Some notes on tax finalization for businesses with associated transactions
Tax finalization when there is an associated transaction is when an enterprise has to fully implement the declaration obligations as well as the documentation obligation in the associated transaction when it arises with the parties having an associated relationship. This is an issue that many businesses are concerned about.
According to Decree No. 132/2020/ND-CP regulating tax management for enterprises with associated transactions, enterprises with associated transactions must submit relevant declarations when performing corporate income tax finalization. (CIT). However, currently some businesses, especially small and micro businesses with family-style related transactions, do not understand this regulation. Therefore, when finalizing taxes, businesses that make related transactions should pay attention to:
1. Declare associated transactions
Correctly determine the declaration obligations of enterprises when there are associated transactions. This is very important because if you do not declare or declare incompletely, you can have your profit rate fixed. With Circular No. 66/2010/TT-BTC, businesses must declare associated transactions and submit it along with the annual CIT finalization declaration.
But according to Decree No. 20/2017/ND-CP and Decree No. 132/2020/ND-CP, there will be some cases that are exempt from declaring and determining associated transaction prices, or must declare but are exempt from preparing. dossiers for determining associated transaction prices.
Enterprises also need to have an affiliated transaction declaration if the enterprise has affiliated transactions within the scope of regulation in Decree No. 132/2020/ND-CP. Accordingly, enterprises are responsible for declaring information about affiliated relationships and affiliated transactions according to Appendix I, Appendix II, Appendix III issued with Decree 132 and submit it together with the income tax finalization declaration. DN.
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2. Interest expenses
As for interest costs, this is a cost that almost all businesses have. So how is this cost included in deductible expenses when there is a related transaction?
Another regulation is that businesses with affiliated transactions are only allowed to calculate interest expenses that do not exceed 30% of net profit. If they exceed it, they must carry it over to the next period. Most Vietnamese businesses, especially small businesses and micro-businesses with family-style relationships, are very indifferent to these issues.
Therefore, businesses need to pay attention to submitting tax declarations to calculate loan interest rates, as well as forms identifying information about associated transactions to avoid risks in tax finalization. Pursuant to Sections a and b, Clause 3, Article 16 of Decree No. 132/2020/ND-CP regulating tax management for enterprises with associated transactions:
The total loan interest expense after deducting deposit interest and loan interest arising during the taxpayer’s period is deductible when determining income subject to corporate income tax and does not exceed 30% of total net profit from business activities. business during the period plus loan interest expenses after deducting deposit interest and loan interest arising during the period plus depreciation expenses arising during the period of the taxpayer;
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The portion of loan interest expenses that are not deductible according to the provisions of Point a, Clause 3, Article 16 of Decree No. 132/2020/ND-CP will be transferred to the next tax period when determining the total deductible loan interest expenses in case the total loan interest expense is deducted. The deductible arising loan interest expenses of the next tax period are lower than the level specified in Point a of this Clause. The time for transferring loan interest expenses shall be calculated continuously for no more than 05 years from the year following the year in which non-deductible loan interest expenses arise.
From the above regulations, we have the formula to calculate total deductible interest expenses as follows:
Total deductible loan interest expenses = 30% * (Total net profit + loan interest – deposit/loan interest + depreciation expense)
In there:
EBITDA (profit before taxes, depreciation and interest) = Total net profit + loan interest – deposit/loan interest + depreciation expense)
Thus: Total loan interest expense deducted = 30% * EBITDA
2.1 Transfer of interest expenses
If loan interest expenses exceed 30% of the total net profit from business activities in the period plus loan interest expenses after deducting deposit interest and loan interest arising in the period plus depreciation expenses, the This interest fee will need to be monitored for subsequent years. This means that you must monitor and carry forward loan interest expenses to calculate deductible expenses if eligible.
2.2 Transfer pricing records
With different businesses, the link relationships or link formations are not the same. In particular, businesses that must prepare documents for related-party transactions need to pay attention to the following issues:
– Prepare documents to determine prices in associated transactions: use dishonest and unrealistic comparison databases for comparative analysis and declaration; Unable to clearly state the source of data to determine price and profit margin to declare affiliated transactions; Businesses take comparative data that are not similar to their own businesses…
- There is no database for comparison;
- Using the wrong method to determine associated transaction prices when declaring and preparing documents;
- Risks when explaining to tax authorities: Inconsistency between declaration and preparation of related party transaction records.
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