Vietnam: Principles of application of profit margin comparison method for taxpayers

According to the Decree No. 132/2020/NĐ-CP of Vietnam’s Government, principles of application of profit margin comparison method for taxpayers are specified as follows:

- Profit margin comparison method shall be applied according to the principle of non-discrimination concerning operational functions, assets and risks; economic conditions and accounting and bookkeeping methods taken into consideration in a comparison thereof between taxpayers and independent comparables have material effects on the profit margin. If there is any difference causing material impacts on profit margins, then these material differences must be eliminated;

Factors having material impacts on the profit margin encompass: Assets, capital, costs and expenses; rights to control and make decisions in reality to serve the purpose of performing main functions of taxpayers; nature of business industry and market for production and consumption of products; accounting and bookkeeping method and cost structure of products; economic conditions in which transactions occur; commercial or financial relationships of multinational groups; technical assistance, sharing of trade secrets, know-how, utilization of employees working under single or dual employment regime and economic conditions of business industries or sectors in which taxpayers are operating, product specifications and contractual terms and conditions or requirements.

- Cases of application of the resale price method: The resale price method is applied to certain differences that may have material impacts upon the ratio of gross profit to price of goods sold (net sales) such as costs reflecting functions of the enterprise that is a sales agent, exclusive distributor or distributor performing marketing functions; growth and development levels of product consumption markets; functions performed by taxpayers within the supply chain such as retailing, wholesale supply and accounting methods of parties;

- Cases of application of the cost plus method: The cost plus method is applied to certain differences that may have material impacts upon the ratio of gross profit to cost of goods, including costs reflecting functions performed by enterprises such as those functioning as contract manufacturers designated by parent companies or intra-group service suppliers; contractual obligations such as durations for delivery of products, costs of quality control, warehousing, terms of payment, and methods for accounting for cost components of products sold, of taxpayers and independent comparables;

- The net profit margin comparison method shall be applied in such cases as: The method for comparison of the net profit margin shall be applied to certain differences that may have material impacts upon net profit margins, e.g. differences in functions, assets, risks; economic conditions; contractual terms, conditions or requirements and product specifications referred to in Article 10 herein.

Taxpayers doing business by performing their routine functions, without performing strategic decision-making functions and engaging in transactions of low added value comprise production or distribution enterprises which are not exposed to inventory risk or market risk and do not have sales revenue or costs arising from uses of intangible assets, shall not have to incur operating losses arising from these risks.

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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