What are regulations on transfer pricing results regarding related-party transactions in Vietnam?

What are regulations on transfer pricing results regarding related-party transactions in Vietnam?

Pursuant to Clause 4 Article 13 of the Decree 132/2020/NĐ-CP stipulating regulations on transfer pricing results regarding related-party transactions in Vietnam as follows:

Method of comparison between the transfer price and the arm's length price

1. Cases of application of the method for comparing the transfer price and the arm’s length price (hereinafter referred to as arm’s length price comparison method):

Taxpayers perform related party transactions in specifically classified products, tangible assets or specified services subject to trading conditions, commonly sold on the market or assigned prices quoted on the domestic and international exchanges of commodities or services; in making payment of royalties on use of intangible assets; payment of loan interest when performing lending and borrowing activities; or perform independent and related-party transactions in products that similar in product specifications and contractual requirements.

2. Principles of application:

a) The arm’s length price comparison method is implemented according to the rule of non-discrimination regarding product specifications and contractual requirements when comparing arm’s length prices with transfer prices which cause material impacts on product prices. In case where there is any difference causing material impacts on product prices, these material differences must be eliminated;

b) Such factors as product specifications and contractual requirements have material impacts on product prices, including characteristics, quality, brands and trademarks of products, and transaction scale and volume; requirements set out under agreements on supply and transfer of products, e.g. amounts, durations of transfer of products, payment deadlines and others; rights to distribute or consume commodities, services or assets, impact economic values and markets where transactions occur and other factors affecting product prices, such as economic conditions and operational functions of taxpayers.

3. Calculation method:

a) The transfer price of a product is adjusted to the arm’s length price of the product or the value within the standard arm's length range of independent comparables as prescribed in this Decree;

b) In case where the product price is publicly announced on the domestic and international exchange of commodities or services, the transfer price of a product shall be determined according to the product price quoted at the comparable time and under the same or similar conditions;

c) Taxpayers purchasing machinery or equipment from foreign related parties must provide records or documents evidencing purchase prices thereof in accordance with the arm’s length principle at the purchase time. For new machinery or equipment, the price used for comparison purposes is the price on the invoice demonstrating that the related party has purchased such machinery or equipment from an unrelated party. For used machinery or equipment of which the invoice or original document evidencing purchase is issued on the purchase date, revaluation thereof shall be subject to applicable legislation on guidance on management, use and depreciation of fixed assets.

4. Transfer pricing results are the taxable prices used for declaring and determining the corporate income tax amounts payable on condition that they do not cause any reduction in taxpayers’ tax obligations to the state budget.

As regulations above, transfer pricing results are the taxable prices used for declaring and determining the corporate income tax amounts payable on condition that they do not cause any reduction in taxpayers’ tax obligations to the state budget.

What are related parties regarding related-party transactions in Vietnam?

Pursuant to Article 5 of the Decree 132/2020/NĐ-CP stipulating related parties regarding related-party transactions in Vietnam as follows:

+) An enterprise participates directly or indirectly in at least 25% of the other enterprise’s equity;

+) Each of the two enterprises has at least 25% of its equity held, whether directly or indirectly, by a third party;

+) An enterprise is the shareholder having the greatest ownership interest in the other enterprise, or participates directly or indirectly in at least 10% of total share capital of the other enterprise;

+) An enterprise guarantees or offers another enterprise a loan under any form (even including third-party loans guaranteed by financing sources of related parties and financial transactions of same or similar nature) to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise;

+) An enterprise appoints a member of the executive board responsible for the leadership or control of another enterprise provided the number of members appointed by the former accounts for more than 50% of total number of members of the executive board responsible for the leadership or control of the latter; or a member appointed by the former has the right to decide financial policies or business activities of the latter;

+) Both related enterprises appoint more than 50% of membership of the executive board or have one member of the executive board authorized to decide financial policies or business activities who is appointed by a third party;

+) Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle and nibling;

+) Both business entities have transactions, either between their head offices and permanent establishments or between permanent establishments of overseas entities or individuals;

+) Enterprises are put under control of one individual through either his/her capital participation into that enterprise or his direct involvement in the administration of that enterprise;

+) In other cases where an enterprise has their business activities managed, controlled or decided de facto by the other enterprise;

+) A related enterprise performs the disposition or acquisition transaction in at least 25% of their equity within a tax period; the borrowing or lending transaction in at least 10% of their equity performed at the transaction time falling within a tax period with a person holding the executive office or the controlling interest in the enterprise, or with a person in one of the relationships as follows: a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle and nibling.

How to determine the total deductible interest expense when determining corporate income taxable income for enterprises having associated transactions in Vietnam?

Pursuant to Article 16 of the Decree 132/2020/NĐ-CP stipulating as follows:

+) Except for payments referred to in point b of this clause, a taxpayer can deduct their service charges from taxable costs within a specified taxable period when meeting the following requirements: services rendered have commercial, financial and economic value and are directly used in their business and production activities; services rendered by related parties are confirmed as already supplied only in the same conditions under which unrelated parties are charged for these services; the arm's length principle and transfer pricing method or the method of allocation of service charges between related parties must be applied in unison within the entire group to payment of charges of similar services of which the taxpayer must provide a contract, evidencing documents, invoices and information concerning the method of calculation, factors of allocation and pricing policies of the group.

In case where there is a connection with centers performing specialized functions and synergies in creating the added value for the group, a taxpayer must determine the total value created from these functions and identify the level of profit allocation proportionate to the value of participation by related parties from which relevant service charges paid to related parties to perform coordination or service supply functions in arm’s length transactions of same or similar nature have been deducted.

+) Service charges that are not deducted from taxable income encompass costs arising from services rendered for the sole purpose of providing other related parties with benefits or values; services rendered to provide benefits for shareholders of related parties; services of which costs are repeatedly charged due to multiple related parties render the same services, or in which the added value offered to a taxpayer is not specified; services which are, in nature, benefits obtained by a taxpayer as a member of a corporation and costs that a related party adds to third-party services rendered through a related intermediary without adding any value to these services.

Best regards!