Method for splitting or allocating the profits between related parties in Vietnam

Cases of applying the method for splitting or allocating the profits between related parties in Vietnam

Pursuant to Clause 1, Article 15 of Decree 132/2020/ND-CP, cases of applying the method of profit allocation between affiliated parties include:

- A taxpayer engages in a related transaction which is specific, integrated or closed in an enterprise group, or activities related to the development of new products, use of proprietary technologies, takes part in the group’s unique value chain or the process of developing, increasing, maintaining, protecting and utilizing proprietary intangible assets without any basis for determination of prices of transactions between related parties or transactions closely linked or simultaneously performed, or complicated financial transactions related to multiple financial markets across the globe;

- A taxpayer engages in the digital transfer pricing in the absence of any basis for determination of prices of transactions between related party or participates in the creation of the added value obtained from synergies of resources available within the group;

- A taxpayer performs its functions to exercise autonomy over their entire production and business process, and is not governed under the provisions of clause 1 of Article 13, clause 1 of Article 14 of Decree 132/2020/ND-CP.

Method for splitting or allocating the profits between related parties in Vietnam (Internet image)

Principles for applying the method for splitting or allocating the profits between related parties in Vietnam

Pursuant to Clause 2, Article 15 of Decree 132/2020/ND-CP, this method is defined as the method for splitting or allocating total profit generated from related-party transactions in order to determine the profit of a taxpayer engaged in the value chain. This method shall be applied to total actual and potential profit of related-party transactions which is calculated by using financial data obtained on such bases as reasonable and valid evidencing documents; values and profits of transactions must be determined by using the same accounting method during the whole time length of application of this method.

Method for splitting or allocating the profits between related parties in Vietnam

Pursuant to Clause 3, Article 15 of Decree 132/2020/ND-CP, the adjusted profit of a taxpayer shall be allocated to total profit gained, including actual or potential profits of parties engaged in the transaction chain.

The adjusted profit of a taxpayer is defined as the summation of the primary profit and the extra profit. The primary profit is calculated according to the profit margin comparison method referred to in Article 14 of Decree 132/2020/ND-CP.

The extra profit is calculated according to the allocation proportion based on one or certain factors such as sales, costs, assets or personnel of related parties engaging in transactions and in conformity with the arm's length principle.

In case of lack of information or data for apportionment of the adjusted profit stipulated above, such allocation can be based on one or certain factors such as sales, costs, assets or personnel of related parties engaged in the transfer pricing and must conform to the arm's length principle.

Regulations on related parties in Vietnam

Pursuant to Clause 1, Article 5 of Decree 132/2020/ND-CP, related parties are parties having relationships where:

- A party is directly or indirectly involved in the management, control of, contribution of capital to, or investment in, the other party;

- Parties are directly or indirectly affected by the management, control of, contribution of capital, or investment, from the other party.

Mai Thanh Loi

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