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Global transfer pricing guide

Transfer pricing - Vietnam

25 Jan 2022

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Introduction to transfer pricing in Vietnam
Transfer pricing rules

  • In FY 2020, the Government of Vietnam issued Decree No. 132/2020/ND-CP, setting out new rules on transfer pricing in Vietnam. The (“Decree 132”) replaced Decree No. 20/2017/ND-CP (“Decree 20”) issued in 2017. The Decree 132 takes effect from 20 December 2020, but applies for the financial year 2020.

  • This Decree 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.

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

  • Decree 132 requires the TP Documentations 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 of TP Documentations shall be subject to regulations prescribed in the Law on Inspection.

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

  • The Vietnamese TP regulations provides 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.

  • MNE groups with global consolidated revenue in the relevant tax period of VND 18,000 billion or more must prepare the CbCR. The CbCR must be submitted no later than 12 months from the financial year-end of the UPE.

  • There is a self-assessment regime, i.e. the burden of proof is on the taxpayer to confirm its TP meets the standard. Taxpayers must provide a full self-assessment of their profits calculated on an arm’s length basis.

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 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.
  • 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, profit split method, and comparable profit 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 premise and submitted to the tax authority for examination and/or review purpose 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 comparables chosen in the Local File, fluctuations in profit margins over the years.
  • Intra group transactions such as royalty and management charges are often challenged
  • None consideration of local Vietnamese comparables may lead to rejection of comparable set
  • At times getting a right comparable locally possess a great challenge.
Penalties
  • The following penalties applicable to TP non-compliance:
    • A penalty ranging from VND8 million to VND15 million for not submitting the TP Appendices 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 deficiency or underpayment of taxes even where a taxpayer has prepared TP Documentation, or has provided the TP Appendices to the tax authorities as per the requirements of Decree 132
    • Potential penalties for tax evasion may also be imposed from one-to-three times the under-declared tax
    • Late payment interest at a rate of 0.03%/day on outstanding tax obligations.
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 35th percentile to the 75th percentile is acceptable
  • When a taxpayer is found to not completely comply with the relevant decree requirements, the tax authority may use internal government databases (ie, 'secret comparable data') to alter transfer pricing results.
  • Practically, Comparable Profit Method (CPM) and Comparable Price Method (CUP) are the most used methods.
  • The interest deductibility 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 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
  • The taxpayers those, which are exempted from the TP declaration, shall also be exempted from preparation obligation of the TP documentation, provided that all the below conditions are met:
    • Taxpayers only engage in transactions with related parties in Vietnam who are subject to Corporate Income Tax (CIT); and
    • Taxpayers and their related parties are subject to the same CIT rate; and
    • Neither party enjoys CIT incentives during the relevant tax period.
Related developments
Digital services tax
  • Digital / electronic services and goods provided to consumers by non-resident (‘overseas suppliers’) providers are subject to 10% Value Added Tax. There is no separate TP impact on such digital transactions as long as they are at arm’s length.
GDT and taxpayer behaviour
  • The focus is on preparation of robust functional analyses that describe the assets used, risks incurred, and functions performed in each of intercompany transaction analysed.
  • In most cases, the TP analysis is done on company as a whole basis undertaking CPM as the most appropriate method.
  • Use of secret comparables by tax authority 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 was 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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