In recent times, Vietnamese authorities have significantly increased their efforts to implement Transfer Pricing regulations for investors in Vietnam, taking active measures to monitor related party transactions and inspect enterprises to ensure they are compliant with the local tax and transfer pricing policies.
According to the last report from the Department of Taxation, in the first 10 months of 2022, the Vietnamese authorities have carried out 55,840 inspections at taxpayers’ offices, with the total amount of petitions valued at VND51,221.8 billion, which is 40% more than the same period in 2021. The total amount of tax increase collected through the tax inspections was VND 12,232.8 billion.
Within the first 9 months of the year, the authorities carried out 597 inspections at enterprises having related party transactions (RPTs), representing more than double the number of inspections in 2021. Based upon market price adjustments for associated transactions, the tax authorities have collected VND406 billion and reduced losses by VND13,903 billion.
Inspections of enterprises engaged in associated transactions are becoming prevalent in Vietnam, therefore it is critical for investors to proactively analyse their operations and ensure they understand the current Transfer Pricing regulations in order to be compliant.
Defining related party relationships
As stated in Clause 1, Article 5, Decree 132/2020/ND-CP, associated parties are:
Other specific cases identified as related parties are specified in Clause 2, Article 5, Decree 132/2020/ND-CP.
Understanding exemptions and ensuring compliance
Taxpayers in Vietnam need to determine first whether they fall into safe harbor rules exempting them from transfer pricing declaration and documentation requirements, wherein:
Enterprises are exempt from declaring Part III, IV of Appendix 01 and are not required to prepare Transfer Pricing Documentation if:
- Have transactions with RPs who are CIT taxpayers in Vietnam
- Apply the same CIT rate
- There are no CIT incentives for either party within a tax period
Enterprises are required to declare Appendix 01 and are not expected to prepare Transfer Pricing Documentation if:
- Total revenues < VND50 billion and total value of RPTs < VND30 billion; or
- Advance Pricing Agreement (APA) is activated; or
- Simple function business, no revenue/expenses incurred from operation of intangible assets; revenue generated < VND200 bn (app. USD8.7 mil); and apply operating margin as follow:
- Distribution: from 5% and above, or
- Manufacturing: from 10% and above, or
- Processing: from 15% and above.
What should enterprises pay attention to when engaging in related party transactions?
Where taxpayers are not exempted from transfer pricing declaration and documentation requirements, they are required to prepare the following documents as instructed by the Vietnamese tax authorities:
Transfer Pricing Appendices
| Items | Content | Submission | Penalty |
|---|---|---|---|
| Appendix I | Information on related parties and related party transactions | Submitted together with the CIT Finalisation return at the year end | Administrative penalties from VND8 mil – VND15 mil (~ USD330 – USD620) (Article 13, Decree 125/2020/ND-CP, effective from 05 Dec 2020) |
| Appendix II | List of information/ documents required in Local file | ||
| Appendix III | List of information/ documents required in Master File | ||
| Appendix IV | Country by country reports (CBCR) of Holding Company | Within 12 months after the year end date of Holding Company |
Transfer Pricing Documentation
| Items | Requirements | Submission | Penalty |
|---|---|---|---|
| Local File | Information on RPTs, pricing policy of the taxpayer, prepared and filed at the office |
|
Risk of having TP adjustments, leading to tax liabilities and penalties:
+ 20% of under-declared tax amount, and + Late payment interest on the underpaid tax amount |
| Master File | Information on business activities of MNCs, global pricing policy, the allocation of income and functions among group members | ||
| Country by country reports (CBCR) | Information on the allocation of income, corporate income tax, business activities and list of subsidiaries by countries of the ultimate holding company |
Secondly, the expenses related to inter-group services which usually take place on a regular basis will be deductible if:
- They benefit the Vietnamese taxpayer in term of commerce/economic/finance
- Services provided in similar circumstance that third parties pay for such services
- The arm’s length principle, TP methods or allocation rates are consistent within group members
- Adequate documentation exists (i.e. contracts, invoices, TPD, etc.)
Another important note for investors to consider is the loan interest limitation:
- Loan interest expenses after deducting the deposit/ lending interest are deductible at maximum 30% EBITDA
- Non-deductible loan interest is carried forward to the next tax period, for 5 continuous years, provided the criteria in term of the threshold of 30% EBITDA in each year is met
- Incurred RPT with RP but loan interest expenses with uncontrolled parties are capped at 30% EBITDA
- The company is in loss position with EBITDA < 0 and incurs loan interest expenses
(Note: All interest expenses are non-deductible and are NOT allowed to be carried forward to next 5 years (applied FY2019 onwards) for CIT purpose. (OL1046/CTTPHCM-TTHT dated 5 Feb 2021))
We encourage all foreign-invested businesses, regardless of size, to conduct a regular Transfer Pricing Review. The review seeks to understand exposures to Transfer Pricing laws, identification of related parties and related party transactions/contracts, suitability of documentation, and risks in respect to operations arising.
Contact our teams for expert support and further information on transfer pricing in Vietnam.
Matthew Lourey, Managing Partner | Email: m.lourey@acclime.com
Kevin Lam, Partner | Email: k.lam@acclime.com
Rizwan Khan, Partner | Email: r.khan@acclime.com
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