Taxing authority and tax law

Tax authority: General Department of Taxation (GDT)

Tax law:

• The Law on Tax Administration¹ contains an article (Article 37) on the arm’s length principle that empowers tax authorities to adjust the value of purchases, sales, exchanges and accounting records of goods and services of taxpayers not in accordance with market prices. The arm’s length principle is also included in Article 26 of Decree 85/2007² and Part B, Sec. XII, Clause 2.2 of Circular 60/2007.³
• Detailed transfer pricing regulations are included in Circular 117/2005/TT/BTC (Circular 117) dated 19 December 2005 of the Ministry of Finance and Circular 66/2010/TT/BCT (Circular 66) dated 22 April 2010 of the Ministry of Finance which provide Guidelines on the Calculation of Market Prices in Business Transactions between Related Parties. Circular 117 was replaced by Circular 66.

Relevant regulations and rulings

See above Law, Decrees and Circulars. Circular 117 is still applicable to transactions which took place in financial years 2006-2009. Circular 66 governs related party transactions between related parties which take place from 2010 onwards.

Circular 66/TT-BTC sets forth formal and comprehensive guidelines on many significant issues with respect to the interpretation and application of the arm’s length principle. The main elements of the Circular include the arm’s length principle, definition of market prices, material differences, associated parties, acceptable transfer pricing methods, the “most appropriate method” rule, arm’s length range, benchmarking principles, acceptable database, and annual declaration of related-party transactions and requirement of contemporaneous transfer pricing documentation.

HCM City Tax Department has recently issued the Official Letter 3304/TB-CT on 15 September 2010 requesting all enterprises in the territory, with related-party transactions, to prepare and submit mandatory TP Disclosure Forms based on Circular 117/2005/TT-BTC for the financial years 2006-2009 by 20 October 2010 at the latest, if not already filed. Failure to submit the information could trigger the selection of company for tax audit and if transfer pricing issues are detected, the company will subject to penalties under tax evasion provisions, including criminal proceedings. In addition, companies with related-party transactions are required to comply with the FY2010 requirements in a timely manner (i.e., submission of the mandatory TP Disclosure Form and maintenance of TP documentation by 31 March 2011 based on Circular 66).

Hanoi Tax Department issued Official Letter 17825/CT-KT1 on 29 September 2010 requesting a transmission and distribution company to submit transfer pricing disclosure form and contemporaneous transfer pricing documentation supporting the arm’s length nature of its related party transactions and the most appropriateness of the selected transfer pricing method based on Circular 117/2005. The company is given only 30 days to provide the tax authority with such required form and documentation.

The Vung Tau Tax Department also issued Official Letter (6443/CT-TB) on 21 October 2010, requesting companies to submit their annual transfer pricing declaration forms for past years.

OECD guidelines treatment

Circular 117 and Circular 66 are generally based on the OECD guidelines. How the GDT will apply the OECD guidelines in interpreting the principles under Circular 117 remains to be seen during the first few years of implementation of the Circulars. Transfer pricing documentations adhere to the OECD guidelines in applying the principles of Circular 117 and Circular 66.

Priorities/pricing methods

Circular 117 and 66 permit the use of the following methods: CUP, Resale Price, Cost Plus, CPM (or TNMM) and Profit Split. Taxpayers must use the most appropriate method under the regulations. There is no hierarchy among the methods although an internal CUP appears to be preferred.

Transfer pricing penalties

Adjustments in corporate income tax liabilities may be made by the tax authority in the following cases:

• Failure to disclose, or incomplete disclosure, of related-party transactions
• Failure to produce information, documents or source documents within 30 days of a request by the tax authority
• Intentional erroneous application of the provisions of the Circulars and failure to produce substantiation requirements within 90 days of the date of request by the tax authority

Administrative penalties ranging from VND500,000 to VND5m may be imposed for failure to comply with TP documentation and disclosure requirements, and an interest penalty of 0.05% of the outstanding tax due may also be imposed in case if there is a TP adjustment. Additional penalties of up to five times of the outstanding tax due may be imposed if there is a finding of tax evasion or fraud.

Vietnamese law allows for criminal proceedings against the taxpayer if a significant tax evasion is proved. According to the Vietnamese Criminal Law, if the evaded (underpaid) tax amount is VND100m (approximately US$5,200) or more, the taxpayer may be subject to tax penalties under criminal proceedings.

Penalty relief

Penalties may be avoided by adequate disclosure on Form GCN-01/HTQT of the related-party transactions and the preparation and timely production of transfer pricing documentation.

Documentation requirements

Contemporaneous documentation is required by law. Documentation must be provided to the tax authority within 30 days upon request. The documents must be in existence when the transaction occurs and must be updated during the performance of the transaction. For penalty-avoidance purposes, a taxpayer is considered to have satisfied the documentation requirement if it maintained sufficient documentation to establish that the taxpayer reasonably concluded that, given the available data and the applicable pricing methods, the method (and its application of that method) provided the most reliable measure of an arm’s-length result under the principles of the most appropriate method rule.

The principal information and documents required by the regulations are:

• Information on relations between affiliated parties and the taxpayer
• Information and updated reports on strategy for development, administration and control between affiliated parties
• The pricing policy for transactions in relation to each group of products in accordance with the general guidance of affiliated parties and the taxpayer
• Documents and reports on the process of development, business strategy, projects, production, business or investment plans
• Regulations and procedures for financial statements and internal control reports of the company and of affiliated parties to the transactions
• A diagram of transactions and documents describing transactions, including information on parties to transactions, order and procedures for payment and delivery of products
• Documents specifying properties and technical specifications of products, the breakdown of costs (or cost) of one product, selling price of products, total amount of products produced or traded and sold in the period (specifying such items on the basis of the related transaction and an independent transaction, if any) and the quantity of products
• Information, documents and source documents concerning the process of negotiation, signing, performance and liquidation of economic contracts and agreements related to transactions (usually including a description of products, place of transaction, form of transaction, value of transaction, terms of payment, payment documentation, period of performance, minutes of meetings or instructions of the management regarding the process of negotiation, signing and the performance of a transaction)
• Information, documents and source documents related to economic conditions of the market at the time of the related transactions affecting the method of calculation of a price for transactions (for example, changes in exchange rates and policies of the government affecting prices in transactions and financial incentives)
• The pricing policy for selling and purchasing products and the procedures for control and approval of prices
• Information, documents and source documents used to select the most appropriate method, including data used for comparative analysis and adjustment of significant differences
• Other information or documents used to select and apply the methods

Documentation deadlines

The documentation must exist at the time of the transaction. Taxpayers must provide documentation to the tax authorities within 30 days of a request. If an enterprise has plausible reasons, a onetime 30-day extension could be applied.

Statute of limitations on transfer pricing assessments

The general principles on statutes of limitations apply. There is no statute of limitations with respect to the recovery or re-collection of taxes. However, administrative penalties may be imposed only within two or five years from the date of commission to the date of discovery of the violation for tax procedures or tax evasion, respectively.

Return disclosures/related-party disclosures

Taxpayers are required to file Form GCN-01/HTQT (under Circular 117) and Form GCN-01/QLT (under Circular 66) to disclose their transactions with related parties, the details of these transactions and the transfer pricing methods used to calculate the prices in these transactions. The disclosure form must be submitted with the corporate income tax return, which must be filed within 90 days of the end of the fiscal year.

Audit risk/transfer pricing scrutiny

The risk of transfer pricing audit is rated as high, because TP regulatory enforcement and audit activities are currently becoming a priority on Vietnam tax authorities’ 2010/2011 agenda. Currently the Vietnamese tax authorities are interested in tax and transfer pricing issues of taxpayers, particularly foreign investment enterprises that are found to be in one of the following situations and circumstances:

• Enterprises that are loss-making for several consecutive years and are expanding their business
• Enterprises with related-party service fees that are not adequately substantiated in terms of service received and supporting documentation
• Enterprises with a large volume of related-party transactions
• Enterprises enjoying preferential tax tratement, especially enterprises operating in industrial zones, export processing zones, or high-tech industrial zones
• Enterprises operating in the construction industry, the infrastructure construction business and the real estate business
• Banks
• Enterprises operating in marine service and transportation, especially international marine transportation
• Enterprises in the automobile industry

APA opportunity

Circulars 117 and 66 do not provide for unilateral or bilateral APAs.

¹ This Law was enacted by National assembly on 29 November 2006 and effective from 2007.
² This Decree was issued by the Government on 7 June 2007, stipulating in detail the implementation of a number of Articles of the Tax Administration Law.
³ This Circular was issued by the Ministry of Finance on 14 June 2007, providing guidelines for the implementation of Decree 85/2007.

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