Transfer Pricing in Vietnam

Can you briefly explain what transfer pricing refers to and why it is important for multinational enterprises in Vietnam?

Transfer pricing refers to the setting of prices on related party transactions (or the sale of goods and provision of services) between related parties.

The fundamental principle of transfer pricing is that the prices for these transactions between related parties must be arm’s length in nature; that means that prices should be the same as they would have been if they were not related.  

What is the current state of transfer pricing regulation in Vietnam?

Vietnam’s Ministry of Finance has aligned its transfer pricing with international standards. These rules are based on OECD Transfer Pricing Guidelines and BEPS Actions. The pillars of these rules are the “arm’s length” principle and “substance-over-form” doctrine – businesses should learn more about these concepts.

Vietnam regularly changes its regulatory framework to achieve its developmental objectives – what are the most notable recent updates?

In support of the OECD’s BEPS Actions, and in line with domestic tax reform plans, Vietnamese authorities issued “Decree 20” in February 2017.

It enforces a stricter set of local regulations, more stringent compliance requirements. Amongst other things, it has brought major changes to the related party definition, transfer pricing methods, and introduced a three-tiered transfer pricing documentation requirement consisting of a master file, local file and country-by-country report. 

What are common mistakes and misunderstandings for transfer pricing?

Failing to report payments, failing to meet exemption requirements, and miscalculating profit margins are common mistakes. Netting off the value of transactions is also not allowed.

Foreign investors should follow local accounting guidelines closely, and tax professionals should work closely with companies to make sure their tax filings are prepared in accordance with the local tax office’s practices.

What are the implications of “Decree 20” on transfer pricing in Vietnam?

The compliance requirements introduced by Decree 20 constitute a heavy administrative burden for Vietnamese enterprises engaged in related-party transactions. It has increased taxed authorities’ interest in transfer pricing, and the lack of guidance regarding upward adjustments and its impact on other taxes will likely increase the risk of lengthy disputes with tax authorities for non-compliant enterprises.

Companies should analyze the impact of new requirements on their current transfer pricing exposure in Vietnam to improve their compliance strategies for local requirements.