2016 24 October

Vietnam’s new TP Decree – the road ahead


Note: The following provides our insights on the draft of the Transfer Pricing Decree (“TP Decree”), dated 3 October 2016, which is published on the official website of the Ministry of Finance.  There may be changes in the final TP Decree so the below should be taken as a reference only. 

Vietnamese langage available here.


Following Vietnam Government’s Resolution No. 19-2016 / NQ-CP on April 28, 2016, the Ministry of Finance (“MoF”) has finally completed the draft of the TP Decree. This was initially published in early September 2016 to collect comments from government bodies and the public. The version released on 3 October captures various comments made, including from the MoF and the Ministry of Planning and Investment. 

Although it is in draft form, the final draft of the TP decree will need to be ready to submit to the Prime Minister by 30 November 2016 for review and signature.  This suggests that any further amendments are likely to be minimal.

The TP Decree was introduced under pressure for more stringent control requirements to combat transfer pricing and loss of tax revenue in the state budget.  From practical point of view, the Vietnamese authorities require enhanced regulations as the existing guidance is outdated and was creating confusion in compliance and enforcement.  In addition, the TP Decree is also a response to Base Erosion and Profit Shifting (“BEPS”) developments at the OECD level as well as in Asian jurisdictions including India, China and Singapore. 

Significant Changes

More specific and internationally consistent definition of related parties

To bring the definition of related party for transfer pricing purposes more in line with global standards the following changes were made:

  • Ownership – In the prevailing regulations, a party that holds directly or indirectly at least 20% of the charter capital of the tested party is considered a related party. In the draft TP Decree, this ownership threshold is adjusted to 25% of the capital actually contributed.

    This threshold is also consistent with the ownership threshold used in international databases such as Oriana, which are commonly applied in Vietnamese benchmarking studies for both transfer pricing documentation and audit defense purposes.

  • Transactions – The existing test of a controlled relationship based on transaction volume was changed from 50% threshold to 60% threshold. Based on the draft Decree, two enterprises are considered related parties if one enterprise directly or indirectly controls more than 60% of the total revenue or total product quantity (in the prevailing regulation, only product quantity is considered).

    This provision was initially introduced to identify transactions between taxpayers in Vietnam with a “paper company” set up in a low tax jurisdiction with no direct shareholding relationship in order to escape the transfer pricing net.  However, the existing definition has triggered significant challenges for many FDI entities that happen to be part of a supply chain with limited customers e.g. parts suppliers for the automobile and motorcycle manufacturers.  The increase from 50% to 60% should have an impact on reducing the number of such companies inadvertently caught in the transfer pricing net, despite no shareholding or other non-arm’s length connection with the customer or supplier.

Annual contemporaneous documentation and 3-tiered documentation

  • Annual TP Form and annual local TP Documentation Report: A New annual TP form (Form No. 01/ ND-GCN) will need to be prepared and submitted together with the Annual Corporate Income Tax Form. In addition, TP documentation is required to be completed annually before the submission of the TP Form.  The TP documentation is required to be submitted within 15 days from a request, with a possible extension of a further 15 days.

    This requirement further stresses the importance of having on hand a ready-to-submit TP documentation report.  In the past, some enterprises have only prepared the TP report upon receipt of an announcement of a tax audit, due to a misunderstanding that a TP Report could be submitted within 30 days from the announcement.  However, TP Audit practice has proven that this is an inappropriate strategy considering the very limited timeline allowed for the submission during a TP audit.  A TP audit (or tax audit with TP focus) may start with a verbal notice with a complicated list of information (including TP forms and TP reports among others) and standard TP audit forms (M01-M06, profit and loss per product lot).  The actual audit field work will generally be completed within a few weeks.  In many cases, tax payers didn’t prepare documentation ready to be submitted as required within the given timeline, greatly restricting their scope for effective clarification or negotiation.

  • In line with BEPS Action 13, 3-tiered documentation (Master file, Local file and Country by Country Reporting are required in the event that the ultimate parent company is required to prepare such documents, in a jurisdiction which has a tax treaty with Vietnam.

    As with other jurisdictions that have recently introduced 3-tiered documentation, significant challenges are expected in harmonizing the confidentiality of information on the Group (e.g. in the Master file and the country-by-country reporting) and the level of information disclosed in accordance with local requirements.  Normally there is a clear threshold of the Group’s total revenue, expressed in local currency, for the requirement of 3-tiered documentation.  No such threshold is applied, although the reference to the documentation only being required if the ultimate parent company has an obligation to prepare, should ensure global thresholds are applied in practice.

Loan and service fee transactions

  • Related party loans: Loan interest expenses cannot exceed 20% of EBITDA, and such ratio is not allowed to exceed the equivalent ratio of the Group (incurred with independent parties). The TP Decree also requires the reporting of the Group ratio in the local annual TP form.

    In addition, the related party loan definition is expanded to not only include direct loans but also back-to-back loans and other financing instruments granted by related parties.

  • Related party services: Several limitations and requirements in both substance, nature, benefit, and service charges have been introduced.
    In practice, compliance with this requires very robust supporting documentation, including:

a.  Service Agreement
b.  Detailed information on each service item, in particular in relation to what the services are and how they are performed, why they are required, who carries them out, in what location and during what time period.
c.  Reason for introducing the service fee
d.  Reasons for selection of certain allocation keys
e.  Service fee computation methods with respect to each service item
f.  Description of how the respective service rendered benefits the service recipient in terms of its business operations
g.  Samples of service deliverables, if any
h.  Invoices / debit notes, payment statements, and any other supporting documents
i.  Transfer pricing documentation pertaining to the service fee.

Guidance on benchmarking

Specific guidance is provided in relation to best practices for Vietnam benchmarking.  International databases are now formally recognised as valid tools for conducting a study.  Comparable companies in jurisdictions out of Vietnam are allowed, however the benchmarking study must include a detailed step-by-step process applied in selecting comparables, with a clear attempt made to identify Vietnamese comparables before reliance on regional comparables.  Adjustments made for material differences should be explained in detail. 

In addition, the comparison of a taxpayer’s profit margin with the interquartile range of a benchmarking study should be conducted on a yearly basis.  In practice, this creates challenges for taxpayers as updated data of comparable companies would not be available in the database at the point of TP Report preparation.

The possibility of a “tested party” outside Vietnam

The draft TP Decree has removed the term “tested party” to avoid confusion between the tested party for benchmarking purposes and the “audited party” in a local TP Audit.  However, based on the explanation of the MoF in its submission of the draft TP Decree, there is a possibility that the tested party in TP documentation would not necessarily be the Vietnamese entity.  

Although this is quite standard transfer pricing practice, it has not typically been applied in Vietnam, and the local entity has nearly always been the tested party by default, so this is a welcome development and may simplify transfer pricing design and documentation in some cases.

The introduction of “safe harbor” and warning of arranged “independent” transactions

The TP Decree provides a safe harbour basis in which taxpayers with annual total revenue less than VND 50 billion (USD 2.2 million) and total related party transaction values less than VND 30 billion (USD 1.3 million) are exempt from the annual TP documentation requirement (the annual TP form is still required).

In addition, taxpayers will be exempt if they only transact with a local related party with the same tax rate that is not in a tax holiday.  This will be helpful within a group but such information will not be available in the case of parties deemed to be related through the 60% customer/supplier transaction relationship discussed above.

Regardless of the above safe harbor, the TP Decree still provides room for a tax auditor to make TP adjustments if the tax payer is considered to conduct related party transactions not following with the “arm’s length principle” and “substance over form principle”, or in the case of “arranged independent transactions”.

The significant involvement of government bodies

The TP Decree also provided a legal base for the MoF to request information from several government bodies tor transfer pricing and tax scrutiny.

State Bank, Ministry of Planning and Investment, Ministry of Science and Technology and Ministry of Trade are among the bodies which tax authorities could seek and exchange information about taxpayers and their transactions, especially cross-border transactions with related parties.

Due to this, taxpayers should be consistent in the information submitted to any authorities and must be well aware that any information submitted previously for other purposes could be easily retrieved and used for TP audit purposes.

Our comments

Transfer pricing audits are not new in Vietnam and in recent years taxpayers have been made aware that Vietnam is one of the more active jurisdictions in Asia in respect of transfer pricing enforcement, audits and adjustments, with several high profile cases in the media and large scale enforcement in place.

The draft Decree signals that Vietnam will continue along this path.  It offers in some respects a very rigid enforcement of transfer pricing best practices, but will also provide much needed clarity on other topics such as safe harbour thresholds and approaches for benchmarking, which are often lacking in transfer pricing rules globally, creating uncertainty and greater compliance costs.  The Decree also makes an effort to introduce BEPS concepts into Vietnam, although further guidance would be welcomed on how this will work in practice, how reports will be exchanged etc.

There is no clear guidance yet on transition process or timeline.  However, it is expected that both TP Decree and a TP Circular which will be issued by the MoF following the TP Decree will both be effective from 1 January 2017.  The TP Circular is expected to give more detailed guidance on the benchmarking study process, the calculation of inter-quartile range, the application of TP methods, as well as the presentation of TP report etc.

Based on the approach seen for the release of TP Circular 66/2010/TT-BTC in 2010, there will be several announcements and public updates to taxpayers.  Tax auditors will require several months to adjust to the new regulations and to learn how to interpret them in practice, however it is inevitable that TP audits will become more frequent and auditors – armed with the Decree and underlying support from the tax authorities and multiple government departments – more confident and assertive in their negotiations.

What should taxpayers do now?

Groups which have subsidiaries in Vietnam and Vietnamese enterprises should:

  • Closely follow updates on the development of the draft TP Decree and the TP Circular to understand key changes which are applicable to both the local entity and the Group.
  • Proactively conduct a thorough review of current business arrangements as well as TP documentation to identify changes / room for improvement following changes in the TP Regulations.
  • Complete all required compliance declarations and documentation based on prevailing regulations for any periods until end of 2016.
  • Enterprises in Vietnam should seek support from the parent company/ ultimate parent company in providing 3-tiered documentation where required.
  • Discuss with a TP consultant on developing of additional supporting package/ addendums to the existing TP documentation referring to the new TP Regulations for any period which was not covered under a TP Audit in the past. In particular it would be useful to draw on experiences of the Group in other jurisdictions such as India, China, Malaysia and Indonesia to ensure consistency but also to seek opportunities to streamline compliance and reduce costs.

Tu Ha
Senior Manager, DFDL,

Steven Carey
Managing Director, Quantera Global

*The information provided is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.