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Tax management over associated transaction enterprises

21 April 2017
VGP

The Government on February 24 issued Decree 20/2017/ND-CP on tax management of enterprises conducting associated transactions (Decree 20).

Question: What are types of associated transactions?

Answer: Under Decree 20, an Associated Transaction is one that arises between the parties with associated partnership in the course of production and business, including: Purchase, sell, exchange, rent, rent out, borrow, lend and transfer machinery, equipment, goods and services; borrowing, lending, financial services, financial guarantee and other financial instruments; purchase, sell, exchange, rent, rent out, borrow, lend and transfer tangible and intangible assets, and agreement on the mutual use of resources such as cooperation to exploit human resources; and sharing of expenses among associated parties.

The parties are determined as having associated relationship with each other of (i) one party gets involved directly or indirectly in the management and control of capital contributions to or investment in the other; (ii) both parties are directly or indirectly subject to the management, control, capital construction or investment by another, which falls into one of the following specific cases:

One enterprise directly or indirectly holds at least 25% of equity of the other; or both enterprises have at least 25% of their equities held directly or indirectly by a third party;

One enterprise is the biggest shareholder in respect of equality of the other, and directly or indirectly holds at least 10% of the total of shares of the other;

One enterprises provides a guarantee or loan for another under whatsoever form provided that the loan must account for at least 25% of equity of the borrowing enterprise and make up more than 25% of equity of the borrowing enterprise and make up more than 50% of the total value of its medium and long term debts.

One enterprise appoints members of the board of directors which manages or holds control of another provided that the number of members appointed by the former enterprise accounts for more than 50% of a total number of members of the board of directors which manages or holds control of the latter; or one member appointed by the former enterprise has the right to decide financial policies or business operations of the latter.

Two business enterprises are related to each other either as a head office and its permanent establishment or as permanent establishments of a foreign organization or individual.

One or more enterprises are under the control of one individual through his capital contribution thereto or his direct involvement in the operation thereof;

Other cases where one enterprise is responsible for actually managing, controlling and making decisions on business activities of the other.

Question: What are the regulations on methods for determining the price of an associated transaction and expenses to calculate tax in some cases with typical associated transactions?

Answer:

1. Methods for determining the price of an associated transaction

The price of an associated transaction is determined according to one of the following methods:

  • The method of comparing the price of an associated transaction with that of an independent transaction.
  • The method of comparing the rate of return of taxpayers with that of independent subjects in comparison.
  • The method of allocating profits between associated parties.

2. Determination of expenses to calculate tax in some cases with typical associated transactions

  • Expenses in associated transactions shall not be deducted from the tax calculating expenses in the period if these expenses do not fit with the nature of independent transactions or do not contribute to the revenue or income from production and business activities of taxpayers.
  • For service provision transactions between associated parties, service expenses will not deducted when determining the taxable income. These include: expenses arising from the services provided for the sole purpose of serving the interests of or creating value for other associated parties; services serving the interests of shareholders of an associated party; services which have been charged for many times as multiple associated parties provide the same services, resulting in an inability to determine the added value for taxpayers; services which are a benefit obtained by taxpayers as members of a corporation; and the expenses that the associated party adds to the services provided by a third party through an intermediary as the associated party do not contribute to the values of these services.
  • A taxpayer’s total interest for expenses arising in the period quality as a deduction if it is determined that the income subject to corporate income tax does not exceed 20% of the total net profit generated from business activities, plus loan interest expenses and depreciation expenses arising in the period./.
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