What are punishments and losses for enterprises if violating the regulations?
Section 3, Article 12 of Decree 20/2017 / ND-CP stipulates as follows:
“Tax authorities shall have authority to set the level of price, profit margin or profit allocation rate which is used for tax assessment or setting thresholds for taxable revenue or corporate income tax amount payable with respect to taxpayers engaged in the transfer pricing within a specified tax period, based on information, data and analysis of assessment of the tax authority in the cases where taxpayers commit violation against transfer pricing legislation as follows:
a) Taxpayers do not provide or insufficiently provide information or do not submit the Form No.01 given in the Appendix hereto appended;
b) Taxpayers provide insufficient information required in the transfer pricing documentation package referred to in the Form No. 02, 03 given in the Appendix to this Decree or do not present the transfer pricing documentation package and data, evidencing documents and materials used as the basis for comparability analysis and redetermination of prices in the transfer pricing documentation package at the tax authority’s request within the permitted time limits referred to herein.
c) Taxpayers use inaccurate or unreliable information about independent information to carry out comparability analysis, declare and determine the transfer price, or rely on materials, data and evidencing documents which are illegitimate, invalid or are of unclear origin to determine the level of price, profit margin or profit allocation rate applicable to related-party transactions;
d) Taxpayers commits any violation against transfer pricing regulations set out in Article 11 hereof.”
Similarly, Section 3, Article 20 of Decree 132/2020 / ND-CP provides as follows:
“Tax authorities shall be vested with authority to set the levels of price, profit margins or profit split ratios; levels of taxable income or corporate income tax payable for any taxpayer failing to comply with transfer pricing declaration or determination requirements; failing to provide or incompletely provide data and information provided for the purpose of determination of prices of related party transaction in the following cases:
a) Taxpayers do not provide or insufficiently provide information or do not submit the Form given in the Appendix I hereto;
b) Taxpayers provide insufficient information required in the transfer pricing files referred to in the Appendix II and III to this Decree, or do not present the transfer pricing files and data, evidencing documents and records used as the basis for comparability analysis and determination of prices in the transfer pricing files at the tax authority’s request within the time limits prescribed herein. Information included in the transfer pricing file that is proved material or substantial if such information has impacts on results of analyses for selection of independent comparables, transfer pricing methods or results of adjustments for levels of price, profit margin and profit split ratios of taxpayers;
c) Taxpayers use inaccurate or unrealistic information about arm’s length transactions for comparability analyses, declaration and determination of the transfer prices, or rely on data, evidencing documents and records which are illegitimate, invalid or are of unclear origin to determine levels of price, profit margins or profit split ratios applicable to related-party transactions;
d) Taxpayers commits any violation against transfer pricing regulations set forth in Article 19 hereof;
đ) Databases used for tax imposition purposes must be subject to regulations laid down in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019.”
In the case that the tax authority fixes tax, it may lead to retrospective tax arrears, reduce losses or increase taxable income.
At the same time, enterprise may be subject to the following additional penalties (according to tax administration law):
1. Interest of late payment: 0.03% / day of late payment (or 0.05%; 0.07% / day of late payment, depending on each period);
2. Under-declaration: 20% of the understated tax amount;
3. Tax fraud / tax evasion: from one to three times of the tax arrears.
Along with the fines, the enterprise may also suffer from its reputation in the market and be placed on the Tax Authority's list of enterprises with high risk of transfer pricing, leading to inspections / inspections tax is more recurring.
What should enterprises do when receiving notification from tax authorities about a coming related-party transaction inspection?
- Review all related tax declarations, quickly add the missing declarations. The lack of declarations or incorrect declaration compared to the document will be the basis for tax authorities to fix tax.
- Review all accounting books and records to ensure that they are fully, accurately prepared and compliance with accounting regulations. If there are many material mistakes in the accounting books are also the basis for tax authorities to fix tax.
- Collect all documentations as required in Decree 20/2017/NĐ-CP and Decree 132/2020/NĐ-CP (from the corporate income tax period of 2020) to help in explaining the data and provide it to the tax authorities upon request.
- Enterprises should prepare accountability strategies for important and complex content, discuss with the parent company (if any) for maximum assistance. In addition, it is advisable to check out similar enterprise that have been inspected before for more information.
- If the enterprise does not feel completely confident about the above contents, it is advisable to hire a professional consulting company to perform an independent inspection for useful recommendations. In addition, given the difficulties faced by enterprises in preparing related documents, professional consulting firms may have the appropriate knowledge, experience, and resources available to help the company handle it properly, timely and appropriate before tax authorities enter. Enterprises can request the consulting company to assist in explaining questions and arguments of the tax authority during the tax agency inspection / examination at the enterprise.
- The best preparation before tax examinations will help ennterprises minimize unnecessary losses due to fundamental compliance-related deficiencies, and help enterprises focus on the really important and complex issues to achieve the highest efficiency when explaining and convincing tax authorities.
What should enterprises do if having conflict with tax authorities regarding related - parties issues?
Due to the complex nature of tax inspections / examinations related to related-party transactions, it is likely that tax officers will be able to make inappropriate arguments / conclusions with the enterprise. If the enterprise does not agree, it is necessary to have an appropriate response strategy to protect its legitimate interests. Here are some recommendations for more business reference:
- For matters that enterprises believe that the tax authorities are misunderstanding or incomplete about the enterprise's operations, enterprises need to provide all relevant documents and explanations to help tax officers understand correctly and fully.
- For the issues that enterprises believe that the tax officials are not understanding the spirit of the tax regulations, the enterprise should write a official letter to the superior tax authority for clarification (if after direct explanation, it is not still convincing tax officiers).
- For problems where the enterprise believes it depends on objective data and does not have sufficient grounds to clearly define which party's argument, the enterprise should negotiate with the tax authorities for an optimal neutralization solution between the two sides.
- If enterprises find that they do not have enough resources to implement the above strategies, they should hire a consulting firm to support. Professional consulting firms will often have the right knowledge, experience, and resources to better handle the above content.
- The last option is that the enterprise can sue in court for a public arbitration (if the issue has a really material impact on the finance and operation of the enterprise).