Nguyen Thu Phuong and Nguyen Hung Du, of Grant Thornton Vietnam, discuss the tax implications of transfer of technology in Vietnam and consider what taxpayers need to do to mitigate any tax risks.
In line with the recent trends of rapid technology development and globalization, transfer of technology is no longer an unfamiliar concept. Technology transfer has been applied into diversified industries, ranging from traditional manufacturing and trading activities to other essential businesses such as transportation, banking, fintech, e-commerce, etc.
In addition, the forms of technology transfer not only limits cross-border transactions but also domestic transactions, all of which unanimously require businesses to consider compliant factors with both international and local regulations.
From the Vietnamese tax perspective, technology transfer is considered a new aspect for tax application and will expose tax risks for taxpayers.
What is Technology Transfer?
Technology transfer can be defined as the transfer of the right of ownership or usage of technology, partially or as a whole, from one party to another (“transferor” and “transferee,” respectively).
In addition, the term “technology” refers to industrial properties whose ownership rights will be reserved and include invention, effective solutions and industrial patterns, patents, trademarks, etc. Transfer of technology is necessary for compliance with the Vietnamese Law on intellectual property and includes the following:
- technical know-how, technological know-how;
Law on Technology Transfer
In order to enhance the management of technology transfer activities as well as contributing to preventing transfer pricing (TP) in technology transfer activities, the Law on Technology Transfer , effective July 1, 2018, also applies:
- All technology transfer agreements related to the technology transfer form need to be registered with the Department of Science and Technology (“DST”), except for technology subject to the limited transfer that has already been granted a technology transfer certificate. The registration of the technology transfer agreement under the previous law was optional.
- In addition to the requirement of technology transfer agreement registration, the pricing of technology must be audited and comply with the regulation on tax and TP.
- Value-added Tax as a Portion of Foreign Contractor Tax or Withholding Tax
If technology is transferred from the overseas transferor to a Vietnamese transferee in absence of any involvement from the transferor’s permanent establishment and no Vietnamese tax provision applied toward the transferor, income generated from such transfer activities will be subject to foreign contractor tax (FCT) regulations in Vietnam, as the transferor could be subject to tax withholdings with regard to the provision of the respective technology.
In addition, the Vietnamese transferee shall be liable for FCT compliance on behalf of the transferor, including declaration, withholding and payment of incurred tax.
Also, the transferee will be entitled to creditable input value-added tax (VAT) in case a transaction is used to produce the goods and services eligible for VAT in Vietnam. Satisfactory documents will be essential to prove the nature of VAT payment (as mentioned above).
However, the application of FCT and VAT toward technology transfer has created a gray area whereby both terms have been misapplied interchangeably.
Misconceptions may include usage of trademark/brands, lack of segregation between intangible technology/supporting services and associated tangible equipment. Consequently, it is recommended that the taxpayer provides detailed clarification and evaluations toward transferrable elements (i.e. intangible and tangible breakdowns) and appropriate pricing mechanism for transfers of services in order to determine the most appropriate tax rate toward each element.
In the event that no proper segregation is provided, the highest withholding tax rate will be reserved and imposed as prescribed by the Vietnamese tax authority. In line with the transfer of technology, Personal Tax Income (“PIT”) may also be a considerable factor relating to salary income and/or any other benefit borne by the assignment of overseas personnel to Vietnam in order to execute the respective technology transfer agreement.
Last, but not least, enrolment of double taxation agreement (DTA) is another essential consideration in transfer of technology whereas CIT and PIT for certain types of income on technical service instalment in Vietnam could also be exempted and opted out from the Vietnamese tax liability section.
- Corporate Income Tax as a Portion of FCT
Receipt of technology would most likely create a cost to the Vietnamese transferee. Therefore, the deductibility nature of the expense relating to technology transfer as well as how to effectively optimize such expenses in the CIT calculation is also worth considering. Having said that, arguments could be drawn during the tax audit/inspection regarding the deductibility of the technology-transfer expense regarding the nature of the technology as follows:
- whether transfer is incurred and directly related to the business of the transferee;
- whether technology received directly supports the business of transferee and not duplicated with other technology recorded;
- whether the technology and relevant services received have been substantiated with legitimate documents (i.e. invoices, agreement as well as other supporting documents) as well as a bank transfer has been used for invoices totalling over 20 million dong ($861); and
- whether registration of technology transfer agreement has been issued by the DST.
To mitigate the risk of expenses being rejected, it is strongly recommended that the above concerns are considered and supplemented with proper compliant documents as such evidence will be presented to the tax authority during a tax audit/inspection.
- Transfer Pricing
If technology is transferred between related parties or subsidiaries under a group company, it will be necessary for the Vietnamese taxpayer to comply with TP regulations in both preparation of compliant documents to ultimately prove that transfer prices are conducted on an arm's length basis.
In our opinion, the Vietnamese tax authority seems to concentrate on the review and inspection of transactions between related parties and strictly challenges the compliance position of the Vietnamese taxpayer. Also, TP matters have been prescribed in other legal regulations, specifically the Law on Technology Transfer, proving that the TP matter has increasingly become a focal point from a tax perspective.
In light of the above, it is highly recommended that the Vietnamese taxpayer prepares compliant documentation and performs proper TP planning activities in order to not only mitigate TP risks but also reserve the operational profitability and efficiency to the group as a whole.
Technology transfer plays a crucial role in the development of the global economy including Vietnam. Accordingly, the Vietnamese government has introduced legislation to encourage and promote technology innovation.
In order to minimize the risks regarding tax and technology transfer compliance, Vietnamese taxpayers should consider the preparation of proper documentation and evidence in relation to the transfer of technology, with the aim of proving the legitimacy of such transfer as well as the registration of technology.
This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisers.