Transfer Pricing - Vietnam

On 13 June 2019, Vietnam’s National Assembly enacted the Law on Tax Administration 2019,[2] which became effective on 1 July 2020. The Vietnamese transfer pricing regulations applicable from tax year 2020 and onwards apply to transactions undertaken between related parties, including organizations, individuals, and PEs.

The regulation requires taxpayers involved in related-party transactions to apply the arm’s length principle and the principle of substance of transactions and business operations as the basis to determine and declare the prices of related-party transactions.

The detailed guidance on the application of the arm’s length principle are included in Circular 66, which was issued by the Ministry of Finance on 22 April 2010 as Transfer Pricing Circular 66. This Circular provides a specific legal basis and detailed guidance on the determination of arm’s length prices in business transactions conducted between related parties. Article 9 of this Circular empowers the tax authorities to make transfer pricing adjustments in case of non-transfer pricing compliance.

The Vietnamese transfer pricing regulations apply to both domestic transactions and cross-border transactions undertaken between related parties. However, Decree 132 states that companies are also exempted from the transfer pricing documentation obligations where the Vietnamese taxpayers involved in the related-party transactions satisfy all the below conditions:

– they only engage in transactions with related-party taxpayers in Vietnam;

– both entities have the same corporate income tax rate; and

– neither entity enjoys corporate income tax incentives during the corporate tax period.

Scope of Legislations

The Vietnamese transfer pricing regulations are largely consistent with the 1995, 2010, 2015 and 2017 OECD Guidelines and the UN TP Manual, with some modifications reflecting the local perspective. Some aspects of the OECD BEPS Actions have been included in Decree 132, Transfer Pricing Decree 20 and Transfer Pricing Circular 41, which include:

– the three-tiered transfer pricing documentation requirement (BEPS Action 13);

– limitations on tax deductions for interest expenses (BEPS Action 4); and

– the concept of DEMPE with respect to the transfer pricing treatment of intangibles (BEPS Action 8)

Decree 132 contains the approach set out in BEPS Action 13 (Guidance on Transfer Pricing Documentation and Country-by-Country Report). Specifically, according to article 18(4) of Decree 132, a taxpayer is obliged to prepare and maintain three tiered transfer pricing documentation (including CbC report). This rule makes the Vietnamese transfer pricing documentation requirement more in line with the OECD Guidelines and BEPS’s recommendations which further strengthens the legal basis for transfer pricing administration and other anti-avoidance efforts.

Article 18(4) of Decree 132 requires taxpayers to prepare a three-tiered transfer pricing documentation including the Local File before the submission of their corporate income tax returns and they must maintain and provide the documentation including the Local File to the tax authorities upon request in an audit.

According to article 18(4) of Decree 132, the Local File covers the information about related-party transactions, policies and transfer pricing methods for related-party transactions which are prepared and kept in the offices of the taxpayer according to the list of the required information and documents prescribed in Appendix 2 attached to Decree 132.

The required items of information/documentation of the Local File are generally in line with the OECD’s recommendations. However, the taxpayer must use Appendix 2 indicating whether the items of information/documents of the Local File have been prepared and maintained and attach this appendix together with the corporate income tax return.

The Vietnamese transfer pricing regulations require the Master File as part of three-tiered transfer pricing documentation from 2017 onwards. The regulation requires taxpayers to prepare a three-tiered transfer pricing documentation (including the Master File) before the submission of their corporate income tax returns and they must maintain and provide the documentation (including the Master File) to the tax authorities upon request in an audit.

The required items of information/documentation of the Master File are generally in line with the OECD’s recommendations. However, the taxpayer must use Appendix 3 indicating whether the items of information/documents of the Master File have been prepared and maintained and attach this form together with the corporate income tax return. The Vietnamese transfer pricing regulations do not address the language aspect of the compliance transfer pricing documentation and forms, including Appendix 3. However according to local tax laws and practice, the information/documents submitted to the tax authorities must be in Vietnamese.

However, article 19 of Decree 132[103] specifies certain exemptions with respect to the transfer pricing compliance. Accordingly, if the taxpayer qualifies regarding one of the following scenarios, it is exempted from three-tiered transfer pricing documentation (including Master File) but is required to declare and submit Appendix 1 as part of annual CIT finalization:

– has sale revenue of less than VND 50 billion (approximately USD 2.15 million or EUR 1.97 million) and the value of its related-party transactions is less than VND 30 billion (approximately USD 1.29 million or EUR 1.19 million). In this case, the taxpayer is exempted from the three-tiered transfer pricing documentation obligation, however it is required to declare and submit Appendix 1 as part of its annual corporate income tax return.

– engages in simple functions, has revenue of less than VND 200 billion (approximately USD 8.61 million or EUR 7.91 million) and achieves a ratio of earnings before interest and tax (EBIT) to revenue of at least 5% for the distribution function, at least 10% for the manufacturing function and at least 15% for the processing function; or

–   has signed an APA and submitted annual APA report.

A Vietnamese Ultimate Parent Entity with global consolidated revenue in a tax period of VND 18,000 billion or more must prepare Appendix 04 (CbCR) and submit it to the tax authority no later than 12 months after the financial year-end of the ultimate parent entity. For a Vietnamese taxpayer whose overseas UPE is obliged to submit a CbC report in its country of residence, the Vietnamese tax authority will obtain that CbC report by engaging in the AEOI in accordance with its commitment under the International Tax Agreement of Vietnam. The Vietnamese taxpayer submits the written notification on the information of the UPE or the appointed organization to the Vietnamese tax authority no later than the financial year-end of the corporation.

The tax authorities gives preference to local comparable companies. However, in absence of the same, pan-Asian comparable companies are accepted.

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Gyan Prakash Srivastava [MBA, LL.B.]

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