Like other tax authorities in the region, the Vietnamese tax authority is trying to protect a fair share of tax from multinational companies operating in Vietnam with authoritative transfer pricing audits and inaugural advance pricing agreement (APA) regime.
In line with the action plan on transfer pricing management for the 2012-2015 period announced by the Ministry of Finance (MOF) in 2012, transfer pricing audits have been initiated by provincial tax departments under the General Department of Taxation's (GDT) instruction across a number of provinces in late 2013. The audits were carried out in the context of reduced tax revenue collection because of weaker economic growth while few audits were really carried out since the application of the transfer pricing regulations in 2006.
With the introduction of official regulations on application of mutual agreement procedures (MAP) and APA in late 2013, the Vietnamese transfer pricing regime has now become comprehensive.
Important new regulations
Advance pricing agreements
The APA regulations were introduced under the Amended Tax Administration Law which took effect from July 1 2013. Circular 201/2013/TT-BTC dated December 20 2013 (Circular 201) of the MOF provides detailed guidance on the APA regime, including principles, duration, procedures, right and obligations of tax authorities and taxpayers and other guidance for implementation. Circular 201 took effect as of February 5 2014 and has been welcomed by both taxpayers and tax authority in view of certainty and predictability of transfer pricing taxation APAs can bring about, protection of tax base, and efficiency in tax administration, especially against the backdrop of increasing transfer pricing controversies in the audits.
An APA is defined under Circular 201 as "a binding written agreement valid for a period of time between the tax authority and taxpayers, or amongst the tax authority and taxpayers and tax authorities of the nation and territories with which Vietnam has signed the tax treaty with respect to the determination of basis for tax calculation, transfer pricing method, or prices based on the arm's length principle. APA is established for a tax year before the taxpayers submit their tax return for that tax year".
An APA can be in the form of a unilateral agreement (that is, between taxpayers and the Vietnamese tax authority), a bilateral or multilateral agreement (that is, amongst taxpayers, the Vietnamese tax authority and foreign tax authorities having a tax treaty with Vietnam). Vietnam has around 65 tax treaties with most of its trading partners and a tax treaty is under negotiation with the US. During APA negotiation process, depending on specific facts and circumstances, taxpayers and the tax authority may change a unilateral APA into bilateral or multilateral, or vice versa.
The APA negotiation and conclusion procedures which consist of five steps – pre-filing consultation, formal application, evaluation, discussion and negotiation, and conclusion and circulation – are basically developed with reference to the OECD's APA guidelines and international practices, including advanced APA regimes and those countries which have recently applied APAs. According to the regulations, it is expected to take nine months from a submission of an APA request to the circulation of a concluded APA.
Duration of an APA can be maximum five years which can be extended for no more than five years provided that (i) there are no material differences in the scope of related party transactions, the transacting related party(ies) and critical assumptions, and (ii) the arm's-length range used for benchmarking purposes remains stable during the extended period. Retroactive application of an APA before the date of lodging an APA application is not allowed under the regulations.
The tax authorities are obliged to keep confidential all information and data used during the process of handling APA requests. Accordingly, where an APA application is terminated, withdrawn or cancelled, information supplied by the taxpayers in the application dossier or annual/ad-hoc APA implementation report(s) will not be used by the tax authority as evidence for tax audit purposes.
A number of pilot APAs have been discussed with the GDT while the tax administrators are active in preparing resources with capacity and building databases (including the possibility of using external databases).
Mutual agreement procedures
Although available in most of the double tax treaties to which Vietnam is a signatory, MAP has not been very practical for the taxpayers because of the lack of guidance on implementation. With the introduction of Circular 205/2013/TT-BTC dated December 24 2013 (Circular 205) of the MOF which provides guidance on double tax treaties, MAP may now be applied by taxpayers as an alternative to settle transfer pricing disputes.
Effective as of February 6 2014, Circular 205 provides two (2) separate MAP situations for taxpayers being tax residents of the treaty counterparty country, and tax residents of Vietnam in the event taxpayers believe that their tax liabilities were not assessed by the Vietnamese tax authority (with respect to the former) or by foreign tax authority (with respect to the latter) in accordance with the provisions of the relevant double tax treaty. Specifically:
- A foreign tax resident may choose to (i) carry out domestic appellation in accordance with the Vietnamese regulations or (ii) appeal directly to the Vietnamese competent authority (being the MOF or any person duly authorized by the MOF, which is the GDT) or the competent authority of the contracting state of which he/she is a resident to apply MAP in accordance with the double tax treaty; or
- A Vietnamese tax resident may request the Vietnamese competent authority to apply MAP.
To be eligible for applying MAP, taxpayers are required to:
- Fulfill all obligations which have been informed in an official decision on tax collection before and during the appeal process, except for the circumstance where a government competent authority decides to suspend the implementation of such a decision on tax amounts or tax impositions; and
- Apply for MAP within three years from the date of first notification by the tax authority in relation to the tax treatment which the taxpayers consider not to be in accordance with the relevant double taxation agreement.
New form for statutory disclosures of related party transactions from 2014
Circular 156/2013/TT-BTC (Circular 156) dated November 6 2013 introduces Form 03-7/TNDN (Form 03-7) for annual disclosure of related party transactions (RPT) which is to be submitted together with the taxpayers' annual corporate income tax return. Form 03-7 is applicable to the tax year commencing January 1 2014 onwards, and replaces Form 01 for the transfer pricing disclosure applicable to the earlier tax years.
With an aim to mitigate potential transfer pricing disputes, the new form requires, among others, taxpayers' voluntary disclosures of transfer pricing adjustments as self-assessed by the taxpayers. This means some supporting transfer pricing analysis should be carried out contemporaneously to support such disclosures, including the contention where nil adjustments are made by taxpayer companies on the self-assessment basis under the local current regulations.
Given the above, contemporaneous transfer pricing documentation has become, again, essential as evidence to support taxpayers' transfer pricing disclosure and compliance with the transfer pricing regulations. Greater attention should be paid to and more work should be done by taxpayers to complete the disclosures under the new form.
Unwavering transfer pricing audits
Under the action plan and pressures of 2013 tax revenue collection, during the fourth quarter of 2013, the GDT issued official instructions to 17 provincial tax departments to carry out transfer pricing audits at 42 textile, garment and footwear companies. The target companies were selected based on transfer pricing risk assessment (mostly loss making). The audits were carried out based on standard information request, risk assessment, reporting and adjustment templates. Although all of these audits were aimed to be completed by December 10 2013, only some of them were completed as of February 26 2014 because of controversies on a number of important matters between taxpayers and tax authority:
- Preference for the cost plus method with respect to contract manufacturing or toll manufacturing, which presents a challenge to loss-making businesses in this sector;
- Use of secret company data with very high profit levels for transfer pricing adjustment purposes;
- Disregard of economic, market and commercial factors in analysing profitability of taxpayers in respect of transfer pricing;
- Arbitrary adjustments without sufficient consideration of the taxpayers' transfer pricing documentation; and
- Audits without robust procedures and consideration of the audited taxpayer companies' transfer pricing policy and commercial circumstances, and the transfer pricing regulations in relation to documentation and benchmarking, which gives rise to the risk of prolonged appellation and litigation.
It is noted that despite the authoritative instructions on profit levels for the purposes of making transfer pricing adjustments, chances for taxpayers to explain their circumstances and effectively close the audits at the field remain open. A number of audit cases show that negotiations with local tax authorities based on an appropriate benchmarking study can help close the audits.
It is important to note that the transfer pricing regulations require taxpayers to maintain contemporaneous transfer pricing documentation, meaning the burden of proof is shifted onto the tax authority. The use of secret comparables or making adjustments without sufficient consideration of the taxpayers' documentation by the tax authority, partly because of the lack of robust transfer pricing audit procedures, creates serious challenges for taxpayers and their voluntary compliance.
The current audits may drive the need for transfer pricing certainty and elimination of double taxation via competent authority.
Vietnamese tax authorities have taken several serious steps to build capacity (with support from OECD experts) and conducted the first real transfer pricing audits. Still, some important initiatives are needed towards a mature system of transfer pricing management.
Given the Action Plan until 2015 where the number of transfer pricing audits may be in the region of 1,500 per annum, there are likely more transfer pricing audits in respect of certain sectors and companies with a perceived high transfer pricing risk, such as garment, footwear and potentially other sectors including steel, electronics, and diversified manufacturing. The challenges for the tax authorities to carry out a viable audit program are to improve audit procedures, audit capacity, and use external databases (rather than solely relying on secret comparables data).
The regulations are planned to be changed to enable effective transfer pricing management and compliance. Given the OECD discussion draft on transfer pricing and country-by-country reporting and a number of actions to counter base erosion and profit shifting (BEPS), it is likely that the Vietnamese policy makers will watch out for international developments before amending the local regulations.
For taxpayers, albeit new, MAP and APA can now be considered as workable options to resolve transfer pricing controversies, create certainty and mitigate double taxation.
Hoang Thuy Duong
KPMG in Vietnam
Duong is a tax partner and head of KPMG's global transfer pricing services in Vietnam, trade & customs and global value chain management advisory group in Hanoi.
Duong has nearly 14 years of experience in tax planning and structuring for publicly and privately held clients and has been in charge of many transfer pricing and business restructuring projects.
Duong has advised multinationals on tax, customs and transfer pricing planning and compliance, supply chain tax planning, business restructuring and provided tax due diligence and structuring advice on corporate transactions in various sectors.
He has been the lead partner advising on a multi-billion infrastructure project in Vietnam.
Tran Dong Binh
KPMG in Vietnam
Binh is a tax director and head of KPMG's global transfer pricing services, trade & customs and global value chain management advisory group advisory team in Ho Chi Minh City.
Binh has nearly 13 years of experience in tax planning and regulatory advisory services to foreign-invested companies. Before joining KPMG Vietnam, he worked for another Big 4 firm in the US.
Binh is leading KPMG Vietnam's global transfer pricing services, trade & customs and global value chain management advisory group advisory team in Ho Chi Minh City and has been in charge of over a hundred of transfer pricing projects.
Binh has extensive experience in providing tax advisory services during the tax audit to foreign-invested companies.
KPMG in Vietnam
Ha is a tax and transfer pricing senior manager and has been with KPMG for more than six years, including with KPMG Australia, Sydney Global Transfer Pricing Services group under an international assignment. Ha has advised a wide range of multinationals from Australia, Europe, the US, and Asia Pacific region in diverse industries including consumer/industrial goods, media and entertainment, financial services, electronics, forwarding and logistics, and information technology, on tax, customs, and transfer pricing compliance, planning and restructuring, and inbound investment.
Ha's sector experience includes transfer pricing, taxation, trade & customs.
Hoang Cao Doan Trang
KPMG in Vietnam
Trang is a tax and transfer pricing manager in KPMG's global transfer pricing services in Vietnam with more than six years of experience. She is responsible for the preparation of transfer pricing planning and documentation reports and providing on-going support to multinational clients from Australia, Europe, the US, and Asia Pacific region in diverse industries including consumer/industrial goods, financial services, electronics, forwarding and logistics, and information technology. She has also assisted several clients with transfer pricing audit support and dispute resolution services.
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