Global Tax Alert | 9 October 2013

Vietnam releases draft anti-treaty shopping provisions

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Executive summary

Vietnam recently introduced for the first time several general anti-avoidance (GAAR) rules in the draft Circular (Circular) related to the claiming of tax treaty benefits.

The GAAR rules are largely in line with the current development trends of the Asia Pacific region. The Circular generally follows the OECD Model Treaty’s definitions of terms such as residency and beneficial ownership but also modify explanations to better reflect Vietnam’s tax policies. It includes procedures with respect to applying for treaty benefits.

In addition, the Circular contains GAAR provisions including but not limited to:

  • Tax avoidance or tax abusive agreements or contracts
  • A determination of a beneficial owner

Detailed discussion

Applicability of the Circular

  • The Circular is applicable to tax residents of Vietnam and/or those of contracting countries.
  • The Circular clarifies that where there are differences between a tax treaty and domestic tax laws, the tax treaty will prevail.
  • It proposes a three year statute of limitations for a refund claim or substantiation of a tax treaty benefit application for prior years’ payments.

GAAR provisions

The Circular for the first time introduces the principles preventing taxpayer from “abusing” tax treaty benefits by setting forth the GAAR rules, including but not limited to the following items:

1. The agreements or contracts are deemed to be abusive if their main purpose is to obtain treaty benefits, but no guidance is provided in the Circular on how to determine whether an agreement or contract is concluded as its main purpose (or one of the main purposes) to have abusive motive.

2. The Circular provides a general “substance over form” principle for a determination of a true beneficial owner of income and provides the following seven scenarios in which a claimed beneficial owner status may be disregarded:

  1. a. The applicant is due to distribute its profit to a third country within 12 months of receipt of the income.
  2. b. The applicant does not carry out any particular business operations except for right to income from assets.
  3. c. The applicant’s assets, size of business and/or a number of employees do not correspond to an amount of income received, even though the applicant may have some business operations.
  4. d. The applicant does not have any control, power or low risk over the assets, income and/or rights to future income
  5. e. The applicant has a back to back loan, royalty or technical service agreement with a third party.
  6. f. The applicant is a resident of a low or no tax jurisdiction.
  7. g. The applicant is formed as a special purpose vehicle solely for treaty shopping purposes.

Impact

The Circular is a timely move by Vietnam’s Tax Authority to be abreast with the current trends in the Asia Pacific region, reflecting nationwide efforts to mitigate abusive tax treaty practices.

The Circular would require taxpayers to review their current investment holding structures and assess potential risks if a tax treaty relief has been or is part of the structures.

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

Ernst & Young Vietnam Limited, Ho Chi Minh City
  • Nhung Tran
    +84 8 3824 5252
    nhung.tran@vn.ey.com
Ernst & Young LLP, Vietnam Tax Desk, New York
  • Anh Phung
    +1 212 773 1897
    anh.phung@ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3860