Currently, we sometimes listen about transfer pricing, somewhere in the newspaper, somewhere in the online newspaper, or listen about it when the tax authorities come to the enterprise to check transfer pricing.

Transfer pricing is a matter of concern for businesses, but businesses often omit or do not know that they are required to declare and prepare documents related to transfer pricing.

To know if you belong to a subject of tax administration on transfer pricing or not? We will present some basic definitions of related parties.

This definition is classified according to five main groups as follows:

First group, companies related to capital ownership:

First, “An enterprise participates directly or indirectly in at least 25% of the other enterprise’s equity.”.

This is a two-way relationship, Which means, one of the two companies which be owned by more than 25% of the capital by the other, and both companies will be subject to transfer pricing.

For companies have capital that beheld, capital ownership information can be found on the business license.

As for the company holding capital, the investment ratio must be considered on the relevant accounting accounts such as investments in subsidiaries, investments in joint ventures and associates, and other long-term investments.

Second, “Both related enterprises own at least 25% of the equity in which a third party participates directly or indirectly”.

This is a two-way relationship, which is often overlooked. The reason is companies having joint venture investments, associated with many companies, accountants will not be able to detect on accounting documents, but can only detect at the level of the owner.

Third, “An enterprise is the shareholder having the greatest ownership interest in the other enterprise, or participates directly or indirectly in at least 10% of total share capital of the other enterprise”.

This is a two-way relationship, note here, only for joint stock companies.

Second group, firms are related in terms of determinism:

First, when one enterprise has the ability to dominate the business and financial decisions of the other enterprise. The main sign is, the first enterprise appoints more than 50% of the management, of the second enterprise.

Second, when there is a three-enterprise relationship, pay attention to the sign, that the two enterprises have more than 50% of the board members, appointed by a third party.

The third group, companies with a transactional relationship:

An enterprise guarantees or offers another enterprise a loan under any form to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise.

The fourth group, companies related by kinship:

Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle and nibling.

The fifth group, companies related to permanent residence:

“Both business entities have transactions, either between their head offices and permanent establishments or between permanent establishments of overseas entities or individuals”.

Summary:

When considering that your business belongs to an affiliate relationship of one of the above five groups, it must consider whether your company has exchange transactions with the above-mentioned companies or not.

If yes, then immediately think about declaring, and preparing documents related to transfer pricing.