Changes released during 2017 to the Transfer Pricing regulations in Vietnam, together with the additional procedural changes from the Vietnam tax authorities, have made the process of transacting with related companies abroad from Vietnam more complicated and uncertain, particularly for smaller foreign invested businesses.Download PDF
As background, Transfer Pricing is the term used when profits are shifted from one country to another through higher prices being by charged, in excess of market or arms-length prices, by related companies. The result is lower tax being paid in a country than would have been paid if the market or arms-length prices had been charged. The concept of Transfer Pricing generally places the proof on the taxpayer to prove their pricing and margins are appropriate.
Vietnam released Decree 20/2017/ND-CP (“Decree 20”) in February 2017, which replaced the previous Transfer Pricing regime and was effective from 1 May 2017, changing many of the fundamentals for Transfer Pricing in Vietnam. Circular 41/2017/TT-BTC (“Circular 41) was released on 28 April 2017, providing additional clarity on the application of Decree 20, and this was followed by the new Law on Technology Transfer ratified on 19 June 2017 providing further requirements to enable tax deductions for certain contract payments.
In addition to the above, tax authorities have begun reviewing the necessity and commerciality of contracts for payments to foreign parties when undertaking tax inspections, requiring taxpayers to justify the substance and necessity of these agreements to the business.
How do The Transfer Pricing Rules Work?
On a high level, the Transfer Pricing rules require additional documentation and justifications of the pricing mechanisms used by multinational companies when undertaking related party transactions (note: a “Related Party” here is an entity that is connected through direct or indirect ownership of 25% or above, or also where common management control exists).
Foreign companies in Vietnam that have related party transactions will need to prepare and lodge a suite of documents each year with the Vietnamese authorities, and which are generally based upon common international documentation standards. These documents (including a Global Group Master File, a Local Transfer Pricing File, and Country by Country Reports) are comprehensive and show appropriate comparable transactions (or other pricing mechanism) that justify prices and profits between the related parties.
The timeframes required to complete and submit these with authorities are tight, and not easy for companies in Vietnam to comply with. Required documents must be lodged at the same time as the annual tax finalisation lodgement is completed (90 days after year end, which is 31 March for most taxpayers). If requested by authorities earlier, then taxpayers have 15 days to lodge these with authorities. Keep in mind that these deadlines require full translation of all documentation into Vietnamese prior to submission.
How do Small Businesses Survive & Comply?
The good news is that there are some exemptions from the requirements, and there are also some safe harbour rules that companies can fall back on to reduce their compliance costs.
Companies with revenue of less than VND50 billion (approx. USD2.2 million), and related party transactions of less than VND30 billion (approx. USD1.32 million) are exempt from the Transfer Pricing regulations.
In addition, taxpayers that engage in “simple functions” can rely on certain safe harbour rules and not need to comply with the all transfer pricing documentation requirements. These safe harbour rules apply to taxpayers with revenue of less than VND200 billion (approx. USD8.8 million) and have a ratio of EBIT to revenue of at least 5% for distribution, 10% for manufacturing or 15% for processing operations.
Transactions Still Need to be Commercial and Appropriate
Despite the above, even small businesses need to ensure that their transactions with foreign related (and unrelated) parties are both commercial and appropriate, as they can be challenged by the Vietnamese tax authorities under general taxation provisions.
If you are making foreign payments for related parties (or even unrelated parties) then:
• Pay your withholding tax, and be aware of the differing rates that may apply depending on the nature of the transactions;
• Have detailed records to show that the services were actually provided;
• Be willing to show that your company, or others, would have paid third parties for the same services, and that the prices paid are commercially appropriate for the services. Ie, where the services necessary; and
• Be able to justify why foreign payments are made (particularly if they have been ongoing for some time) and not the use of local services.
The effect is that if you do not have the above in place, or fall foul of Transfer Pricing rules generally, then you will likely lose corporate income tax deductions for your foreign payments, and your corporate income tax expenses in Vietnam will increase (dramatically, in some cases).
Vietnam doesn’t have an extremely high CIT rate in a global context (although compliance requirements can send the effective rate much higher), but pushing the envelope with questionable payments to related parties may not be worth the risk in light of the current environment.