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Global transfer pricing guide

Transfer pricing - Vietnam

01 Oct 2023

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Introduction to transfer pricing in Vietnam
Transfer pricing rules

  • The Ministry of Finance formally introduced the first Transfer pricing Circular 117/2005/TT-BTC in 2005 which subsequently was replaced by Circular 66/2010/TT-BTC in 2010. During this period, any taxpayer having related party transactions was required only to submit the TP Form together with corporate income tax finalization within 90 days from the end of the Company’s fiscal year.

  • In 2017, the Vietnamese Government released TP Decree 20/2017/ND-CP (“Decree 20”) marking the most important development with respect to Vietnam TP regimes with the requirements on preparation of three-tiered TP documentation.  

  • Subsequently in FY2020, the Government of Vietnam issued Decree No. 132/2020/ND-CP (“Decree 132”), setting out new rules on transfer pricing in Vietnam. Decree 132 replaced Decree 20 that took effect from 20 December 2020, and applied for the financial year 2020.

  • The Decree 132 deals with principles, methods, processes, and procedures for determining prices of related-party transactions; obligations of a taxpayer in declaration and determination of the price of a related-party transaction, and tax declaration and payment; responsibilities of regulatory authorities for tax compliance management, check and audit for a taxpayer engaged in the transfer pricing.

  • The TP rules apply to Vietnamese taxpayers, including Vietnamese branches of foreign companies, who are payers of the corporate income tax in Vietnam and incur transactions with their related parties.  

  • Taxpayers are required to maintain contemporaneous records, obtained, and prepared at the time the related party transactions took place.

  • Decree 132 requires the TP documentation to be prepared before the time of annual CIT finalization and must be maintained and presented upon request from the tax authority. When facing TP inspection and audit, upon receipt of information request from the tax authority, the time limit for taxpayers to submit TP Documentations shall be subject to regulations prescribed in the Law on Inspection. For pre-inspection or pre-audit period, the deadline for submission upon receiving the request from tax authorities is 30 days and shall be extended only once to no longer than 15 working days.

  • Annual Disclosure Forms must be filed along with the annual return disclosing the arm’s length value, related party transactions, the method adopted, and other details as prescribed.

  • The Vietnamese TP regulations provide a threshold for TP filing simplification, in which small and medium taxpayers who do not breach the said threshold conditions will be exempted from the preparation of TP Documentation report for the respective tax years.

  • There is no specific threshold prescribed for Master File. However, any taxpayer eligible for Local File is also expected to maintain Master File.

  • Vietnamese ultimate parent companies (“UPC”) with consolidated revenue greater than VND 18,000 billion in the fiscal year is required to file the CbCR and submit to tax authority no later than 12 months from the financial year-end of the UPC.

    For taxpayer having foreign ultimate parent, the local filing of CbCR may be required if the ultimate parent is subject to submit CbCR in its jurisdiction and only if automatic exchange of information doesn’t happen.

OECD guidance
  • The Vietnamese TP regime is mostly aligned with the principles of Transfer Pricing guidelines (TPG) and the Base Erosion and Profit Shifting (BEPS) action plan issued by Organization for Economic Co-operation and Development (OECD).
  • OECD document is used as a guidance document and has no legal implications.
Transfer pricing methods
  • The principle of comparability analysis and the selection of transfer pricing methods follows the priority order in selecting comparison data as below:
    • Internal comparable of taxpayers;
    • Resident comparable residing within the taxpayer’s country or territory;
    • Comparable of other regional states in the same or similar sectoral conditions and economic growth levels.
  • Decree 132 requires the use of a method that is most likely to give a reliable estimation of an arm’s length result. The most appropriate method is determined based on the nature of the transactions and information or data available for comparative analysis.
  • The acceptable methodologies for determining arm’s-length pricing are comparable uncontrolled price, resale price method, cost plus method, comparable profit method and profit split method.
Self-assessment

  • Vietnam has a self-assessment regime, where the burden of proof is on the taxpayer to ensure that TP regulations are adhered to arm’s length principle.

  • Under annual transfer pricing disclosure form filed with annual tax returns, a taxpayer confirms on the arm’s-length value of their transactions or otherwise have to make a voluntary tax adjustment.

Transfer pricing documentation
Preparation of transfer pricing documentation
  • Any Vietnamese taxpayers who enter into related party/controlled transactions are subject to declaration by preparation of annual TP Disclosure Forms and TP Documentation reports to be declared and filed.
  • While TP Disclosure Forms are required to be prepared and submitted together with the annual Corporate Income Tax return. The TP Documentation reports could be stored at the taxpayer’s premises and submitted to the tax authority for examination and/or review purposes only upon request. Submission deadlines for TP Documentation reports have been mandated to be in line with Inspection Law in case of tax audit.
  • In Vietnam, there are four types of TP compliances: (i) Annual Disclosure Form, (ii) Local file, (iii) Master file and (iv) CbCR.
Master and local file
  • The TP regulation establishes the list of contents of a transfer pricing report, which taxpayers will be obliged to prepare if they meet the prescribed threshold.
  • A taxpayer is exempt from preparing transfer pricing documentation if one of the following conditions is met:
    • has revenue below VND 50 billion and total value of related-party transactions below VND 30 billion in a tax period
    • concludes an advance pricing agreement (APA) and submits annual APA report(s)
    • has revenue below VND 200 billion, performs simple functions, and achieves at least the following ratios of earnings before interest and tax to revenue from the following business: distribution (5%), manufacturing (10%), processing (15%), or
    • taxpayers only have domestic related party transactions, taxpayers and their related parties have the same tax rate, and none of the parties enjoys tax incentives.
  • There is no specific threshold prescribed for Master File. However, any taxpayer eligible for Local File is also expected to maintain Master File.
Some risk factors for challenge
  • In recent years, there has been a noticeable increase in the number of transfer pricing audits conducted.
  • In general, tax authorities pay close attention to the operating results of taxpayers who engage in related-party transactions. Taxpayers with operating results that are negative or below the deemed arm's length range have a considerable TP risk.
  • Common challenges by the tax authorities include questions on the validity of comparable chosen in the Local File, fluctuations in profit margins over the years, difference between profit margin of related party segment and third party segment.
  • Intra group transactions such as royalty and management charges are often challenged.
  • No consideration of local Vietnamese comparable may lead to rejection of comparable set
  • Company having related party segment lower than third party segment can be
Penalties
  • The following penalties applicable to TP non-compliance:
    • A penalty ranging from VND8 million to VND15 million for not submitting the TP Forms together with the annual CIT finalization returns as per the requirements of Decree 132;
    • A penalty equal to 20% of the underpaid tax amount shall be imposed for making incorrect declarations with respect to related-party transactions leading to any underpayment of taxes even where a taxpayer has prepared TP Documentation, or has provided the TP Forms to the tax authorities as per the requirements of Decree 132;
    • Late payment interest at a rate of 0.03%/day on outstanding tax obligations;
    • Potential penalties for tax evasion may also be imposed from one-to-three times the under-declared tax.
Economic analysis and how to demonstrate an arm’s length result
  • The Vietnamese regulation follows the priority order in selecting comparison data as follows:
    • Internal comparables of taxpayers;
    • Resident comparables residing within the taxpayer’s country or territory;
    • Comparables of other regional states in the same or similar sectoral conditions and economic growth levels.
    • Usually, a search for Vietnamese comparables followed by an external worldwide comparable companies search is employed.
    • As per the regulation, the use of inter percentile range of the 35th percentile to the 75th percentile is acceptable.
    • When a taxpayer is found not completely comply with the relevant decree requirements, the tax authority may use internal government databases (i.e., 'secret comparable data') to alter transfer pricing results.
  • Practically, the Comparable Profit Method (CPM) and Comparable Price Method (CUP) are the most used methods.
  • The net deductible interest expenses (equal to Interest expense minus Interest income) is capped at 30% of EBITDA (total net operating profit before interest, tax, depreciation, and amortization)
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • Advanced Pricing Agreements (APAs) are written agreements between a taxpayer and the Ministry of Finance (GDT) to govern the appropriate transfer pricing policy for a forward-looking period.
  • Circular 45/2021/TT-BTC (Circular 45) provides guidance toward the application of Advance Pricing Agreement (APA) mechanism. The APA duration is valid for 3 years from the 5-year period mandated under the preceding regulations.
  • Taxpayers have the option to enter into unilateral, bilateral, or multilateral APAs with the tax authorities.
  • Currently, no APA has been concluded so far and the process is extremely slow. It is extremely rare for a taxpayer to file an APA, although some cases do exist.
Exemptions
  • A taxpayer is exempt from preparing transfer pricing documentation if one of the following conditions is met:
    • Has revenue below VND 50 billion and total value of related-party transactions below VND 30 billion in a tax period;
    • Concludes an advance pricing agreement (APA) and submits annual APA report(s);
    • Has revenue below VND 200 billion, performs simple functions, and achieves at least the following ratios of earnings before interest and tax to revenue from the following business: distribution (5%), manufacturing (10%), processing (15%), or
    • Taxpayer only has domestic related party transactions, taxpayers and their related parties have the same tax rate, and none of the parties enjoys tax incentives
Related developments
Digital services tax
  • Digital/electronic services and goods provided to consumers by non-resident (‘overseas suppliers’) providers are subject to Foreign Contractor Withholding Tax (including Value added Tax and Corporate Income Tax) with different tax rate depending on nature of the activities performed. There is no separate TP impact on such digital transactions if they are at arm’s length.
  • Where the overseas supplier comes from a country which has a tax treaty with Vietnam, it may be possible to submit a tax treaty claim for a corporate income tax exemption if it can be demonstrated that it does not operate through a permanent establishment in Vietnam
GDT and taxpayer behaviour
  • The focus is on the preparation of robust functional analyses that describe the assets used, risks incurred, and functions performed in each of the intercompany transactions analyzed.
  • In most cases, the TP analysis is done on the company as a whole basis undertaking CPM as the most appropriate method.
  • Use of secret comparables by tax authorities is challenging.
COVID-19
  • From TP perspective, there was no specific guidance on Covid19. The taxpayers and the consultants mostly relied on the guidance issued by OECD and other international publications.
  • Due to the impact of the Covid-19 pandemic, there were less of field audits at taxpayer’s premises. This shortened time for taxpayers to prepare their responses to the tax authorities.

For further information on transfer pricing in Vietnam please contact:

Hoang Khoi.png

Hoang Khoi
National Head of Tax Services
T +84 24 3850 1618
E khoi.hoang@vn.gt.com

Vishwa Sharan.png

Vishwa Sharan
Director
T +84 24 3850 1691
E vishwa.sharan@vn.gt.com

Hoang Viet Dung.png

Hoang Viet Dung
Director
T +84 24 3850 1687
E dung.hoang@vn.gt.com

 

 

 

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