Published by Bloomberg

Potential Tax Implications Beyond Transfer Pricing?

Nguyen Dinh Du Nguyen Dinh Du

The preamble sets out the decree’s objective of administering transfer pricing in order to prevent the loss of tax revenue to the state budget. It also introduces the concept of ‘‘substance over form’’ to be applied by tax officials in the administration, examination and auditing of transfer pricing. This new principle will be applied to analyze legal contracts and documents of related party transactions as well as business operations of parties engaged, so as to determine the nature and substances of related party transactions incurred. Key changes of the decree promulgating tax administration applicable to enterprises having related party transactions include:

  • types of related party transactions subject to transfer pricing compliance are extended to include the use of common resources such as group synergies, a shared service center and cost sharing between related parties;
  • threshold for determining whether parties are related is changed from 20 percent to 25 percent direct or indirect ownership. Further, companies are related if they are under common control of an individual through that person’s contributed capital or direct management;
  • in line with an approach set out in BEPS Action 13, a three-tiered transfer pricing documentation approach is newly introduced, requiring a taxpayer to prepare a master file, local file, and country-bycountry reporting (‘‘CbCR’’). The CbCR is now required if a Vietnamese taxpayer has an overseas parent and the ultimate parent company overseas is subject to CbCR in its country of residence. CbCR is also applicable to Vietnamese taxpayers who is an ultimate parent entity in Vietnam with overseas subsidiaries having global consolidated revenue of 18,000 billion dong or more;
  • detailed guidance on the application of transfer pricing methods are also provided, where for the first time in Vietnam, selection of the most appropriate transfer pricing method should now be more hierarchical, depending on the type of specific related party transaction incurred. It means that the transaction-by-transaction approach is now more preferable by the authorities, and single benchmarking on aggregated basis would now be less acceptable;
  • guidelines on comparability analysis has also changed in the way that the transaction-bytransaction approach is more preferable, and, therefore, geographical comparability is more emphasized;
  • in terms of transfer pricing adjustments, the decree provided clearly that commercial and/or publicly available databases can be used by taxpayers for defending their position. However, those databases are only prioritized for application by the authorities during an audit, and secret databases can be applied for transfer pricing adjustments/imposition if a taxpayer is deemed non-compliant;
  • revisions to the transfer pricing declaration forms are provided for under the decree, that require disclosure of more detailed information, including segmentation of profit and loss by related party and third party transactions; and
  • the decree further requires taxpayers to prepare their transfer pricing documentation before the filing of their annual corporate income tax returns and to submit their documentation within 30 working days upon request during pre-audit discussions and consultations with a 15-day extension available. However, in cases of a tax/transfer pricing audit, the deadline for submission of transfer pricing documentation is reduced to within 15 working days upon request, non-extendable.

Under the decree, all taxpayers having related party transactions are required to submit the transfer pricing disclosure forms, but exemptions from compliance requirements on transfer pricing documentation are also available. In particular, full exemptions are provided to taxpayers who fall within the following categories:

  • has sales revenue of less than 50 billion dong (US$2.5 million) and the value of its related party transactions is less than 30 billion dong (US$1.5 million);
  • engages in simple functions having neither revenues nor expenses incurred from the use of intangibles, has revenue of less than 200 billion dong (US$100 million) and achieves a ratio of earnings before interest and taxes to revenue of at least 5 percent for a distribution function, 10 percent for a manufacturing function, and 15 percent for a processing function; and
  • has signed an advance pricing agreement (‘‘APA’’) and has submitted annual APA reports.

Partial exemptions are also provided if the taxpayer only has transactions with related parties, who are subject to corporate income tax in Vietnam and apply the same corporate income tax rate as the related party, provided that none of the engaged parties enjoy corporate income tax incentives in an assessment year.

The decree extends its scope beyond transfer pricing to also providing guidance on the deductibility of intercompany charges. This includes a limitation on the tax deductibility of interest on loans. For intercompany services, various criteria for tax deductibility
are set out, notably, a taxpayer needs to demonstrate that the services bring in economic benefit(s) and provide evidence, i.e. supporting documents, on the reasonableness of the service charge calculation method. It means that a tax deduction is disallowed for expenses incurred, but the direct benefit or additional value to the taxpayer cannot be determined, such as duplicated services, shareholder costs, etc. Furthermore, taxpayers are required to
show evidence that an independent taxpayer would be willing to pay for similar services in similar circumstances and conditions. Then taxpayers should also provide evidence of the consistent application of the selected pricing method. Expenses incurred for services provided by a related party domiciled in a tax haven will, likely, be challenged.

As briefly mentioned above, the release of the decree obviously creates a more solid and expansive legal basis for the Vietnamese transfer pricing administration and brings the country closer to international standards with the changes in transparency and anti-tax avoidance efforts.

A key concern, however, is on how further guidelines will be provided for the implementation of the decree and how it will be enforced in practice. For instance, a lack of comparable local data for use to apply the provided transfer pricing methods raises concerns from taxpayers over broadening the use of comparable data, e.g. using data of companies in expanded geographical markets. Then, the acceptance of such an approach by tax authorities in practice brings in more uncertainties for taxpayers.

Furthermore, under the decree, tax authorities reserve the power to use the government’s internal databases for assessment purposes in cases where a taxpayer is deemed non-compliant. This development could clearly give rise to increasingly lengthy disputes. By providing that the selected transfer pricing method must ensure no loss of tax revenue to the State Budget, an asymmetry which could be inconsistent with the arm’s length principle is implied, i.e. adjustments by the authorities reducing taxpayers’ obligations might not be allowed. Another controversial point is the tax deductibility of interest on loans, which is unclear whether all interest payments or those paid to related party(ies) are capped at 20 percent of EBITDA. Last, but not least, further guidelines on how adjustments should be done and the potential impact on other taxes, e.g. VAT, import duty, etc., are also expected by taxpayers.

Despite some of these concerns, the decree represents the most important development of the transfer pricing regime in Vietnam for the last 10 years, as it demonstrates Vietnam’s commitment to align with the global tax framework on transparency and antiavoidance.
While the decree aims to enhance transfer pricing enforcement, it also increases the compliance burden on taxpayers. Although the compliance obligation of the decree will be effective from May 1, 2017, taxpayers should take immediate action to assess the impact not only on local tax compliance, but also on their businesses, considering the new decree has potential implications beyond transfer pricing.

Nguyen Dinh Du is Tax and Corporate Service Partner at Grant Thornton, Vietnam

The above contains general information only, and it does not mean that Grant Thornton Vietnam (‘‘GTV’’), being by way of this Article rendering professional advice or services. GTV shall not be responsible for any loss whatsoever sustained by any person who relied on this communication. Hence, for proper and appropriate advice for any specific case, please contact Mr. Nguyen Dinh Du ( or Mr. Pham Ngoc Long (

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