behalf of employees, costs for personnel when moving to work between affiliated enterprises, costs for trademarks, copyrights, secrets, etc … many other transactions come under the lens of the authorities.
What are the tax risks in an associated transactions ?
Tax risks in associated transactions include, but are not limited to loss, damage to property or impaired business profits that may occur while performing transfer pricing activities and transfers, valuation of corporate income tax and inspection of transfer pricing issues at the enterprise.
Here are a few tax risks that frequently arise in affiliate transactions:
- Errors in declaration are often encountered such as: Enterprises not declaring, or late declaration, or incomplete declaration, or failure to submit Forms 01, 02, and 03 in Appendix I, Appendix II, and Appendix III under ‘Decree 132/2020/ND-CP.
- Documenting price determination in associated transactions: Using dishonest transaction information, unrealistic data, comparing, declaring and determining the associated transaction price, or relying on invalid documents, data and vouchers, or not specifying the basis of the price, etc. Such violations lead to tax authorities imposing of fines for violations.
- Wrongful identification and incorrect application of the transfer pricing method when declaring and making documents: Businesses need to consider evaluating and determining the correct method of pricing. This is very necessary for the purpose of determining the appropriate value of goods and services and is the basis of determining the payable tax amount.
- Risks when explaining directly to tax authorities: Data and documents are not consistent with declarations and dossiers. Such obstructions lead to long delays.
What to do to avoid tax risks in associated transactions ?
To avoid tax risks in related-party transactions, businesses should pay attention to the following:
- Review and re-evaluate dossiers on determining the price of related-party transactions. Enterprises should promptly detect errors (if any) in the process of making dossiers and correct, supplement, and offer remedial solutions to avoid risks and losses when declaring and paying tax
- Working with the tax office: Determining which questions will be answered and questions that can be answered later to the tax office, and providing the most reasonable and accurate answer. This limits answers that are unclear or uncertain which may lead to tax officials misinterpreting information on the dossier when explaining.
- Regularly update new regulations: To master the information related to affiliate transactions, businesses can also use services from reputable tax and accounting consulting firms experienced in this field to provide consulting services such as: making declarations of associated transactions, preparing transfer prices determination dossiers, etc.
Thus, these are some of the tax risks in associated transactions that we frequently encounter in the implementation process. Hopefully, this article would help businesses understand the tax risks in associated transactions and limit those risks so that plans and decisions suitable for its business activities in Vietnam can be made. This not only helps businesses optimize business profits, but also ensures compliance with tax laws and expands the scale of their business activities.
The article is based on applicable law at the time noted above and may no longer be relevant at the time the reader approaches this article due to the change in applicable law and the specific case in which the reader wishes to apply. Therefore, the article has only reference values.