17:26 (GMT +7) - Wednesday 18/07/2018

Consultant's Corner

BEPS - What does it mean for Vietnam?

Released at: 10:23, 14/10/2016 FINANCE - TAX CONSULTANCY

BEPS - What does it mean for Vietnam?

Photos: Deloitte Vietnam/Courtesy

Mr. Joy Mukherjee, Tax Director (Transfer Pricing) at Deloitte Vietnam, takes a closer look at the implications of the Base Erosion Profit Sharing action points for taxpayers and tax authorities in Vietnam.

by Mr. Joy Mukherjee, Tax Director, Deloitte Vietnam

Mr. Joy Mukherjee, Tax Director, Deloitte Vietnam Base Erosion Profit Sharing (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax regulations of different countries to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but taxes are low, resulting in minimal or zero corporate tax being paid and thereby reducing the effective tax rate of a group. Countries have realized that it is not possible to take any corrective action to stop BEPS unilaterally and it must be a multilateral effort.

The G20 nations mandated the OECD (Organization for Economic Cooperation and Development) to come up with a comprehensive BEPS report, as a result of which the OECD released its first report, “Addressing Base Erosion and Shifting Profits”, in February 2013. The 15 action points in the report were then deliberated and final action points were released in October 2015. Although BEPS is an initiative of the OECD and the G20 countries, this is an inclusive initiative and the objective is to address the issues of developing countries as well.

In this day of globally-integrated business models, all countries are likely to feel the rippling effects of a global economic shakedown. Tax authorities in Vietnam have also recognized the need to be prepared for BEPS and we understand that there are discussions going on regarding the way forward with BEPS. We understand that the General Department of Taxation (GDT) has formed a steering committee with three working groups, led by GDT’s General Director, to research various agreements on tax and transfer pricing and to prevent tax evasion and profit shifting as well as to further contribute to Vietnam’s integration process to international practice. While we wait for tax authorities to make a formal announcement on the next steps with BEPS, in this article we briefly discuss what BEPS means for taxpayers and tax authorities and what are the most likely areas that could be affected.

Fifteen action points have been proposed covering various aspects of direct and indirect taxation. These action points are designed with the objective of:

1. Establishing coherence in corporate taxation (Action Points 1-5 with respect to the digital economy, hybrid mismatches, CFC rules, interest rate deductions, and harmful practices);

2. Turning tax policies into tax rules (Action Point 15 with respect to developing multilateral instruments);

3. Restoring effects on international standards (Action Points 6-10 with respect to the prevention of treaty abuses, artificial avoidance of Permanent Establishment (PE), value creating intangibles and high risk transactions); and

4. Ensuring transparency (Action Points 11-14 with respect to data collection and analysis, aggressive tax planning, country-by-country reporting and dispute resolution mechanisms).

From an analysis of the 15 action points in the context of Vietnamese tax regulations, it seems likely that in the current scenario not all the action points will have an impact. But it is possible that some will potentially have an impact in Vietnam.

For example, Action Point 7 deals with preventing artificial avoidance of PE status. This action point states that if activities performed by an intermediate company (a commission agent, for example) leads to the conclusion of contracts to be executed by another non-resident entity, the intermediate company may be viewed as constituting a PE of the non-resident entity in that country, unless the intermediate company is acting in the ordinary course of work. Without going into too much detail, this has far reaching consequences both for tax authorities as well as taxpayers. Tax authorities will want to examine in great detail and determine if the conditions for the creation of PE are being breached or not and, similarly, the taxpayer needs to reconsider its activities and analyze if its activities would lead to the creation of a PE of its group company. In Vietnam, Commission Agency/Contract Manufacturing is a common business model and a large number of companies could be impacted due to the amendments made in the model treaty for dependent agents covered under this action point.

Having said that, the current foreign contractor withholding tax (FCWT) regulations in Vietnam have quite a wide coverage for taxing scope. Circular No. 103/2014/TT-BTC, providing guidelines for the tax liability of foreign entities doing business in Vietnam or earning income in Vietnam, includes “any foreign entity that negotiates or concludes contracts via a Vietnamese entity.” Given the provisions of the current FCWT and the approach of the GDT, it is likely that FCWT will take precedence over Action Point 7 unless the GDT decides to change its approach to be aligned with the BEPS provisions. 

The changes suggested in Action Points 8-10 on transfer pricing aspects can also have significant impacts on companies having intra-group transactions operating in Vietnam. There is a lot of emphasis on “value creating” activities and the commensurate compensation. Until now, the focus of tax authorities in Vietnam in many cases seems to have been primarily on the adequacy of the margin earned by companies from an arm’s length perspective. But the guidance from BEPS action points may result in a fresh approach to transfer pricing audits where tax authorities (if they adopt the BEPS approach) critically examine the activities performed by the Vietnamese entity and where it stands in the group value chain.

In our view, considering the far reaching changes suggested in the BEPS action points and the fact that we are working in a globally-integrated economic environment, there is a certain need for both taxpayers and tax authorities to be prepared for the future.

Vietnamese tax authorities have recently released a draft transfer pricing decree, which is one step towards aligning transfer pricing provisions with the BEPS recommendations. Some of the proposals in the draft decree are similar to the BEPS actions points, for example the limitation on interest on loans paid to a group company is similar to Action Point 4 on interest deductions.

It is the right time for tax authorities to introduce reform measures to streamline the existing process for tax audit and tax collection processes and prepare itself to align with global reforms. Similarly, it is important for taxpayers to be cognizant of the proposed measures and be proactive in taking necessary action.

User comment (0)

Send comment