Is your firm is doing business in Vietnam? Then it is important to understand what types of risks there are with regards to transfer pricing in Vietnam.
After reading this article, you understand exactly what transfer pricing rules and requirements there are in Vietnam, what risks there are for your firm, and how you can make sure you stay compliant with the law.
What you need to know about transfer pricing in Vietnam
These days, Vietnam is booming. Many Western firms try to benefit from low labour costs by relocation manufacturing activities and the impressive domestic growth rates.
The Vietnam tax-authorities welcome these foreign investments. But not without requiring them to pay their “fair share” of tax. For that reason, there is more and more focus on anti-abuse rules.
In particular, Vietnam has strict transfer pricing rules.
What are your obligations in Vietnam?
Vietnamese companies that have controlled transactions should in principle maintain full-fledged transfer pricing documentation. The goal is to proof that the prices used are at arm’s length.
In addition, you should keep a record of all accounting books, invoices, vouchers, and other documents related to tax-calculation, tax-payment and tax-settlement.
Important to mention is that thresholds apply: you are exempt from preparing transfer pricing documentation if the revenue is below VND 50bn (approx. USD 2.2m) and transactions with associated enterprises are below VND 30bn (approx. USD 1.3m).
You are also required to disclose details of your controlled transactions in your annual tax returns, 90 days after the end of the financial year. The tax return needs to show which controlled transactions the company entered into and the prices charged. If that price differs from the arm’s length price, the company should explain the reason for this.
When are you at risk?
Besides the general requirements mentioned, it is worth noting that there are a number of areas that are under high scrutiny. Most notably, management services and low-risk routine-like activities.
In many cases, a Vietnamese company will be charged fees by the (often Western) head office. Examples are management fees, but also the fees for HR, legal and group accounting services. These fees are generally calculated based on Western cost levels. These levels are much higher than in Vietnam.
A German head office of a multinational car company provides HR services to a Vietnamese associated enterprise. Say that the hourly rate of an HR professional in Germany is 50 USD while the hourly rate of a similar HR professional in Vietnam is USD 10.
The Vietnam tax authorities often take the position that the fees charged are too high. For a successful charge of service fees, it is important to have proof that they are necessary and reasonable. This needs to be supported by valid invoices, contracts and other relevant supporting documents.
Low-risk routine-like activities
Multi-nationals nowadays often relocate bulk activities to Vietnam, like the manufacturing of clothing. These activities are generally paid on the basis of a mark-up on the relevant manufacturing costs.
As a result, associated enterprises that carry on manufacturing activities in a country with low manufacturing costs realize a lower profit compared with associated enterprises in a country with high manufacturing costs.
A German multinational car company manufactures cars via enterprises in both Vietnam and Germany. These companies do exactly the same and incur exactly the same types of costs (plant, labor etc.). A transfer pricing analysis has shown that an arm’s length remuneration for the manufacturing activities is a mark-up of 8% on total costs.
Say that in one year the annual costs are as follows (all in kUSD):
As you can see, based on normal and compliant transfer pricing practices, there is a profit of USD 52.000 in Germany and USD 13.600 in Vietnam for similar activities. Assuming that the market value of both cars is the same, producing in Vietnam results in a much higher profit down the line.
Instead of just applying logic that companies are there for the lower cost of production in the first place, governments in developing countries like Vietnam think that it is unfair that a similar mark-up is applied to a lower costs base. And they can for example argue against either the costs base or the mark-up.
How tight is government control?
You should definitely consider transfer pricing rules when doing business in Vietnam. As mentioned, according to the law all terms and conditions of transactions between associated enterprises must be at arm’s length. Next to this, there are many guidelines on transfer pricing.
Therefore, it is in Vietnam very important to have your transfer pricing strategy in good order. The burden of proof rests with the you to prove that the figures used are honest and reasonable.
What penalties do you face when being non-compliant?
When the Vietnamese tax authorities deems a transfer price incorrect, it can make corrections to the transfer price applied. The statue of limitation that applies to such correction is generally 10 years.
There are small administrative penalties for non-compliance with transfer pricing regulation. However, penalties can be imposed of up to 3 times the amount of outstanding tax due (with an interest penalty for every day of delay) if there is a finding of tax evasion or fraud. In addition, there could also be criminal proceedings against taxpayers if it is proven that there is significant tax evasion.
Do you want to be sure?
Do you want to be sure that your transfer pricing policy is compliant with regulations in Vietnam? Does your firm have inter-company transactions and do you want to be sure you charge the right prices?
We are Transfer Pricing Asia, a boutique transfer pricing firm based in Asia. We assist multi-nationals en medium sized businesses with all matters related to transfer pricing.
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Relevant regulations and rulings about transfer pricing in Vietnam
The arm’s-length principle was enshrined in Vietnam’s Law on Business Income Tax. It came into force on 1 January 2004. It requires, that all transactions between related parties are to be conducted at market prices.
- Article 37 of the Law on Tax Administration articulates the arm’s-length principle, which empowers tax authorities to adjust the value of purchases, sales, exchanges and accounting records of goods and services of taxpayers if that value is not in accordance with market prices.
- The Amended Law on Tax Administration No. 21/2012/QH13 was officially enacted on 3 December 2012 and took effect on 1 July 2013. Decree 83/2013/NÐ-CP (Decree 83/2013), issued on 22 July 2013, stipulates in detail the Implementation of a number of Articles of the Amended Law on Tax Administration No. 21/2012/QH13 and took effect on 15 September 2013. Decree 83/2013 also includes Article 34, stipulating the arm’s-length principle.
- The Amended Law on Tax Administration No. 71/2014/QH13 was officially enacted on 26 November 2014 and took effect on 1 January 2015.
Detailed transfer pricing regulations are included in Circular 117/2005/TT/BTC (Circular 117) and Circular 66/2010/TT/BCT (Circular 66). Circular 66 provides guidelines for the calculation of market prices in business transactions between related parties. Circular 117 applies to transactions that took place in the financial years between 2006 and 2009.
And finally, Circular 201/2013/TT-BTC (Circular 201)5 provides detailed guidance about the APA application process.
OECD compatibility transfer pricing in Vietnam
Circulars 117 and 66 are generally based on the OECD Guidelines.