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

Method of comparison between the transfer price and the arm's length price in Vietnam (Internet image)

Regarding this issue, LawNet would like to answer as follows:

1. Method of comparison between the transfer price and the arm's length price in Vietnam

Method of comparison between the transfer price and the arm's length price in Vietnam according to Article 13 of Decree 132/2020/ND-CP is as follows:

- 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.

- Principles of application:

+ 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;

+ 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.

- Calculation method:

+ 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 Decree 132/2020/ND-CP;

+ 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;

+ 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.

- 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.

2. Regulations on selection of transfer pricing methods in Vietnam

Regulations on selection of transfer pricing methods according to Article 12 of Decree 132/2020/ND-CP are as follows:

Comparison method for determination of prices of related-party transactions (shortly referred to as transfer pricing method) shall be applied according to the arm's length principle, transaction nature and functions of taxpayers to the extent that this method is assessed and applied in a consistent manner in the entire business cycle or stage; based on financial data obtained from independent comparables, shall be selected according to comparability analysis principles referred to in Article 6, 7, 8, 9 and 10 of Decree 132/2020/ND-CP.

The transfer pricing method shall be selected amongst the methods prescribed in Article 13, 14 and 15 of Decree 132/2020/ND-CP, based on features of related-party transactions and available information.

>> CLICK HERE TO READ THIS ARTICLE IN VIETNAMESE