Related Party Transaction Report: Professional Consulting for Businesses

The reporting of related-party transactions is becoming one of the most closely scrutinized aspects by tax authorities for FDI enterprises, parent-subsidiary companies, and entities with internal transactions. Incorrect declarations, incomplete documentation, or failure to demonstrate the principle of independent accounting can lead to tax arrears, late payment penalties, and significant risks of tax assessment. This article will help businesses understand the latest regulations on reporting related-party transactions, conditions for exemption from reporting, how to calculate the ceiling on interest expense under form 30% EBITDA, the standard reporting process, and common mistakes to avoid to ensure effective tax compliance.

What is a related-party transaction report?

The related-party transaction report is a collection of documents and declarations that businesses with related-party transactions must submit to the tax authorities to demonstrate that these transactions were conducted at market prices (Arm's Length Principle).

Who are the related parties?

According to Article 5 Decree 132/2020/ND-CP, The affiliation is defined based on control, management, or capital contribution. There are 12 common forms, with businesses often paying particular attention to the following cases:

• Ownership: One business directly or indirectly holds at least 25% of the owner's equity of the other business; or both businesses have at least 25% of the owner's equity held by a third party.
• Management and control: One business designates members of its board of directors to manage or control the other business, respectively.
• Lending relationships: This is a "hot spot" during inspections. One business lends capital to another, provides guarantees, or controls at least 25% of the owner's equity and accounts for over 50% of the total value of the borrowing business's medium and long-term debts.

See details: Forms of related-party transactions.

Incorrectly identifying related parties can lead to the rejection of the entire related-party transaction report, resulting in significant risks of back taxes and late payment penalties for the business entity.

Subjects required to prepare price determination documents and conditions for exemption from these requirements.

Not all businesses with related-party transactions are required to prepare all the complex documentation. The Tax Authority has set thresholds to reduce the administrative burden for small businesses, but filing remains mandatory.

Who is required to participate?

All taxpayers who have transactions with related parties (regardless of the value) must declare the required appendices. However, the level of detail and the required supporting documentation in the related-party transaction report will vary depending on the revenue and transaction value of each financial year.

Cases exempt from preparing documentation for determining transfer pricing.

Based on the latest regulations, businesses are exempt from filing related-party transaction records but must still declare Appendix I if they fall under the following cases:

Important Note: Even if exempt from preparing a national or global corporate profile, businesses must still complete the related-party transaction reporting section on the corporate income tax return by the deadline.

To determine correctly which entities are required to prepare price determination documents or are exempt, businesses should consult with a professional. related party transaction advisory services With the support of reputable, specialized, and experienced units, businesses can ensure timely declarations, protect their rights, and minimize the risk of tax arrears and assessments.

What are the components of a related-party transaction reporting file?

A complete and accurate set of documents in accordance with current regulations includes two main parts: the appendix on related-party transactions and Transfer pricing determination dossier.

These appendices must be declared and submitted along with the tax return.

Businesses need to complete the following forms:

• Appendix I: Information on related party relationships and related party transactions. This is the most important form for tax authorities to identify risks based on profit margin and transaction value indicators.
• Appendix II: List of information and documents required for the National File.
• Appendix III: List of information and documents required for the Global Corporate Profile.
• Appendix IV: Declaration of Information for the Country-by-Country Report.

See details: Instructions for completing the appendix to related-party transactions.

Transfer pricing records (Stored at the company)

This is a crucial part of demonstrating the legality of the related-party transaction report and the reasonableness of the transaction prices to the tax authorities:

• Local File: Focuses on transactions occurring in Vietnam, providing detailed functional analysis, asset analysis, risk assessment (FAR analysis), and price comparison methods.
• Global corporate profile (Master File): Provides an overview of the global corporation's supply chain, ownership structure, intangible assets, and internal financial arrangements.
• Country-by-Country Profit Reporting (CbCR): Applicable to corporations with consolidated global revenue of VND 18 trillion or more, helping tax authorities assess whether profit allocation is commensurate with actual economic performance.

Thorough preparation of related-party transaction reports at the beginning of the fiscal year will help businesses proactively manage their data and avoid confusion when unexpected audits are requested by specialized transfer pricing inspection teams.

The process for completing accurate related-party transaction reports.

To create a high-quality and compelling related-party transaction report for the tax authorities, businesses should:

Step 1: Review and identify stakeholders

Businesses need to cross-reference the corporate organizational chart, shareholder list, board meeting minutes, and loan records. Don't forget to also review influential executives, as this is often a loophole that leads to the related-party transaction report being deemed incomplete.

Step 2: Gather financial data and transaction contracts.

Gather all economic contracts, invoices, and documents related to related-party transactions such as royalties, management fees, and material purchases. These figures must match the accounting ledger and audited financial statements. Data consistency is crucial in the reporting of related-party transactions.

Step 3: Compare and contrast the methods for determining the price.

Businesses must choose an appropriate method, then conduct a search for comparable independent businesses on international databases such as Orbis, Bloomberg, or Moody's to determine the benchmark market profit margin.

Step 4: Prepare a detailed declaration appendix.

Use the latest version of the Tax Declaration Support Software (HTKK) to fill in the Appendices. Ensure that the tax identification numbers and transaction values of the related parties are entered with absolute accuracy. A small error in this step could cause the entire related-party transaction report to be flagged as high-risk by the system.

Step 5: Check for logic and perform a final verification.

Before filing, check the logic between the numbers. For example, interest expense on the related-party transaction report must correspond to the declared loan and must strictly comply with the 30% EBITDA interest expense ceiling regulations.

See details: Related-party transaction reporting service.

Ceiling on interest expense and EBITDA in the related-party transaction report.

Regulations regarding the limitation of interest expense remain the most challenging issue. According to Decree 132, the total interest expense after deducting interest on deposits and loans incurred during the period, which is deductible when determining taxable corporate income, must not exceed 30% of the total net profit from business operations plus net interest expense and depreciation expense during the period (EBITDA).

How to accurately calculate EBITDA for tax purposes.

The EBITDA used to calculate the interest expense ceiling in the related-party transaction report differs from the EBITDA used in financial management. Businesses should note that operating profit is taken as the base, and then net interest expense and depreciation that were deducted when calculating that profit are added back. If this figure is negative, all interest expense incurred with related parties during the period will be disallowed.

Reference: How to calculate interest expense according to Decree 132.

Transfer interest expense to the next period.

The portion of interest expense not deductible exceeding the 30% EBITDA will be carried forward to the next tax period when determining the total deductible interest expense, provided that the total interest expense incurred in the next period is less than the 30% EBITDA. The carry-forward period shall not exceed five years from the year following the year in which the non-deductible interest expense was incurred. Closely monitoring this interest expense balance is an essential part of the annual related-party transaction report.

Common risks and errors when settling transfer pricing tax

Based on tax audit experience, there are typical errors that often lead to businesses having their related-party transaction reports rejected and being overcharged:

• Exceeding the interest expense ceiling: Many accountants are not yet familiar with how to exclude interest expenses exceeding the 30% EBITDA limit from the 03/TNDN tax return, leading to incorrect declarations of tax payable.
• Choosing dissimilar comparison targets: This is the most common mistake. Using companies that are not in the same industry, not the same size, or have vastly different intangible assets to compare profit margins in a related-party transaction report will make the report unconvincing.
• Lack of documentation proving internal services: Management fees paid to the parent company are often scrutinized very closely. If a business cannot provide evidence of benefits and proof of actual services, the tax authorities will exclude these expenses from the related-party transaction report.

Practical experience shows that if a company's related-party transaction report shows consistently negative or lower-than-market-standard profit margins for several years, the company will almost certainly be on the priority list for transfer pricing audits.

Deadline for submitting and penalties for late submission of related-party transaction reports.

Compliance with deadlines is the first proof of a business's transparency before the law.

• Deadline for filing: By law, the deadline for submitting the related-party transaction report (electronic appendices) coincides with the deadline for filing the corporate income tax return. For the fiscal year ending December 31, 2025, the deadline will be March 31, 2026.
• Deadline for providing pricing documentation: Local File and Master File must be prepared and readily available. Businesses must provide them within 15 working days of an inspection request, or within 30 working days during the pre-inspection consultation period.

Legal consequences of delay: According to Decree 125/2020/ND-CP, failure to submit the appendix on related-party transactions on time not only results in administrative fines but also deprives businesses of their right to protect their transaction prices. In this case, the tax authorities have the right to determine the amount of tax payable based on the tax department's database, which often leads to extremely large tax arrears plus a late payment penalty of 0.031 TP3T/day.

Conclude

In summary, completing the related-party transaction report is not only the responsibility of the accounting department but also requires close cooperation from management and relevant departments. To ensure tax safety, businesses need to proactively review internal contracts and build a strong set of pricing documentation to protect profit margins against questions from auditors.

If your business is struggling to find comparable data or is unsure about how to calculate EBITDA, consider seeking expert advice and support from related-party transaction specialists like MAN – Master Accountant Network.

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 production by: Mr. Le Hoang Tuyen – Founder and CEO of MAN – Master Accountant Network, CPA Vietnam with over 30 years of experience in accounting, auditing, and financial consulting.

Frequently Asked Questions about Affiliate Transaction Reporting

Below is a summary of common questions when implementing related party transaction reporting: