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The Covid-19 pandemic and the hidden risks in determining related-party transaction prices

Covid-19 has affected economies worldwide. Under the impact of the pandemic, companies are currently facing numerous risks in their business operations.



Immediate risks can be easily identified, but many risks, especially those related to determining related-party transaction prices for businesses experiencing losses during the Covid-19 period, may not be immediately apparent.


In reality, during the Covid-19 pandemic, many businesses had to temporarily cease operations due to government mandates worldwide. In this situation, variable costs from business activities could be reduced, but many fixed costs could not be immediately cut. Along with this, many pre-ordered shipments could not be delivered to customers due to government export restrictions or orders being canceled by customers.


Furthermore, in many countries and industries, the demand for certain goods or services has sharply decreased, or even disappeared, during and after the period of business interruption. To maintain market share, many companies have sold/provided goods/services at prices lower than cost, or have had to increase marketing expenses to sustain their business goals.


In many cases, the product life cycle for some companies may suddenly shift from a growth phase to a decline phase due to the impact of the pandemic. However, companies may still want to retain these products by selling them at prices lower than cost to try to introduce a complete range of their company's products to customers.


As we can see, the impact of the pandemic has increased business operating costs and rapidly reduced global demand. This can lead to a global economic crisis or recession.

Independent businesses may incur losses due to extraordinary events caused by the global economic downturn, which is unavoidable. Incurring losses can create significant risks for businesses engaged in transactions with related parties. According to the recommendations of the Organization for Economic Cooperation and Development (OECD) and the United Nations, losses from business activities will trigger a special scrutiny of related-party transaction pricing, depending on the reasons and nature of the loss. With losses arising from the Covid-19 pandemic, tax authorities will carefully examine the reasons for the losses. Therefore, RSM recommends that businesses pay attention to three important aspects when explaining losses to tax authorities, as follows:


First, the impacts of Covid-19 can vary from one country to another. Businesses in some countries may suffer significant disadvantages, while companies in other countries may seize many opportunities arising from the pandemic.


Second, the effects of Covid-19 can vary across industries. While businesses in certain industries may incur substantial losses, companies in other industries may remain unaffected by the pandemic.


Third, the sharing or allocation of losses from Covid-19's impact will also depend on the risk-bearing capacity of businesses. For example, a company facing market risks may increase marketing expenses to protect market share.


With significant risks related to determining the pricing of related-party transactions arising from losses or low-profit margins, RSM recommends that businesses engaged in related-party transactions take certain actions now, including:


  • Conduct assessments of the impact of Covid-19 on the countries and industries in which the business operates, determining whether these risks are substantial.


  • Document and quantify the effects of Covid-19 based on operational and financial data.


  • Segregate business operating results between periods affected by Covid-19 and other periods.


Review the records regarding functions and related risks to ensure that the reasons for losses caused by Covid-19 correspond to the risks borne by the business.

The Covid-19 pandemic is still ongoing, and Vietnamese businesses continue to grapple with unforeseen impacts. Most Vietnamese businesses have resumed operations and are facing various business risks. RSM Vietnam will continue to monitor the potential effects of Covid-19 on Vietnamese businesses and proactively identify early risks to assist clients in minimizing impacts when determining related-party transaction pricing.


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