Transfer pricing

Vietnam introduced the first “anti-transfer pricing” guidelines in 1997, which was initially applicable to only Foreign Invested Enterprises (“FIEs”). The guidelines subsequently underwent several changes and were largely left unimplemented until 2005, and then revised substantially to extend the scope of application to all enterprises and became the effective guidelines for “transfer pricing” (as opposed to “anti-transfer pricing”) until recent time.

In February 2017, the Government released the first Decree on transfer pricing (“Decree 20”)[1] which replaced all former guidelines. The Ministry of Finance (“MoF”) subsequently released Circular 41/2017/TT-BTC dated 28 April 2017 guiding the implementation of Decree 20.  In November 2020, the Government released new Decree (“Decree 132”)[2] which updated the transfer pricing rules and replaced Decree 20.

The development of transfer pricing (“TP”) rules in Vietnam demonstrates the tax authorities’ increasing focus on protecting revenue through the requirement of arm’s length TP amongst related parties. The tax authorities have been stepping up their TP audit activities within the scope of a general tax audit or inspection, and TP has become one of their top priorities in recent years.

The latest regulation places emphasis on the need for taxpayers to adhere to the TP rules and builds upon the early rules.  It clearly defines, among others, related party transactions (“RPTs”) which are subject to the TP rules, methods, and compliance requirements. The tax authorities are given extensive power to make TP adjustments with respect to non-arm’s length RPTs and taxpayers’ failure to comply with the TP requirements.

Generally, Vietnam’s TP rules are harmonised with the principles of the OECD’s Action Plan on Base Erosion and Profit Shifting (“BEPS”).  The key features include:

1.   Related party rules

The TP regulation defines that a party is considered as related to another if (i) it participates directly or indirectly in the management, control, or ownership of another party or (ii) both parties operate under the common management, control, or ownership of a third party, under any of the following circumstances[3]:

• Either party directly or indirectly holds at least 25% of the ownership in another party;

• Both parties have at least 25% of their ownership held directly or indirectly by a third party;

• Either party is the largest shareholder of another party and holds directly or indirectly at least 10% of the shares in another party;

• Either party provides another party with a guarantee or a loan in any form (including a loan from a third party that is guaranteed by the other party, or a financing transaction of similar nature) of at least 25% of the capital of the borrowing party or more than 50% of the sum of all long-term and medium-term loans of the borrowing party;

• Either party appoints a member to the executive board, or hold control, of another party, if the number of members appointed by the former accounts for more than 50% of the members of the executive board of the latter; or a member appointed by the former has the authority to make decisions on financial policies or business activities of the latter;

• Both parties jointly have more than 50% of the number of members of their executive board or jointly have a member of their executive board, appointed by a third party, who has the authority to make decisions on financial policies or business activities;

• Both parties are managed or controlled in terms of personnel, finance or business activities by individuals who are family members;

• Both parties have a common head office or permanent establishment, or are permanent establishments of a foreign entity or individual;

• Either or both parties are controlled by an individual by way of this individual’s ownership or direct participation in the management;

• Under any other circumstances whereby either party has effective management or control of the business of another party.

 2.   TP methods

Decree 132 provides for guidance for the determination of market prices in business transactions between related parties in Vietnam. The methods recognised in the Decree 132 are as below:

Type of method	Specific Method	Abbreviation
Transaction-based methods	Comparable Uncontrolled Price Method	“CUP”
	Resale Price Method	“RP”
	Cost Plus Method	“CP”
Profit-based methods	Profit Split Method	“PS”
	Comparable Profit Method	“CPM”

There is no hierarchy of methods.  However, the elected method must be most suitable to the conditions surrounding the transactions, and there must be adequate and reliable sources of information and data for a comparable analysis.

Data, source documents and documentation which are used as basis for comparative analysis must specify their origin to enable the tax office to carry out an examination and verification.

3.   Acceptable TP data and information

Data/information from the following sources are acceptable for transfer pricing study analysis and comparison[4]:

• Data/information from commercial information/data providers in Vietnam or overseas;

• Data/information published by stock markets, government’s agencies, or other official sources;

• Data/information from the tax authorities’ transfer pricing database;

4.   Determination of arm’s length price

According to the Decree 132, a related party transaction is deemed to be at arm’s length where the consideration is consistent with that of a transaction with an unrelated party in comparable transactions and under comparable circumstances. The transaction with related parties does not need to be identical to the transaction with an unrelated party in order to be comparable but they must be similar enough to enable a reliable measure of arm’s length.

In determining the most reliable measure of arm’s length, the following factors are taken into consideration:

• Degree of comparability between controlled and uncontrolled transactions is assessed by:
  • Functions;
  • Contractual terms;
  • Risks;
  • Economic conditions; and
  • Nature of goods and services supplied.
• Quality of data and assumptions is assessed by:
  • Completeness and accuracy of data;
  • Reliability of assumptions; and
  • Sensitivity of results to deficiencies in data and assumptions.

5.   Specific rules applicable to RPTs

In addition to the usual tax deduction rules, a tax deduction is prohibited in respect of payments to a related party in the following circumstances[5]:

• The business of the related party is not relevant to the taxpayer’s business or the related party has no interest or obligation in respect of any assets, products, or services of the taxpayer;

• The size of business of the related party is disproportionate to the value of the underlying transactions;

• The related party is resident of a country that has no corporate income tax, and it does not create revenue or value for the paying party etc.

6.   Deductible related party service payments

Intercompany service payments to a related party are tax deductible if they satisfy all three following conditions[6]:

• The services create a commercial, financial, or economic value for the business of the paying party;

• The same services have been provided to an unrelated party with similar terms and conditions and the unrelated party has paid for such services; and

• The service fees are determined at arm’s length and the TP method is applied consistently throughout the group.

7.   Non-deductible related party service payments

Service payments to a related party will not be tax deductible where[7]:

• The services are intended to create benefits or value to other related parties or their shareholders;

• The services overlap the same services provided by another related party and they do not create value for the paying party; or

• The services represent the benefits to which the paying party is entitled to, for being a member of the group, whereby the margin charged by the related party in respect of the allocation of service fees charged by a third-party service provider does not justify any value to the paying party.

In addition, tax deduction of net interest expenses (after deduction of interest income) to a related party is capped at 30% of EBIDA (Earnings Before Interest, Depreciation and Amortisation). The balance of undeducted interest expenses may then be carried forward for a period up to 5 subsequent years.  However, banks, credit institutions and insurance companies are exempt from this rule[8].

8.   TP documentation and disclosure requirements

The following requirements are applicable to taxpayers who have related party transactions[9]:

• Disclose the related party transactions in a standard prescribed form to be attached to annual corporate income tax returns; and
• Prepare and maintain contemporaneous TP documentation and keep them up to date, including (i) a Country File; (ii) Global File; and (iii) A Country-by-Country Report – This TP documentation must be submitted to the tax authorities by the deadline of 30 working days following their request, which may be extended for a period up to 15 working days[10].

Submission of Country-by-Country Report is required in the following cases[11]:

• The taxpayer is the ultimate parent company in Vietnam and generates at least VND18,000 billion (~USD765 million) in global consolidated revenue – in this case, the Country-by-Country Report must be submitted to the tax office no later than 12 months following the date of financial year-end of the ultimate parent company; or

• The taxpayer’s ultimate parent company is overseas, and it is required to submit the Country-by-Country Report in the country of residence, if:

• There is an effective tax treaty between that country and Vietnam but there is no Competent Authority Agreement (“CAA”) as at the due date for submission of the Country-by-Country Report;

• There is a CAA but it the protocol of exchange of information concerning Country-by-Country Report is suspended;

• The overseas ultimate parent company has more than one subsidiary in Vietnam and the taxpayer has been nominated as being the subsidiary responsible for submission of the Country-by-Country Report – in which case the taxpayer is required to submit the nomination letter issued by the ultimate parent company before or on the last day of the financial year of the ultimate parent company;

However, submission of Country-by-Country Report is NOT required if the ultimate parent company of the taxpayer has appointed a proxy to submit such report on its behalf in the country of residence before or on the due date for submission of the same in Vietnam, subject to all following conditions[12]:

• The country of residence of the ultimate parent company also requires submission of the same report;

• There is an effective CAA between that country and Vietnam as at the due date of submission;

• The protocol of exchange of information concerning Country-by-Country Report is not suspended;

• The proxy has submitted the proxy nomination letter to the tax authority in the country of residence before or on the last day of financial year-end of the ultimate parent company;

• The taxpayer has provided the tax authorities in Vietnam with a copy of such proxy nomination letter; and

• The taxpayer has notified the tax authorities in Vietnam in writing the name, tax filing number and country of residence of the overseas ultimate parent company or its proxy before or on the last day of financial year-end of the group.

The regulation also prescribes specific information to be included in the TP documentation (which must be available in Vietnamese). Extensive disclosures are required in relation to related party (ies) involved, description of transactions and the rationale for the selection and application of TP methods.

9.   Safe harbour rules

A taxpayer will be exempt from the requirement of TP documentation (but it is still required to lodge an annual related party disclosure form together with its annual corporate income tax returns), if it falls in any of the following cases[13]:

• The concerned related parties are in Vietnam and they are paying corporate income tax at the same rate as the taxpayer, and neither parties are enjoying a tax holiday or a reduced tax rate in the reporting year;

• The taxpayer’s annual revenue is below VND50 billion (~USD2.2 million) and the sum of all related party transactions is below VND30 billion (~USD1.3 million);

• It has entered into an Advanced Pricing Agreement (“APA”) and fully complies with the annual APA reporting requirements; or

• Its business involves simple functions, its annual revenue is below VND200 billion (~USD8.8 million), it does not earn revenue or expense that are attributable to intangible assets, and it applies an EBIT (Earnings Before Interest and Tax, and before income and expenses from financing activities) at least 5% for a trading/distribution enterprise, 10% for a manufacturing enterprise, or 15% for a processing enterprise.

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[1] Decree 20/2017/ND-CP dated 24 February 2017 (“Decree 20”).

[2] Decree 132/2020/ND-CP dated 5 November 2020 (“Decree 132”).

[3] Art 5, Decree 132.

[4] Art 17.1, Decree 132.

[5] Art 16, Decree 132.

[6] Art 16.2(a), Decree 132.

[7] Art 16.2(b), Decree 132.

[8] Art 16.3, Decree 132.

[9] Art 18, Decree 132.

[10] Art 18.7, Decree 132.

[11] Art 18.5, Decree 132.

[12] Art 18.5(c), Decree 132.

[13] Art 19, Decree 132.