The Vietnamese government has approved a decree concerning transfer pricing documentation, and the decree introduces requirements for country-by-country (CbC) reporting and includes Master file and Local file requirements.
Decree No. 20/2017/ND-CP (24 February 2017)—Quy định về quản lý thuế đối với doanh nghiệp có giao dịch liên kết—concerns the management of transfer pricing in Vietnam.
The decree is applicable from 1 May 2017, meaning that it will be effective from the 2017 financial year. The following discussion provides an overview of the documentation guidelines under the decree.
The contemporaneous documentation requirement included in the decree includes measures for implementation of the documentation requirements, as provided under the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) recommendations for BEPS Action 13. These requirements are more precise in comparison to the previous rules under Circular 66.
The new decree specifies that a transfer pricing documentation package must include (1) a Master file, (2) a Local file, and (3) a country-by-country (CbC) report. Other requirements under the decree provide:
Certain thresholds are provided that exempt multinational entities from the documentation requirements in Vietnam. The safe harbor exemption applies for taxpayers that satisfy the following.
The safe harbor exemption is also available for taxpayers having an advance pricing agreement (APA) in place and that have submitted an annual APA report in accordance with the APA regulations. However, for those taxpayers’ related-party transactions not covered by the APA, the taxpayers must comply with the new transfer pricing documentation requirements (in other words, the safe harbor exemption does not apply).
Taxpayers that satisfy the requirements for the safe harbor exemption from the transfer pricing documentation rules still must comply with the mandatory disclosure form (as described below).
The rules for mandatory disclosures about related-party transactions and transfer pricing information include a requirement that taxpayers provide for information about: (1) the transfer pricing methods applied; (2) the values and types of transactions; and (3) the country of residence of the related parties, among other information. This information must be reported within 90 days of the end of a financial year.
A significant change to new Form No. 01 concerns “voluntary” transfer pricing adjustments regarding the operating results of taxpayers, with three forms provided for:
Taxpayers that only engage in transactions with Vietnamese (domestic) related parties are exempt from making a disclosure on Form No. 01 under Section III (concerning information on the determination of transfer prices for related-party transactions) and Section IV (business result after determining the transfer prices in related-party transactions) when both entities are subject to the same rate of corporate income tax and none of the entities receives any corporate income tax incentive during the relevant tax period. However these taxpayers are still required on Form No. 01 to declare the basis for the exemption in Section I (concerning information about the related parties) and Section II (situations that are entitled to exemption from the disclosure obligation, provision of transfer pricing documentation).
A number of new principles and rules are introduced or enhanced with the decree. These include:
The application of these principles will enable the tax authorities to disregard or re-characterize related-party transactions in instances when those transactions result in reduced tax revenue.
Related-party transactions that are inconsistent with the arm’s length principle or that do not contribute to generating revenue or add value to the production and business activities of the taxpayer will be considered to be non-deductible expenses. These include:
Taxpayers with service expenses must satisfy a number of conditions to be allowed a deduction for these expenses. In summary, taxpayers need to be able to prove that:
Expenses for services considered to be “shareholders activities” or duplicative services may be disallowed.
Total interest expenses incurred in the tax period, to be deductible, must not exceed 20% of a taxpayer’s net profit before interest, taxes, depreciation and amortization (EBITDA).
It is understood from the drafting process of the decree that the use of secret comparables was being considered for tax risk assessment purposes by the tax authority only, and that the use of commercial databases and public information was to prevail in situations of a proposed tax assessment during a transfer pricing audit. However, the text of the new decree is not clear on this point.
The decree states that the tax authority may use different sources of information—including commercial databases and publicly available data—as well as the tax authority’s own database and other information provided by ministerial bodies for the purposes of transfer pricing risk assessment and tax adjustment.
However, in transfer pricing audit cases when taxpayers fail to submit the required forms or the transfer pricing documentation within the statutory timeline, the tax authorities will have absolute authority to assess the transfer price and/or profits of the taxpayers based on the “secret comparables.”
The decree clarifies the bases for which the tax authorities can make determinations of price or can apply a profit margin or profit split ratio or can impose taxable income or a tax amount. For instances, this authority applies if:
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in Vietnam:
Thuy Duong Hoang | +84 439461600 | firstname.lastname@example.org
Alvaro Flores | +84 838219266 | email@example.com
Thuy Ha Dang | +84 838219266 | firstname.lastname@example.org
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