Vietnam: Guidance on steps of the comparability analysis process of related-party transactions of enterprises

According to the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, steps of the comparability analysis process of related-party transactions are guided as follows:

1. Identifying the substance of a related-party transaction before analyzing it to find out its comparability with independent comparables.

2. Analyzing, comparing, finding and selecting independent comparables on the basis of identifying comparison time, product specifications and contractual terms and conditions; analyzing the industry, market and economic conditions wherein transactions arise; analyzing related-party transactions and taxpayers performing related-party transactions; databases; transfer pricing methods and adjustments for any potential material difference, specifically as follows:

- Identifying the comparability extent, subject matters and factors, e.g. comparison time and date, information used for analysis of the taxpayer with respect to comparability factors relating to functions, assets and risks; product specifications; contractual requirements; economic conditions under which transactions occur, analysis of the industry, market, context of business activities and transaction of goods, services and assets of parties, for the purpose of selecting the related party that requires the determination of prices of their related party transactions in accordance with this Decree;

- Evaluating and searching comparables, e.g. prioritizing examination of internal independent comparables on the basis of verification of the level of their reliability and independence in order to ensure that these transactions are not those arranged in breach of the arm’s length doctrine; setting out criteria for searching and determining database that may be relied on, as referred to in Article 17 herein, in order to search similar independent comparables. On the basis of information that has been subject to the analysis and examination of availability of data of independent comparables, the transfer pricing method appropriate for the substance of business, commercial, financial activities and risks incurred by each related party that requires the determination of the transfer prices must be selected;

- Analyzing the level of the similarity and reliability of independent comparables that have been selected on the basis of examination and screening of qualitative and quantitative criteria; analyzing information about the economy, industry and financial figures of selected comparables in order to verify the level of similarity; determining and correcting material differences. On the basis of the selection of similar independent comparables, it shall be necessary to use financial data and figures of selected independent comparables to determine bases for adjustment in the levels of price, profit margins and profit split ratios of taxpayers under the provisions of Article 8 herein.

3. Identifying the level of price, profit margin or profit split ratio, based on the results of the analysis of independent comparables, as the basis for the comparison or application thereof for the determination of corporate income tax obligations of taxpayers and avoidance of any reduction in tax obligations to the state budget. Calculation method must be identically applied in the operating and business cycle or stage in agreement with functions and business models as prescribed in Article 12, 13, 14 and 15 herein.

View more details at the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, effective from December 20, 2020.

Thuy Tram

>> CLICK HERE TO READ THIS ARTICLE IN VIETNAMESE