One of the biggest tax audit risks for foreign-invested enterprises or those with related-party transactions is the service costs paid to the parent or affiliated companies. Despite proper accounting and payment, tax authorities often disallow these expenses for CIT purposes if they are not proven reasonable.

This article outlines the specific requirements and 5 key principles for businesses to defend such service costs.

1. Nature of Parent Company Service Costs

Common services include:

• Strategic management & operation

• HR training & recruitment support

• Legal, accounting, and system consulting

• IT, software, and tech platforms

• Branding, marketing, and market research

These costs are often charged as a percentage of revenue or on a fixed allocation basis. Due to the intangible nature of the value, they are easily deemed unnecessary or irrelevant.

2. When Are These Costs Disallowed?

Per Circular 96/2015/TT-BTC, deductible costs must:

• Be supported by legitimate invoices and documents

• Serve business operations

• Be reasonably priced (not exceeding market rate)

They are commonly rejected if:

• No specific service contract exists

• No proof of service performed

• Arbitrary allocations

• Generic services overlapping local company functions

• No demonstrated economic benefit

3. 5 Principles to Justify Reasonableness

Principle 1: Clear and Legally Valid Contract

• Must be bilingual (if foreign), with detailed terms: service type, pricing method, payment period, acceptance criteria

• Include annexes describing service scope, duration, KPIs

• Signed by legal representatives from both sides, properly stamped

Principle 2: Verifiable Evidence of Services Rendered

Evidence can include:

• Emails, reports, training slides, meeting minutes

• IT access logs, strategic plans, market reports

• Internal training docs, HR plans

Principle 3: Prove Necessity & No Overlap with Local Functions

• Use organization charts to show function division

• Show HQ provides strategic direction vs. local operations

• Justify the value-added nature of HQ services

Principle 4: Reasonable Pricing with Clear Basis

• Use Cost-Plus method: actual cost + 5–10% markup

• Allocation by revenue, headcount, or subsidiary count

• Include cost breakdown and benchmarking if fee >10% of revenue

Principle 5: Clearly Disclosed in Transfer Pricing File

As per Decree 132/2020/NĐ-CP, related-party service costs must be documented in:

• Local File: transaction nature, pricing method, economic benefit

• Master File: group model, cost-sharing mechanisms

• CbCR (if applicable): Form 04

Conclusion:

These are not prohibited costs, but failing to justify them may lead to tax back payments, fines, and reputational damage. Enterprises must:

• Proactively review documentation

• Retain internal explanation files and evidence

• Declare properly in transfer pricing disclosures

• Consult tax experts for complex/risky transactions

Viet Australia
Viet Australia Auditing Company is an independent auditing organization licensed and established in 2007 in the Socialist Republic of Vietnam.