Vietnam transfer pricing rules for related parties

Vietnam transfer pricing rules now ask firms to prove that deals with related companies are priced fairly, under Decree 20/2017/ND-CP. The Government issued it on 24 February 2017. It took effect on 1 May 2017. If your company buys, sells, lends or pays fees to a parent, a sister company or another related party, read on.

What the decree is about

Transfer pricing is the price one company charges a related company. A parent might sell goods to its Vietnam unit. A group might charge a management fee. If the price is too high or too low, profit can move from one country to another, and so can tax.

The decree sets out how the tax authority looks at these deals. The core idea is the arm's length principle. A related-party price should match what two unrelated parties would agree in a similar deal. If it does not, the tax authority can adjust it.

Sources: Government of Vietnam, Decree 20/2017/ND-CP on tax administration for enterprises having related-party transactions, issued 24 February 2017.

Who counts as a related party

The decree lists several links. Ownership is the simplest. One company holding a set share of the capital of another is the usual test. The ownership threshold rose to 25 percent from 20 percent under the new decree. Common control also creates a link. A person who manages or controls both sides can do the same.

Check the full list in the decree before you decide that a partner is not related. Many firms are surprised to find a link through a shareholder or a lender. When in doubt, ask your tax adviser.

Sources: TMF Group, "Updates on Transfer Pricing in Vietnam", 12 June 2017.

What you must prepare and file

Firms with related-party deals must report them. The decree asks for disclosure forms that go with the annual corporate income tax return. These forms list each related party and the type and value of each deal.

Firms must also keep supporting files in three tiers: a master file on the global group, a local file on the Vietnam business, and a country-by-country report. These explain the group and the way prices were set. The files should show why your price fits the arm's length principle. Keep them ready, because the tax authority can ask for them during an inspection.

Some small businesses and low-risk deals may be exempt from the heavier paperwork. The decree sets the limits. Do not assume you qualify. Test your own figures against the text.

Sources: Government of Vietnam, Decree 20/2017/ND-CP, issued 24 February 2017; TMF Group, "Updates on Transfer Pricing in Vietnam", 12 June 2017.

Timing matters too. The decree took effect on 1 May 2017, and its compliance duties apply from that date. Plan your paperwork as the year goes on, not in the weeks before the tax return is due. A short file kept up to date each quarter is easier to build than a large one rushed at year end.

How prices are tested

The decree describes methods for checking whether a price is fair. One method compares your price with prices in similar deals between unrelated firms. Others look at resale margins, cost plus a markup, or profit levels. You choose the method that fits your deal best and explain why.

Good records help here. Keep contracts, invoices, price lists and notes on how each price was set. Evidence that exists before a dispute starts is worth far more than a report written after it.

The cap on loan interest

The decree also limits how much interest on loans a firm can deduct. The cap is tied to earnings: total interest on loans is limited to 20 percent of EBITDA, which means earnings before interest, tax, depreciation and amortisation. Interest above the cap may not be deducted.

If your Vietnam unit is funded mostly by loans, work out this number now. It can change your tax bill.

Sources: Government of Vietnam, Decree 20/2017/ND-CP, issued 24 February 2017; PwC Vietnam, "New transfer pricing decree: a step closer to international standards", Vietnam Investment Review, 8 March 2017.

What to do now

Start with a list of every deal with a related party. Note the type, the value and the pricing basis. Next, check each deal against the arm's length idea. Then gather your contracts and prepare the forms for your next tax return.

Talk to a tax adviser early if the sums are large. The rules are new, so get advice before you file. Treat this as a general guide. A transfer pricing specialist can check how it fits your own group and deals.

Sources

Government of Vietnam, Decree 20/2017/ND-CP on tax administration for enterprises having related-party transactions, 24 February 2017.