The reality of Decree 20
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The reality of Decree 20

Vietnam’s regulatory changes have required an increasing number of taxpayers having to be aware of the transfer pricing rules, explain Hoang Thuy Duong, Tran Thi Thuy Ha and Sandra Liston of KPMG. However, inconsistencies in the interpretation has led to substantial efforts by the tax authority to clarify the rules.

This past year predominantly focused on the implementation of Vietnam's Government Decree 20/2017/ND-CP of February 24 2017 (Decree 20) and Circular 41/2017/TT-BTC (Circular 41) dated April 28 2017, which were both applicable from May 1 2017. The regulatory changes have led more and more taxpayers to be aware of the transfer pricing (TP) rules, and enhanced compliance requirements for taxpayers in terms of documentation. Nevertheless, since this is the first year of implementing the new rules, there have been inconsistencies in the interpretation of the legislation. Hence, substantial efforts went into clarifying any ambiguous areas, including in relation to the deductibility of interest expenses, the safe harbour, and the new Form 01.

In addition, the anticipated increase in audit activity manifested itself in the form of numerous audit notices already being received by taxpayers in the first quarter of 2018. The audits so far have focused both on TP and tax audits in various industries, and the selected taxpayers have ranged from loss-making companies all the way to highly profitable companies. As the audit activity by the tax authorities is expected to further increase, it will be crucial to maintain adequate resources in order to properly deal with the specific cases at hand.

Law on Technology Transfer

The recent Law on Technology Transfer 07/2017/QH14 (LTT 2017) of June 19 2017 on the state management of technology transfer transactions was effective from July 1 2018 and also includes technology transfers concluded before July 1 2018 that were amended or extended. It should also be noted that the TP of the payments for inbound technology transfers is subject to a state audit.

In addition, the tax authorities during the audit and inspections process may request proof of registration of the technology agreements to evaluate the credibility of the royalties in order to assess corporate income tax (CIT), despite the fact that registration was not compulsory under the existing 2006 Law on Technology Transfer 80/2006/QH11 dated November 29 2006 (LTT 2006). More detailed information regarding LTT 2017 will be provided below.

Insights into the BEPS Action Plan

The adoption of the BEPS Action Plan in emerging markets and a developing economy like Vietnam may attract the tax authorities' attention regarding a plethora of issues. Businesses in Vietnam already have reviewed and should continue to review their policies based on a greater level of transparency and their internal risk assessment. Shared master files and, for the largest groups, the country-by-country (CbC) reports may potentially provide tax officials with insights that were previously denied to them in the vast majority of cases.

Specific issues that exist post-adoption of the BEPS Action Plan are as follows:

  • Income tax deductibility:

  • In Vietnam and from an 'inbound' perspective, income tax deductibility – particularly for inbound service charges from overseas affiliates – has been posing a greater challenge than the TP remuneration itself. For the local tax authorities, allowing a service fee deduction from both a technical and administrative perspective may not be easier than arguing the merits of the arm's-length nature of the transaction itself. The characterisation of the deduction is also critical, where a payment termed 'management fee' or 'service charge' may automatically be disallowed as a deduction;

  • The interest expense deduction cap, whereby the interest payment is in excess of 20% of taxpayers' total operating profit plus interest and depreciation expenses in the tax year (earnings before interest, tax deductions, amortisation, or EBITDA).

  • This is a problem for a number of sectors and taxpayers depending on the phase of their enterprise's development, including group financing companies, holding companies infrastructure, and real estate companies that are highly leveraged and will not have positive EBITDA during the first few years of commercial operations; and

  • Proof of benefits for payments of royalties, which will be discussed further below.

Vietnam already signed up to be the 100th member of the BEPS inclusive framework, adopting the four minimum standards, and the observation is that the tax authorities have been open to the new BEPS measures on permanent establishment (PE) and the OECD guidance on attribution of profits to PEs.

Loss-making entities

Foreign-owned enterprises, which are loss-making entities in Vietnam and are paying royalties and service charges to parent entities (intangible holding companies) with an existing overall group profit, can give impetus to the tax authorities for critically examining the master file and the CbC report. These reviews may even happen before analysing the local file, benchmarking, underlying agreements and the system that produces TP figures for returns and accounts.

Given that there are unprecedented numbers of countries that see TP as a golden opportunity to raise tax revenues, the taxpayers in Vietnam may require elements of subjective and objective reasoning to arrive at a supportable position in all of their Action 13 documentation. Taxpayers' positions and approaches in the three-tiered documentation would be reviewed together, and it is not surprising that the scope for challenge and negotiation is seen as high by many jurisdictions, including Vietnam.

Provincial tax authorities increased scrutiny of inter-company transactions involving intangibles and intra-group services

Following the guidance in Decree 20 on TP management, particularly the specific rules for deductibility of inter-company charges between related parties, and the recent LTT 2017, some of the provincial tax authorities have increased their focus on reviewing and challenging historical CIT deductions for royalties and service fee payments to related parties of Vietnamese taxpayers.

Specifically, the tax authorities have requested companies to provide details of expenses paid to related parties and relevant supporting documents, and self-assess and amend historical CIT returns to pay additional CIT in accordance with the rules provided under Decree 20.

Implementation dates of Decree 20 and LTT 2017 and substance-over-form principle

For the past few years, under Circular 117/2005/TT-BTC dated December 19 2005 (Circular 117) and Circular 66/2010/TT-BTC dated April 22 2010 of the Ministry of Finance (Circular 66), the plain vanilla arm's-length principle applies. From financial year 2017, with the implementation of Decree 20 and LTT 2017, the consideration of CIT deductions in respect of the payments are complicated given the new rules, such as the substance-over-form principle under Decree 20 and the legal requirements under LTT 2017.

Based on this principle, related-party transactions (RPTs) that are inconsistent with the arm's-length principle or do not provide direct economic benefits and add value to the business activities of taxpayers will be rejected.

For royalties, for example:

  • Royalties that involve a payment made by a taxpayer to the recipient, where the taxpayer cannot show that the recipient has the rights over the economic assets and the power and ability to generate revenue through such ownership;

  • Royalties where the taxpayer cannot demonstrate that a direct benefit was achieved from the payment of the fees to the related parties;

  • Royalties paid to related parties with regard to a technology transfer where the taxpayer fails to prove the technology has in fact been transferred; and

  • Royalties paid to related parties by a Vietnamese contract manufacturing subsidiary based on a percentage of net sales made to related parties.

For intra-group services, for example:

  • Intra-group services that are seen as not providing the local taxpayer with direct economic or commercial value to enhance or maintain its business position;

  • Intra-group services that benefit related parties' shareholders;

  • Duplicative services that are provided by several related parties; and

  • Services that provide benefits to the taxpayer because the taxpayer is an entity of the group.

As mentioned previously, in order to avoid rejection by the tax authorities, a documented functions, assets and risk profile of the related-party recipient should be maintained. In addition, the benefit test can determine whether an independent party in comparable circumstances would have entered into the arrangement.

Supporting documentation is key

The new Law on Technology Transfer reinstates the statutory requirement of companies to register their technology transfer agreements with the relevant state body and, for the first time, enables an audit of the pricing of inbound technology transfers.

It is recommended that companies that have RPTs that involve intangibles or intra-group services review their transactions and prepare all necessary supporting documentation. The following measures may be considered to ensure defensive or proactive tax management in relation to the afore-mentioned transactions:

  • Review and ensure consistency among the master file, local file, and CbC report, as well as the statutory disclosures of the transactions in accordance with the guidance under Decree 20;

  • Review of the companies' inter-company agreements supporting the payments for intangibles and/or intra-group services;

  • Review and register technology transfer agreements with the relevant authorities;

  • File and pay foreign contractor tax on the payments for intangibles or intra-group services;

  • Seek subject matter expertise during audits or inspections conducted by the competent authorities, or when resolving disputes or controversies; and

  • Apply for an advanced pricing agreement (APA) with the competent authority in respect of complex transactions to gain certainty on the tax treatment.

Transfer pricing audits doubled from 2016 to 2017

Notwithstanding the above focus on TP audits during the past 12 months, there has been a substantial increase in the number of TP audits conducted by the tax authorities on enterprises that have low profits or have had consecutive losses during past years. In 2016, 329 enterprises were audited on TP. In 2017, the number of audits increased to 700 enterprises and that number is expected to be even more in 2018. Non-tax authorities (e.g. the customs authority, or state auditor) have started to conduct (or will be involved in) TP audits, in addition to the tax authorities. For example, in certain cases, the customs authority is enquiring into TP matters in the post-clearance audit, or the state auditor may initiate the audit of royalty payments under the new Law on Technology Transfer. Based on the recently released targets for tax audit and inspections in 2018, the domestic revenue should be increased by 12% to 14% and the number of enterprises subject to tax audit and inspections should involve at least 18.5% of the total number of enterprises.

Given that an APA takes a long time to be completed and the mutual agreement procedure (MAP) has not been very productive so far, the most effective option for defending the taxpayer's TP position during a TP audit is to be compliant, responsive and cooperative with the tax authorities during the audit.

Prevailing landscape regarding the treatment of transfer pricing versus customs

Similar to other tax jurisdictions in the Asia-Pacific region, Vietnam does not have a formal recognition of the inter-dependency between a TP report or APA and a customs valuation. It continues to remain a bone of contention between businesses, customs and the tax authorities.

A transfer price adjustment may or may not be acceptable to customs authorities (depending on the net effect on customs duty collection). However, referring to TP studies and APAs for useful information regarding the valuation of goods is gaining momentum with the customs authorities. The developments regarding the APA regime could be a positive step towards mutual recognition between customs valuation and TP.

Both tax and customs authorities are realising the inter-dependency between TP and customs legislation. This recognition, albeit without a legal basis, is quickly gaining ground and is expected to become a norm in due course.

Taking stock of the insights gained throughout the year

This past year entailed adapting to a new environment. Not only were there challenges regarding the proper application of Decree 20, but also the volume of the deliverables increased substantially in size. Through proper communication with the tax authorities as well as the taxpayers, the preparation of the Forms 01, 02, 03 or 04, the preparation of the local file, and the review of the taxpayer's master file and CbC report a new status quo has gradually emerged.

As discussed already in detail, the large increase in TP audit activity in 2018 will likely over time become the new norm regarding TP work in Vietnam.

Hoang Thuy Duong



KPMG in Vietnam

46th Floor, Keangnam Hanoi Landmark Tower

72 Building, Plot E6, Pham Hung Street

Me Tri, Tu Liem, Hanoi

+84 4 3946 1600

Hoang Thuy Duong has been with the KPMG network of firms for almost 18 years, including with KPMG Australia for 15 months in the global transfer pricing services (GTPS) and corporate tax groups.

Duong has advised numerous multinationals on tax, customs and transfer pricing (TP) planning, compliance and dispute resolution, supply chain tax planning, business restructuring and has provided tax due diligence and structuring advice on a number of corporate transactions in various sectors including industrial, automotive, fast moving consumer goods (FMCGs), financial services, infrastructure, information technology, and the Japanese market.

Duong was the engagement partner of several dozens of TP audit and dispute resolution engagements where many of the cases were resolved successfully either in the audit, appellation or in one court case (the only court case on TP adjustment in Vietnam to date). Duong himself was invited to speak to the central and provincial fiscal and non-fiscal authorities on international best practices in TP audits and local practical issues.

Having been the engagement partner for a TP capacity building project with the General Department of Taxation (GDT), funded by the EC, Duong advised on the conclusion of Vietnam's first advance pricing agreement (APA) which is the only APA to have been concluded to date.

Duong provided advice to the General Department of Taxation and Ministry of Finance in relation to Decree 20/2017/ND-CP on TP management in line with BEPS Action 13, including the consideration of practical issues in local TP audits of multinational corporations operating in Vietnam.

Tran Thi Thuy Ha



KPMG in Vietnam

46th Floor, Keangnam Hanoi Landmark Tower

72 Building, Plot E6, Pham Hung Street

Me Tri, Tu Liem, Hanoi

+84 4 3946 1600

Tran Thi Thuy Ha is a tax and transfer pricing (TP) director in KPMG's integrated international tax team in Hanoi.

Ha has been with the KPMG network of firms for 11 years, including with the KPMG Australia, Sydney global TP services group for an international assignment.

Ha has advised a wide range of multinationals from the Australia, Europe, US, and Asia Pacific regions in diverse industries including consumer/industrial goods, media and entertainment, financial services, electronics, forwarding and logistics, and information technology, on tax, customs, and TP compliance and planning, and inbound investment.

Ha's sector experience includes TP, taxation, trade and customs.

Ha was the engagement director of several dozens of TP audit and dispute resolution engagements where many of the cases were resolved successfully either in the audit or appellation. She was invited to speak to the central and provincial tax authorities on international best practices in TP audits and local practical issues.

Ha is directly involved in consultation with the General Department of Taxation and Ministry of Finance in relation to Decree 20/2017/ND-CP on TP, including the consideration of practical issues in local TP audits of multinational corporations operating in Vietnam.

Sandra Liston



KPMG in Vietnam

46th Floor, Keangnam Hanoi Landmark Tower

72 Building, Plot E6, Pham Hung Street

Me Tri, Tu Liem, Hanoi

+84 (28) 3821 9266

Sandra Liston specialises in transfer pricing (TP) services, including TP planning, local TP documentation, global TP documentation, and activity-based costing analyses.

Previously, she worked as a TP professional at KPMG in the US for seven years, and at KPMG in Germany for one year. During this time she assisted a variety of multinational clients in the US, Europe and Asia with TP services. The companies were primarily engaged in industrial products, commercial products and the provision of services.

Sandra now works with clients from Europe and the Middle East as well as Asian clients from countries including Japan, Korea, Taiwan and China.

Sandra's portfolio includes manufacturers in industries such as automotive, FNB, electronics, and chemicals, service providers including IT, engineering, logistics, and project management, as well as various trading entities.

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