| GOVERMENT | SOCIAL REPUBLIC OF VIETNAM Independence - Freedom - Happiness |
| Number: 20 / 2017 / ND-CP | Hanoi, date 24 month 02 year 2017 |
DECREE
REGULATIONS ON TAX MANAGEMENT FOR ENTERPRISES WITH RELATED PARTY TRANSACTIONS
Pursuant to the Law on Organization of the Government dated April 30, 2013, 19 year of 6;
Based on the Law on Tax Administration dated November 29, 2006; and the Law amending and supplementing a number of articles of the Law on Tax Administration dated November 20, 2012;
Based on the Corporate Income Tax Law dated June 3, 2008; and the Law amending and supplementing a number of articles of the Corporate Income Tax Law dated June 19, 2013;
Based on the Law amending and supplementing a number of articles of the Laws on taxation dated November 26, 2014;
Based on the Investment Law dated November 26, 2014;
Based on the Enterprise Law dated November 26, 2014;
Based on the Accounting Law dated November 20, 2015;
At the proposal of the Minister of Finance;
The government has issued a Decree regulating tax management for enterprises with related-party transactions.
Chapter I
GENERAL RULES
Article 1. Scope
1. This Decree stipulates the principles, methods, procedures, and steps for determining transfer pricing; the obligations of taxpayers in declaring and determining the price of related-party transactions and in declaring and paying taxes; and the responsibilities of state agencies in managing, inspecting, and auditing taxes for taxpayers with related-party transactions.
2. Related-party transactions subject to this Decree are transactions arising from the business activities of taxpayers with related-party relationships as stipulated in Article 5 of this Decree, excluding business transactions involving goods and services subject to state price regulation, which are governed by the law on pricing.
Article 2. Subject of application
1. Organizations producing and trading goods and services (hereinafter referred to as taxpayers) are subject to corporate income tax under the declaration method and have transactions with related parties as stipulated in Article 5 of this Decree.
2. Tax authorities include the General Department of Taxation, the Provincial Tax Department, and the District Tax Office.
3. Other state agencies, organizations, and individuals involved in the application of regulations on price management of related-party transactions, including the tax authorities of countries and territories that have valid tax agreements with Vietnam.
Article 3. Principles of Application
1. Taxpayers with related-party transactions must declare these transactions; excluding factors that reduce tax liability due to the influence or impact of the related-party relationship, in order to determine that the tax liability for related-party transactions is equivalent to that of independent transactions under the same conditions.
2. The tax authorities shall manage, inspect, and audit the related-party transaction prices of taxpayers according to the arm's length principle and the substantive principle (substance over form) to disallow related-party transactions that reduce the enterprise's tax obligations to the state budget and adjust related-party transaction prices to determine the correct tax obligations as stipulated in this Decree.
3. The arm's-length principle is applied in accordance with the principle of transactions between independent parties with no related party relationship as stipulated in the tax agreements in force in Vietnam.
Article 4. Explain words
1. "Tax Agreement" is an abbreviated term for the Agreement on the Avoidance of Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income Signed between Vietnam and other countries and territories, and the Agreement amending and supplementing existing agreements in force in Vietnam.
2. “Partner tax authority” refers to the tax authority of a country or territory that has signed a tax agreement with Vietnam.
3. "Related-party transactions" are transactions arising between related parties in the production and business process, including: Buying, selling, exchanging, leasing, renting, borrowing, lending, transferring, assigning machinery, equipment, goods, and providing services; borrowing, lending, financial services, financial guarantees, and other financial instruments; buying, selling, exchanging, leasing, renting, borrowing, lending, transferring, assigning tangible and intangible assets, and agreements to share resources such as synergy, cooperation in exploiting and using human resources; and sharing costs between related parties.
4. "Independent transaction" refers to a transaction between parties that are not related.
5. “Independent comparable entities” are independent transactions or businesses conducting independent transactions selected based on comparative analysis, identifying comparable entities to determine prices; profit margins; and profit allocation ratios in order to determine the tax obligations payable to the state budget by taxpayers, ensuring compliance with the Law on Tax Administration and the Law on Corporate Income Tax.
6. “Material difference” refers to a difference in information or data that has a significant or substantial impact on the price; the rate of return and the allocation of profit among the parties involved in the transaction.
7. "Tax Authority Database" refers to information and data built and managed by the Tax Authority in accordance with the Law on Tax Administration, related to determining the tax obligations of taxpayers, collected, analyzed, stored, updated, and managed by the Tax Authority from various sources, including databases and information exchanged with tax authorities and competent authorities abroad.
8. The principle of "Substance over Form" is a principle aimed at analyzing the business activities of taxpayers to determine the nature of related-party transactions as a basis for comparison with equivalent independent transactions. This ensures that related-party transactions accurately reflect the commercial, economic, and financial nature of transactions conducted between unrelated parties, preventing these related-party relationships from influencing or distorting the taxpayer's tax obligations to the state budget. This principle is based on data and the actual execution of transactions between related parties, comparing them with independent transactions under similar conditions, regardless of the form of the transaction as expressed in contracts or documents between related parties. Determining the nature of the economic, financial, and commercial relationship of a related-party transaction is done through comparison and contrast with independent transactions under similar conditions.
9. “Independent transaction value range” is a set of values regarding price levels; profit margins or profit allocation ratios of independent comparable entities selected by the Tax Authority and taxpayers based on the data stipulated in Article 9 of this Decree. The values in this set have equivalent levels of comparable reliability. If necessary, statistical probability methods may be applied to determine the standard independent transaction value range and the representative, universal, and common middle value to increase the reliability of the set of independent comparable entities.
10. “Ultimate Parent Company” is a term used to refer to a legal entity that has direct or indirect equity ownership in other legal entities of a multinational corporation and is not owned by any other legal entity. The consolidated financial statements of the Ultimate Parent Company of the corporation are not consolidated into any financial statements of any other legal entity globally.
Chapter II
DETAILED REGULATIONS
Article 5. Related Parties
1. Related parties (hereinafter referred to as "related parties") are parties that have a relationship falling under one of the following categories:
a) One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party;
b) The parties are directly or indirectly subject to the management, control, capital contribution, or investment of another party.
2. The affiliated parties referred to in Clause 1 of this Article are specifically defined as follows:
a) One business directly or indirectly holds at least 25% of the owner's equity of the other business;
b) Both businesses have at least 25% of their owner's equity held directly or indirectly by a third party;
c) One enterprise is the largest shareholder in terms of owner's equity of the other enterprise, holding directly or indirectly at least 10% of the total shares of the other enterprise;
d) An enterprise guarantees or lends capital to another enterprise in any form (including third-party loans secured by related-party financing and similar financial transactions) provided that the loan amount is at least 25% of the owner's equity of the borrowing enterprise and accounts for more than 50% of the total value of the borrowing enterprise's medium and long-term debts;
d) An enterprise designates a member of the executive board or controlling entity of another enterprise, provided that the number of members designated by the first enterprise accounts for more than 50% of the total number of members of the executive board or controlling entity of the second enterprise; or a member designated by the first enterprise has the right to decide on the financial or operational policies of the second enterprise;
e) Two businesses have more than 50% of their board members or have a board member with the authority to decide on financial or business policies designated by a third party;
g) Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse, biological father, adoptive father, biological mother, adoptive mother, biological child, adopted child, biological brother, biological sister, biological sibling, brother-in-law, sister-in-law, daughter-in-law, paternal grandfather, paternal grandmother, grandchild, maternal grandfather, maternal grandmother, grandchild, aunt, uncle, cousin, and niece/nephew;
h) Two business establishments have a head office and permanent establishment relationship, or both are permanent establishments of a foreign organization or individual;
i) One or more businesses are controlled by an individual through that individual's capital contribution to the business or direct participation in the business's management;
k) Other cases in which one enterprise is subject to the actual management and control of another enterprise regarding its production and business activities.
Article 6. Comparative analysis, selection of independent comparable entities for comparison, and determination of transfer pricing.
1. The principle of comparative analysis with independent transactions and the principle of substance over form are used to determine whether related-party transactions are similar in nature to independent comparable entities.
a) The nature of the transaction is compared between the legal contract or written agreement between the related parties and the actual implementation by those parties. In cases where a taxpayer engages in related-party transactions but there is no written agreement, or the agreement is inconsistent with the arm's length principle, or the actual transaction is inconsistent with the arm's length principle between unrelated parties, the related-party transaction must be determined according to the true nature of the business between the independent parties, specifically: The related party receiving revenue and profit from the related-party transaction with the taxpayer must have ownership and control over the business risks of the assets, goods, services, resources, rights to generate economic benefits, and rights to generate income from shares, stocks, and other financial instruments; and the taxpayer incurring costs from the transaction with the related party must receive direct economic benefits or contribute to the revenue and added value of the taxpayer's production and business activities in accordance with the arm's length principle.
b) The nature of the transaction is determined by the method of collecting information, evidence, and data about the transaction and the risks of related parties in their actual business operations.
2. Comparative analysis must ensure similarity between independent comparable entities and related-party transactions, with no material differences affecting the price; profit margin or profit allocation ratio between parties. If there are material differences affecting the price; profit margin or profit allocation ratio, the material differences must be analyzed, identified, and adjusted to eliminate them according to the comparative factors specified in Clause 3 of this Article and in accordance with each method of determining the price of related-party transactions as prescribed in Article 7 of this Decree.
Comparative analysis seeks to find independent and similar objects to compare:
a) The selection of internal, independent comparable entities is based on transactions between the taxpayer and unrelated parties, ensuring similarity without material differences affecting the price; profit margin or profit allocation ratio between the parties. If there are no similar internal, independent comparable entities, the selection of comparable entities shall be carried out according to points b and c of Clause 3, Article 9 of this Decree. Comparison between related-party and independent transactions shall be conducted on a transaction-by-transaction basis for each similar product. If a product-based comparison is not possible, the grouping of transactions must ensure consistency with the nature and business practices, and the application of the pricing method for related-party transactions shall be carried out in accordance with the provisions of Article 7 of this Decree;
b) The financial data of comparable entities must be reliable for use in tax declaration and calculation purposes, in accordance with accounting, statistical, and tax regulations. The transaction time of independent comparable entities must coincide with the transaction time of related-party transactions or have the same fiscal year as the taxpayer, except in specific cases where an extension of the comparison period is necessary as stipulated in point d of this clause. The data format must ensure that prices at the time of the transaction or within the same tax period can be compared and calculated; comparative data on profit margins or profit allocation ratios must cover at least three consecutive tax periods. For relative ratios and ratios, taxpayers shall round the numbers to the second decimal place. If the relative numbers are taken from published data without accompanying absolute numbers and this rounding principle is not used, the published data with source citation shall be used;
c) The minimum number of independent comparable entities selected after comparative analysis and adjustment for material differences is as follows: One entity in the case of related-party transactions or taxpayers conducting related-party transactions and the independent comparable entity has no differences; three entities in the case where the independent comparable entity has differences but there is sufficient information and data to exclude all material differences; and five or more entities in the case where there is only information and data to exclude most material differences of the independent comparable entity;
In cases where the selected comparable entities do not have equivalent reliability, apply statistical probability methods to determine the standard independent transaction value range and select the middle value of the set to adjust and redefine the price, profit margin, or profit allocation ratio of the taxpayer according to the transfer pricing methods stipulated in Article 7 of this Decree;
d) For unique or specific related-party transactions where no independent comparable entities can be found, the scope of comparative analysis should be expanded to include the industry, geographical market, and time period to find independent comparable entities. This expansion of the comparative analysis is carried out as follows: Select independent comparable entities within the economic sector that have the highest degree of similarity to the taxpayer's business sector in the same geographical market; expand the geographical market to countries in the region with similar industry conditions and levels of economic development.
In cases where the scope of analysis is expanded to include independent comparable entities in other geographical markets, qualitative and quantitative analysis of similarities and significant differences must be conducted in accordance with point e of this clause and clause 2 of Article 7 of this Decree; or data from independent comparable entities from the previous fiscal year must be used, and adjustments for significant differences due to time (if any) must be made.
The extended period for collecting data from independent comparable entities shall not exceed one fiscal year compared to the taxpayer's fiscal year if using the pricing method specified in Clause 2, Article 7 of this Decree.
d) Based on the pricing method and the selected independent comparable entities, adjust the price level; the profit margin or profit allocation ratio of the taxpayer to determine the corporate income tax liability of the taxpayer without reducing the tax liability payable to the state budget.
3. Comparative analysis applies methods of comparison, review, and adjustment of material differences to the comparative factors in order to select independent comparable objects.
a) Comparative factors include the product characteristics of goods, services, and assets (hereinafter referred to as product characteristics); operational functions and assets, production and business risks; contract conditions and economic conditions at the time of the transaction;
b) Functional analysis of operations and assets, and production and business risks, must identify the main functions associated with the use of various types of assets, capital, and costs, including cooperation in the exploitation and use of human resources, cost sharing among affiliated parties, and risks from investment in assets and capital, as well as risks associated with the profitability of business transactions. Functional analysis is the basis for determining and reallocating the actual production and business risks of the affiliated parties;
c) Analyzing the specific comparative factors of intangible assets requires reviewing and analyzing the rights that generate economic benefits stipulated in contracts, agreements, and non-contractual relationships that provide economic benefits to the parties. The analysis of intangible assets must be based on ownership rights; potential profits from intangible assets; geographical limitations on the use and exploitation of rights to intangible assets; the life cycle of intangible assets; rights and relationships that generate economic benefits; the role of the franchisee in developing the intangible asset; and the operational functions and ability to control business risks in practice of each affiliated party related to the entire process of developing, increasing, maintaining, protecting, and exploiting the intangible asset.
d) Economic analysis at the time of the transaction must include cost advantages based on geographical location, specialization; market development level and economic conditions of the industry and business sector of the taxpayer;
d) Comparative analysis, excluding material differences, is an analysis that excludes qualitative and quantitative differences in financial information or data that materially affect the basis for determining the transfer pricing of related-party transactions according to each pricing method stipulated in Article 7 of this Decree. The determination of material differences is based on quantitative and qualitative factors, including: Quantitative differences are differences determined by absolute numbers regarding business cycles, years of establishment or operation of the enterprise, or relative numbers such as differences in financial indicators according to the specific investment sector or operational function, differences in working capital; qualitative differences are information determined based on each pricing method.
Information identified as material includes: Differences in product characteristics, contract terms, functions, assets and risks, and business sectors; economic conditions of taxpayers and independent comparable entities; differences in policies, investment environments, and the impact of input costs in different geographical markets.
Quantitative and qualitative differences must be reviewed and adjusted accordingly to the comparative factors that significantly affect the method for determining transfer pricing as stipulated in Article 7 of this Decree.
e) The results of the analysis serve as the basis for selecting independent comparable entities suitable for each method of determining transfer pricing as stipulated in Article 7 of this Decree.
4. The comparative analysis process includes the following steps:
a) Determine the nature of the related-party transaction before conducting a similarity analysis with independent comparable entities;
b) Comparative analysis, searching for and selecting comparable independent entities based on the identified comparison period, product characteristics, and contract conditions; analysis of the industry, market, and economic conditions at the time of the transaction; analysis of related-party transactions and the taxpayers involved in those transactions; data sources; methods for determining related-party transaction prices and adjusting for material differences (if any);
c) Determining the price, profit margin, or profit allocation ratio based on the analysis of independent comparable entities as a basis for comparison and application in determining the corporate income tax liability of taxpayers, without reducing the tax liability payable to the state budget. The calculation method must be applied consistently throughout the production and business cycle and phase, in accordance with the function and business model as stipulated in Article 7 of this Decree.
Article 7. Comparative methods for determining the price of related-party transactions
The comparative method for determining the price of related-party transactions (hereinafter referred to as the related-party transaction pricing method) is applied in accordance with the arm's length principle, the nature of the transaction, and the functions of the taxpayer, based on calculations and consistent application throughout the entire production and business cycle; based on financial data of independent comparable entities selected according to the comparative analysis principles stipulated in Article 6 of this Decree. The method for determining the price of related-party transactions is selected from the methods specified below, based on the characteristics of the related-party transaction, the availability of information and data, and the nature of the pricing method.
The methods for determining transfer pricing are stipulated as follows:
1. Method of comparing transfer pricing with independent transaction pricing (hereinafter referred to as the independent transaction price comparison method):
a) Cases where the independent transaction price comparison method applies include: Taxpayers conducting related-party transactions for each type of goods, tangible assets, or service with common market conditions or prices published on domestic and international commodity and service exchanges; transactions for royalty payments when exploiting intangible assets; interest payments in lending and borrowing activities; or taxpayers conducting both independent and related-party transactions for products similar in product characteristics and contract conditions;
b) The method of comparing prices of independent transactions is carried out on the principle that there are no material differences in product characteristics and contract conditions when comparing independent transaction prices and related-party transaction prices that significantly affect the product price. If there are material differences affecting the product price, these material differences must be excluded.
The following factors significantly impact product prices: product characteristics, quality, brand, trademarks, and transaction volume; contract conditions for product supply and delivery: quantity, delivery time, payment terms, and other contract conditions; distribution and consumption rights of goods, services, and assets affecting the economic value and market where the transaction takes place; and other factors affecting product prices, such as the economic conditions and operational functions of the taxpayer.
c) Method of determination: The price of products in related-party transactions is adjusted according to the price of products in independent transactions or the value within the standard independent transaction price range of independent comparable entities as stipulated in this Decree.
In cases where product prices are published on domestic and international commodity and service exchanges, the product price in related-party transactions shall be determined according to the published product price at the time and under similar transaction conditions.
Taxpayers purchasing machinery and equipment from affiliated parties abroad must have documents proving that the purchase price of the machinery and equipment adheres to the arm's length principle at the time of purchase: For new machinery and equipment, the comparable price is the invoice price that the affiliated party purchased the machinery and equipment from an independent party; for used machinery and equipment, original invoices and documents at the time of purchase are required, in which case the asset value is reassessed according to current legal regulations on the management, use, and depreciation of fixed assets.
d) The results of determining transfer pricing are the taxable prices used for declaring and determining the amount of corporate income tax payable, but do not reduce the taxpayer's tax liability to the state budget.
2. Method of comparing the taxpayer's profit margin with the profit margin of independent comparable entities:
a) Cases where the method of comparing the taxpayer's profit margin with the profit margin of independent comparable entities applies include: the taxpayer lacks the database and information to apply the method of comparing independent transaction prices as stipulated in Clause 1 of this Article; or the taxpayer cannot compare transactions by product on a transaction-by-transaction basis for each similar product; the grouping of transactions is carried out to ensure consistency with the nature and business practices and to select appropriate profit margins of independent comparable entities; or the taxpayer does not perform autonomous functions over the entire production and business chain or does not participate in the implementation of comprehensive and specific related-party transactions as stipulated in Clause 3 of this Article;
b) Principle of application: The comparative profit margin method is applied on the principle that there are no material differences in operational functions, assets, risks, economic conditions, and accounting methods when comparing taxpayers and independent comparable entities that significantly affect the profit margin. If there are material differences affecting the profit margin, these material differences must be eliminated.
Functional factors, assets, business risks, and economic conditions have a significant impact on profit margins, including: factors related to assets, capital, and costs; actual control and decision-making power serving the taxpayer's main function; the nature of the business and the production and consumption market; accounting methods and cost structure of products; and the economic conditions under which transactions take place.
Other influencing factors are determined based on the practical implementation between the related parties, including the commercial or financial relationships of the multinational corporation; technical support; sharing of business know-how; use of seconded or dual-role personnel; and the economic conditions of the industry or business sector of the taxpayer. Other comparable factors include product characteristics and contract terms.
Taxpayers engaged in business with simple functions, lacking strategic decision-making capabilities, and generating low value-added transactions, including manufacturing or distribution businesses that do not face inventory risks, market risks, and do not generate revenue or expenses from the exploitation of intangible assets, are not liable for losses arising from these risks in their business operations.
c) Method of determination: The comparative profit margin method uses the gross or net profit margin of selected independent comparable entities to determine the corresponding gross or net profit margin of the taxpayer. The selection of profit margins, including gross and net profit margins calculated on revenue, expenses, or assets, depends on the nature and economic conditions of the transaction; the function of the taxpayer; and the accounting methods of the parties. The basis for determining the profit margin, including revenue, expenses, or assets, is the accounting data of the taxpayer not controlled by the related parties, which determines the transfer pricing of related-party transactions.
– Method of comparing gross profit margin on revenue (resale price method):
The purchase price of goods, services, and assets (cost of goods sold) from related parties equals (=) the selling price (net revenue) of the goods, services, and assets resold to independent parties minus (-) the gross profit on the selling price (net revenue) of the taxpayer minus (-) other costs included in the purchase price: import tax; customs fees; insurance costs, international transportation costs (if any).
The gross profit margin on the selling price (net revenue) of the taxpayer is determined from independent comparable entities by (=) the selling price (net revenue) of the taxpayer multiplied (x) by the gross profit margin on the selling price (net revenue) of the selected independent comparable entities.
The gross profit margin on selling price (net revenue) of selected independent comparable entities is the midpoint within the standard independent transaction range of the gross profit margin on selling price (net revenue) of selected independent comparable entities, adjusted to conform with the principles stipulated in this Decree.
The purchase price from related parties (or cost of goods sold) is adjusted against an independent comparable entity to determine the taxable price, the declared expense, and the tax liability of the taxpayer.
– Method of comparing gross profit margin to cost of goods sold (cost-plus method):
The selling price or net revenue of goods, services, and assets sold to related parties is determined by (=) the cost of goods, services, and assets purchased from independent parties plus (+) the gross profit on the cost of goods sold for the taxpayer.
The gross profit margin on cost of goods sold of the taxpayer is determined from independent comparable entities by (=) the taxpayer's cost of goods sold multiplied by (x) the gross profit margin on cost of goods sold of the selected independent comparable entities.
The gross profit margin on cost of goods sold of selected independent comparable entities is the midpoint within the standard independent transaction range of the gross profit margin on cost of goods sold of selected independent comparable entities, adjusted to conform with the principles stipulated in this Decree.
The selling price to related parties (or net revenue) adjusted against an independent comparable entity is the price used for tax calculation, expense declaration, and determining the corporate income tax liability of the taxpayer.
– Method of comparing net profit margins:
The net profit margin before deducting interest expenses and corporate income tax on revenue, expenses, or assets of the taxpayer engaging in related-party transactions is adjusted according to the net profit margin before deducting interest expenses on revenue, expenses, or assets of selected independent comparable entities. Based on this adjustment, the taxpayer's tax liability is determined.
Net profit excludes the difference between revenue and expenses from financial activities.
The chosen net profit margin is the middle value within the standard independent trading range of the net profit margins of the selected independent comparable entities used to adjust and determine the taxable income and tax liability of the taxpayer in accordance with the principles stipulated in this Decree.
The net profit margin (before deducting interest and corporate income tax) is determined according to the regulations of the law on accounting, tax administration, and corporate income tax.
3. Method of profit distribution among affiliated parties:
a) Cases where the method of allocating profits of related parties applies include: taxpayers participating in comprehensive, specific, unique, and closed-loop related-party transactions within the group; activities related to new product development, the use of proprietary technology; participation in the group's proprietary value chain; or the development, enhancement, maintenance, protection, and exploitation of proprietary intangible assets, where there is no basis for determining the price between related parties; or closely related transactions, carried out simultaneously; complex financial transactions involving multiple financial markets worldwide; or taxpayers participating in digital economic related-party transactions, where there is no basis for determining the price between related parties; or participating in the creation of added value derived from synergies within the group; or taxpayers performing autonomous functions over the entire production and business process and not subject to the provisions of Clauses 1 and 2 of this Article;
b) Principles of application: The profit allocation method is a method of allocating the total profit of related-party transactions to determine the taxpayer's profit. The profit allocation method is applied to: The total actual and potential profit of related-party transactions specified in point a of this clause, determined by financial data based on reasonable and valid documents; the value and profit of related-party transactions must be determined using the same accounting method throughout the entire period of application of the profit allocation method;
c) Method of determination: The adjusted profit of the taxpayer is allocated to the total profit of the related-party transaction, including the actual and potential profits that the parties involved in the related-party transaction could have earned.
The adjusted profit of the taxpayer is the sum of basic profit and excess profit. Basic profit is determined using the profit comparison method stipulated in Clause 2 of this Article. Excess profit is determined according to an allocation ratio based on one or more factors such as revenue, expenses, assets, or human resources of the related parties involved in the transaction and in accordance with the arm's length principle.
In cases where there is insufficient information or data to allocate profits as adjusted according to the above regulations, allocation may be based on one or more factors such as revenue, expenses, assets, or personnel of the related parties involved in the transaction, in accordance with the arm's-length principle.
d) The adjusted profit of the taxpayer is the basis for determining taxable income and the amount of corporate income tax payable, but it does not reduce the taxpayer's obligation to pay taxes to the state budget.
Article 8. Determining expenses for tax calculation in certain specific cases for enterprises with particular related-party transactions.
1. Related-party transactions that are inconsistent with the nature of independent transactions or do not contribute to generating revenue or income for the taxpayer's production and business activities are not deductible as taxable expenses in the period, including:
a) Expenses paid to related parties that do not carry out any production or business activities related to the taxpayer's industry or business activities;
b) Payments made to related parties engaged in production and business activities, but whose asset size, number of employees, and production and business functions are not commensurate with the value of the transactions received by the related party from the taxpayer;
c) Payments made to related parties who have no rights or responsibilities related to the assets, goods, or services provided to the taxpayer;
d) Expenses paid to related parties who are residents of a country or territory not subject to corporate income tax, and which do not contribute to generating revenue or added value for the taxpayer's production and business activities.
2. Transactions involving the provision of services between affiliated parties:
a) Except for the expenses specified in point b of this clause, taxpayers may deduct service fees from their taxable expenses in the period if the following conditions are met: The services provided have commercial, financial, and economic value and directly serve the taxpayer's production and business activities; services from related parties are only determined to have been provided under similar circumstances as those paid for by independent parties; service fees are paid on the basis of the arm's length principle, and the method of calculating transfer pricing or allocating service fees among related parties must be applied uniformly throughout the group for similar types of services; and the taxpayer must provide contracts, documents, invoices, and information on the calculation method, allocation factors, and pricing policy of the group for the services provided.
In cases involving centers performing specialized functions and synergistically creating added value for the group, taxpayers must determine the total value generated from these functions, and determine the appropriate profit allocation based on the value contributed by the affiliated parties after deducting (-) the corresponding service fees for the affiliated party performing the coordination and service provision functions of independent transactions of a similar nature.
b) Service expenses that are not deductible when determining taxable income include: expenses arising from services provided solely for the benefit or value creation of other related parties; services serving the interests of the related party's shareholders; duplicate fees charged by multiple related parties for the same type of service, where the added value for the taxpayer cannot be determined; services that are essentially benefits received by the taxpayer as a member of a group; and additional costs that the related party adds to services provided by a third party through the related party's intermediary, which do not contribute additional value to the service.
3. The total interest expense incurred during the period by the taxpayer that is deductible when determining taxable income for corporate income tax purposes shall not exceed 20% of the total net profit from business operations plus interest expense and depreciation expense for the period of the taxpayer.
This regulation does not apply to taxpayers who are subject to the Law on Credit Institutions and the Law on Insurance Business.
Taxpayers declare the ratio of interest expense in the tax period using Form No. 01 in the Appendix attached to this Decree.
Article 9. Databases used in declaring, determining, and managing transfer pricing.
1. The databases used in declaring and determining transfer pricing by taxpayers include:
a) Databases provided by information business organizations, including financial information and business data collected by these organizations from public information sources and stored, updated, managed, and used by these organizations (hereinafter referred to as commercial databases);
b) Data and information of businesses are publicly disclosed on the stock market;
c) Information and data published on domestic and international commodity and service exchanges;
d) Information publicly released by domestic ministries and agencies or other official sources.
2. The databases used by the Tax Authority in managing transfer pricing include:
a) The database specified in Clause 1 of this Article;
b) Information and data exchanged with partner tax authorities;
c) Information provided to the Tax Authority by domestic ministries and agencies;
d) The tax authority's database.
The tax authority's database is used in risk management and transfer pricing assessment for cases violating the provisions of Clause 3, Article 12 of this Decree.
3. Analyze the selection of independent comparable entities for analysis, determining independent transaction ranges in accordance with the principles of comparative analysis and the methods for determining transfer pricing stipulated in this Decree, in the following order of priority for selecting comparable data:
a) Internal comparable entities of the taxpayer;
b) The comparable entity resides in the same country or territory as the taxpayer;
c) Target groups in countries within the region with similar industry conditions and levels of economic development.
In cases where foreign comparable entities are selected in different geographical markets, qualitative and quantitative analyses of similarities and significant differences must be conducted in accordance with the provisions of point e, clause 3, Article 6 and clause 2, Article 7 of this Decree.
Article 10. Rights and obligations of taxpayers in declaring and determining transfer pricing.
1. Taxpayers with related-party transactions falling within the scope of this Decree have the rights as prescribed by the Law on Tax Administration.
2. Taxpayers with related-party transactions falling within the scope of this Decree are responsible for declaring and determining the transfer pricing, without reducing their corporate income tax liability in Vietnam as stipulated in this Decree.
Taxpayers are responsible for providing proof of their choice of pricing method as stipulated in this Decree when requested by the competent authority.
3. Taxpayers with related-party transactions falling within the scope of this Decree are responsible for declaring information on related-party relationships and related-party transactions using Form No. 01 in the Appendix attached to this Decree and submitting it together with the Corporate Income Tax Return.
4. Taxpayers are responsible for retaining and providing Transfer Pricing Documentation, including:
a) National dossier in accordance with Form No. 02 in the Appendix issued with this Decree;
b) Global corporate information profile according to Form No. 03 in the Appendix issued with this Decree;
c) Report on the country-by-country profit of the ultimate parent company according to Form No. 04 in the Appendix issued with this Decree.
In cases where the taxpayer is the ultimate parent company in Vietnam with consolidated global revenue of 18 trillion VND or more during the tax period, it is responsible for preparing the Country-by-Country Report in the Transfer Pricing Documentation Form No. 04 in the Appendix attached to this Decree.
In cases where the taxpayer has a parent company located abroad, the taxpayer is responsible for providing a copy of the parent company's Country-by-Country Report if the parent company is required to submit this report to the tax authority of the host country, using the declaration form provided by the tax authority of the host country or the declaration form No. 04 in the Appendix attached to this Decree. If the taxpayer is unable to provide the Country-by-Country Report, the taxpayer must provide a written explanation of the reasons, legal basis, and specific legal provisions of the partner country that prohibit the taxpayer from providing the Country-by-Country Report.
5. Transfer pricing documentation must be prepared before the annual corporate income tax return filing deadline and must be retained and presented upon request from the Tax Authority. When the Tax Authority conducts an audit or inspection of the taxpayer, the deadline for providing transfer pricing documentation shall not exceed 15 working days from the date of receiving the request for information.
The taxpayer must provide the tax authorities with the relevant documents and information regarding transfer pricing, as required by tax management laws. The data, documents, and materials used as the basis for comparative analysis and transfer pricing must clearly state their origin. If the data from independent comparable entities is accounting data, the taxpayer is responsible for storing and providing it to the tax authorities in soft copy, in spreadsheet format.
6. Taxpayers are responsible for providing complete and accurate information and documents in the Transfer Pricing Documentation File, and are legally liable for this information and documentation when requested by the Tax Authority during the consultation process prior to inspection or audit as stipulated in Article 12 of this Decree. The deadline for providing the Transfer Pricing Documentation File is no more than 30 working days from the date of receiving the request from the Tax Authority. In cases where the taxpayer has a legitimate reason, the deadline for providing the Transfer Pricing Documentation File may be extended once for no more than 15 working days from the expiration date.
7. Independent consulting, auditing, or tax-related business firms acting as tax representatives for taxpayers in preparing transfer pricing documentation are responsible for complying with tax management laws for related-party enterprises as stipulated in this Decree and are liable under the law as prescribed.
8. The Ministry of Finance shall provide specific guidance on the information content for preparing Forms No. 01, No. 02, No. 03, and No. 04 in the Appendix attached to this Decree.
Article 11. Cases where taxpayers are exempt from declaring and preparing transfer pricing documentation.
1. Taxpayers are exempt from declaring transfer pricing in sections III and IV of Form No. 01 in the Appendix attached to this Decree if the transactions only occur with related parties that are subject to corporate income tax in Vietnam, apply the same corporate income tax rate as the taxpayer, and neither party enjoys corporate income tax incentives during the tax period, but must declare the basis for the exemption in sections I and II of Form No. 01 in the Appendix attached to this Decree.
2. Taxpayers are responsible for declaring and determining transfer pricing using Form No. 01 in the Appendix attached to this Decree, but are exempt from preparing the Transfer Pricing Documentation in the following cases:
a) Taxpayers who have related-party transactions but whose total revenue for the tax period is less than VND 50 billion and whose total value of all related-party transactions during the tax period is less than VND 30 billion;
b) Taxpayers who have signed a Pre-Agreement on Pricing Methods shall submit an Annual Report in accordance with the law on Pre-Agreements on Pricing Methods. For related-party transactions not covered by the Pre-Agreement on Pricing Methods, the taxpayer is responsible for declaring and determining the price of the related-party transaction in accordance with Article 10 of this Decree;
c) Taxpayers conducting business with simple functions, not generating revenue or expenses from the exploitation or use of intangible assets, with revenue under VND 200 billion, shall apply the net profit margin before interest and corporate income tax on revenue, including the following sectors:
– Distribution: 5% or more;
– Production: 10% or more;
– Processing: 15% or more.
If the taxpayer does not apply the net profit margin rate specified in this section, they must prepare a Transfer Pricing Documentation file in accordance with regulations.
Article 12. Responsibilities and powers of the Tax Authority in managing transfer pricing.
1. Apply risk management in tax administration regarding transfer pricing in accordance with tax laws.
2. The tax authorities shall base their tax assessment on the principles of comparative analysis, the principles and methods for determining transfer pricing as stipulated in this Decree, and the tax declaration information of enterprises with related-party transactions, in the following cases:
a) In cases where the enterprise fully complies with accounting, invoicing, and documentation regulations: The determination of revenue, expenses, or taxable income to determine tax obligations shall be carried out according to the principles of comparative analysis, the method of determining transfer pricing, and the database used in managing transfer pricing as stipulated in this Decree;
b) Other cases: Tax assessment based on the tax authority's database in accordance with regulations on tax assessment for businesses that have not fully complied with accounting, invoicing, and documentation regulations, or regulations on handling tax violations.
3. The tax authority has the right to determine the price; profit margin; profit allocation ratio used for tax declaration and calculation, to determine taxable income or the amount of corporate income tax payable for taxpayers with related-party transactions during the tax period, based on information, data, and analysis by the tax authority, in cases where the taxpayer commits the following violations of the law on determining related-party transaction prices:
a) Taxpayers who fail to declare, declare incomplete information, or fail to submit Form No. 01 in the Appendix issued with this Decree;
b) The taxpayer provides incomplete information in the Transfer Pricing Documentation as prescribed in Form No. 02 and Form No. 03 in the Appendix issued with this Decree, or fails to present the Transfer Pricing Documentation and the data, documents, and materials used as the basis for comparative analysis and price determination in the Transfer Pricing Documentation as requested by the Tax Authority within the time limit prescribed in this Decree;
c) The taxpayer uses inaccurate or untrue information about independent transactions to analyze, compare, declare, and determine the transfer pricing of related-party transactions, or relies on illegal, invalid, or unverified documents, data, and records to determine the price, profit margin, or profit allocation ratio applicable to related-party transactions;
d) The taxpayer has violated the regulations on determining transfer pricing as stipulated in Article 11 of this Decree.
4. The tax authorities are responsible for maintaining the confidentiality of information provided by taxpayers related to the determination of transfer pricing as stipulated in this Decree. The provision of information to other agencies and organizations shall comply with the provisions of Clause 5 of this Article.
5. In cases where inspections and audits reveal discrepancies in the mechanisms and policies related to related industries and specialized fields, the Tax Authority shall seek opinions from relevant agencies, organizations, and individuals, specifically:
a) Specialized management agencies, specialized organizations and associations;
b) The tax authorities are responsible for providing records, information, and documents related to the determination of related-party transaction prices to the specialized agencies and organizations consulted. The agencies and units consulted are responsible for maintaining the confidentiality of information in accordance with the law.
6. The tax authority exchanges information with taxpayers and partner tax authorities through pre-audit, during-audit, and post-audit procedures for transfer pricing as follows:
a) In cases where, through the application of risk management in tax administration regarding transfer pricing, the Tax Authority deems it necessary to exchange information in advance with the taxpayer regarding Form No. 01 in the Appendix attached to this Decree and the taxpayer's transfer pricing documentation, the Tax Authority shall send a letter requesting consultation with the taxpayer to exchange and provide information in advance on the taxpayer's transfer pricing documentation as prescribed in this Decree;
b) In cases where the Tax Authority needs to contact and exchange information with the partner Tax Authority regarding the Country-by-Country Profit Reporting and other related information, this shall be done in accordance with the provisions on bilateral agreement procedures and information exchange in the relevant tax agreement. If necessary, the Tax Authority shall notify the taxpayer in writing of the temporary suspension of the inspection or audit to conduct information exchange with the partner Tax Authority in accordance with tax laws;
c) The tax authorities are responsible for facilitating taxpayers in providing proof and explanations regarding the data and figures of independent comparable entities used in the Transfer Pricing Documentation.
7. In cases where the Tax Authority signs a Pre-Agreement on the method of price determination with the taxpayer, the Tax Authority is responsible for:
a) To manage, inspect, and audit related-party transactions that are not within the scope of the Advance Pricing Agreement based on risk management principles.
b) Managing, inspecting, and auditing compliance with the Advance Pricing Agreement by taxpayers as stipulated.
Article 13. Responsibilities of ministries, ministerial-level agencies and People's Committees of provinces and centrally-administered cities
1. Ministry of Finance:
a) Be responsible for implementing state management of transfer pricing in accordance with the provisions of this Decree;
b) To chair and coordinate with the Ministry of Information and Communications in carrying out information and communication work on state management of transfer pricing;
c) Conduct inspections and audits of the implementation of regulations on transfer pricing as stipulated in this Decree.
2. State Bank of Vietnam
Coordinate the provision of information and data on foreign loans and debt repayments of specific enterprises with related-party transactions based on the list requested by the Tax Authority, including data on loan amount, interest rate, interest payment period, principal repayment period, actual capital withdrawal, debt repayment (principal and interest), and other relevant information (if any).
3. Ministry of Planning and Investment
Coordinate the provision of business registration data for enterprises; databases on investment capital structure at the time of licensing and at times of adjustment or amendment of investment certificates, business registration certificates, and related information for investment projects when tax authorities conduct inspections and audits to determine signs of transfer pricing to evade taxes, as requested by the Tax Authority.
4. The Ministry of Science and Technology and the Ministry of Agriculture and Rural Development, within their respective duties and powers, are responsible for...
Coordinate the provision of databases related to technology transfer contracts; industrial property rights transfer contracts; plant variety rights transfer contracts; intellectual property registration records after industrial property rights and plant variety rights have been established; and provide information to the Tax Authority for tax management purposes related to related-party transactions when requested.
5. Ministry of Information and Communications
Coordinate the provision of databases on businesses licensed to operate in the sectors under management and information on related-party transactions in the digital economy sector, as requested by the Ministry of Finance.
6. Ministry of Industry and Trade
Coordinate the provision of databases on the transaction prices of commodities on domestic commodity exchanges and information within the functions and responsibilities under the management of the Ministry of Industry and Trade, as required by the Tax Authority for managing related-party transaction prices.
7. People's Committees of provinces and centrally-administered cities
Direct the Department of Planning and Investment, the Department of Finance, and other departments and agencies to build databases within their respective specialized management fields to serve the management of related-party transaction prices.
Chapter III
TERMS ENFORCEMENT
Article 14. Enforcement
This Decree takes effect from May 1, 2017.
Article 15. Responsible for implementing
1. The Ministry of Finance shall provide specific guidance on Articles 6 and 7, Clause 8 of Article 10, and Point c of Clause 2 of Article 11; and shall preside over and coordinate with relevant ministries, sectors, and the People's Committees of provinces and centrally-administered cities in implementing this Decree.
2. Ministers, heads of ministerial-level agencies, heads of government agencies, chairpersons of provincial and centrally-administered city People's Committees, and relevant organizations and individuals are responsible for implementing this Decree.