With World Cup fever all over Vietnam, let us give you our “half-time” take on the rapidly evolving transfer pricing landscape in Vietnam. This article takes a mid-year look at what has happened so far in the area of transfer pricing in Vietnam in 2014.
To recall, immediately after Vietnam’s reduced corporate income tax (“CIT”) rate (from 25% to 22%) took effect on 1 January 2014, the General Department of Taxation (“GDT”) announced that its key task for 2014 was to fight against abusive transfer pricing practices. The events of the first half of 2014 indicate that the GDT has taken this challenge seriously.
Effective 1 January 2014, there is a new annual transfer pricing disclosure form (Form 03-7/TNDN or “Form 03-7”) required to be submitted together with the annual corporate income tax return. This form is similar, in many respects, to the form that it replaced (Form 01 GCN-01/QLT covering financial years 2010-2013). However, a notable change that came with Form 03-7 is the disclosure of (among others) not only the value of related party transactions recorded in the company’s books but also the value of the related party transactions according to arm’s length pricing, the gap between those values (if any) and the resulting adjustment because of such gap. Such a requirement implies that at the time of the form preparation, companies should have a transfer analysis supporting the disclosures made in the form. This also reinforces the requirement of contemporaneous transfer pricing documentation under Vietnam transfer pricing regulations, Circular 66/2010/TT-BTC dated 22 April 2010 (“Circular 66”).
In February, two (2) important issuances came into effect:
- 5 February - the new Circular on Advance Pricing Agreements or “APA” (Circular 201/2013/TT-BTC dated 20 December 2013); and
- 6 February 2014 - the guidelines for the application of Mutual Agreement Procedures (MAP) under Circular 205/2013/TT-BTC dated 24 December 2013.
Taxpayers in Vietnam now have an option to proactively manage their transfer pricing risks by entering into an APA with the tax authorities. An APA is a binding written agreement valid for a certain period of time between the taxpayer and the tax authority in one country (unilateral APA), or among taxpayer/s and tax authorities from two (2) or more jurisdictions that are treaty partners (bilateral/multilateral APA) with respect to the transfer pricing methodology over specific related party transaction/s based on the arm’s length principle. MAP procedures under tax treaties on the other hand, can be used as basis for bilateral or multilateral APA negotiation.
In March, the GDT issued its disclosure policy. This requires the local tax departments to publicize on GDT’s website, the names and other details of taxpayers that have violated Vietnam’s tax rules and regulations as well as those showing signs of or being suspected of committing tax violations. Taxpayers which have “irregular” transactions with related parties are likely to be categorized under the second group of taxpayers mentioned. The details that will be publicly disclosed include the taxpayer’s tax code, its registered address, the name of its legal representatives, its scope of business, the identification number of its legal representatives, a list of its members and information about the (alleged) tax violation.
The reference to those taxpayers showing signs of or being suspected of committing tax violations clearly demonstrates that the Vietnam tax authorities’ assessment or audit process is ongoing and that further taxpayer’s transfer pricing positions are being and will be scrutinized. Taxpayers do need to carefully manage and document their related party transactions and arrangements as any indication of the misapplication of the transfer pricing rules may not only invite questions from the tax authorities but also put the taxpayer’s name and reputation under public scrutiny due to the disclosure on the GDT website. In our opinion, contemporaneous documentation (supported by appropriate executed legal agreements) is the best initial defense against any transfer pricing inquiry.
The number of transfer pricing audits of companies in various industries has been rising since the issuance of Vietnam’s revised transfer pricing regulations in 2010 (Circular 66/2010/TT-BTC). This year is no different with recent information from the GDT indicating that the first four months of 2014 resulted in tax adjustments of VND 759 billion (approximately USD 36 million). These adjustments arose from 20 audits mostly in the textile and leather industries. As a consequence, approximately VND 230 billion (USD 11 million) in additional tax was levied and VND 12 billion (USD 571,000) of compliance penalties were applied. If these numbers are treated as indicative of the ongoing activities over the remainder of 2014, we would expect that around 40 further companies will be audited and the amounts above could be tripled.
Persistent loss-making entities are still easy targets for transfer pricing scrutiny. However specific industries that have been targeted recently include electrical equipment manufacturing, real estate and construction companies, as well as companies in export processing zones. It has also been reported that automotive companies will be investigated.
The above trends are expected to continue to increase as the Vietnam government implements its 2012-2015 National Action Plan. The National Action Plan sets out an expectation that 20% of the annual tax audit cases will include a transfer pricing audit. With 18 months to go before the 2015 deadline of the National Action Plan and with the CIT rate reduction this year, it is considered that the GDT will continue ramping up efforts to enforce its transfer pricing rules both to ensure it collects its fair share of taxes and that it meets its obligations under the National Action Plan.
What should you do?
We recommend that, in respect of all companies that operate in Vietnam, you should, as a minimum:
- Review whether they have documentation that supports the price-setting method applicable to each international or domestic related party transaction entered into by the Vietnamese entity and whether that price-setting method is consistent with the functional profile of the Vietnamese entity and the legal agreements in relation to those transactions;
- Review the arm’s length nature of the profitability of the Vietnamese entity in the context of its local business operations; and
- Assess the degree to which they have documentation that can evidence the correct application of the arm’s length principle from a Vietnamese perspective if the company is selected by the GDT for review.