Nhuyễn Vân Quỳnh
The legal article from Lawyer Nguyen Van Quynh of Phuoc & Partners titled: “Associated transactions and important changes”, was posted on published on The Sai Gon economic times, dated 23 March 2017, (1.371).
The principle of “substance over form”
The tax law of Vietnam allows local tax authorities to fix the payable tax amounts and decide every element related thereto in some specific circumstances, including the case where goods are purchased and sold not in accordance with actual payment prices applicable to the market. Directly targeting associated transactions, Circular 66 also provides for situations where local tax authorities may suspect the declared data, vouchers and comparing data of an enterprise and fix another tax amount which is often higher than that which one declared by such enterprise.
While Decree 20 retains similar regulations on the rights of the local tax authorities in managing associated transaction prices to fix taxes and decide the elements affecting payable tax amounts, it offers more general coverage by introducing the basic principle of “substance over form”. This rule has become the core of Decree 20, which is new and serves as a basis for other regulations.
By doing a comparison analysis and selection of independent subjects to compare associated transactions with independent transactions under the same conditions, it is possible to determine the prices of associated transactions without dependence on the forms of transactions presented in the contracts between associated parties.
In fact, this rule is not strange to enterprises because one of the accounting rules state that the preparation and presentation of financial statements must ensure reflection of the true nature of a transaction instead of its form or name, but this is the first time this rule has been affirmed from a tax perspective. This reflects the uniformity of Vietnamese legal instruments in different sectors, and is a common rule recognized by most countries in the world when it comes to “suspicious transactions”.
Enterprises must, in a careful manner, prepare and maintain internal databases of their associated and independent transactions, external data publicly announced by other enterprises, data announced by the State, if any, and information acquired from other transactions conducted under the same conditions in the region or throughout Vietnam. This will be used to substantiate their actual associated transactions and convince tax authorities of the same, instead of focusing on drafting internal documents for use among associated parties, which is often viewed as the “mantle” of a transaction.
Basically the content of Decree 20 is the same as that of Circular 66, which specifies associated parties based on the ownership relationships, both longitudinal and horizontal (one party’s equity is in the other or both parties have another party’s equity), operation control (board members of one party are appointed by the other; both parties have the same board members; or both parties are operated by individuals with personal relations), debts (one party is guarantor or offers loans to the other), fixed business premises (both parties are related in terms of headquarters, or are permanent establishments of another foreign party).
However, Decree 20 lifts the floor level to specify the associated relationship in ownership from 20% to 25%. In debt relationships, the minimum level to specify associated parties is 25% of the capital contribution by the owner of the borrowing or guaranteed party instead of 20% as stipulated previously.
As stipulated by Circular 66, associated parties are also specified based on contractual relationships in cases of business cooperation, or where over 50% of product prices, revenue or input expenses of one party are controlled by transactions with the other. Decree 20 is not as detailed as that, but its scope of application is much larger as it groups them all into “one party [which] is subject to the actual operation, control, and decision-making with respect to business operations by the other”. This generality may create controversy between tax authorities and enterprises in determining who has the “actual operation, control, and decision-making”, and it is highly possible that the circular guiding the implementation of this Decree 20 will regulate the same as Circular 66 did in this respect.
Expenses are not deducted when calculating taxes during the period
Although meeting the general conditions for deductible expenses when calculating corporate income tax (“CIT”), expenses from associated transactions will not be deducted in the period if the production and business operations of the parties are not related to each other; or the payee’s operation size is not commensurate with the transaction value; or the payee is not liable for goods or property in transactions with the corporate taxpayer; or the payee is a resident of a non-CIT country. In other words, the tax authorities will exclude the expenses of the transactions that are unreal and inappropriate.
In addition, if enterprises must make payments to their associates without enjoying any corresponding benefit, such expenses will not be deducted (e.g. payment for services in the interest of one party’s shareholders; payment for the benefits which a party is automatically entitled to as a member of the other party or a member of a corporation; or an additional amount (intermediary fees, brokerage fees, etc.) paid to an associate as intermediary between the other party and a third party. The payees themselves do not contribute to the value of the service provided to the corporate taxpayer.
Loan interest expenses are only deductible if they do not exceed 20% of net profit before loan interest and depreciation expenses. Enterprises should pay attention to the fact that Decree 20 does not clarify that the said loan interest expenses are only applicable to associated loan transactions, so taxation will be based on the interest expense of all loans. Of course, enterprises can only deduct loan interest expenses paid to their lending associates that are not credit institutions or economic organizations if they do not exceed 150% of the basic interest rate announced by the State Bank of Vietnam at the loan time, and the corporate borrower must already contribute sufficient charter capital.
Declaring and determining the price of an associated transaction
Decree 20 and Circular 66 require enterprises to declare associated transactions and submit them along with CIT finalization declaration forms. But pursuant to Decree 20, there will be some cases where the declaration and determination of associated transaction prices are exempted, or the declaration is mandatory but does not require a prepared dossier for determination of associated transaction prices.
The exempted declaration is applicable if associates are subject to CIT in Vietnam to the same rate and without entitlement to CIT incentives. This is praiseworthy as the simplification of administrative procedures helps the State manage taxation issues, as in this case, the CIT liability must inevitably fall on either party regardless of how the parties try to arrange their transaction.
In order to be exempted from establishing the dossier for determining associated transaction prices, the corporate total turnover must be less than VND50 billion and the total value of associated transactions less than VND30 billion; or associated transactions fall within the scope of the advance pricing agreements (“APA“) entered into by enterprises and tax authorities and the enterprise will submit the annual report as required by the law on APA; or enterprises which turnover of less than VND200 billion and meet the condition for the ratio of net profit before loan interest and CIT.
The dossier for determining associated transaction prices must be prepared before the annual declaration of CIT finalization, which are maintained and supplied to tax authorities upon demand. A dossier set must include inter-country submittal, global corporation information submittal and the parent company’s international profit report. This novel regulation increases transparency as it provides information in terms of information volume and the time required to prepare submittals, whilst concurrently enabling tax authorities to gather additional data for evaluation and comparison of the transactions of multinational corporations before considering the associated transaction price.
Decree 20 in particular and legal documents in general only create a general legal corridor and a dealing basis for related parties, so this cannot avoid disagreements and differences between tax authorities and enterprises during their application and enforcement. This requires enterprises to be fully informed and prepared in the face of the changing laws. Tax authorities should organize seminars on this topic for enterprises. In this case, the operations of the enterprises involved in associated transactions will increase and become more complicated as they must prove the transaction nature, prepare a multiple-level dossier including notes on the dossier for determining associated transaction prices and collect relevant information in response to the tax authorities’ questions.
 Article 25 Circular 156/203/TT-BTC of the Ministry of Finance dated November 6, 2013
 Article 25.2(b) Circular 156/203/TT-BTC of the Ministry of Finance dated November 6, 2013
 Articles 9.2 and 9.3 Circular 66
 Article 4.8 Decree 20
 Article 6.6 Law on Accounting 2015
 Articles 3.4 Circular 66 and Article 5 Decree 20
 Article 6.1 of Circular 78/2014/TT-BTC as amended and supplemented by Circular 96/2015/TT-BTC
 Article 6.2.17 of Circular 78/2014/TT-BTC as amended and supplemented by Circular 96/2015/TT-BTC
 Article 6.2.18 of Circular 78/2014/TT-BTC as amended and supplemented by Circular 96/2015/TT-BTC
 Article 10.3 of Decree 20 and Article 7.2.2 of Circular 66
 Article 11 of Decree 20