Related Party Transactions Commonly Scrutinized By Tax Authorities – Key Considerations For FDI Enterprises

In the context of global economic integration, foreign-invested enterprises (FDIs) are increasingly engaging in related party transactions (RPTs) within their corporate groups. These transactions are a primary focus of tax authorities during audits and inspections due to their inherent transfer pricing risks, which can directly impact a company’s tax obligations.

1. Common Types of Related Party Transactions

In practice, related party transactions are diverse and occur on a daily basis within multinational groups. Common examples include:

• Purchase and sale of goods/products: A subsidiary manufactures components and sells them to the parent company for assembly.
  
  
• Intra-group service arrangements: Management, technical support, marketing, and HR services provided by the parent company to subsidiaries.
  
  
• Financial transactions: Intercompany loans, lending, and loan guarantees.
  
  
• Use of shared assets and intangibles: Payment of royalties for trademarks, technology, or intellectual property to an overseas parent company.
  

2. Summary of Common Related Party Transactions

3. Why Are Related Party Transactions a Key Focus of Tax Administration?

From the perspective of tax authorities, it is clear that transfer pricing activities must be strictly controlled to ensure the correct and sufficient collection of taxes. This requirement is stipulated under Decree 132/2020/ND-CP (Decree 132) issued by the Government. This is the current legal framework governing the principles, methods, and procedures for determining the pricing of related party transactions; the rights and obligations of taxpayers in determining transfer prices and fulfilling declaration requirements; as well as the responsibilities of state authorities in tax administration for taxpayers engaging in related party transactions.

Related party transactions have become a focal point in tax administration due to the risk of transfer pricing, i.e., the pricing of transactions not in accordance with market conditions in order to optimize the overall tax liabilities of the group.

Such practices may lead to:

• The shifting of profits from high-tax jurisdictions to low-tax jurisdictions;
  
  
• The erosion of the tax base in Vietnam (in line with the BEPS – Base Erosion and Profit Shifting initiative).
  

For example, a foreign-invested enterprise (FIE) in Vietnam, where the tax rate is relatively high, may incur significant management fees or royalty payments to its overseas parent company located in a lower-tax jurisdiction. As a result, taxable profits in Vietnam are reduced, giving rise to potential tax risks if not properly managed and substantiated.

4. What Fundamental Principles Must Enterprises Comply With?

Enterprises engaging in related party transactions are responsible for declaring information on related party relationships and transactions, and must also maintain and provide transfer pricing documentation in accordance with the prescribed forms under Decree 132.

Such documentation generally includes:

• Information on related party relationships and transactions;
  
  
• Transfer pricing policies and methods applied to related party transactions;
  
  
• The Master File containing information on the business operations of the multinational group;
  
  
• The Country-by-Country Report (CbCR) of the ultimate parent company;
  
  
• And other relevant supporting information.
  

5. Transfer Pricing Documentation: What Should Enterprises Prepare?

Enterprises with related party transactions (unless exempted) are required to prepare and retain transfer pricing documentation at three levels:

• Local File: Provides detailed information on the operations of the entity in Vietnam and its related party transactions during the fiscal year.
  
  
• Master File: Provides an overview of the multinational group’s business operations, transfer pricing policies, and intangible assets.
  
  
• Country-by-Country Report (CbCR): Mandatory for multinational groups with consolidated global revenue of EUR 750 million or more, detailing revenue, profits, taxes paid, and business activities in each jurisdiction where the group operates.
  

⚠️ Important note: This documentation must be prepared contemporaneously, i.e., at the time the transactions occur or prior to the submission of the corporate income tax finalization return, rather than waiting until requested during a tax audit.

✅ Conclusion

Managing related party transactions is one of the most complex challenges in corporate financial management, particularly for FDI enterprises.

Compliance goes beyond timely declarations; it also involves the ability to:

• Substantiate the arm’s length nature of transaction pricing
  
  
• Safeguard the enterprise against tax audit risks
  
  
• Avoid unexpected tax reassessments and penalties
  

Understanding and properly complying with regulations on related party transactions is not only a legal obligation but also an effective risk management strategy that supports sustainable long-term growth.

For detailed advice on transfer pricing risks, preparation of transfer pricing documentation, or optimization of intercompany financing costs, please contact TPM’s tax agency experts for timely and professional support.

 📧 Contact:

Van Le – Head of Tax Advisory

T: +84 916 777 662

E: van.le@tpm.com.vn

Or TPM Hotline: +84 28 3505 1800