With the tax authorities intensifying transfer pricing audits using a globally interconnected data system by 2026, mastering the formula for calculating related-party transactions has become a vital legal safeguard for all FDI enterprises and multinational corporations. Even a small error in determining profit margins or calculating the interest rate ceiling under Article 30% EBITDA can lead to the risk of billions of dong in back taxes and damage to the company's reputation.
Based on the core legal framework of Decree 132/2020/ND-CP, This in-depth article, compiled by a team of financial experts, aims to provide the most accurate formulas for calculating related-party transactions, as well as methods for determining pricing and optimizing interest expense, helping businesses confidently prepare pricing documentation, optimize tax obligations, and ensure absolute compliance in the era of digital tax management.
What are related-party transactions and why is it necessary to define the calculation formula?
Related party transactions (NFCs) are transactions arising between related parties in the production and business process, including: buying, selling, exchanging, leasing, renting, borrowing, lending, transferring, assigning goods, providing services; borrowing, lending, financial services, financial guarantees and other financial instruments.
Applying the correct formula for calculating related-party transactions helps businesses avoid the risk of tax assessments, back taxes, and late payment penalties. In the digital economy era of 2026, tax authorities will use big data systems to reconcile global transaction values; therefore, any discrepancies in applying the formula for calculating related-party transactions will be easily detected.
The goal in determining the formula for calculating related-party transactions is to bring the value of transactions between related parties to the "market price" (Arm's Length Principle), which is the price that independent parties would agree on under equivalent conditions in terms of transaction nature, economic conditions, and market conditions.
Legal basis and criteria for identifying affiliates
The highest legal basis currently is Decree 132/2020/ND-CP. To apply the formula for calculating related-party transactions, businesses must first determine whether they are subject to regulation through Article 5 of the Decree.
Common linking cases
Identifying related parties is a prerequisite for correctly applying tax rules; specifically, businesses need to compare their data with realistic scenarios based on ownership percentages, sources of debt, or control over personnel as follows:
Once the related-party relationship has been identified, businesses are required to use standard related-party transaction calculation formulas to declare in the four appendices attached to the annual corporate income tax return.
Methods and formulas for calculating related-party transactions.
According to Chapter II of Decree 132/2020/ND-CP, there are five methods for determining transfer pricing. Choosing the correct method will determine the accuracy of the transfer pricing formula applied by the enterprise.
Independent transaction price comparison method
This method directly compares the price in a related-party transaction with the price in an independent transaction. This is the preferred method if there is a high degree of similarity in the comparative data.
Recipe:
The GDLK price to be determined = Independent price +/- Adjustments due to differences in product characteristics and contract terms |
For example: Company A (Vietnam) manufactures electronic components and sells them to its parent company in Japan for $10 per product. At the same time, Company A sells similar components to an independent partner in Thailand for $12 per product, but the Thai partner bears the shipping costs (estimated at $0.50 per product).
- Applying the formula for calculating related-party transactions, the price of the related-party transaction is determined to be 11.5 USD.
- Conclusion: Company A is selling to its affiliates at a price $1.5 USD/product lower than the market price.
Resale price method
Typically used by commercial entities or distribution units that only purchase goods from affiliated parties and resell them to independent parties without changing the nature of the goods.
Formula for calculating the purchase price from affiliates:
Purchase price = Independent selling price x (1 – Profit margin of equivalent distribution businesses) |
For example: Company X in Vietnam is the exclusive distributor of imported smartphones from its parent company in South Korea.
- Company X's selling price to independent retailers in Vietnam is VND 20,000,000 per unit.
- Based on market data analysis, the average gross profit margin of other independent mobile phone distribution businesses of similar size and operating conditions is 15%.
Then, apply the formula for calculating related-party transactions as mentioned above:
Purchase price = 20,000,000 x (1 – 15%) = 17,000,000 VND |
Conclude: The purchase price (import price) from the parent company is considered consistent with the market price when it reaches VND 17,000,000. If Company X records the actual purchase price as VND 18,500,000, the difference of VND 1,500,000 per unit will be considered a reduction in profit and may be subject to an upward adjustment of taxable income by the tax authorities.
Cost plus profit method
This applies to units that manufacture products on order, process them, or provide services to affiliated parties.
Formula for calculating the selling price to affiliates:
Selling price to related parties = Production cost (or cost of services) x (1 + Net profit margin on cost of goods sold of equivalent independent production units). |
Net Profit Margin Comparison Method
This is the most common method due to the ease of finding comparative data. Businesses compare their net financial indicators (such as ROS, ROA, and NCP) with those of comparable independent businesses.
Profit allocation method
This is the fifth method, often applied to specific, complex transactions, those with a closed nature, or where parties jointly develop intangible assets (intellectual property) that cannot be separated to determine their individual value.
Formula for calculating related-party transactions using the profit allocation method:
Affiliate Profit = Combined Profit x Contribution Rate |
In there:
- Aggregate profit: The total profit from related-party transactions of all participating parties.
- Contribution rate: Determined based on the investment cost, assets used, or key personnel contributing to the value chain.
For example: Company A and its affiliate B jointly researched and developed a management software. A was responsible for coding, while B was responsible for interface design and marketing. The total profit from selling the software was 100 billion VND. Functional analysis showed that A's contribution accounted for 601 TP3T and B's for 401 TP3T of the value.
- Applying the formula for calculating related-party transactions and profit allocation: A's profit should be 60 billion and B's should be 40 billion. If A only accounts for 30 billion in profit, the tax authorities will adjust A's taxable income upwards by 30 billion.
Formula for calculating interest expense control
In the 2026 tax control roadmap, proper application is crucial. Formula for calculating interest on related-party transactions It is the focus of audits. The government maintains regulations to limit interest expense deductions to combat base erosion (BEPS), requiring businesses to accurately calculate EBITDA thresholds.
How to determine EBITDA according to tax law.
Many accountants confuse EBITDA in financial statements with EBITDA used for tax purposes. The standard formula for calculating related-party transaction EBITDA is:
EBITDA = Net operating profit + Net interest expense + Depreciation |
In there:
Interest expense = Total interest expense incurred – Interest on deposits |
Formula for determining the ceiling on deductible interest expense (30% EBITDA)
The total interest expense, after deducting interest on deposits and loans incurred during the period, is deductible when determining taxable corporate income, provided it does not exceed the total net profit from business operations plus net interest expense plus depreciation expense for the period of the taxpayer.
Example: Multinational corporation C has a subsidiary in Vietnam with the following figures for fiscal year 2025:
- Net revenue: 500 billion VND.
- Cost of goods sold: 350 billion VND.
- Administrative & Selling Expenses: 80 billion VND.
- Interest expenses paid to banks and the parent company: 60 billion VND.
- Interest earned from the current account: 5 billion VND.
- Depreciation expense for the year: 40 billion VND.
The steps to determine EBITDA are as follows:
- Step 1 – Calculate Net Profit from Business Operations: Net Profit = 500 – 350 – 80 – (60 – 5) = 15 billion VND.
- Step 2 – Calculate EBITDA using the related party transaction calculation formula: EBITDA = 15 + (60 – 5) + 40 = 110 billion VND.
- Step 3 – Calculate the 30% limit: Deductible interest limit = 110 x 3% = 33 billion VND.
- Step 4 – Determine the disallowed interest expense: Actual net interest expense (60 – 5) is VND 55 billion and excess interest expense (55 – 33) is VND 22 billion.
Conclude: This 22 billion VND will be excluded from deductible expenses when settling corporate income tax.
Standard Independent Trading Range
To ensure that the formula for calculating related-party transactions yields objective results, Decree 132/2020/ND-CP requires the use of the percentile statistical method.
The concept of the 35th-75th percentile range.
The tax authorities do not accept a single figure. Businesses must find a sample set (at least 5 independent comparable companies). A range from the 35th to the 75th percentile is considered an acceptable market price range.
- If the company's index is between 35 and 75: No adjustment is needed.
- If it falls outside the median: The tax authorities will adjust it to the median value of 50.
To ensure accuracy when determining these value ranges, consultation with experts is necessary. related party transaction advisory unit Experienced firms like MAN – Master Accountant Network will help businesses select the optimal sample set for comparison, minimizing the risk of expense exclusions during tax audits.
Common mistakes when applying the formula for calculating related-party transactions.
In tax consulting practice, businesses often make the following mistakes:
- Incorrect EBITDA calculation: Failing to exclude interest income before calculating 30%, or forgetting to add depreciation expense.
- Choosing the wrong company to compare with: Selecting companies that are too different in size.
- No adjustments are made for material differences: For example, differences in intellectual property rights or brand value.
- Inconsistent records: The figures in Appendix I do not match the figures in the Financial Statements.
To optimize the application of the related-party transaction calculation formula, businesses should proactively establish a transfer pricing policy (TP Policy) at the beginning of the year and retain supporting documentation for at least 10 years. Consultation with relevant parties is also recommended. related party transaction advisory services Professionalism in handling complex transactions is crucial to minimize the risk of tax assessments and ensure that pricing records comply with the latest regulations.
Conclude
The formula for calculating related-party transactions according to Decree 132/2020/ND-CP is a complex system of knowledge. Understanding and accurately calculating indicators such as EBITDA, and correctly applying the five valuation methods, will help businesses comply with the law and build a solid financial foundation.
Contact MAN – Master Accountant Network for advice and support!
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
Content is moderated by: Mr. Le Hoang Tuyen – Founder & CEO of Man, CPA Vietnam Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
References:
- Decree 132/2020/ND-CP regulating related-party transactions
- Circular 80/2021/TT-BTC provides guidance on the implementation of certain provisions of the Law on Tax Administration.
- OECD Transfer Pricing Guidelines
Frequently Asked Questions about the Formula for Calculating Affiliate Transactions
Below is a compilation of questions that businesses often encounter during the calculation process:
Not exactly. According to regulations, the portion of interest expense that is not deductible (exceeding the 30% EBITDA limit) will be carried forward to the next tax period if the EBITDA of subsequent years still has a remaining limit. The carry-forward period for interest expense is continuous and does not exceed 5 years from the year following the year in which the non-deductible interest expense was incurred. This helps businesses optimize their taxes in the medium term.
The depreciation expense used in the EBITDA calculation is the depreciation expense incurred during the tax period as stipulated by tax laws (not the depreciation figure according to accounting standards if there is a difference between the two systems).
If a business reports profits lower than the 35th percentile of the comparison group, the tax authorities have the right to determine the business's taxable income at the median level, i.e., the 50th percentile. This results in the business having to pay a significant additional amount of corporate income tax plus late payment interest.If net interest expense is disallowed due to exceeding the 30% EBITDA threshold, will this portion of the expense be lost entirely?
When calculating EBITDA, which figure is used to account for depreciation expense?
What is the practical significance of the 35th-75th percentile range in inspections?