Vietnam Gov’t Issues New Transfer Pricing Circular

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Sept. 5 – Vietnam’s Ministry of Finance and General Department of Taxation (GDT) released a new draft circular this week aimed at simplifying its transfer pricing policy.

Specifically, the circular introduces the Advance Pricing Arrangement (APA) program, which will allow taxpayers to arrange in advance the tax treatment of transfer pricing transactions with affiliated companies.

Essentially, transfer pricing is used when two affiliated companies exchange goods instead of actually purchasing them on the open market. For tax purposes, companies are required to record the exchange of goods using the arms-length principal, which states that the prices charged by the affiliated companies should be equivalent to the prices that would have been charged by a third-party.

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Vietnamese tax authorities tend to pay special attention to transfer pricing as companies may undervalue the exchange of their products in order to avoid a larger tax bill. As such, the new APA program will clarify beforehand the prices a company will charge using the arms-length principal, and will also reduce burdensome compliance procedures and tax disputes.

The draft policy will push Vietnam’s transfer pricing mechanisms to be more in-line with international practices, and was developed with input from the Organization for Economic Cooperation Development and several tax jurisdictions from around the world.

The APA program will be implemented in two broad phases:

  1. In the pre-fling consultation phase, the GDT will review the prospective company’s business model and acceptable transfer prices; then
  2. Upon acceptance into the APA program, the companies will continue on with the agreed upon transfer price(s) in addition to minimal compliance procedures.

A company may maintain these transfer prices for up to five years before facing another review by the GDT.

Furthermore, per the draft policy, companies looking to utilize the new APA program will be allowed to hire independent consultants to assist with the application process and may withdraw from the application process at any time.

Once a company has been accepted into the APA program, it will be responsible for monitoring its transfer pricing transactions to ensure that they are within the pre-approved APA guidelines. The participating company will also be responsible for filling an annual APA report and income tax return with the GDT.

Currently, several international companies – including Samsung – have commenced participation in the Ministry of Finance’s three-year pilot APA program.

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