Outline of transfer price in Vietnam (What is local file / master file)

An overview of transfer pricing in Vietnam

Many foreign-affiliated companies operate with factories scattered around. The financial management team needs to be aware that internal transactions are based on principles between independent companies or economic substantive principles.

Before the Vietnamese government announced a transfer pricing tax system (Decree 20) in April 2017, Vietnam's transfer pricing rules were loose. Investors can enter the market without much concern for transfer pricing policies.

Companies currently considering investing in Vietnam, and those already operating in Vietnam, must comply with the strict regulatory requirements of Decree 20 based on OECD guidelines and BEPS actions. I have.

Vietnam transfer pricing compliance

In principle, transfer pricing rules are a common policy, and they are almost the same in every country. Regarding the rules of Vietnam, the important items are the same, although there are slight differences compared to other countries.

Prior to the issuance of Decree No. 20, Vietnam's transfer pricing provisions were based on the principle of independent enterprises. Therefore, the biggest amendment of Decree 20 isIntroduction of economic substantive standardsis. Foreign investors also need to consider economic substantive standards when building their supply chains.

Transfer Pricing | What is the Economic Substantial Standard?

Many global companies with production bases in Vietnam have parent companies overseas in Vietnam. In many cases, the local subsidiary in Vietnam is just functioning as a subcontract factory. The parent company invoices the local subsidiary in Vietnam every month.

In order for the Vietnamese authorities to approve the expenses related to the parent-child transaction as a deduction, according to the principle of economic substance, it is permitted if the important purpose and economic effect of the transaction can be proved. However, there are many cases where technical support received by a Vietnamese subsidiary related to transactions between parent and subsidiary companies is not deducted from taxable income.

Revenues earned by a Vietnamese subsidiary through its sales activities may be treated as a loss if it is an independent third-party transaction price.

Obligations regarding transfer pricing regulations

Vietnamese taxpayers who have entered into transactions with related parties will be obligated under Decree 20. This chapter describes the taxpayer's obligations regarding transfer pricing.

Submission of annual tax return

Vietnamese companies engaged in transactions with related parties are required to disclose their relationships and transactions in their annual tax returns. Taxpayers subject to transfer pricing regulations must submit Form 01 attached to Decree 20 to disclose the details of the transaction regarding transfer pricing. In addition, related party transactions became independentProven as a third party priceTaxpayers must provide relevant materials in order to do so.

Submission Deadline

Within 90 days from the end of the fiscal yearYou must collect and submit the necessary information and materials. Due to time constraints, careful planning is required when conducting parent-child transactions.

Simultaneous transfer pricing documentation

Simultaneous transfer pricing documentation aims to document relationships between taxpayers and stakeholders, transfer pricing policies, and profit sharing among all members / entities within a corporate group.

In accordance with Decree 20, taxpayers who meet certain criteria are required to prepare a simultaneous transfer pricing document, including a local file, master file and national report (CbCR).

Local File: Detailed information about individual related party transactions
Master File: Business Overview of Multinational Companies
Country report: Total income distribution by country, tax payment status, whereabouts of economic activities, major business contents

The master file and CbCR are usually created by the headquarters. All of these documents must be submitted using Forms 02, 03, 04 as provided for in Decree 20.

Transfer Pricing | Exemption from Simultaneous Documentation

In accordance with Decree 20, you will be exempt from making transfer pricing texts if any of the following conditions are met:

・ Total revenue is less than VND50 billion (US $ 2.5 million)
・ Total revenue of related transactions is less than 30 billion dong (US $ 1.5 million)
・ Transfer pricing prior confirmation APA (Advanced Pricing Agreement) annual report has been submitted
・ The Vietnamese subsidiary has only simple functions and sales are less than 200 billion dong (US $ 10 million).
・ Based on EBIT, 5% (logistics), 10% (manufacturing), 15% (consignment manufacturing)
EBIT = Net income before tax + Interest expense-Interest income
(Earnings before interest and tax: Ebit, earnings index excluding the effects of interest rates)

Transfer pricing risks and penalties

If the tax authorities determine that the transaction is not priced according to the principles of business-to-business transactions, the tax authorities will adjust the value of the transaction and impose taxes accordingly. In addition, in accordance with substantive principles, costs arising from transactions solely intended to benefit other affiliates are not deductible.

Companies may also be subject to criminal liability if determined to be tax source erosion.Tax authorities publish details of non-compliant companies and companies that have committed fraud on their websitedoing.
Many companies go bankrupt when they are open to the public.

Measures to be implemented regarding transfer pricing

Recently, interest in transfer pricing has increased around the world. It is important for each company to comply with compliance, thoroughly manage risk, and implement necessary measures.

Information disclosure

All companies must disclose information about relationships and transactions between related parties in a prescribed format and for the required period.

risk assessment

It is necessary to carry out a risk assessment to thoroughly implement transactions between affiliated companies and to develop a steady transfer pricing strategy.

Simultaneous document creation

Taxpayers who fall under Decree 20 are required to prepare a simultaneous document. Even companies that do not meet the standards need to accurately document transactions between related parties and provide objective and rationale-based explanations when receiving inquiries or audit notices from the tax office.

Transfer pricing prior confirmation APA

Taxpayers can proactively manage transfer pricing risk by signing a transfer pricing prior confirmation document (APA) with local tax authorities.

Vietnam transfer pricing situation

Based on the "Action Plan on Base Erosion and Profit Shifting" of the Organization for Economic Co-operation and Development (OECD), through the introduction of Decree 20, between affiliated companies and related parties Transactions are becoming more and more tightly controlled.

In Vietnam, target companies need to ensure compliance and take effective risk mitigation measures. If you do not need transfer pricing practitioners within your company, it is important to seek appropriate outside advice.

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