The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Nitin Jain and Phat Tan Nguyen, Ernst & Young Vietnam
Nitin Jain is a Partner;
Transfer pricing remains one of the most important international tax issues faced by multinational companies and it is equally important and challenging for tax administrators. As Vietnam gains more importance in companies' supply chain, transfer pricing is becoming more important for tax payers and authorities alike.
In an attempt to administer transfer pricing and collect the appropriate amount of taxes associated with related party transactions, Vietnam introduced a set of relatively comprehensive transfer pricing regulations effective in 20061 and made revisions in 2010.2 In 2012, the National Assembly approved the Amended Tax Administration Law, effective July 1, 2013, introducing the new Advance Pricing Agreements (APA). In addition, Vietnamese tax authorities are also putting considerable effort into “capacity building”, including providing training for its tax officers, preparing audit manual, etc, for more effective and efficient enforcement. This article discusses and comments on the key features of Vietnam's existing transfer pricing regulations and associated ongoing enforcement efforts.
All business transactions, including cross-border as well as domestic transactions, between related parties are subject to Vietnamese transfer pricing regulations. Transactions involving goods whose prices are subject to state control under the Pricing Law3 are excluded from the scope of transfer pricing.
The Vietnamese definition of related parties covers a broad range of related party relationships between two parties, including relationship of equity, management, economic controls and family. Circular 66 lists out the following situations where two parties are deemed related and thus subject to transfer pricing regulations:
• Equity relationships: if one enterprise directly or indirectly holds at least 20 percent of the owner's equity of another enterprise or at least 20 percent of the owner's equity of two enterprises is directly or indirectly owned by another party or two enterprises directly or indirectly hold at least 20 percent of the owner's equity of a third party. The threshold is reduced to 10 percent where it is the single largest equity stakeholder in the other entity. A head-office and its permanent establishment or two permanent establishments of the same foreign entity are also considered related parties.
• Managerial relationships: if more than half of the members of the board of executive directors or members of the control board of one party are appointed by another party; or if one executive director or one member of the control board of one party, who has power to decide on financial policies or business activities of that party, is appointed by the other enterprise, or if more than half of the members of the board of directors or a member of the board of directors who has power to decide on financial policies or business activities of the two parties is appointed by a third party.
• Family relationships: if two enterprises are managed or controlled with regard to their personnel, financial or business affairs by individual members of the same family.
• Economic control relationships: if one party:
• provides a guarantee or grants loan which constitute 20 percent of the owner's equity or more of another company and that loan accounts for more than 50 percent of the total value of long and medium term loans of the latter;
• uses intangible properties and/or intellectual property rights of another party and the payment for this use accounts for more than 50 percent of the cost of such products;
• supplies more than 50 percent of the total value of raw materials and materials or input products for manufacturing or trading output products of another party;
• directly or indirectly controls more than 50 percent of the sales calculated for each type of product of another party; and
• has business co-operation on a contractual basis with the other party.
The five contractual situations will trigger the need to comply with the Vietnamese transfer pricing rules, and this will cover business transactions between legally independent enterprises. The coverage of a wide range of de facto control relationships may lead to a situation that the Vietnamese tax authorities may deem the taxpayer “controlled” and may adjust deemed pricing and/or taxable income/tax payable of legally independent businesses.
Circular 66 define five acceptable methods for establishing arm's length prices, including three traditional methods:
• the comparable uncontrolled price method (CUP),
• the resale price method and
• the cost-plus method,
and two profit-based methods,
• the comparable profit method (CPM) and
• the profit split method.
Under the Vietnamese transfer pricing regulations, there is no priority of one method over the other methods. Taxpayers must select and apply the “most appropriate method”. The most appropriate method is the one selected from the five specified methods that is best suited under the conditions for the transaction and which provides sufficient and reliable information, data and figures for a comparability analysis.
While Circular 66 does not impose a rigid methodological hierarchy, it nevertheless gives some indication as to the efficacy for each method applicable to specific transactions. In addition, when applying methods, whenever possible, it is preferable to choose the “internal comparable”. Under Circular 66:
• CUP method is appropriate to apply to
i. separate transactions in each type of goods, service, copyright or loan contract, and
ii. companies conducting both uncontrolled and controlled transactions in the same type of goods;
• resale price method is appropriate to apply to transactions with respect to the provision of simple services and distribution activities with short turnover cycles from the time of purchase to the time of resale and less affected by seasonality. The resale price method is, however, not appropriate if the re-seller adds substantial value because of processing, assembly or alteration of characteristics or labelling;
• cost-plus method is useful for establishing arm's length prices for services and production activities where semi-finished products and services are sold or provided between related parties;
• CPM is appropriate in cases where the resale price method and the cost-plus method should be applicable but they cannot apply due to the lack of sufficiently reliable comparables; and
• profit split method is appropriate to apply to related companies that jointly conduct research and development for new products or exclusive intangible assets, or engage in controlled transactions related to a vertically integrated production process that involves the ownership or use of unique intellectual property rights.
The arm's length range is defined in Circular 66 as a combination of a ranges of prices, gross profit ratios or profitability ratios of products, which are determined from uncontrolled transactions, depending on the rules applicable for each transfer pricing method.
• Single price: in cases where a single exact comparable uncontrolled transaction is available or a single inexact comparable uncontrolled transaction is available and the taxpayer has sufficient information to eliminate all differences, the arm's length result would be a single price.
• Inter-quartile range: Circular 66 stipulates that if material differences between controlled and uncontrolled transactions exist but taxpayers only have information to eliminate most material differences, the inter-quartile arm's length range must be applied. The taxpayer is required to select the most appropriate result in the range that reflects the greatest similarity between conditions of uncontrolled and controlled transactions.
• Median of the range: the median of the inter-quartile arm's length range is applicable where the taxpayer is not able to select comparable data in its business-operating sector and allowed to select comparables in other related sub-sectors of the national economy and in case of tax audit and adjustments are made. In respect of sales transactions, the arm's length result shall be a value equal to or higher than the median. In respect of purchase transactions, the arm's length result shall be a value equal to or lower than the median.
Circular 66 lists the following sources of information and data, which are acceptable for benchmarking purposes, including:
• information and data disseminated or supplied upon request by competent state agencies, research institutes, associations and specialised international organisations recognised by the state;
• information and data certified or publicised by licensed organisations or individuals engaged in independent services (e.g. independent audit organisations, registry offices, quality registration offices and organisations engaged in classifying or rating the credit of enterprises);
• annual or periodical financial statements and investment reports of companies listed on the securities markets which are publicised as required under the regulations and operating rules of the securities markets; and
• data, records and documents on transactions which taxpayers supply for tax declaration and payment purposes and for which they are responsible.
As limited number of companies are listed on the Vietnam security market, it is generally difficult for enterprises to obtain sufficient number of qualified local comparables for benchmarking.
Circular 66 provides that at least three consecutive financial years of comparables be used to calculate profit margins for benchmarking purposes. The regulations do not stipulate the use of foreign comparables. However, in practice, in the absence of local comparables or when local comparables are not sufficient, foreign companies (Pan-Asian comparables) are acceptable.
Circular 66 requires companies with related party transactions to declare their related party transactions and submit a related party disclosure form4 to the tax authorities together with the annual corporate income tax return within 90 days after the end of the fiscal year. The form requires that the value and the adopted transfer pricing method for each category of related party transaction with respect to each related party be stated. The form also requires the disclosure of detailed information on related parties, including the type of relationship with the related parties.
In addition to the disclosure form submitted on an annual basis, taxpayers are obliged to provide the tax authorities with detailed contemporaneous documentation in Vietnamese, supporting the arm's length nature of covered related party transactions within 30 working days upon the tax authority's written request.
The burden of proving the appropriateness of the selected transfer pricing method(s) and arm's length prices rests on taxpayers. Tax authorities are allowed to adjust the taxable income of taxpayers if they fail to prove arm's length transfer prices. In addition, the taxpayer is subject to a tax penalty ranging from:
• 20 percent of additional tax (incorrect declaration); or
• one to three times of additional tax (tax evasion); and
• late payment interests for shortfall amounts.
In case of tax evasion where the additional taxes are equal to VND 100,000,000 (approximately US$5,000) or more, the tax authorities have the right to initiate criminal proceedings against the taxpayer.
Under the Amended Tax Administration Law5 effective July 1, 2013, an Advanced Pricing Agreement (APA) is defined as an agreement between the tax authority and taxpayer that determines in advance the basis of tax calculation and transfer pricing methods or arm's length prices of related party transactions for a specified period. APAs can take the form of unilateral or bilateral/multilateral.
As the APA is new in Vietnam, the Ministry of Finance and General Department of Taxation launched a 'pilot’ APA project to enter into an APA with a few selected large MNCs. Following the conclusion of the 'pilot’ project, detailed guidelines on APA procedures will be released under a separate circular.
With continued efforts to administer transfer pricing, in May 2012, the Ministry of Finance approved the Action Plan to manage transfer pricing policies of foreign investment enterprises for 2012-2015. The Action Plan aims to improve the medium and long-term transfer pricing administration which covers, among others, developing transfer pricing audit procedures and the APA process and procedures, enhancing the tax authority's databases and intensifying audits i.e., at least 20 percent of annual tax audits are allocated to transfer pricing.
In addition, the OECD, European Commission and World Bank are jointly implementing an assistance project on “capacity building” in respect of both transfer pricing regulation improvement and technical competence for Vietnam tax officers for the period of 2012-2013.
Vietnam's transfer pricing system is now based on a more comprehensive set of legislation and regulations that adopts the arm's length approach based on internationally accepted standards and common national practices as the underlying principle to allocate taxable income of associated enterprises. The Vietnamese regulations are largely in line with the OECD Transfer Pricing Guidelines (OECD TP Guidelines) and those of its major trading partners.
Although Vietnamese transfer pricing regulations with mandatory requirements of annual disclosure and contemporaneous documentation have existed since 2006, enforcement was limited until 2010. Given the nascent stage of TP enforcement, the tax authorities' experience in conducting transfer pricing audits varies significantly from province to province. Further, an absence of precedents and court cases on transfer pricing could lead to inconsistent enforcement of the same set of regulations adding to potential risk and uncertainty for taxpayers.
With the issuance of Circular 66 in 2010, the approval of National Action Plan in 2012 and the recent introduction of APAs, the Vietnamese tax authorities are putting considerable efforts into training tax officers and conducting audits. Transfer pricing enforcement is a very high priority and an area of focus for the Vietnamese tax authority in 2013 and beyond. Given the tax authorities' focus on transfer pricing, companies should proactively review their transfer pricing risk profile and ensure compliance with the documentation requirements in order to mitigate adjustments and associated risks.
Nitin Jain is the Partner heading Ernst & Young Vietnam's transfer
pricing practice; Dr. Phat Tan Nguyen is a transfer pricing Senior Manager with
Ernst & Young Vietnam. They may be contacted at:
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global Ernst & Young organisation or its member firms.
1 Circular 117
2 Circular 66
3 The Pricing Law No. 11/2012/QH13 was enacted by the National Assembly on June 20, 2012 and came into effective January1, 2013.
4 Form GCN-01/QLT
5 The Amended Tax Administration Law No. 21/2012/QH13 was enacted by the National Assembly on November 20, 2012.
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