Vietnam publishes draft transfer pricing law to combat tax avoidance

26-Nov-2016 Intellasia | Mnetax | 6:00 AM Print This Post

Vietnam’s Ministry of Finance (MOF) in early October published a draft decree establishing uniform transfer pricing rules, including an expansive definition of “related party transactions” and a new rules on comparability analysis and documentation. The draft law would also impose new conditions on the deductibility of common expenses arising between related parties, such as interest and service fees.

Feedback and comments are being sought from the public, in particular from potentially affected multinational corporations, prior to the MOF’s submission of the draft decree to the government for issuance.

Vietnam transfer pricing – challenges

Transfer pricing is understood to mean the setting of a price for goods and services sold between related parties within a group. Related parties enter into transactions to allocate revenues and costs among themselves, thereby minimising profits and therefore tax.

In Vietnam, FDI capital inflows from foreign investors play an essential role in boosting economic growth. However, it has been estimated by the general Department of Taxation (GDT) that approximately half of all foreign direct investors in Vietnam have either not declared all tax payable by them or have wrongly declared their tax.

While multinationals have declared losses for multiple consecutive years, FDI has continually been expanded. It can therefore be inferred that these losses may not truly reflect the underlying profits or losses of these FDI enterprises, and that some foreign direct investors may be using transfer pricing mechanisms to exploit differences in tax laws between Vietnam and foreign jurisdictions in which they operate.

According to the GDT’s statistics, it is estimated that roughly 4,751 enterprises suspected of engaging in related party transactions were subject to inspection and investigation in 2015. These enterprises were forced to adjust their tax losses for a cumulative amount of greater than VND 10,000 billion (~ USD 500 million). The tax authorities collected tax arrears and imposed fines of more than VND 1,000 billion (~ USD 50 million) on these enterprises.

However, there is currently no uniform legislation on transfer pricing. As transfer pricing becomes a more complex and pressing issue given rapid growth in FDI flows and cross-border transactions, this is causing difficulties for the state authorities to inspect and handle transfer pricing violations.

Current regulatory regime

Issues pertaining to transfer pricing are currently regulated by Circular No. 66/2010/TT-BTC (MOF, 22 April 2010), which provides guidance on the determination of market prices in business transactions between related parties (Circular 66) and Circular No. 201/2013/TT-BTC (MOF, 20 December 2013), which provides guidance on the application of advanced pricing agreements (APAs) on tax determinations in tax administration (Circular 201).

Provisions have recently been added to the Amended Law on Tax Administration (2012) relating to prior agreements as to the methodology of calculating taxable prices, which are an attempt to prevent corporate tax evasion, whilst maintaining flexibility for companies.

In 2015, the MOF decided to establish at least four tax inspection divisions empowered to inspect transfer pricing matters. These divisions are located in Vietnam’s major economic zones, including HCM City, Hanoi, Dong Nai, and Binh Duong Province.

The locations were chosen as a significant number of foreign invested enterprises (both joint venture enterprises and 100 percent foreign owned enterprises), which frequently engage in offshore related party transactions, are located in these areas. The MOF has also established an inspection division on transfer pricing, which is directly managed by the Inspection Department of the GDT of the MOF.

Recent legal developments

In the spirit of the government’s Resolution 19-2016/NQ-CP, which promulgates key measures to improve the business environment and enhance national competitiveness, the newly-elected government expects to issue the draft decree to combat transfer pricing and create a better investment climate in Vietnam. In the longer term, it is expected that lawmakers will consider promulgating a law on transfer pricing, similar to comparable regional economies such as Thailand.

Related party transactions

The MOF’s draft decree introduces a uniform definition of “related party transaction.” These are transactions between parties having associated relations in the process of production and business, including:

purchasing, selling, exchanging, leasing, renting, borrowing, lending, delivery, and transfer of goods and services; and

purchasing, selling, exchanging, renting, leasing, borrowing, lending, assets transfer, and the common use of factor endowment (synergy, cooperation in exploitation and using of human resources, cost sharing between associated parties).

The draft decree proposes a definitional scope of related party transactions which is broader and more extensive than the prevailing legal framework.

Particularly, two companies deem to be related parties if one holds at least 25 percent equity in the other company. This can be contrasted with Circular 66, which states that two companies are related parties if one holds 20 percent of the total investment of the other company. Whilst this may ostensibly seem like a dilution of the definition of “related party,” investment capital and equity are two distinct concepts.

A company’s investment capital is now defined as the total amount of equity and mobilised capital used to execute the investment project, and is customarily much higher than a company’s equity capital alone. For this reason, the draft decree represents, in practice, a significant tightening of the definition of “related party.”

In addition, according to Circular 66, if two separate companies jointly appoint greater than 50 percent of a company’s board of directors, they will be considered to be related parties. Under the draft decree, this figure is decreased to 30 percent.

As such, the draft decree appears to propose a much more expansive definition of what constitutes a “related party,” thereby potentially bringing more companies within its scope of application than the existing regulatory regime.

Comparability analysis

From 2013, Vietnam introduced APAs in accordance with the Amended Law on Tax Administration (2012) and Circular 201. Pursuant to the APA rules, a tax declaring company and the tax authorities would may enter into a binding agreement setting out, inter alia, bases for calculation of tax, pricing methodologies and market prices for the goods or services in question, prior to the tax declaration dossier being submitted.

The arrangement is intended to provide companies with certainty as to how the tax authorities will assess its operations and its tax affairs. Theoretically, investors may sign identical APAs with Vietnam and other jurisdictions in which they operate, provided that such other jurisdictions has entered into a double-taxation avoidance agreement with Vietnam. The rules are expected to enhance investors’ confidence in Vietnam, and enable them to mitigate their risk and structure their taxation arrangements more efficiently and transparently.

The draft decree inherits from the prevailing regulations existing principles of comparability analysis and methods to determine transfer prices. It also provides detailed guidance on comparability analysis to determine the market price in related party transactions. The comparable methods by which to determine taxable prices of goods and services in related party transactions include: (1) comparable uncontrolled transaction price method, (2) resale price method, (3) cost plus method, (4) comparable profit method, and (5) profit allocation method.

One notable point is that the selected method on price determination is to be based on the nature and and substance of method, rather than simply dependent on the name of the method.

According to the draft decree, the tax authorities shall manage, control, and inspect the transfer price of related party transactions based on arm’s-length principles, and will apply “substance over form” to decide whether to recognise a related party transaction which results in revenue loss to the state and to determine whether to impose any adjustment to the price of the related party transactions to determine appropriate tax liabilities.

Deductible expenses in common transactions

The draft decree proposes clear conditions and requirements for the deduction of certain expenses arising between related parties. This is a recent development; such provisions are not present in Circular 66.

For example, the draft stipulates that total loan interest expenses payable to related parties are deductible from taxable expenses provided that such loan interest expenses do not exceed 20 percent of the borrower’s before-tax profit and such loan interest expenses do not exceed the percentage of loan interest expenses paid to independent parties against before-tax profit of the whole group.

Under the draft, special rules apply to determine whether services paid to a related parties are deductible against taxable expenses, as follows:

Payments for services must have commercial, financial and economic value and must directly serve the production and business operations of the taxpayer.

Payments for services from related parties are only be deductible if, in similar circumstances, independent parties pay for such services.

Service fees must be paid for on an arm’s-length basis. Services which are for the benefit of related parties are not deductible.

Services provided to related parties are not deductible if: services are duplicated, services are provided for the interests of shareholders of related parties, services are received by the taxpayer as a member of the group, or payment for services is provided to a related party acting as an intermediary which enters into arrangements with third parties to provide such services to the taxpayer.

The policies and methods of price determination for related party transactions and the principle on allocation of service charges between related parties must be applied consistently throughout the group for similar services.

If there are transactions between related parties, and such transactions pertain to specialised and synergistic functions of the group, the taxpayer must determine the total value created from these functions and the profit allocation in conformity with the value contributed by the associated parties after deducting corresponding service charges for the party which coordinates and provides services in the nature of an independent transaction.

The draft specifies that expenses that cannot be justified as arm’s-length or which do not create income and added value for the taxpayer are not deductible. These include expenses paid to related parties:

Which perform no business relevant to the taxpayer.

Whose scale, number of employees, and business functions are inappropriate to the value of the transaction and income received by the related party.

Which are not capable of controlling their business risks for their assets, goods, and services supplied to the taxpayer.

Which are resident in jurisdictions which do not impose corporate income tax.

Transfer pricing documentation and reporting

The draft decree provides greater specificity on companies’ documentation and reporting obligations than the prevailing regulations. Companies must now declare related party transactions and factors which distort tax obligations resulting from the related party transaction.

Such obligations include:

Declaring and determining the price of related party transactions based upon that of an arm’s-length transaction; analysing, comparing and selecting similar objects to benchmark against an arm’s-length transaction; and adjusting the price of related party transactions pursuant to the most appropriate value of the arm’s-length transactions if it does not reduce the corporate income tax obligations to be paid in Vietnam.

Preparing a dossier on the determination of price for related party transactions and declaring the information. Documents and records in a foreign language must be translated into Vietnamese and the taxpayer shall be liable for the content and accuracy of the translation.

Providing information in the dossier on the price determination of related party transactions at the request of the tax authorities, no later than 15 working days from receipt of the request.

Independent auditing agencies assisting with determining the price of related party transactions are liable for the implementation of auditing standards and professional ethics standards and must comply with principles of independent auditing activities.

Independent auditing agencies representing taxpayers must comply with regulations on transfer price management of related party transactions and are responsible for consulting activities, preparing the dossier for their clients, and ensuring the accuracy and sufficiency of corporate income tax to be paid in Vietnam.


Whereas Circular 66 only refers to the responsibilities of the MOF, particularly the GDT, the draft decree enhances the roles and responsibilities of multiple authorities, including the State Bank of Vietnam, the Ministry of Planning and Investment, and the Ministry of Industry and Trade. The participation of these ministries and agencies represent an effort to institute stricter procedures to combat transfer pricing.

The MOF has recently reported the decree-making process and firmly expects that the final draft decree will be submitted to the government before the end of November 2016.

If the draft decree is promulgated, it can be expected to only affect companies which purposely and systematically enter related party transactions with the intention of avoiding tax. For investors that conduct legitimate business and duly comply with their tax obligations, the new law would be beneficial, as the draft ecree will foster a fairer, more transparent and competitive business environment.

In addition, given Vietnam’s is lack sufficient tax administration, we believe that contemporary APAs, as provided for by the current tax laws, may be an appropriate method for Vietnamese tax authorities to consider whether transfer pricing arrangements possess legitimacy and to cross-check the tax histories of multinational companies which operate in Vietnam.


Category: Business, Vietnam

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