Compliance obligations affiliate transactions is a mandatory requirement for all businesses with affiliated relationships, especially in the context of tax authorities increasingly tightening transfer pricing management. According to Decree 132/2020/ND-CP, businesses must declare, establish and maintain records to determine transparent and accurate transfer pricing. Full compliance not only helps businesses avoid the risk of sanctions, but also strengthens the reputation and legality of future business operations.
Who is responsible for compliance with related party transactions?
The obligation to comply with related party transactions must be performed by taxpayers that have related party transactions within the scope of Decree 132/2020/ND-CP, i.e. organizations and enterprises that have related party relationships and transactions such as buying and selling goods, providing services, transferring intellectual property rights, lending or borrowing, guaranteeing, sharing costs, or other financial transactions between related parties.
Specifically, who must perform the obligation to comply with related party transactions:
- Enterprises/organizations that have affiliated relationships and generate affiliated transactions as prescribed in Article 5 of Decree 132/2020/ND-CP. (See details: Affiliated Relationships)
- Taxpayers are responsible for declaring information on related relationships and related transactions according to Appendices I, II, III attached to the Decree and submitting it together with the corporate income tax finalization declaration when within the scope of regulation.
- Taxpayers must prepare and maintain Transfer Pricing Records (Local file, Master file, CbCR) when they are not exempted from declaration according to Article 19 of Decree 132/2020/ND-CP (See details: Exemptions from preparing Transfer Pricing Documents)
Although enterprises have clearly understood the regulations on the obligation to comply with related-party transactions, in reality, there are still many errors in the implementation process. Therefore, it is necessary to identify important notes in advance to ensure correct and complete compliance and limit risks when tax authorities conduct inspections.
Important notes in the process of implementing compliance obligations for related party transactions
In order for enterprises to perform their compliance obligations regarding related-party transactions accurately and effectively, they need to pay special attention to some important points below:
- Expanding the scope of related transactions: Not only buying and selling goods but also including financial transactions, guarantees, transfer of intangible assets, cost sharing, etc. Therefore, it is necessary to review the legal relationship and actual transactions.
- Exemption from filing does not mean non-declaration: Enterprises may be exempted from filing under certain conditions but must still declare information according to the Appendix. If the declaration is incorrect or missing information, the tax authority will still inspect, collect or impose penalties.
- Tax authorities have the right to request documents and post-audit: Enterprises must keep documents and analyze appropriate pricing methods to prove when requested.
Understanding the obligation to comply with related party transactions is not only about “doing it right”, but also about “doing it right the first time”. Behind the detailed provisions of Decree 132/2020/ND-CP are clear goals of transparency, fairness and tax risk management that every business needs to master.
Purpose of implementing compliance obligations for related party transactions
Fulfilling the obligation to comply with related party transactions is not only a legal requirement, but also has many strategic values for businesses. The following objectives help explain why correct, complete and timely compliance has become a key factor in modern tax management..
- Ensuring transparency and anti-transfer pricing: The obligation to comply with related-party transactions helps enterprises declare, prepare and maintain price determination records in accordance with the provisions of Decree 132/2020/ND-CP, thereby making transparent the nature and value of transactions between related parties. This limits the manipulation of profits or shifting of income to low-tax countries.
- Creating a solid legal basis during tax inspection and audit: A complete transfer pricing dossier, with a basis for comparison and a clear pricing method (CUP, TNMM, RPM, etc.) is evidence that helps businesses prove the independence of transactions. This helps minimize the risk of being taxed, collected or fined when the tax authority conducts a post-audit.
- Reducing legal risks and optimizing tax costs: Compliance with regulations helps businesses avoid administrative fines, while ensuring a stable, legal and sustainable tax strategy. This is also an important factor in the internal tax risk management system.
- Enhance governance and internal control capacity: Fulfilling the obligation to comply with related-party transactions helps businesses strengthen their accounting and tax systems, standardize financial data and improve internal control processes. As a result, decisions on pricing, cost allocation or profit are made on a more transparent and reasonable basis.
- Increase the reputation and trust of investors and partners: Enterprises that fully comply with regulations on related-party transactions demonstrate professionalism and transparency in financial activities, thereby enhancing brand reputation and attracting the trust of shareholders, strategic partners and tax authorities.
Accurately identifying the related party transaction compliance obligations that an enterprise must fulfill. Decree 132/2020/ND-CP has specifically regulated each obligation, from declaration, preparing price determination records, to storing and providing information when requested by tax authorities. From there, helping businesses to be proactive and transparent in all related transactions.
Obligations to comply with specific inter-company transactions of enterprises under Decree 132/2020/ND-CP
To fully comply with related party transaction compliance obligations, enterprises need to clearly understand the specific steps required by Decree 132/2020/ND-CP. Each obligation corresponds to a different stage in the related party transaction management process, from initial declaration to archiving and providing records when necessary.
Declaration of related party transaction information (Form 01)
The obligation to comply with related party transactions begins with the step of declaring basic information according to Form 01. This is a fundamental procedure that helps tax authorities grasp the structure of related party relationships and transactions arising between the parties.
Subjects required to declare
To properly perform the obligation to comply with related-party transactions, enterprises must first determine whether they are subject to mandatory declaration under Decree 132/2020/ND-CP or not. Below are typical groups of entities that must make declarations according to regulations:
- Taxpayers are organizations and enterprises that have related relationships and during the tax period have related transactions (purchase and sale of goods, provision of services, transfer of intellectual property rights, borrowing - lending, guarantees, cost sharing, etc.).
- Including cases where parent enterprises - subsidiaries, associated companies, or parties having direct or indirect control or management relationships as prescribed; if there are commercial or financial transactions with associated parties, they must still be declared regardless of the size of the transaction.
After knowing that the enterprise belongs to the group that must comply with the obligation to comply with related party transactions, the question arises: when to declare, how to declare and who is primarily responsible? Below are specific regulations on the deadline, form and responsibilities of taxpayers that enterprises need to clearly understand.
Time limit, form and responsibility
Fulfilling the obligation to comply with related party transactions does not stop at identifying the declarant but also requires enterprises to comply with the deadline, form and responsibility of declaration. Specifically, the following points help enterprises easily visualize and properly implement the provisions of Decree 132/2020/ND-CP.
- Time limit: Taxpayers must declare according to the tax period (usually declared together with the corporate income tax finalization declaration). The declaration must be made in the correct period in which the transaction occurs so that the tax authority has a basis for management and post-audit.
- Form: Declaration according to Form 01 includes information on the structure of the affiliated group, transaction description, transaction value during the period and necessary identification information. Enterprises need to enter accurate and complete information and keep a copy of the declaration for comparison when requested by the tax authority.
See details: Declare related party transactions on the accounting system according to Decree 132/2020/ND-CP
- Responsibility: In the process of implementing the obligation to comply with related party transactions, enterprises must ensure the accuracy and honesty of the declared information, and fully store vouchers, contracts, invoices and related documents to serve the explanation when necessary. In addition, enterprises should periodically review and update when there are changes in the structure of the association or transaction value, as well as closely coordinate with the legal department, finance, audit or consulting unit to ensure that the records and declaration methods are in accordance with current tax regulations and standards.
Once an enterprise has declared information on related-party transactions as prescribed, the preparation and maintenance of a Transfer Pricing Document is an indispensable step in the obligation to comply with related-party transactions. This document helps to demonstrate the objectivity of transaction prices and is also important evidence when tax authorities conduct inspections.
Establish and maintain transfer pricing records
Establishing and maintaining the Transfer Pricing Document is a key step in the process of implementing the obligation to comply with related-party transactions under Decree 132/2020/ND-CP. This is not only a mandatory legal requirement but also a basis for enterprises to prove the reasonableness of transaction prices between related parties, ensuring transparency and limiting the risk of being taxed or administratively sanctioned.
Specifically, businesses must prepare and store three main sets of documents:
- Local File: Reflects details of related party transactions arising in Vietnam, including analysis of functions, assets, risks and methods of determining transaction prices.
- Master File: Provides a comprehensive picture of the corporation, its operating model, value chain, ownership structure and global transfer pricing policies.
- Country-by-Country Report – CbCR: for multinational corporations with consolidated revenue exceeding the prescribed threshold, helping tax authorities assess the distribution of profits and tax obligations between countries.
According to regulations, enterprises must keep all these records at their headquarters and only provide them upon request from the tax authorities, within the prescribed time limit. Careful preparation and periodic updating of records not only helps enterprises meet their obligations to comply with related-party transactions, but also demonstrates their proactive, professional and transparent tax management capacity in the business environment.
Comply with the principle of independence and choose the method of determining the price of related transactions
In the process of implementing the obligation to comply with related-party transactions, determining prices according to the independence principle is a key requirement, ensuring that all transactions between related parties are carried out as between independent parties under similar conditions. This principle is the foundation of Decree 132/2020/ND-CP, aiming to ensure transparency, prevent transfer pricing and reflect the true economic nature of the transaction.
To comply with the independence principle, enterprises need to choose the method of determining the price of related-party transactions that best suits the nature and actual conditions of each transaction. According to regulations, there are five main methods commonly used:
- Comparable Uncontrolled Price (CUP) method: Compare transaction prices between related parties with prices in similar transactions between independent parties.
- Resale Price Method (RPM): Based on the selling price of goods or services to an independent party, minus a reasonable gross profit to determine the initial purchase price from the related party.
- Cost Plus Method (CPM): Applied when an affiliated party supplies goods or services to an independent party, by adding a reasonable profit margin to the cost of production.
- Profit Split Method (PSM): Divide total profits among affiliates based on their contribution to assets, functions and risks.
- Transactional Net Margin Method (TNMM): Compares the net profit margin of related transactions with similar transactions between independent parties.
Enterprises need to analyze the functions, assets, risks and transaction conditions to choose the most suitable method. Applying the method in a well-founded manner, recorded in the valuation records, not only helps enterprises comply with the obligation to comply with related-party transactions.
Accountability and post-audit
To properly perform accountability and post-audit responsibilities within the framework of compliance obligations for related-party transactions, enterprises need to pay special attention to the following contents:
- According to Decree 132/2020/ND-CP, when the tax authority requests the provision of Transfer Pricing Documents, the taxpayer must submit the documents within no more than 30 working days from the date of receipt of the request. In some cases with legitimate reasons, this period may be extended once for no more than 15 working days.
- Time limit for direct inspection and examination: During the direct inspection and examination process, the tax authority may request to present documents within a shorter time limit (for example, some practical guidelines note about 15 working days depending on the specific requirements of the inspection). Therefore, enterprises need to prepare documents always ready to present when requested.
See details: Time for preparing and submitting the affiliated transaction dossier.
- Tax authorities have the right to determine and adjust: If a taxpayer fails to declare, fails to declare fully, fails to prepare documents or fails to provide complete documents, the tax authorities have the right to determine the price, profit margin, profit allocation ratio, taxable income or tax payable. This is a direct post-audit measure that may lead to tax arrears.
- Administrative fines and additional taxes: Taxpayers may be fined according to prescribed levels (for example, the fine for not submitting an appendix of related-party transactions with the final settlement dossier is VND 8,000,000 - VND 15,000,000 for organizations; the fine may vary depending on each specific act). In addition, if the declaration is incorrect, leading to a tax deficiency, the enterprise may have to pay additional under-declared tax along with late payment fees; in some cases, there are also regulations applying a handling rate based on a percentage of the tax deficiency.
In the context of increasingly strict regulations on compliance with related party transactions and increasingly strict post-tax audit processes, many businesses face difficulties in preparing documents, choosing pricing methods or explaining to tax authorities. Therefore, using professional consulting services becomes a practical solution, helping businesses not only minimize legal risks but also ensure compliance with regulations.
Why should you use affiliate trading consulting services?
Choosing the consulting service on related party transaction compliance obligations at MAN – Master Accountant Network brings many practical benefits to businesses. With a team of experts with in-depth knowledge of tax, accounting – auditing in general and the field of related party transactions in particular, along with practical experience in international tax management, MAN – Master Accountant Network helps businesses:
- Ensure full and accurate compliance
- Optimizing the method of determining transfer pricing
- Consulting, supporting in preparing and reviewing valuation documents
- Accompanying in the process of explanation and post-audit
MAN – Master Accountant Network is not only a unit that supports businesses in fulfilling their affiliated transaction obligations, but also a strategic partner that helps businesses optimize operations and enhance their reputation and corporate image.
Conclude
Fulfilling the obligation to comply with related party transactions is not only a legal requirement but also a measure of the management capacity and reputation of the enterprise. Proper compliance from the beginning helps enterprises avoid the risk of collection, while strengthening the trust of tax authorities, partners and investors.
Contact MAN – Master Accountant Network for consultation and optimization of comprehensive and safe related party transaction compliance strategy.
Contact information MAN – Master Accountant Network
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