In recent years, together with the development of science and technology and production capacity, the multinational enterprise group (MNE group) has increasingly penetrated into all countries, with dedicated functioning entities to create optimal additional value chain creation. Developing, fast-growing economies play an important role in value chains, including Vietnam.
Most MNE groups have invested in Vietnam through the establishment of their subsidiaries or branches. In a fiercely competitive environment, through investment and maximizing profits for the whole group, the Vietnamese entity specializes in a number of functions, e.g. processing and manufacturing, outsourcing hubs, consumer markets.
The application of intra-group/intercompany supporting activities is considered a tool that MNE groups can use to arrange transactions between a service rendering company—the parent company or the related parties overseas—and the Vietnamese entity (service recipient).
In practice, supporting services normally rendered to a Vietnamese entity can be categorized as, but not limited to, information technology, business production/operation, human resources, legal and finance, strategic and planning, risk management, sales and marketing. Intra-group services (IGS) are considered crucial for the development of an MNE group and service recipient.
What are Intra-Group Services?
As per the guidance of the Organization for Economic Co-operation and Development on transfer pricing for IGS in its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (OECD Guidelines), IGS are defined as services that have been provided by one member of an MNE group to other members of that group (e.g. administrative, technical, financial, commercial). The subsidiary’s payment for these services is classed as IGS fees when they are made within the same group.
There is a need to enhance the business of scale, harness cost savings, and efficiently manage operations/standards to provide seamless services/goods to customers. Service recipients need the support from service entities with more experience and more capacity to handle complex matters rather than the sole functioning entities as mentioned above.
Inter-group Transactions and the Vietnamese Taxpayer/Service Recipient
Global tax authorities pay more attention to intercompany transactions because an MNE group may utilize these transactions to reduce taxable income in the receiving company and shift untaxed profit to the rendering company where a lower income tax rate can be applied, where possible.
From a Vietnamese tax perspective, IGS fees are quite popular, with diverse form,s and are normally challenged by the local tax authorities in terms of tax compliance requirements as a way of collecting more taxes from a Vietnamese entity.
Deductibility for Corporate Income Tax (CIT) Calculation
Depending on the involvement of overseas related parties, the more significant IGS fees are re-charged to the service recipient (a legal entity in Vietnam).
Consequently, this contributes to reducing the taxable income of the receipt company in a tax year. The concern of the service recipient company, as well as the whole group, is whether the IGS fee can be deducted for CIT calculations and whether, at a later date, the tax authorities will collect CIT in a tax audit.
Under current Vietnamese CIT regulations, an expense is commonly considered as deductible provided that it is:
- incurred and related to the activities of production and business of the company;
- adequately substantiated by legitimate invoices, agreement and supporting documents;
- a non-cash payment voucher for any invoice of 20 million dong ($861,326) or more (including value-added tax (VAT)); and
- not mentioned in the list of non-deductible expenses.
Beyond the above requirements, covering compliance in terms of forms is crucial; however, it is also important to assess the nature of the intra-group transactions or so-called evidence of benefit.
Also, documentation should be provided to the service recipient from the service provider for activities under intra-group transactions, showing whether:
- the service has been rendered and the benefit has been conferred;
- the service provided creates economic and commercial value for the recipient;
- the service enhances the operational efficiency of the recipient to facilitate delivery of the services/goods to the end customer; and
- whether there is any duplication of rendered services from the service render compared to the local service provider/local service recipient’s business functions and whether documentation for the non-duplication is in place.
Last but not least, since the tax authorities test the tax purposes for IGS and the requirement on “intra-group charges be comparable to getting benefits of recipient” or being charged in line with the arm’s length principle as well as complying with local transfer pricing regulation, such pricing requires the price assessment/documentation to have proper explanation.
Suggested documentation, at a global and local level, capturing the above, from the service provider to the service recipient includes the following:
- IGS agreement needs to cover the following: contracting parties, details of work, service fee, payment terms and conditions, date of effect, etc., plus invoice from the rendering company with a clear description and/or reference to a specific contract; details for supporting tasks, tasks conducted under the IGS, written forms from the overseas entities on the work/services rendered;
- documents supporting the business activities of the receipt company as well as not duplicating other expenses incurred for its operations; evidence of foreign contractor tax (FCT) payment, if applicable (i.e. FCT return and payment vouchers);
- pricing documentation, as well as compliance with TP regulations and ensuring that the planning price is conducted on an arm’s length principle, and other TP regulations (e.g. submission of TP declaration form and availability of TP documentation, etc.).
It is worth noting that the arrangement of the IGS fee can be viewed as a management fee allocation only allowed for CIT deduction under the allocation between the head office overseas to its permanent establishment (PE).
Under Vietnamese regulations, a foreign invested company established in Vietnam is considered as an independent legal entity, not a PE of the offshore company in Vietnam. Therefore, it is worth noting that there is a risk that the tax authority will classify intra-group charges as management fee; and the management fee allocation would not be deductible expenses for the Vietnamese entity under common tax practices in Vietnam.
Foreign Contractor Tax or Withholding Tax
In contrast to the service recipient company, the service rendering company derives income from providing intercompany services to the Vietnamese entity. If the rendering company does not have a PE in Vietnam with no local tax registration, the receipt company, being a Vietnamese entity, will be liable to declare and pay withholding tax on behalf of the render company (including VAT and CIT) apart from services provided, performed, and consumed outside Vietnam.
The withholding tax rate on revenue depends on the type of services rendered, and for pure service provision the current FCT is 5% VAT, 5% CIT.
Some supporting activities are conducted and consumed overseas, e.g. market development, sales supporting activities, overseas training, with the possibility of an FCT exemption (although the tax authorities will challenge this exemption and will require further explanation from the receipt company).
On the other hand, to conduct the services in Vietnam income, normally the assigned individual would be sent to the site; and any benefits in-cash/in-kind of experts or technicians assigned to Vietnam to perform the work under the IGS agreement would be subject to personal income tax (PIT) in Vietnam either as a Vietnamese tax resident or a non-tax resident under PIT regulation.
Avoidance of Double Taxation Agreement
Another key point to consider is that the rendering company in a country that has signed an avoidance of double taxation agreement (DTA) with Vietnam may be exempt from CIT and PIT under the FCT regime for income regarding IGS earned in Vietnam if its presence in Vietnam does not establish/constitute a PE. Of course, other requirements as stipulated in the DTA corresponding to each country must be complied with.
Entitlement to tax exemption under the DTA provision is currently based on self-assessing and submitting the DTA application to the local tax authorities of the taxpayers, and an approval being issued. It will only be accepted if the taxpayer qualifies as per the DTA requirements that is re-assessed by the tax authority in the event of a tax audit. This may lead to the taxpayer being exposed to a tax obligation if it does not meet the criteria, which should have been carefully analyzed before implementation.
There are many benefits that intra-group transactions bring to an MNE group. Such intra-group transactions are becoming the key force in promoting the process of globalization, affecting every aspect of socioeconomic life.
However, in the tax authority’s view, when conducting the management of tax collection of the receipt company, an intra-group transaction is considered as a tool to the MNE’s group, and is a tax benefit for their country. Hence, tax authorities globally, including the Vietnamese tax authority, always pay attention to intra-group transactions and will challenge the company by asking it to prove the nature of the transaction as well as providing documentation as prescribed in the current laws and regulations.
In order to carry out intercompany services smoothly and minimize the tax risks/save tax on transactions, before and during the implementation of any intra-group agreement, companies are advised to:
- clearly consider the main contents of the intra-group agreement (contracting parties, details of work, the service fee, payment terms and conditions, date of effect); and
- fully prepare and file both the internal documents and external documents/evidence among the parties involved to prove the transaction actually occurred, was related to own business, with no duplication, as well as determine the nature and value of the IGS to the local tax authority.
Companies must conduct and prepare TP applications and consider other requirements at group level regarding the feasible model of the group under TP regulations, both at a local level as well as at an international level under current laws.
The transaction cost in terms of an FCT or withholding tax should be taken into account and a safeguard put in place to protect against double taxation on the income in the group, via an available DTA.
Nguyen Thu Phuong is Director and Nguyen Hung Du is a Partner at Grant Thornton Vietnam.
This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisers.