Differences in the interpretation and application of regulations by tax authorities and taxpayers have resulted in a number of controversies, creating a need for certainty among taxpayers in tax audits and proactive tax compliance.

Transfer pricing regulations

    Transfer pricing regulations were first introduced by the Ministry of Finance (MoF) in Circular No 117/2005, defining “arm’s length prices” related party relationship tests, transfer pricing methods, benchmarking standards, mandatory transfer pricing documentation, and the annual filing required of taxpayers. The arm’s length principle was officially legislated in the Tax Administration Law, effective from July 1, 2007. In 2010 MoF issued amended transfer pricing regulations in Circular No 66/2010, which replaced Circular No 117.

    In late December 2013 MoF issued two important new circulars: Circular No 201/2013 providing detailed guidance on Advance Pricing Agreements (APA), and Circular No 205/2013, providing guidance on the application of double tax treaties, including Mutual Agreement Procedures (MAP), to eliminate double taxation in cases of transfer pricing adjustments (adjustments of profits or transfer prices for tax purposes). It is noted that double tax treaties allow competent tax authorities to tax based on the arm’s length principle and MAP where taxpayers, being tax residents of Vietnam or the treaty counter party country, claim that their tax liabilities were not assessed in accordance with the provisions of the relevant double tax treaty.

    Further, given the Organisation for Economic Cooperation and Development (OECD)’s discussion drafts on transfer pricing and country-by-country reporting and a number of actions to counter base erosion and profit shifting (BEPS), international developments have implications for further changes to local transfer pricing regulations, which are scheduled to be revised at another time.

    Implementation of transfer pricing regulations was accelerated after the introduction of the Action Plan on Transfer Pricing Management for the 2012-2015 Period under MoF’s Decision No 1250/2012. A number of transfer pricing audits have been initiated by provincial tax departments in 17 provinces for the fourth quarter of 2013 under the General Department of Taxation (GDT)’s instruction. 

Transfer pricing audits

Key highlights of transfer pricing audits carried out in 2013 include the following.

    Firstly, while the audit programme was targeted at selected garment, textile and footwear companies for the 2006-2012 period, it is said to have been expanded to other companies in these sectors. Audits were carried out in respect of all open tax years that have not been transfer pricing audited since the effective date of the transfer pricing regulations (i.e. since 2006) or the company’s establishment, whichever comes later.

    Overall, the programme was carried out in a rather authoritative manner, which resulted in significant transfer pricing adjustments. The most controversial issue perhaps surrounds benchmarking, which relates to the use of comparables’ data as a basis to reassess profits for tax, and, to some extent, the consideration of economic and commercial factors impacting business profits besides transfer pricing. It should be recalled that there were a number of unfavourable external and domestic economic conditions that adversely affected business profits during the period under audit, stemming from the outbreak of the global financial crisis in late 2007.

    There were no clear procedures for the examination of taxpayers’ documentation. Instead, comprehensive information requests and transfer pricing risk assessment templates were used by tax authorities in the audits. It is noted from the regulations and self-assessment principle under the Tax Administration Law that taxpayers are obliged to maintain contemporaneous transfer pricing documentation as supporting evidence of their arm’s length dealings. Where documentation is adequate, it is understood that the burden of proof on non-arm’s length dealings lies with the tax inspectors.

    Transfer pricing audits under the 2014 tax audit programmes are expected to remain focused on loss-making businesses and expanded to some other business sectors. Comprehensive transfer pricing audit procedures are expected to have been submitted to MoF by the end of May for approval, with a specialised transfer pricing inspection team to be set up by September. This is an essential step in ensuring that transfer pricing regulations are applied fairly and equitably in audits, given the complexity and severity of transfer pricing adjustments in terms of their consequences on corporate income tax liabilities and consequential penalties and interest charges. Under the amended Tax Administration Law effective from July 1, 2013, underpayment penalties were increased to 20 per cent of the shortfall and late payment interest charges were set at 0.05 per cent per day for the first 90 days and 0.07 per cent per day thereafter.

    It is important to note that, in a nutshell, transfer pricing is about allocating profits among the different transacting related parties in a regional or global supply chain. It is integral to the business of any enterprise or economic group. The arm’s length pricing requirement, as specified in Vietnamese and other countries’ transfer pricing regulations, provides guidance for determining a fair share of profits for each party to the related party transactions for tax purposes. Under local regulations and OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines), “arm’s length prices” are defined as those that are negotiated and agreed among related parties as if they were independent of each other.


    Objective benchmarking is fundamental in determining whether transfer prices of related party transactions were arm’s length or not. It is also the measurement based on which tax authorities determine whether taxpayers’ related party pricing was actually in accordance with the arm’s length principle. That said, implementation is challenging due to various factors, including the availability of comparables’ data.

    Secret company data was used by tax authorities for purposes of transfer pricing adjustments in the audits. This is the most controversial issue in the current audits, for example whether secret comparables’ data should only be used for transfer pricing risk assessment and as a last resort (with no benchmarking provided by taxpayers), rather than as a norm for transfer pricing adjustments in the first place. In this regard, transparency between tax authorities and taxpayers on audit procedures and financial data of secret comparables, if they are ever used, is needed. In normal cases, tax authorities should consider benchmarking analyses provided by taxpayers in their transfer pricing documentation and provide their assessment.

    Vietnamese tax authorities have been trying to build a database for transfer pricing management. It is very challenging, especially in a developing country like Vietnam, to obtain adequate information due to the insufficient number of companies in certain sectors and a lack of publicly available data, not to mention the quality of such data. There are a number of external independent database solutions that are used by taxpayer companies and tax authorities in quite a number of countries.

    The OECD released the “Paper on Transfer Pricing Comparability Data and Developing Countries” last March. The Paper sets out and briefly discusses four possible approaches to addressing concerns over the lack of data on comparables expressed by developing countries, including (i) expanding access to data sources for comparables, (ii) more effective use of data sources of comparables, (iii) approaches to identifying arm’s length prices or results without reliance on direct comparables, and (iv) APA and MAP. The Paper draws a distinction between “use for risk evaluation purposes (i.e. identifying a taxpayer for possible audit) and for making a transfer pricing adjustment” and points out that “both the guidelines and the practical manual note that it would be inequitable to make use of secret comparables to make an adjustment unless the data can be disclosed to the affected taxpayers …”. It is important to note that Vietnam is not an OECD member and therefore not bound by the OECD Guidelines. There is no explicit acknowledgement or reference to the OECD Guidelines in the application of Circular No 117 and Circular No 66, although Vietnamese tax authorities appear willing to consider best practice.

So to avoid transfer pricing disputes, what can taxpayers do?

Advance Pricing Agreements (APA)

    An APA is defined in Circular No 201 as “a binding written agreement between the tax authority and taxpayers over a period of time with respect to the determination of basis for tax calculation, transfer pricing method, or prices based on the arm’s length principle, which will be issued before taxpayers submit their tax returns.” An APA can be in the form of a unilateral, bilateral or multilateral agreement between Vietnamese tax authorities, taxpayers and the tax authorities of relevant countries or territories with which Vietnam has a signed tax treaty. Vietnam now has around 70 tax treaties with most of its trading partners. The duration of an APA can be a maximum of five years and is renewable for up to five years. Under APA regulations, a formal APA process takes five steps lasting for around nine months.

    An obvious benefit of APAs is certainty of transfer pricing for taxpayers on the basis that a transfer pricing methodology and arm’s length range of prices or profits are agreed upon in advance with the tax authority, hence eliminating the need for audits and adjustments provided the signed APA is complied with. At this stage, a number of pilot APAs have been discussed with the GDT. Still, no formal APA applications have been submitted as yet but tax administrators are active in preparing resources including capacity building and the acquisition of databases, including the possibility of using external databases.

Closing remarks

    Vietnamese tax authorities have taken several important steps in effecting the transfer pricing system, including building capacity - with support from OECD experts - and conducting some of the first real transfer pricing audits. Still, some important initiatives are needed towards a mature system of transfer pricing management. Given the Action Plan to 2015, where at least 20 per cent of annual tax audits are targeted to include the review of transfer pricing matters, there will be a lot more transfer pricing audits in respect of certain sectors and companies with a perceived high transfer pricing risk, such as garments, footwear and potentially other sectors including steel, electronics, automotive parts, and diversified manufacturing.

    The challenges for tax authorities in carrying out a viable audit programme are to have clear audit procedures, audit capacity, and objective databases. The regulations are planned to be changed to enable effective transfer pricing management and compliance. For taxpayers, albeit new, MAP and APA can now be considered as workable options to resolve transfer pricing controversies, create certainty and mitigate double taxation from transfer pricing. As a minimum, compliance with the transfer pricing regulations, including the arm’s length pricing standards, documentation, and disclosures of transactions, is required.

(*) The views and opinions expressed by the author do not necessarily represent those of KPMG Vietnam.