Tax Administration for Enterprises Engaged In Transfer Pricing

On February 24, 2017, Vietnam Government issued Decree 20/2017 / ND-CP (took effect from May 1, 2017) prescribing tax administration for enterprises engaged in transfer pricing (Decree 20), in which provided principles, methods, processes and procedures for determining prices of related-party transactions; obligations of a taxpayer in declaration and determination of the price of a related-party transaction, and tax declaration and payment.

Related transactions
“Related-party transaction” is transactions arising between parties having related-party relationships during their production and business process, including:
a) Purchase, sale, exchange, hire and rent with(out) rental fee for, transfer, and assignment, of (i) machinery, equipment and commodities, (ii) providing services, (iii) tangible assets and intangible assets;

b) Borrowing, lending, financial service, financial guarantee and other financial instruments;

c) Agreement on joint use of resources such as synergies and co-operations in utilization of human resources; sharing of costs between related parties.

Related parties
Related parties are parties having relationships where:
a) A party participates directly or indirectly in the management, control or equity of the other, or puts investment in the other;

b) Parties participate directly or indirectly in the common management, control, or the capital of or put investment in other parties.

In which, related parties shall be subject to the following specific provisions:
i. An enterprise participates directly or indirectly in at least 25% of equity of the other enterprise;

ii. Both enterprises own at least 25% of equity in which a third party participates directly or indirectly;

iii. An enterprise is the shareholder who has the greatest ownership of equity of the other enterprise, or participates directly or indirectly in at least 10% of total share capital of the other enterprise;

iv. An enterprise guarantees or offers another enterprise a loan under any form (even including third-party loans guaranteed by financing sources of related parties and financial transactions of same or similar nature) to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise;

v. An enterprise appoints a member of the executive board responsible for the leadership or control of another enterprise provided the number of members appointed by the former accounts for more than 50% of total number of members of the executive board responsible for the leadership or control of the latter; or a member appointed by the former has the right to decide financial policies or business activities of the latter;

vi. Both enterprises appoint more than 50% of membership of the executive board or have one member of the executive board authorized to decide financial policies or business activities who is appointed by a third party;

vii. Other specific cases under the Decree 20.

Obligation of Enterprises to declare and determine the price related to related transactions
Enterprises having related transactions are accountable for:

a) Declare information about related parties and transactions according to Form 01 of the Appendix of Decree 20;
b) Submitting the above Form 1 and the Declaration for Corporate Income Tax Accounting (“CIT”);
c) Prepare and retent a set of transfer pricing documentation files for presentation to tax authorities when requested, including:
+ a national standard Form 02 Application attached in the Decree Appendix;
+ a multinational company Form 03 Application attached in the Decree Appendix;
+ a cross border standard Form 04 Income Statement from the parent company attached in the Decree Appendix.

Exemption from making a declaration
Enterprise having related transactions is exempt from making a declaration of determination on price of related transactions, but has to indicate the exemption basis in sections i and ii of Form 01 attached in Decree 20 in order to get the exemption only if the related transaction is arisen between related parties which:
+ subject to Vietnam CIT;
+ entitle the same CIT rates;
+ neither party is entitled to CIT incentives during the tax assessment;

Exemption from making related-transaction transfer pricing documentation
Enterprises must declare the transfer pricing transactions according to regulations but are exempt from making related-transaction transfer pricing documentation in the following cases:
+ The total revenue generated during the tax period is less than VND 50 billion and the total value of related transactions is less than VND 30 billion;
+ An Agreement on Price Determination Methodology has been signed in advance for the submission of Annual Report in accordance with the law on Advance Price Determination Methodology;
+ Enterprise which (a) operation conducts simple functions towards sectors of distribution, production, and processing; (b) revenue is less than VND 200 billion; (c) generates no income and expenses from using and exploitation activities of intangibles; and (d) earnings before interest and taxes (EBIT) is incurred not less than: 5% net sales for distribution sector, 10% net sales for production sector, and 15% net sales for processing sector.