1 Competent authority and transfer pricing regulations

Competent authority

Vietnamese Ministry of Finance (“MOF”), General Department of Taxation (“GDT”), and local / provincial tax departments

Regulatory framework

• Law on Tax Administration
• Circular 117/2005/TT-BTC (“Circular 117”), effective from 2006 - 2010
• Circular 66/2010/TT-BTC (“Circular 66”), effective from 2010 - 2017
• Decree 20/2017/ND-CP (“Decree 20”) and Circular 41/2017/TT-BTC (“Circular 41”), effective from 1 May 2017

Applicability

Transfer pricing (“TP”) rules are applicable to taxpayer which pays corporate income tax by the declaration method and have business transactions with related party(s).^[1] 

Definition of related party

Entities are deemed related parties if any of the following conditions are met:^[2]

1. One enterprise holds directly or indirectly at least 25% of the charter capital of the other enterprise
2. Both enterprises are directly or indirectly owned at least 25% of the charter capital by a third party
3. One enterprise is the biggest shareholder regarding charter capital of another enterprise, holding directly or indirectly at least 10% of the total shareholding of the other enterprise
4. One enterprise guarantees another enterprise or provides it with loans in any form (including third party loans secured by financial sources of the related party and including financial transactions of a similar nature) on condition that such loans account for at least twenty five per cent (25%) of charter capital of the borrowing enterprise and account for more than fifty per cent (50%) of the total value of medium and long-term loans of the borrowing enterprise
5. One enterprise appoints members of the executive board of another enterprise or holds the controlling right in the second enterprise on condition that the number of such members appointed by the first enterprise accounts for over fifty per cent (50%) of the total number of members of the executive board or the first enterprise holds the controlling right in the second enterprise; or one of the members appointed by the first enterprise has the power to decide the financial policies or business activities of the second enterprise
6. Two enterprises both have above fifty per cent (50%) members on the executive board or both have a member with power to decide the financial policies or business activities who are appointed by the same third party
7. Two enterprises are executively managed or controlled regarding personnel, financial and business activities by individuals in the relationship of husband and wife, or parent and child (including both natural, adopted and children-in-law), two siblings, grandparent and grandchild, uncle or aunt and niece or nephew;
8. Two business establishments are of headquarter and permanent establishment relationship or both of them are permanent establishments of a foreign organization or individual
9. One or more enterprises are under the control of one individual by his or her capital contribution to such enterprise/s or by his or her direct participation in executive management of the enterprise/s
10. Other cases in which an enterprise is in reality subject to executive operation and decisive control of its production and business activities by the other enterprise

2 Transfer pricing documentation requirements

Three-tiered TP documentation

Taxpayer is required to prepare and maintain the three-tiered TP documentation as follows:^[3]

a Local File referring specifically to related party transactions of the Vietnamese taxpayer, highlighting material related party transactions, transaction value, and the company’s analysis of the transfer pricing calculations and support with regard to those transactions;

a Master File which contains standardized information of the ultimate parent company and other group members of the taxpayer, including information regarding the global business operations of the Group, key value drivers, supply chain analysis, functional analysis describing the principal contributions to value creation by individual entities within the Group and their transfer pricing policies; and where applicable,

a Country-by-Country (“CbC”) Report which reports annual income earned and taxes paid in each tax jurisdiction in which the Group conducts businesses, including the disclosure of the amount of revenue, profit before income tax, and income tax paid and accrued. 

The CbC Report is required in the following cases:

Vietnamese taxpayer is the ultimate parent company of a Group in Vietnam which has global consolidated revenue in the tax period of eighteen (18) thousand billion Vietnamese Dong (approximately 750 million Euro) or more; or

Where the overseas ultimate parent company of the taxpayer in Vietnam is required to submit a CbC Report in its country of residence, the Vietnamese taxpayer is required to maintain a copy of such CbC Report.  In case such CbC Report is not required to be submitted in the ultimate parent company’s home country, the Vietnamese taxpayer is required to submit a written explanation to the local tax authorities.

Due date and submission requirements^[4]

The three-tiered TP documentation (Local File, Master file and CBC Report) shall be prepared and maintained before the Corporate Income Tax (“CIT”) finalization deadline of the respective year (i.e., 90 day after the financial year-end).

Taxpayers are only required to submit the TP documentation to the tax authorities within 15 working days upon request in the event of a tax audit.  However, in the event of a tax consultation, the timeline to submit the TP documentation is 30 working days upon request, which can only be extended once to no longer than 15 working days.

Exemptions

Relief is provided for small taxpayers, specifically, TP documentation can be exempt if the taxpayer satisfies any of the following requirements:

• The taxpayer’s annual revenue does not exceed VND50 billion and the total value of the related-party transactions does not exceed VND30 billion;
• A taxpayer which has an Advance Pricing Agreement (“APA”) with the competent authority and has submitted the annual APA report in accordance with the APA regulations.
• Taxpayers which perform routine functions and do not generate revenue or incur expense from exploitation and use of intangibles: the taxpayer’s annual revenue does not exceed VND200 billion and the ratio of net operating profit before interest and tax to net sales revenue is not lower than:

                > 5% for distribution enterprises;

                > 10% for manufacturing enterprises; and

                > 15% for toll manufacturing enterprises.^[5]

3 Related party disclosures

In addition to the above three-tiered TP pricing documentation, taxpayers are required submit the following related party disclosure forms:

Form 02 –  List of information, documents required in Local File

Form 03 –  List of information, documents required in Master File

Form 04 – CbCR (only in case the taxpayer is an ultimate parent company in Vietnam which has global consolidated revenue in the tax period of 18 thousand billion VND or more)

Due date and submission requirements^[6]

The related party disclosure forms must be filed together with the annual corporate income tax returns, which are due 90 days after the fiscal year end.

4 Transfer pricing methods

The following methods are endorsed in the transfer pricing regulations for determining and evaluating the arm’s length nature of related party transactions.[1]

1. Comparable uncontrolled price method (“CUP”)
2. Comparable profit method including:
   • Resale price method (“RPM”)
   • Cost plus method (“CP method”)
   • Comparable net profit method (“CPM”)
3. Profit split method (“PSM”)

5 Comparability analysis

Database for benchmarking analysis

The TP regulations endorse the following types of database / information source that can be used for benchmarking analysis purposes: 

• Databases of commercial information providers;
• The information, and data published on stock exchange/national and international commodity/services exchanges; and
• The information published by the Ministries, Sectors or other official sources.

The TP rules prioritize the type of comparable data for benchmarking analysis in the following order:

• internal comparables of the taxpayers;
• comparables located in the same country, territory of the taxpayers; and
• comparables located in the region which have similar industry condition and economic development level.

The TP regulations give tax authorities the power to use their internal databases (i.e., secret comparables) for TP assessment purposes in cases where a taxpayer is deemed noncompliant with the requirements of Decree 20.

Comparability adjustments

In evaluating the arm’s length nature of related party transactions, comparability adjustments are required to ensure no material differences between independent and controlled transactions.  The TP rules also set out the minimum number of independent comparables required for benchmarking analysis purposes.

Comparable data needs to correspond with the same financial year as the tested party/transactions.  However, data of the preceding one year can be used if current information is not available in the database at the time when the benchmarking analysis is conducted.

6 Deductibility of intercompany expenses

According to Decree 20, the tax deductibility of interest on loans is capped at 20% of total net operating profit before interest, depreciation and amortisation expenses (note that total net operating profit is exclusive of other income and other expenses).

For intercompany services, various criteria for tax deductibility are set out, notably, a taxpayer needs to demonstrate that the services provide economic benefit and provide evidence (supporting documents) on the reasonableness of the service charge calculation method. A tax deduction will not be allowed for expenses where the direct benefit or additional value to the taxpayer cannot be determined, such as duplicated services, shareholder costs, etc. Further, the mark-up portion of third party ‘pass-through’ expenses that are recharged to a Vietnam taxpayer are not deductible.

7 Penalties and statute of limitation

Penalties and interest

In case the tax authorities make a transfer pricing adjustment that results in additional tax liability (i.e., underpayment of taxes), the taxpayer is generally liable to pay a penalty of 20% of the additional tax liability (additional penalties of up to three times the outstanding tax due may be imposed in case of tax evasion or fraud) depending on the nature of the offences and circumstances.  In addition, interest of 0.03% per day over the outstanding tax due is also generally added to the penalty and additional tax liability. 

Statute of limitation

Statute of limitation is 10 years for transfer pricing assessment.  Tax recollection and interest on late payment for the underpayment of taxes are imposed for the maximum of 10 years.  However, penalties are generally imposed only for the maximum of 5 years.  Note that the tax recovery can be indefinite if the entity failed to register itself as a taxpayer. [1]