Global Tax Alert (News from Transfer Pricing) | 16 January 2014

Vietnam issues detailed guidance on APA process effective 5 February 2014

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Executive summary

Following the introduction of Advance Pricing Agreements (APA) in the Revised Law on Tax Administration, the issuance of its implementation regulations (Decree 83 dated 22 July 2013) and the release of the Draft APA Circular for public comments, Vietnam’s Ministry of Finance (MoF) issued Circular No.201/2013/TT-BTC (Circular 201) providing detailed guidance on the APA application process, which will take effect as of 5 February 2014.

The substantial part of the Circular remains unchanged compared to the latest draft version released in August 2013.1 The material changes in Circular 201 are deletion of application fee clause and reduction of General Department of Taxation (GDT)’s timeline for evaluation of APA application dossier from six months to three months.

This Alert summarizes key points of the Circular and provides an overview of the benefits and effective implementation of the APA regime in the context of the challenging tax compliance environment in Vietnam.

Detailed discussion

Key features of Circular 201

The guidance on APAs and standardized processes and procedures for APA application included in Circular 201 are generally in line with the OECD’s APA guidelines and effective APA regimes in other taxing jurisdictions. Below is the summary of the key features of the APA regime and application processes included in the Circular.

  • APA definition: APA is a binding agreement between the taxpayer(s) and tax authority(s) that determines in advance the basis of tax calculation, transfer pricing (TP) methods and arm’s length prices of the covered related party transactions for a specific period of time;
  • Scope of application: APA is available to corporate taxpayers who undertake domestic and/or overseas related party transactions;
  • Types of APA: Unilateral/bilateral/multilateral APA are all accepted;
  • APA period: An APA can be effective up to five years with a renewal of a maximum of five years;
  • Competent authorities: The MoF gives final approval of APAs, with the GDT being in charge of signing off the APA application. The provincial tax departments assist in negotiating, processing and monitoring the APA application within their authority;
  • APA process: APA application involves five formal steps including pre-filing meeting, formal application, evaluation, negotiation and conclusion;
  • Database: Data and database use for price/ profit margin analysis must be publicly recognized with the specified hierarchy of preference;
  • Confidentiality: Information confidentiality is to be observed by both taxpayer and tax authorities. All information/ documents provided during the APA application process shall not be used as evidence for further tax audit, tax inspection, and tax imposition on the taxpayers;
  • Compliance after APA sign-off: Follow-up annual reports on the agreed APA terms compliance to be filed by taxpayers;
  • Flexibility: Revision options available in case material assumptions established in the APA change and the agreed APA can be also used as a benchmark to revise declared prices/profit margins for past years to avoid tax penalties in accordance with the Law on Tax Administration; and
  • Independent consultants: Both taxpayers and tax authorities are entitled to hire independent consultants to assist them during the APA process.

Implications

TP compliance is considered to be challenging for taxpayers in Vietnam’s tax environment

According to Vietnamese transfer pricing regulations, taxpayers are required to prepare and maintain contemporaneous transfer pricing documentation based on limited available sources of eligible information/database. However, in the case of a transfer pricing audit, there is still a potential risk that the prices/profit margins might be adjusted based on the tax authority’s secret comparables if the declared profits are low or negative without sufficient explanation and valid evidence.

It appears that the tax authority’s TP administration experience varies from province to province and even among tax authorities within the same province. Further, the absence of precedents and court cases for TP could lead to inconsistent enforcement of the same set of regulations, contributing additional potential risks and uncertainties for taxpayers.

Proactive approach to TP risk management

APAs are becoming one of the most popular tools with both taxpayers and tax authorities to pro-actively mitigate the TP risk and related controversy with an increasing number of countries having an effective APA program. The objectives of the APA application stated in Circular 201 are to improve the efficiency in tax administration, reduce compliance cost, avoid double taxation, and mitigate controversies/risks arising from the determination of arm’s length prices of related party transactions.

According to the approved national action plan on TP administration for 2012-2015 and beyond, TP audits continue to be the priority of the MoF/GDT and local tax departments for the upcoming years. Given uncertainties and potential risks of TP adjustments, double taxation and penalties involved in tax/TP audits and the lack of effective tax appeal mechanisms in Vietnam, APA may be considered to be a valid alternative consideration and proactive approach to mitigate those risks and related controversies.

Taxpayers should review the impact of this new guidance on their operatsions with the assistance of local tax professionals.

Endnote

1. For details see EY Global Tax Alert, Vietnam issues Draft Circular providing detailed guidance on application of Advance Pricing Agreement, dated 23 August 2013.

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

Ernst & Young Vietnam Limited, Ho Chi Minh City
  • Nitin Jain
    +84 8 38245 252
    nitin.jain@vn.ey.com
  • Takahisa Onose
    +84 8 38245 252
    takahisa.onose@vn.ey.com
  • Phat Tan Nguyen
    +84 8 38245 252
    phat.tan.nguyen@vn.ey.com
  • Ha Thi Khanh Nguyen
    +84 8 38245 252
    ha.khanh.nguyen@vn.ey.com
Ernst & Young Vietnam Limited, Hanoi
  • Nitin Jain
    +84 4 3831 5100
    nitin.jain@vn.ey.com
  • Yukihiro Sato
    +84 4 3831 5100
    yukihiro.sato@vn.ey.com
  • Kyung Hoon Han
    +84 4 3831 5100
    kyung.hoon.han@vn.ey.com

EYG no. CM4105