On 24 February 2017 the Government issued Decree No. 20/2017/ND-CP (Decree 20) regulating tax administration with respect to enterprises having transactions with related parties which take effect from 1 May 2017. Decree 20 creates a new legal framework for related-party transactions
in Vietnam and provides certain changes to the current transfer pricing rules which are governed under Circular No. 66/2010/ TT-BTC of the Ministry of Finance (Circular 66). Decree 20 provides detailed guidance on the determination of arm's length pricing of related party transactions,
- The ownership threshold to be considered as related parties is increased to 25% from 20%.
- Two entities with mutual transactions more than 50% of sales/purchases are no longer treated as related parties.
- Transfer pricing (“TP”) documentation is more complicated and includes a master dossier on global group information, a local dossier and country-by-country profit report. The documentation must be submitted by the annual tax return deadline (within 90 days after the fiscal year-end).
- Dossier of identifying related-party transaction prices should be prepared by the deadline of the annual Corporate Income Tax (CIT) finalisation, and provided to the tax office within 15 working days from the date of the tax request.
- More detailed guidance on benchmarks such as use of data sources, TP method selection, minimum numbers of comparable companies and other adjustment factors is provided.
- The following entities are exempted from TP documentation:
- Entities with revenue below VND50Billion and total value of related-party transaction below VND30Billion in a tax period
- Entities concluding an Advanced Pricing Agreement (APA) and submitting annual APA reports
- Entities with sales revenue below VND200Billion and achieving at least 5% for distribution, 10% for manufacturing and 15% for processing for ratios of earnings before interest and tax to revenue.
- Tax payers that only have transactions with domestic related parties, the same tax rate and no entity entitled to tax incentives can be exempt from reporting information about these transactions.
- Loan interest applicable to both related-party and third-party loans are capped at 20% earnings before interest, tax, depreciation and amortisation (EBITDA).
- For services between related parties, the tax payer must prove the economic benefit and provide sufficient evidence (supporting documents such as a contract, invoice etc) on calculation method, proportion method and price policy of the group for services provided. The mark-up portion of third-party expenses recharged to Vietnam entities are not deductible for CIT purposes.Decree 20 mainly affects companies with various related party transactions. Interest loans with related parties or with third parties are also under the administration of this decree, when capped at 20% of EBITDA.
Key considerations for investors and companies
Decree 20 emphasizes that the transfer pricing method applied must ensure that there is no loss of tax revenue to the state budget. This implies an asymmetry that may be in consistent with the arm’s length principle. In addition, there is no guidance on how adjustments should be done and the potential impact for other taxes (i.e Value added tax or foreign contractor tax).
Below are the analysis for the compliance risk and the profitability for tax purpose resulting in TP risk for each enterprise and needs investors/ companies’ consideration:
Expected TP Audit program for 2017
In order to enforce the TP audits, Tax Authority will manually select enterprises with below criteria: 1) Key industry players; 2) Enterprises which have persistent losses and are still expanding; 3) Enterprises which have not been audited for a long period; 4) Enterprises with high tax incentives; 5) Enterprises which have had several tax issues or high adjustments during previous audits; 6) Enterprises which have significant related party transactions; and 7) Others.
Therefore, companies in Vietnam shall have its own assessment on above criteria to see how possible they will be fall in the audit list by Tax Authority.
What Should Companies Do
- Run a comprehensive risk assessment and readiness analysis for the regulatory change: Master File, Local File, Country by Country report
- Ensure the proper TP filling and documentation for FY2017 and prior years
- Consider an APA as an alternative to transfer pricing reporting compliance requirements under the new Decree
- Undertake a review of the corporate structure and potential risks, specially when conducting transactions with preferential tax regimes and reduce the risk of double taxation
- Intercompany agreements will be reviewed in the event of a tax audit and form part of the suite of transfer pricing documentation. Companies should ensure that absent or insufficient intercompany agreements do not adversely impact intended tax position
Decree 20 represents the most important development with respect to Vietnam’s transfer pricing regime in the last 10 years. However, it is a challenge for enterprises to comply and tax payers should take immediate action to assess the impact not only on local tax compliance, but also on the business, considering that Decree 20 has potential implications beyond transfer pricing.
Khuat Lien Huong
Huong is Consulting Director of ASTC from 2017. She has more than 10 years in assurance and consulting services and she is both CPA Australia member and FCCA member. She has a lot experience in wide range manufacturing and real
estates clients in Vietnam, Laos and Cambodia.