In an acquisition, the transfer price is, in principle, negotiable. Unfortunately, if that price is agreed to be less than the face value of the sellers’ capital contribution to the charter capital (equity)]of the target, the licensing authority may not accept the acquisition and refuse to approve the acquisition. The acquisition may subsequently also be examined by the tax authority who may review the transfer price again to ensure that it reflects the ‘market price’ or the above ‘book value’ of equity. If the tax authority concludes that the market price or book value has not been reflected appropriately, it may refer to another transfer price it deems fit for tax management purposes. Exceptions can be made for a local company that has suffered from large losses. In our view, it is important that the law clarifies that the licensing authority cannot ‘review’ the transfer price, which is per se a purely commercial issue; and that only the tax authority may do so for taxation purposes. It should be clear that a transfer price determined not to reflect the market price or book value cannot be a ground for the licensing authority to block the transfer by refusing the issuance of its approval.
Moreover, tax liabilities arising from any M&A transaction also create concerns to the investor. Generally, any assignment of capital is subject to the standard capital gain tax rate (i.e. 22% corporate income tax of the profit derived from such assignment) while the sale of assets is subject to Value-added Tax (VAT) (at a default 10% rate) in most of cases. The personal income tax of the individual seller may be applied with various tax rates of between 5% and 20% for capital investment and capital assignment depending on the types of taxable income and taxpayer. The gain from the shares transfer in a public company may also be subject to tax at 0.1% of the gross sales proceeds.
Vietnamese tax regulations are also not clear on the capital gain tax (if any) applicable to an offshore acquisition (i.e. transfer between offshore seller and buyer of equity interest in an offshore target company which holds capital contribution in a Vietnamese company). The position of Vietnam’s General Tax Department (“GTD”) has once been that no Vietnam’s capital gain tax is applicable if all the following conditions are met: (i) the acquisition is entirely offshore, (ii) the capital of the offshore target in the onshore subsidiary remains intact, (iii) the offshore target and the onshore subsidiary do not receive any income from the acquisition and (iv) the investment certificate of the onshore subsidiary does not change. For example: see Official Letter 2268/TCT-CS of the GTD dated 28 June 2012. However, under a recent development of Vietnam’s tax law (in particular Decree 12/2015/ND-CP effective from 1 January 2015), the GTD has opined in some of its recently guidance (for instanceOfficial Letter 1595/TCT-DNL of the GTD dated 24 April 2015) that offshore acquisitions may also be subject to Vietnam’s capital gain tax. There has not been any specific guidance on how this application of Vietnamese capital gain tax is implemented in practice.
Potential gains/concerns for Vietnam
Capital gain tax is important for planning the structure of an M&A transaction. This lack of clarity regarding whether taxes are applicable, how they are applicable and/or the applicable tax rates creates uncertain financial obligations for investors. In practice, due to these ambiguities, transfer prices are often frozen for long periods of time. This impacts on the planned timescale of transactions and could lead to deals being stopped.
Furthermore, the ambiguous tax regulatory frameworks and the sole discretion of tax authorities on the tax liabilities lead the M&A parties to face difficulties in determining risks levels on this matter or even to the risk of tax arrears or accusations of tax evasion after the conclusion of an M&A.
We would like to make the following recommendations:
- Harmonise the interpretation of transfer price;
- Clarify and improve the regulatory frameworks on tax liabilities arisen from M&A transaction.