Global Tax Alert (News from Transfer Pricing) | 10 July 2013

Vietnam Tax Authorities increase Transfer Pricing enforcement activities

  • Share

Background

Subsequent to the approval of the National Action Plan on transfer pricing (TP) administration for the period 2012-2015, Vietnam has made considerable efforts in training its tax officers and intensifying TP audits.

Recently, tax authorities at both central and local levels have been increasingly conducting TP enforcement activities by requesting the submission of TP declaration forms and relevant TP documentation.

In addition, the Amended Tax Administration Law, effective 1 July 2013, officially introduces Advance Pricing Agreements (APAs) in Vietnam. The Circular providing detailed guidance on APAs is currently being completed and finalized.

This Alert summarizes the current TP enforcement activities and expected regulatory guidance on APA applications.

Increasing TP scrutiny and enforcement activities

Recently, tax authorities in large provinces and cities, for example Binh Duong Tax Department, issued formal notices requesting many enterprises to explain arm’s length pricing of their related party transactions supported by relevant documentation for financial year 2012 and prior years.

During the scrutiny, tax authorities challenged the TP compliance status of the companies and requested the submission of:

  • financial statements;
  • inter-company agreements;
  • TP declaration forms; and
  • relevant TP documentation.

In addition, they requested detailed explanation of related party transactions based on economic control criteria.

Loss making companies had an additional burden of documentation/explanation. In certain cases, companies with losses or low profitability were advised by the tax authorities to proactively make self-adjustments on their submitted corporate income tax returns.

In cases of non-compliance with the TP declaration form and where taxpayers fail to provide the requested documentation, tax authorities proposed TP adjustments and imposed relevant penalties based on their secret comparables.

In most cases, the time limit provided to submit the requested information is 30 days.

Foreign-owned companies are mainly selected for TP scrutiny with a focus on companies with investors from Japan, Korea, Taiwan, Hong Kong, China and the United States.

Drafting detailed guidance on APA application

As of this writing, the General Department of Taxation and Ministry of Finance are in the process of completing and finalizing the Circular containing detailed guidance on the APA application process, which is expected to be issued soon.

Implications

It appears that the tax authorities are becoming progressively more sophisticated and increasingly focused on administering TP rules. The increasing number of companies under tax authority’s detailed TP scrutiny indicates that

TP continues to be a national focus of Vietnam’s tax authority for the period 2012-2015.

Generally, the initial information request is the first step in the tax authority’s TP review process. If a taxpayer does not respond to this initial step carefully and in a timely manner, it could trigger a formal and intensive TP audit. A TP audit is a time-consuming process that often requires considerable resources on the part of the taxpayer. Accordingly, enterprises should review their current TP compliance status and proactively prepare for potential audits.

Given the increasingly challenging TP audit landscape, the introduction of APA in Vietnam is a positive development as it can be a tool to proactively manage potential TP risks, including adjustments and penalties. Future Alerts will cover APA developments.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Vietnam Limited, Ho Chi Minh City
  • Christopher Butler
    +84 8 38245252
    christopher.butler@vn.ey.com
  • Nitin Jain
    +84 8 38245252
    nitin.jain@vn.ey.com
  • Nhung Tran
    +84 8 38245252
    nhung.tran@vn.ey.com
  • Takahisa Onose
    +84 8 38245252
    takahisa.onose@vn.ey.com
  • Lea Gracia Molina
    +84 8 38245252
    lea.gracia.molina@vn.ey.com
  • Phat Tan Nguyen
    +84 8 38245252
    phat.tan.nguyen@vn.ey.com
  • Ha Thi Khanh Nguyen
    +84 8 38245252
    ha.khanh.nguyen@vn.ey.com
  • Takahisa Onose
    +84 8 38245252
    takahisa.onose@vn.ey.com
Ernst & Young Vietnam Limited, Hanoi
  • Huong Vu
    +84 4 38315100
    huong.vu@vn.ey.com
  • Nitin Jain
    +84 4 38315100
    nitin.jain@vn.ey.com
  • Trang Pham
    +84 4 38315100
    trang.pham@vn.ey.com
  • Yukihiro Sato
    +84 4 38315100
    yukihiro.sato@vn.ey.com
  • Kyung Hoon Han
    +84 4 38315100
    kyung.hoon.han@vn.ey.com

EYG no. CM3626