|By Dinh Mai Hanh - Tax partner and national transfer pricing leader, Deloitte Vietnam |
However, there are no specific guidelines for enterprises having related party transactions which have been severely affected by the pandemic, such as disruptions to the global supply chain, decline in profits, and downsizing of operations.
In lieu of this, enterprises can refer to the guidance on the transfer pricing implications of the COVID-19 pandemic published by the Organisation for Economic Co-operation and Development (OECD) to manage transfer pricing more effectively.
Guidelines from the OECD have four key points that enterprises with related transactions should pay attention to.
Firstly, the impact of the pandemic is most clearly reflected in the benchmarking study process to find comparable companies. Enterprises should consider eliminating comparable companies in the historical analysis that are not affected or do not have comparable data for the same period as the tested party; add or eliminate screening criteria and select the appropriate comparability analysis period.
Secondly, the OECD guidelines mentioned pandemic-specific costs for enterprises recording losses. In the fiscal year, enterprises need to record and calculate in detail the impact of COVID-19, meaning changes in sales, production performance and additional costs; quarterly/semi-annual financial results; and per sales segment to related parties and third parties separately.
They should also consider and discuss carefully with related parties regarding intra-group services such as the necessity of rendering services and pricing policy.
At the end of the fiscal year, enterprises could review current benchmarking study and consider using a combination of transfer pricing methods; and perform comparability adjustments, such as comparing revenue/costs/profits between the budgeted amount and the actual amount or with the previous year, calculating additional costs, adjusting profits due to low productivity, and costs in the social distancing period.
Thirdly, enterprises that are eligible for supportive regimes and policies due to the pandemic for related party transactions should take into account the classification of subsidies that affect the pricing policy of controlled transactions, the influence of supportive policies in the process of selecting comparables, and adjustment of material differences.
Finally, enterprises should consider the impact of the pandemic on the advance pricing agreement (APA) application process to coordinate with tax authorities efficiently and flexibly in terms of implementing and minimising the risk of delay in the process.
|Firms are advised to rework their recordings and contact tax advisors, photo Le Toan |
Based on these guidelines, many countries have introduced regulations in line with the legal framework and business environment. In particular, the Inland Revenue Authority of Singapore has issued guidance on determining CIT and personal income tax for costs related to transfer pricing during the pandemic. The application of a benchmarking study using multi-year average data for the period affected by the situation, using comparable companies incurring operating losses; and case-by-case plan for handling APA applications.
The Australian Taxation Office has also issued guidance on the economic impact on related party transaction agreements. In developed countries such as the US and Canada, the governments also issued guidelines for enterprises related to transfer pricing in this time.
Regarding the Vietnamese market, enterprises shall properly assess the tax audit and inspection trends during the pandemic. Per Deloitte’s observation, during social distancing, tax authorities often requested documents and explanations via email or phone.
Immediately after transitioning to the new normal state, the tax authorities focus on tax audit and inspection, especially in transfer pricing. According to the General Department of Taxation, in 2021, there were over 66,000 tax audits and inspections carried out. The total tax liability amount proposed to be handled is over VND44.3 trillion ($1.9 billion).
For enterprises with loss-making business results, it is essential to record and calculate in detail the effects due to COVID-19 to make comparability adjustments, review intra-group service transactions, and consider using a combination of appropriate transfer pricing methods.
In addition, enterprises should also prepare and maintain appropriate explanations regarding business operations and proactively contact tax advisors for timely support on new policies, in order to prepare a comprehensive strategy in the time ahead.