Vietnam has rather comprehensive transfer pricing regulations now in place. Mr Hoang Thuy Duong, Tax Partner & Head of KPMG Limited's Global Transfer Pricing Services in Vietnam
Differences in the interpretation and application of regulations by tax authorities and taxpayers have resulted in a number of controversies, creating a need for certainty among taxpayers in tax audits and proactive tax compliance.
Transfer pricing regulations
Transfer pricing regulations were first introduced by the Ministry of Finance (MoF) in Circular No 117/2005, defining “arm’s length prices” related party relationship tests, transfer pricing methods, benchmarking standards, mandatory transfer pricing documentation, and the annual filing required of taxpayers. The arm’s length principle was officially legislated in the Tax Administration Law, effective from July 1, 2007. In 2010 MoF issued amended transfer pricing regulations in Circular No 66/2010, which replaced Circular No 117.
In late December 2013 MoF issued two important new circulars: Circular No 201/2013 providing detailed guidance on Advance Pricing Agreements (APA), and Circular No 205/2013, providing guidance on the application of double tax treaties, including Mutual Agreement Procedures (MAP), to eliminate double taxation in cases of transfer pricing adjustments (adjustments of profits or transfer prices for tax purposes). It is noted that double tax treaties allow competent tax authorities to tax based on the arm’s length principle and MAP where taxpayers, being tax residents of Vietnam or the treaty counter party country, claim that their tax liabilities were not assessed in accordance with the provisions of the relevant double tax treaty.
Further, given the Organisation for Economic Cooperation and Development (OECD)’s discussion drafts on transfer pricing and country-by-country reporting and a number of actions to counter base erosion and profit shifting (BEPS), international developments have implications for further changes to local transfer pricing regulations, which are scheduled to be revised at another time.
Implementation of transfer pricing regulations was accelerated after the introduction of the Action Plan on Transfer Pricing Management for the 2012-2015 Period under MoF’s Decision No 1250/2012. A number of transfer pricing audits have been initiated by provincial tax departments in 17 provinces for the fourth quarter of 2013 under the General Department of Taxation (GDT)’s instruction.
Transfer pricing audits
Key highlights of transfer pricing audits carried out in 2013 include the following.
Firstly, while the audit programme was targeted at selected garment, textile and footwear companies for the 2006-2012 period, it is said to have been expanded to other companies in these sectors. Audits were carried out in respect of all open tax years that have not been transfer pricing audited since the effective date of the transfer pricing regulations (i.e. since 2006) or the company’s establishment, whichever comes later.
Overall, the programme was carried out in a rather authoritative manner, which resulted in significant transfer pricing adjustments. The most controversial issue perhaps surrounds benchmarking, which relates to the use of comparables’ data as a basis to reassess profits for tax, and, to some extent, the consideration of economic and commercial factors impacting business profits besides transfer pricing. It should be recalled that there were a number of unfavourable external and domestic economic conditions that adversely affected business profits during the period under audit, stemming from the outbreak of the global financial crisis in late 2007.
There were no clear procedures for the examination of taxpayers’ documentation. Instead, comprehensive information requests and transfer pricing risk assessment templates were used by tax authorities in the audits. It is noted from the regulations and self-assessment principle under the Tax Administration Law that taxpayers are obliged to maintain contemporaneous transfer pricing documentation as supporting evidence of their arm’s length dealings. Where documentation is adequate, it is understood that the burden of proof on non-arm’s length dealings lies with the tax inspectors.
Transfer pricing audits under the 2014 tax audit programmes are expected to remain focused on loss-making businesses and expanded to some other business sectors. Comprehensive transfer pricing audit procedures are expected to have been submitted to MoF by the end of May for approval, with a specialised transfer pricing inspection team to be set up by September. This is an essential step in ensuring that transfer pricing regulations are applied fairly and equitably in audits, given the complexity and severity of transfer pricing adjustments in te