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- Companies in Vietnam want to make sure full compliance with switch pricing rules as tax authorities are more likely to scrutinize companies to make sure they meet their targets.
- The federal government issued Decree 132 on tax administration for transactions with associated events; the Decree replaces Decree 20 and Decree 68.
- Vietnam Briefing outlines the procedures and compliances vital for international companies to be compliant as per current switch pricing rules.
Many international companies delocalize their manufacturing services in Vietnam and cost their international outposts for administrative, technical, monetary, and industrial companies. Nonetheless, monetary administration groups have to be conscious that their transactions should adjust to the arm’s size and substance-over-form ideas.
Earlier than the federal government launched Offering tax administration relevant to enterprises having managed transactions (‘Decree 20’) in April 2017, adopted by Decree 132/2020/ND-CP (Decree 132) in November 2020, which replaces Decree 20, switch pricing guidelines in Vietnam have been lax. Buyers might enter the market with out worrying an excessive amount of about their switch pricing insurance policies.
Now, firms which might be contemplating an funding into Vietnam, in addition to these firms which might be already working within the nation, must adjust to the stricter regulatory necessities in Decree 132, that are primarily based on OECD tips and BEPS actions.
Key compliance in Vietnam
Switch pricing guidelines are virtually the identical all over the place as they’re typically primarily based on the identical ideas and share frequent approaches. In fact, there are small variations between Vietnam’s guidelines and different international locations, however the core is identical.
Earlier than Decree 20 and Decree 132 have been issued, switch pricing guidelines in Vietnam integrated the arm’s size precept as their basis. Accordingly, the most important influence is the introduction of the substance-over-form precept: international traders ought to overview this when structuring provide chains.
Substance-over-form is a precept by which tax authorities look previous the authorized types of transactions and working buildings, and as a substitute think about and analyze their financial substance.
What it means in follow
International mother or father firms that delocalize their manufacturing services in Vietnam might search to behave solely as a subcontractor, working by way of their Vietnamese subsidiary alone. The international mother or father firm then seeks to cost its subsidiary on a month-to-month foundation for industrial companies carried out in regard to growing gross sales in Vietnam.
In keeping with the substance-over-form precept, these industrial companies ought to contribute to the creation of working gross sales income or revenue for the Vietnamese subsidiary. As a consequence, bills associated to industrial companies should not deductible from the subsidiary’s taxable revenue.
Alternatively, if the identical Vietnamese subsidiary have been engaged in gross sales actions, then those self same industrial service bills would adjust to the substance-over-form precept. Accordingly, the bills might then be deducted if the costs charged have been at arm’s size (or market charge).
Some firms, nonetheless, might search to have interaction in additional difficult relationships. A multinational enterprise might wish to interpose a Vietnamese entity in transactions between two member firms which might be residents of nations, which haven’t signed a double taxation settlement.
In keeping with the substance-over-form precept, related transactions ought to have a major function (except for discount of tax legal responsibility) and an financial impact (except for any tax impact) with a purpose to be accepted by authorities. On this case, no associated bills could be deductible from the Vietnamese entity’s taxable revenue.
Lastly, from a tax planning perspective, it’s value noting that the earlier Decree 20 launched limitations on the deductibility of mortgage curiosity prices, which now – after Decree 132 – mustn’t exceed 20 p.c of earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA). This measure is aimed toward addressing skinny capitalization, as Vietnam lacks particular skinny capitalization guidelines.
How one can adjust to switch pricing rules
Taxpayers in Vietnam which have entered into related-party transactions have numerous obligations beneath Decree 132. These have been summarized and set out beneath:
Varieties
Firms in Vietnam that have interaction in associated social gathering transactions must disclose their relationships and transactions in their annual tax returns.
Taxpayers topic to switch pricing rules must file Kind 01 – which is connected to Decree 132 – to reveal what switch pricing transactions they’ve entered into, and the worth of those contracts. Moreover, taxpayers want to offer what the arm’s-length costs of the related-party transactions could be to allow a comparability.
The timeframe to do that is 90 days after the tip of the monetary 12 months. This will show very difficult given the brief period of time to gather and collate all vital data and knowledge – cautious planning and observance are subsequently prudent.
Contemporaneous documentation
Switch pricing contemporaneous documentation is designed to doc taxpayers’ relationships and transactions with associated events, in addition to their world switch pricing insurance policies and the allocation of earnings amongst all members/entities inside a company group.
Taxpayers assembly particular thresholds should, in accordance with Decree 132, put together, after which keep switch pricing contemporaneous documentation, which encompasses a Native File, and a number of of the Grasp File and Nation-by-Nation Report (CbCR).
It’s doubtless that the Grasp File and CbCR will likely be ready by headquarters, as they’re more likely to have direct entry to all vital data. All these paperwork have to be declared by submitting Kind 02 and Kind 03, connected to Decree 132 (for Native file and Grasp file respectively), and Kind 04 (CbCR).
Protected harbors from contemporaneous documentation
In keeping with Decree 132, enterprises are exempted from making ready the switch pricing documentation if any of the next circumstances are glad:
- Whole income < VND 50 billion (US$2.5 million) and complete income of related-party transactions < VND 30 billion (US$1.5 million);
- Entered into an Superior Pricing Settlement (APA) and submitted annual APA report(s);
- Train solely easy features, gross sales < VND 200 billion (US$10 million) and EBIT, relying on enterprise, of no less than 5 p.c (distribution), 10 p.c (manufacturing), or 15 p.c (toll manufacturing).
Audits
Within the case of switch pricing audits, taxpayers may have 10 working days to offer the switch pricing documentation, whereas they’ll have 30 working days to offer it through the session procedures previous to the audit.
Threat/Penalties
If the tax authorities consider the transaction was not priced in keeping with the arms’ size precept, they’ll alter the worth of the transaction and impose tax accordingly. Moreover, in keeping with the substance-over-form precept, prices arising from companies rendered for the only function of offering different associates with advantages or values won’t qualify for a deduction from taxable revenue.
Firms can be held criminally liable if discovered to be evading tax. The tax authorities additionally publish the main points of firms which might be non-compliant, or report irregularities, on their nationwide and provincial web sites – a important reputational threat.
Managing threat
In gentle of the current developments in native switch pricing guidelines and the growing curiosity on switch pricing worldwide, it can be crucial that firms take the mandatory steps to make sure that they’re compliant and successfully managing their threat. There are a number of measures that firms can take. These embrace:
- Offering disclosures: All firms ought to disclose details about their related-party relationships and transactions within the prescribed types and in accordance with the requisite timeframes.
- Threat assessments: Conducting threat assessments to observe and revise intercompany transactions and planning forward to create a sturdy switch pricing technique can also be an necessary threat mitigation device.
- Contemporaneous documentation preparation: Taxpayers assembly the abovementioned thresholds are required to organize contemporaneous documentation. Firms not assembly the thresholds ought to nonetheless nonetheless precisely doc their related social gathering transactions and be capable of substantiate the rationale adopted in case they obtain any queries or audit notices from the tax bureau.
- Superior Pricing Preparations: Taxpayers have the choice to proactively handle their switch pricing threat profiles by getting into into an Superior Pricing Settlement (APA) with the native tax authority. An APA is a binding settlement as to how taxpayers’ switch pricing association will likely be taxed.
Key takeaways
In gentle of the current focus internationally on tax and switch pricing by way of the Group for Financial Cooperation and Growth’s (OECDs) Base Erosion and Revenue Shifting (BEPS) program, as properly particularly in Vietnam by way of the legal guidelines similar to Decree 132, firms partaking in associated/related social gathering transactions are beneath elevated scrutiny. It is necessary that these firms search the suitable recommendation to make sure that they’re compliant and that efficient threat mitigation measures are put in place.
About Us
Vietnam Briefing is produced by Dezan Shira & Associates. The agency assists international traders all through Asia from places of work the world over, together with in Hanoi, Ho Chi Minh Metropolis, and Da Nang. Readers might write to vietnam@dezshira.com for extra help on doing enterprise in Vietnam.
We additionally keep places of work or have alliance companions aiding international traders in Indonesia, India, Singapore, The Philippines, Malaysia, Thailand, Italy, Germany, and the United States, along with practices in Bangladesh and Russia.
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