The majority of Vietnamese taxpayers end their financial years on December 31 and thus will be subject to the deadline for 2017 corporate income tax (“CIT”) returns on March 31, 2018.
In an effort to prevent taxpayers from illegal transfer pricing act-of-conduct and fight against the loss of State Budget, the Vietnamese government introduced its new regulations on transfer pricing matters, i.e. Decree No. 20/2017/ND-CP dated February 24, 2017 (“Decree 20”) and Circular No. 41/2017/TT-BTC dated April 28, 2017 (“Circular 41”), which should supersede Circular No. 66/2010/TT-BTC dated April 22, 2010 (“Circular 66”) of the Vietnam’s Ministry of Finance. Accordingly, these new regulations of Vietnam on Transfer Pricing matters take effect from May 1, 2017 onwards.
This article discusses the new Vietnamese transfer pricing filing requirements that taxpayers should pay attention to.
Transfer Pricing Disclosure Forms
Decree 20 has provided four disclosure forms, which replace the disclosure form provided for under Circular No. 156/2014/TT-BTC, i.e. Form 03-7/TNDN. The four new forms are:
- Form 01 – Information about related party relationships and related party transactions;
- Form 02 – List of required information and documents in the Local File;
- Form 03 – List of information and documents in the Global Master File; and
- Form 04 – Declaration of information in the country-by-country report.
These forms should be prepared and attached as appendices of the annual CIT return. However, the most current version of the CIT filing software has yet to update such forms into the system, which might cause confusion during the hassle time of finalization.
In such a case, several provincial tax authorities will require taxpayers to prepare Form 03-7/TNDN using the tax filing software while at the same time, prepare the new four disclosure forms and submit hard copies of the forms to the respective tax authority. Therefore, taxpayers are recommended to closely manage and pay attention to any update of the tax filing software.
In addition, while Form 02 and Form 03 can be seen as the checklists of information and Form 04 is only required for the Vietnamese taxpayer classified the ultimate parent of the whole group with globally consolidated revenues stated at 18,000 billion dong or above.
Form 01 is considered the essential element in the whole package. This form alone may require alot of work to complete. In particular, Form 01 does not only require similar information compared to Form 03-7/TNDN such as relationship between entities, transactional values of related party transactions, re-determination of market value of such transaction and the associated transfer pricing method, but also supplemental disclosures such as the re-determined value of Income statements per segregation of accounting books between related parties and independent parties or factor in any appropriate segregation alternative in case the separation of accounting record seems impossible.
It is also noteworthy that the taxpayer, who only incurs transaction(s) with Vietnamese related parties having neither different tax rate nor tax incentive, might be exempted from the disclosure of re-determination of the market value and selection of transfer pricing method in Form 01.
Transfer Pricing Documentation Report
While Circular 66 required a set of documents and supporting evidences to prove the arm’s length/appropriateness nature of transactions with related parties, Decree 20 specifically defines and mandates the content of the Transfer Pricing documentation report, which generally should include the following:
- Local File (following checklist in Form 02);
- Master File (following checklist in Form 03); and
- A copy of the country-by-country profitability report.
Given that the transfer pricing documentation report provides analyses, such as selection of the transfer pricing method(s) and assessment of the arm’s length/appropriateness nature of the transfer pricing policy, the preparation timeline has been formalized in a way that those documentation reports should be done in advance of the CIT returns. However, the deadline for submission of the transfer pricing documentation report has been maintained 30 working days upon receiving notice of the authority, except the cases of tax audits, where the taxpayers may be required to submit the documentation reports within 15 working days upon receiving the written notice.
Additionally, preparation of the transfer pricing documentation report, in most cases, is a costly and time-consuming process, and such preparation is really a hassle during the busy time finalizing the CIT returns.
Therefore, several exemption/safe harbor conditions were provided for under the new regulations in order to simplify filing procedures. Such exemption rules focus on taxpayers with small or medium size in term of operations as well as the ones who already dealt with the tax authorities by participating in the Advance Pricing Agreement (“APA”).
In particular, taxpayers will be exempted from the preparation of the transfer pricing documentation report in case one or more of the following conditions are satisfied:
- revenues earned in tax year are less than 50 billion dong (approx.. $2.2 million), and total values of related party transactions incurred during such a tax year are less than 30 billion dong (approx.$1.3 million); and/or
- taxpayer has entered into the APA and has completed the submission of the mandatory annual report; and/or
- taxpayer operates with simple function(s), does not incur any revenue/expenses from the use of intangible and meet the prerequisite operation margins, which are respectively stated at 5 percent for distributor, 10 percent for manufacturer and 15 percent for toll manufacturer/processor.
In particular, the simple function can be considered as:
- routine functions;
- not conducting strategic decision-making;
- engaging in transaction with low value comprise production or distribution enterprises which are not exposed to inventory risk or market risk; and
- do not have sales revenue or costs arising from uses of intangible assets.
Deductibility of Expenses
Besides the transfer pricing filing requirements, taxpayers are recommended to look at the service and interest expenses as the new regulations also expand the scope of effectiveness to the front page of the CIT returns.
For service expenses paid to related parties, it is a common “cost-benefit” principle that service incurred, in order to be recognized as deductible expense for tax purpose, should be non-duplicated and bring in direct economic benefits for a taxpayer as if it would have been provided by independent taxpayers under a similar scenario.
On the other hand, a vague rule introduced for deductibility of interest expenses incurred. Generally, it is provided that a cap of 20 percent of earnings before interest, tax, depreciation and amortization (“EBITDA”) should be applied for interest expenses incurred during a tax year. In this respect and together with the official rulings from several tax authorities, the taxpayer carrying loss on EBITDA would have to forfeit the interest expenses and opt-out these figures from determining its CIT obligations.
Taxpayers that have incurred transactions with related parties are recommended to closely observe the regulations and properly prepare necessary documents. Additional costs is obviously required, but in returns, penalties and adjustments by authorities can be saved in case of a tax/transfer pricing audit.
It is also recommended that taxpayers, moving forward, should consider and factor in the new requirements in their planning and budgeting activities, aiming to ensure their compliant status and avoid the last minute hassle during the busy time finalizing CIT every year.
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.