Chapter Thirty-Two

Vietnam Transfer Pricing

Vietnam Introduced Transfer pricing regulations in 2003 and then introduced formal transfer pricing regulations on December 19, 2005, through Circular 117/2005/TT-BTC. Vietnam became a World Trade Organization (WTO) member in 2006. Vietnam enacted transfer pricing regulations by statute on July 1, 2007, and the Ministry of Finance has been implementing the transfer pricing provisions. We expect the Ministry of Finance to promulgate new regulations and that these regulations will call for stricter enforcement.

The Vietnamese transfer pricing regulations provide guidance as to the definition of related party relationships, transfer pricing methodologies, benchmarking standards, mandatory transfer pricing documentation requirements, and annual filing requirements. The Vietnamese tax authorities define arm’s length price as being an amount that the taxpayer objectively sets in market transactions between independent parties.

The Vietnamese transfer pricing provisions apply to inbound and to outbound related party transactions. The pricing provisions do not have a size criterion, making virtually all taxpayers subject to scrutiny. Most significantly, the Vietnamese transfer pricing provisions apply to tax-favored domestic transactions through lower rates, tax holidays, and different tax profiles. We expect the Vietnamese government to focus on international transactions, but the transfer pricing provisions cover both domestic transactions and cross-border transactions.

EXPANSIVE VIEW OF RELATED PARTY OWNERSHIP

The Vietnamese tax authorities have the most expansive view of related party ownership of any country in Asia. The Vietnamese tax authorities impose 12 specific relationship tests, including:

• Share ownership or equity ownership based on a 20% or more interest
• Control
• Management
• One party dominates the other party by controlling its output, controlling 50% or more of the party’s total sales output
• One party dominates the other party by controlling its supplies, controlling 50% or more of the party’s total supplies

TRANSFER PRICING METHODS

The Vietnamese transfer pricing regulations permit the taxpayer to select from any of five transfer pricing methods:

Although some countries in Asia, such as Japan, establish a hierarchy of transfer pricing methods, the Vietnamese tax authorities do not impose such a hierarchy. Nevertheless, Vietnam apparently requires a “best transfer pricing method” approach. In addition, Vietnam prefers internal independent comparables to external comparables. The Vietnamese tax authorities permit the taxpayer to apply the interquartile range and to apply the median value for benchmarking and for preparing transfer pricing adjustments.

From a compliance standpoint, the Vietnamese tax authorities obligate the taxpayer to declare related party transactions on a prescribed form, GCN-01, when the taxpayer files its income tax return. The Vietnamese tax authorities obligated the company to file (or lodge) Form CGN-01 within 90 days of its financial year end.

DOCUMENTATION REQUIREMENTS

The Vietnamese tax authorities require the taxpayer to disclose the following in its annual transfer pricing filing:

• Name of the related party
• Country of residence of the related party
• Description of the transaction with the related party
• Value of the transaction
• Nature of the transaction, describing whether the transaction is tangible property, services, intangible property, or financial
• Transactions for each related party
• The transfer pricing method the taxpayer selects
• The nature of the related party relationship applicable to the transaction

The Vietnamese tax authorities require that all tax filers must “prepare and maintain contemporaneous documentation.” The tax authorities, in turn, must submit the document request to the taxpayer in writing. The taxpayer must provide the transfer pricing documentation to the tax authorities within 30 working days after the tax authorities submit the written request to the taxpayer.

The Vietnamese tax authorities request specific documentation from the taxpayer:

• Organizational structure
• Related party relationships
• Business strategy
• Management
• Control
• Functions the company performs
• Related party relationships
• Transactions taking place with related parties and with independent parties
• Descriptions of products or services
• Company’s transfer pricing policy
• Company’s process of price setting
• Company’s control structure
• Company’s approval structure
• Company’s contract term and contractual term process
• Analysis of the industry factors that impact the company’s transfer pricing
• Method selection, and application of the “most appropriate” transfer pricing method, including comparables data and benchmarking

COMPLIANCE CONSIDERATIONS

The Vietnamese tax authorities have designed the transfer pricing regulations so as to operate under Vietnam’s tax administrative law. Taxpayers must retain their transfer pricing documentation. A taxpayer’s failure to meet the transfer pricing provisions may lead to deemed assessments of the tax liabilities and penalties.

The Vietnamese tax authorities impose two deadlines to submit documents to the government:

The Vietnamese provisions impose transfer pricing penalties for failure to retain and provide information. Such a taxpayer’s failure to provide evidence may lead to the Vietnamese tax authorities’ imposing arbitrary transfer pricing adjustments. The taxpayer’s failure to provide evidence may lead to heavy penalties for underpayment, including lump-sum penalties.

The Vietnamese tax authorities have wide powers over taxpayers, which include:

• Heavy penalties for a wide range of tax offenses
• Failure to retain or submit documentation
• Underpayment provisions
• Evasion provisions
• Fraud provisions

The Vietnamese tax authorities impose strong penalties on taxpayers for failure to comply. The tax authorities can impose penalties in these situations:

• The tax authorities may deem an amount of tax to be payable if a taxpayer fails to provide evidence or provide transfer pricing documentation within 10 days after the government provides notice.
• The government additionally can impose heavy penalties for failure to provide information.
• The tax underpayment situation is 10% of the tax liability adjustment plus a late payment interest charge.
• The late payment interest charge is .05% per day for the period of nonpayment.
• The penalty can amount to one to three times the amount of the tax liability adjustment if the government ascertains that the taxpayer’s tax practice is abusive.

The Vietnamese tax administration is contemplating making extensive changes to its transfer pricing regime. Practitioners had expected the Vietnamese tax administration to initiate the reform in 2010 or shortly thereafter, but the Vietnamese government has not issued the reform as of this writing, mid-2012. As part of the reform process, Vietnam is trying to improve its investigatory process, to develop transfer pricing databases, and to adopt information technology into its tax administration. We expect these changes might lead to more stringent enforcement.

Vietnam offered tax holidays to foreign-invested enterprises in certain manufacturing and export sectors. The tax holiday amounted to a 50% income tax reduction and lower tax rates, depending on the province in which the enterprise is located. But note that Vietnam has removed many of these tax incentives.

The Vietnamese tax officials are already engaged in transfer pricing audits. The government, in conducting a transfer pricing audit, now assesses revenue risk. The specific business sector determines the taxpayer’s tax audit risk. Vietnam is expected to consistently conduct tax audits after a taxpayer’s tax holiday ends. The Vietnamese government is concerned about protecting its tax base.

Some taxpayers are more susceptible than others. Persistent losses can trigger a transfer pricing audit. The Vietnamese government is concerned about persistent corporate losses. In fact, Vietnam introduced a corporate tax anti-avoidance measure effective January 1, 2009. This anti-avoidance measure addresses the shifting of losses among taxable years.

A taxpayer subject to transfer pricing audits should be concerned about corollary tax considerations. Vietnam provides strict deductions of expenses and revenue/expense matching. In addition, Vietnam caps expense deductions for interest and for marketing.

From an audit situation, the Vietnamese tax authorities postulate a normal structure and look to economic issues. The tax authorities reject intercompany service fees, in large measure because the taxpayer fails to substantiate service fees or establish the basis on which the service fee can be set.

Vietnam is seeking to set up advance pricing agreements (APAs) but has not yet set up a transfer pricing mechanism. Vietnam has an advance ruling mechanism but has not provided advance rulings in the transfer pricing context. Vietnam has apparently made private confidential APAs.

“Hot button” transfer pricing issues in Vietnam include:

• Corporate tax system
• Permanent establishment issues
• Foreign-earned income
• Tax incentives for foreign investors
• Using offshore jurisdictions to reduce taxation

Profit repatriation remains a transfer pricing issue in Vietnam in regard to the application of the double tax treaties, dividend repatriation, and foreign contractor taxation.