Vietnam: When to apply the method for comparing profit margins of taxpayers

According to the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, applying the method for comparing profit margins of taxpayers is as follows:

Taxpayers do not have database and information in order to apply the arm’s length price comparison method referred to in Article 13 herein; taxpayers are unable to compare product-based transactions on the basis of specific transactions in specific comparable products to the extent that these transactions are aggregated according to the business nature and reality, and then successfully select profit margins of appropriate independent comparables; or taxpayers fail to exercise their autonomy over the entire business and production chain, or fail to participate in the execution of related-party transactions prescribed in Article 15 herein, specifically including:

- The method for comparison of gross profit to sales (resale price method) shall be applied when the taxpayer sells or distributes products purchased from its related party to unrelated customers and does not create intangible property associated with products sold; does not participate in the process of development, enhancement, maintenance and protection of intangible property under the ownership of its related parties associated with the products sold, carry out processing, manufacturing or installation activities that may lead to any change in the nature and characteristics of these products, or attach trademarks to these products to increase their value. The resale price method shall not be applied to taxpayers acting as distributors that own intra-group valuable product intangibles with respect to brand names, trademarks and other marketing-related intangibles such as customer lists, distribution channels, logos, images and other brand identity elements for market research, marketing or trade promotion, or incurs expenses from establishment, design of distribution channels, brand identities or after-sale costs;

- The method for comparing the ratio of gross profit to cost of goods sold (cost plus method) shall be applied when taxpayers that do not own its product intangibles and incurs little risk perform their functions of contract manufacturing, make-to-order manufacturing or toll manufacturing, assembly, processing of products, installation of equipment; procurement and supply of products; supply of services or rendering of research and development services agreed upon with related parties. The cost plus method shall not be applied to taxpayers that are independent manufacturing companies, or perform various functions like product research, development, building and creation of product brands, trade names, market strategies and product warranty and customer care services;

- Net profit margin comparison method: The method for comparing the net profit margin shall be used in the cases where taxpayers do not have information necessary for the application of the arm’s length price comparison method; do not have data and information about the accounting method of independent comparables or, because of failure to search comparables with similar functions and products, do not have sufficient grounds for application of the resale price method or the cost plus method; taxpayers performing distribution or manufacturing functions do not own product intangibles or do not engage in development, enhancement, maintenance, protection and exploitation of product intangibles, or does not fall within the scope of application of the method for distribution of profit between related parties in accordance with clause 1 of Article 15 herein.

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

Thuy Tram

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