Tax Administration on Associated Enterprises Related Transactions

On 24th February 2017, the Government promulgated the Decree 20/2017/ND-CP regarding tax administration on associated enterprises related transactions (“Decree 20”), under which regulates (i) specific principles, methods, sequences, and procedures on price fixing related to associated transactions; and (ii) obligations of taxpayers in declaring and fixing the price related to associated transactions as well as paying tax.

Determination of associated enterprises and its related transactions

The related transactions are transactions arisen between associated enterprises which share common interests. Transactions include:

  1. purchase, sale, exchange, lease out, rent, borrow, lend out, deliver, and transfer (a) machines, equipment, goods, services; (b) tangible or intangible assets;
  2. borrow, lend out, provide financial services, financial securities and other financial instruments; and
  3. reach agreements for common use of resources for collaborating and/or cooperating to exploiting the use of manpower; split the expenses between those associated enterprises.

In which, the associated enterprises are defined hereinafter:

  1. There is one party has the participation directly or indirectly in the execution, governance, share capital, or investment to the other party;
  2. Which parties directly or indirectly subject to execution, governance, share capital, or investment of the other party.

Decree 20 specify terms to define Associate Enterprises:

  1. One enterprise holds directly or indirectly not less than 25% share capital of the other enterprise’s voting power;
  2. Any other third party directly or indirectly holds not less than 25% share capital of  each of such enterprises’ voting power;
  3. Any of the party has the right to appoint members of the executive board or govern over (“Executive Board”) the other party when (a) such members appointed account for more than 50% of the total members at Executive Board; or (b) appointed members have the power to regulate financial policies or business activities in the other enterprise;
  4. Any other third party has the right to appoint Executive Board of the other two when the other two enterprises equally have more than 50% members on the Executive Board or a member with power to regulate financial policies or business activities; and
  5. Other specific cases under the Decree 20.

Obligation to declare and fix the price related to associated transactions

Associated Enterprises are accountable for:

  1. declaring relationship and transaction related information on standard Form 1 at this Decree Appendix; and
  2. submitting the above Form 1 and the Declaration for Corporate Income Tax Accounting (“CIT”);
  3. engrossing and archiving Price Fixing document of a related transaction for a requested presentation by Tax authorities, comprising:
    • a national standard Form 02 Application attached in the Decree Appendix;
    • a multinational company Form 03 Application attached in the Decree Appendix;
    • a cross border standard Form 04 Income Statement from the parent company attached in the Decree Appendix.

Enterprise is exempt from making a declaration of Price Fixing related to an associated transaction; however, an associated enterprise must somehow indicate the basis sections i and ii standard Form 01 attached in Decree 20 Appendix in order to get the exemption only if the related transaction is arisen between associated Parties which:

  1. subject to Vietnam CIT;
  2. entitle same CIT rates as enterprises; and
  3. is entitled to CIT incentives by neither party during tax assessment.

Enterprise must declare the Price Fixing of related transactions under the provisions of Decree 20 but is exempt from preparing Price Fixing for related transactions as followings:

  1. Total revenue in a tax assessment is less than VND 50 billion and the total value of all related transactions generated in the tax assessment is less than VND 30 billion;
  2. Advance Price Fixing Methodology has been signed for the submission of Annual Report in accordance with the law on Advance Price Fixing Methodology;
  3. Enterprise which (a) operation conducts simple functions towards sectors of distribution, production, and processing; (b) revenue is less than VND 200 billion; (c) generates no income and expenses from activities being exploitation and intangibles use; and (d) earnings before interest and taxes (EBIT) is incurred not less than: 5% net sales for distribution sector, 10% net sales for production sector, and 15% net sales for processing sector.

Decree 20 took effect from 01st May 2017.