Guidelines for excluding related-party elements in tax declarations according to Decree 132

In the era of globalization, multinational corporations and groups of companies with cross-ownership relationships are increasingly thriving in Vietnam. This growth is accompanied by challenges in tax management, particularly regarding related-party transactions (Transfer Pricing). To ensure fairness and transparency, Vietnamese law has enacted strict regulations on excluding related-party transactions from tax declarations. Understanding and correctly implementing this principle is not only a legal responsibility but also a way for businesses to protect themselves from the risk of being unfairly assessed by authorities.

Do businesses have to exclude factors that reduce their tax liability?

This is a question many accountants and business managers ask when they first encounter related-party transaction records. The short answer is: Yes, this is a mandatory obligation clearly stipulated in legal regulations.

Core legal basis

According to the provisions of Clause 1, Article 3 Decree 132/2020/ND-CP, The principles applicable to taxpayers with related-party transactions are clearly stated:

“"Taxpayers with related-party transactions must exclude factors that reduce tax liability due to the influence or impact of the related-party relationship in order to declare and determine tax liability for related-party transactions equivalent to independent transactions under the same conditions."”

Analysis of the principle of excluding related parties in tax declarations.

This principle is based on the assumption that, in an independent (non-affiliated) relationship, the parties will agree on prices based on maximizing economic benefits and market fairness. However, when there is an affiliated relationship (e.g., parent and subsidiary), transaction prices may be subjectively adjusted to shift profits from high-tax areas to low-tax areas, or to take advantage of tax incentives.

To exclude related-party transactions from tax returns, businesses need to perform two main tasks:

• Eliminate influence: Determine whether current prices and profit margins are being affected by cronyism or ownership.
• Bringing to independent value: Adjusting the financial indicators of related-party transactions to be equivalent to transactions between independent parties under similar conditions.

The supervisory role of the Tax Authority

Clause 2 of Article 3 of this Decree also affirms the authority of the Tax Authority in managing, inspecting, and auditing. The Tax Authority will base its actions on the principle of "standalone transactions" and "the nature of the activity and transaction determines the tax liability." If a business conducts transactions that do not adhere to the standoff principle, resulting in a reduction of the tax payable, the Tax Authority will not recognize those transactions and will adjust the transaction price to determine the correct tax liability.

Cases where taxpayers are assessed tax on related-party transactions.

The biggest risk for businesses that fail to properly exclude related-party transactions in their tax returns is that the tax authorities may exercise their right to assess the tax liability. In this case, the business loses its autonomy in tax declaration and often faces very high back taxes and late payment penalties.

Based on Article 50 Tax Administration Law 2019, Taxpayers with related-party transactions will be subject to tax assessment if they fall under one of the following nine violations:

Violations related to registration and tax filing.

If a business has related-party transactions but does not register for tax, does not file tax returns (Appendices I, II, III, IV according to Decree 132/2020/ND-CP) or does not submit supplementary documents as required by the management agency.

Errors in accounting records and data.

In cases where businesses fail to reflect, or reflect incompletely or dishonestly, figures in their accounting records, this lack of transparency in record-keeping makes it difficult for tax authorities to accurately determine tax obligations, leading to the need for assessment.

Failure to submit documents on time.

When an inspection or audit is ordered, if the taxpayer fails to present the necessary books, invoices, receipts, and other documents related to determining the amount of tax payable, the tax authority has the right to determine the amount of tax payable.

Failure to comply with inspection and audit decisions.

Obstructing or failing to cooperate with tax inspectors is one of the direct causes leading to the application of harsh tax assessment measures.

Transactions not based on market value.

This is the most common error related to failing to exclude related-party transactions in tax declarations. When businesses buy, sell, or exchange goods and services at prices unusually higher or lower than market prices in order to shift profits, the tax authorities will intervene.

Using illegal invoices

The purchase or exchange of goods using illegal invoices, or the illegal use of invoices (even if the goods are genuine) to declare revenue and expenses, will result in the disallowance of expenses and the assessment of sales tax.

Signs of fleeing or dispersing assets.

If the tax authorities discover that a business is attempting to conceal assets to evade tax obligations, they will immediately assess the amount of tax due to recover the funds.

Transactions that are not in line with economic principles.

This is an important principle in Decree 132/2020/ND-CP. If a business conducts transactions that do not reflect actual occurrences, or complex transactions that do not inherently generate economic value but are solely aimed at reducing taxes, these transactions will be excluded when excluding related-party transactions in tax declarations.

Violation of the obligation to declare transfer pricing.

Specifically, this refers to businesses failing to comply with regulations on declaring and determining transfer pricing, or failing to provide information/documents for determining transfer pricing (National Dossier, Global Group Dossier, Country-by-Country Profit Statement) as required.

Database used in declaring and determining transfer pricing.

To scientifically and convincingly eliminate related-party transactions in tax declarations, businesses cannot simply "argue out figures." Determining equivalent independent transaction prices must be based on legitimate and highly specialized data sources.

According to Clause 1, Article 17 of Decree 132/2020/ND-CP, accepted data sources include:

Trade database

This is the most important data source for large businesses. A commercial database is a collection of financial information and data collected and standardized by professional data businesses (such as Standard & Poor's, Moody's, Thomson Reuters, etc.).

• Advantages: Provides tools to search and compare similar businesses by industry, geographic location, and capital size.
• Application: Helps businesses find "independent benchmarks" to demonstrate that their profit margins are consistent with market conditions.

Data published on the stock market

Information from companies listed on stock exchanges (such as HOSE, HNX) is a public, transparent, and audited source of data. Businesses can use these financial reports to exclude related-party transactions in tax declarations by comparing net profit margins or gross profit margins.

Commodity and services exchange

For mass-produced commodities such as iron ore, crude oil, coffee, and rubber, the listed prices on domestic and international exchanges are the most reliable basis for determining independent trading prices.

Information from government agencies

Data publicly released by the Ministry of Finance, the General Department of Taxation, the General Department of Customs, or other relevant ministries and agencies are also considered official sources of data. In addition, information from other official sources such as industry associations is also highly valuable for reference.

5 Steps to Eliminate Related Parties in Tax Filing

To ensure full compliance and avoid the risk of tax assessment, businesses should follow this procedure:

Step 1: Identify related party relationships and related party transactions.

Businesses need to refer to Article 5 of Decree 132 to identify related parties (based on ownership ratio >25%, or actual management and control relationships). Then, list all transactions arising with these parties such as: sales, raw material purchases, loans, franchise agreements, etc. 

Step 2: Benchmarking Study

Use commercial or stock market databases to find at least 3–5 independent businesses with similar functions, assets, and risks. This process helps businesses determine a “standard independent transaction value range.”.

Step 3: Choose a suitable pricing method.

There are three main groups of methods commonly used to exclude related-party transactions in tax returns:

• The Comparable Prices of Independent Transactions (CUP) method.
• The method is based on the profit margin (Resale price, Cost plus profit).
• The method of allocating profits among affiliated parties.

Step 4: Adjust for significant differences

If comparable entities have differences in payment terms, transaction volume, or market position, the business must take mathematical adjustments to eliminate these differences and bring the values to a comparable level.

Step 5: Create and archive records

The results of the process of eliminating related-party transactions in tax declarations must be reflected in the Transfer Pricing Documentation. Businesses need to prepare the Appendix in accordance with the mẫu of Decree 132 to submit with the annual corporate income tax return. In cases where internal personnel lack sufficient professional experience, businesses should consult with relevant professionals. hire someone to prepare related party transaction documents. To ensure accuracy and maximize protection of interests before the tax authorities.

Risks and special considerations for businesses

Many businesses adjust prices but lack documentation proving their independence. During tax audits, without a complete set of standard documents (Local File and Master File), businesses are automatically considered to have violated their tax declaration obligations and are easily subject to tax assessments. To minimize this error, consulting with relevant service providers is crucial. related party transaction advisory services A reputable organization like MAN – Master Accountant Network – is essential for reviewing documents and providing optimal solutions to minimize tax costs.

Note regarding interest expense (EBITDA): A key new feature in the tax deduction system is the limitation of interest expense to no more than 30% EBITDA. This is a form of directly "excluding" factors that reduce taxes through excessive internal borrowing.

Conclude

Excluding related-party transactions in tax declarations is not just an administrative procedure but a core tax risk management strategy. Businesses need to proactively review transactions, build a reliable comparative database system, and prepare complete documentation to demonstrate their transparency. Proactive compliance with Decree 132/2020/ND-CP and the Tax Administration Law will help businesses avoid unnecessary tax assessment penalties. For in-depth solutions and a safe compliance roadmap, businesses should consult with experts. Transfer pricing consultancy The aim is to create a foundation for sustainable development and establish credibility in the market.

Contact Contact MAN – Master Accountant Network for free support and advice!

Contact information MAN – Master Accountant Network

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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.

Frequently Asked Questions about Excluding Related Party Elements in Tax Filing