GOVERNMENT
/ SOCIALIST REPUBLIC OF VIETNAM
Independance - Liberty - Happiness

No: /201.../NĐ-CP
/ Ha Noi, date month year 201...

DECREE

Guiding transfer pricing administration to combat transfer pricing and loss of tax revenue to the state budget

Pursuant to the Law on Government Organisation dated 19 June 2015;

Pursuant to the Law on Tax Administration 78/2006/QH11 dated 29 November 2006 and its additional Law on Tax Administration 21/2012 dated 20 November 2012;

Pursuant to the Law on Corporate Income Tax 14/2008/QH12 dated 3 June 2008; Law supplementing several articles of Corporate Income Tax Law 32/2013/QH13 dated 19 June 2013; Law 71/2014/QH13 supplementing several articles of Laws on taxes;

Pursuant to the Law on Accounting 88/2015/QH13 dated 20 November 2015;

Pursuant to the Law on Investment 67/2014/QH13 dated 26 November 2014;

Pursuant to the Law on Enterprises 68/2014/QH13 dated 26 November 2014;

Pursuant to the Agreements on avoidance of double taxation and prevention of tax evasion with respect to taxes on income between Vietnam and other countries/territories,

At the proposal of the Minister of Finance;

The Government issues the Decree on transfer pricing administration to combat transfer pricing and loss of tax revenue to the State budget.

Chapter I

GENERAL PROVISIONS

Article 1. Governing scope

1. This Decree stipulates subjects; transfer pricing methods; the taxpayers’ obligation in declaring their transfer pricing; government agencies’ responsibilities in administering and carrying out tax audit and examination of taxpayers with controlled transactions.

2. Controlled transactions subjected by this Decree's scope of application include transactions between related parties conducting business with each other as specified in Article 5 of this Decree, except transactions involving goods and services governed by the price management legislation provided in the Law on Price.

Article 2. Subjects of application

1. Organizations producing, trading goods and services (hereinafter referred to as “the taxpayer”) that are subject to corporate income tax according to the declaration method and have transactions with related parties as specified in Article 5 of this Decree.

2. Tax authorities include the General Department of Taxation, Provincial Tax Offices and District Tax Offices.

3. Other governmental bodies, organizations and individuals relating to transfer pricing management, including tax authorities of nations and territories with which Vietnam has Double Taxation Avoidance Treaty.

Article 3. Principles of application

1. The taxpayer having controlled transactions shall declare them; the declaration shall include the elimination of factors distorting tax obligations resulting from the relationship between the parties so that tax obligations in controlled transactions are similar to that of comparable uncontrolled transactions.

2. Tax authorities shall carry out the administration, examination and audit of transfer pricing in controlled transactions based on the principle of arm’s length and substance over form for the purposes of non-recognition of controlled transactions resulting in tax revenue loss to the state budget and make adjustments to determine tax obligations under this Decree.

Article 4. Interpretation of terms

1. “Tax treaty” is a short term of the Agreements on avoidance of double taxation and prevention of tax evasion with respect to taxes on income between Vietnam and other countries/territories (DTA) and Agreements amending, supplementing Agreements applicable in Vietnam; “DTA partner(s)” means tax authority (s) of country(s)/territory(s) that Vietnam has already signed DTAs with.

2. “Controlled transactions” mean transactions between related parties in the course of production, trading including purchasing, selling, exchanging, leasing, renting, lending, borrowing, delivering or transferring goods or services (including intra-group services; borrowing, lending services; financial services and other financial instruments); purchasing, selling, exchanging, leasing, renting, lending, borrowing, delivering or transferring property (intangible and tangible property) or resources sharing (synergies; human resources sharing; cost sharing among related parties).

3. "Uncontrolled transactions" are transactions between unrelated parties.

4. “Comparables” mean uncontrolled transactions or independent enterprises selected based on comparability analysis to identify comparables for determining price; profit margins; profit split ratio so that the amount of tax payable to the state budget by the taxpayer is determined in line with the Law on Tax Administration and Law on Corporate Income Tax.

5. "Material difference" is the difference in information or data materially and significantly affecting price; profit margins; profit allocation proportion of the taxpayer.

6. “Internal database of tax authorities” means information and data that tax authorities develop and manage according to Articles 70 and 71 of the Law on Tax Administration relating to determining the taxpayer's tax liabilities, which are collected, analyzed, stored, updated and managed from various sources, including database and information exchanged with foreign tax authorities.

7. Principle of “Substance over form” is applied to identify the nature of controlled transactions by comparing them with comparable uncontrolled transactions, ensuring that controlled transactions reflect the nature of financial, economic and commercial relations between independant parties and thereby preventing the distortion of tax liabilities to the state budget. This principle relies on the factual substance of the transactions between related parties to eliminate factors resulting from the nature of controlled transactions regardless of transaction form under contracts and agreements between related parties. Identification of the nature of commercial, economic and financial relations shall be based on arm’s length conduct between independent parties in comparable circumstances.

8. “Arm's length range” is a range of figures on price, gross profit, net profit or profit split ratio of independent comparables selected by tax authorities and the taxpayer based on the databases as specified in Article 9 of this Decree.

9. “Benchmarking range” is a range of figures on price, gross profit, net profit or profit split ratio of the independent comparables that are of highrepresentativeness, frequency and extensiveness, computed from the arm’s length range to make comparison of, and evaluate the irrationality of price, gross profit, net profit or profit split ratio in controlled transactions.

10. “The ultimate parent of the MNE group” (hereinafter referred to as “the ultimate parent”) is a term applied to a legal entitiy which owns directly or indirectly a sufficient interest in one or more other legal entities of such MNE Group and is not owned by any other legal entities of such MNE group. The ultimate parent’s consolidated financial statements are not consolidated into the financial statements of any other legal entities worldwide.

Chapter II

SPECIFIC PROVISIONS

Article 5.Associated enterprises

"Associated enterprises" (below referred as "related parties") mean parties having relations which belong to the following cases:

1. One party participates directly or indirectly in the management, control or capital of the other party;

2. The parties are directly or indirectly subject to the management, control or capital by another party;

3. The parties participate directly or indirectly in the management, control or capital of another party.

Related parties subject to paragraphs 1, 2 and 3 mentioned above are specified in detail as follows:

a) One enterprise directly or indirectly holds at least 25% of invested capital of the owner of the other enterprise; or.

b) A third party directly or indirectly holds at least 25% of invested capital of the owners of both enterprises; or

c) Both enterprises directly or indirectly hold at least 25% of invested capital of the owner of a third party; or

d) One enterprise is the biggest shareholder regarding invested capital of the owner of the other enterprise, directly or indirectly holding at least 10% of investment capital of the owner of the other enterprise; or

e) One enterprise guarantees or gives to the other enterprise loans in any form (including third party loans guaranteed by the related party and financial transactions with similar nature) on the condition that such loans account for at least 25% of invested capital of the owner of the borrowing enterprise and account for over 50% of the total value of medium-term and long-term loans of the borrowing enterprise; or

g) More than 30% of total members of the board of executive directors or total members of the control board of one enterprise are appointed by the other enterprise or one executive director or one member of the control board of one enterprise who has power to decide on financial policies or business activities of the other enterprise is appointed by the other enterprise; or

h) More than 30% of members of the board of directors or a member of the board of directors who has power to decide on financial policies or business activities of each of the two enterprises are appointed by the same third party: or

i) The two enterprises are managed or controlled in personnel, financial and business affairs by individuals being members of a family who have relations between husband and wife, parent and child (regardless of natural, adopted children or children-in-law);

siblings of the same parent (regardless of natural or adoptive parent); grandparent and grandchild of the same blood line; aunt or uncle and niece or nephew of the same blood line; or

k) The business establishments have the relationship of head office and resident establishment or are resident establishments of the same foreign organization or individual; or

l) One enterprise manufactures or trades in products using intangible assets and/or intellectual property rights of the other enterprise for which it has to make a payment accounting for over 50% of the historical cost (or cost price) of such products; or

m) Over 60% of the total value of raw materials, materials, supplies or input products (excluding fixed asset depreciation expenses) used by one enterprise for manufacturing or trading in output products are supplied by the other enterprise; or

n) Over 60% of products (calculated for each kind of product) sold or of sales and service provision by one enterprise is directly or indirectly controlled by the other enterprise.

Article 6. Principle of comparability analysis

1. The principle of comparability analysis is applied as follows:

a) The comparability analysis shall follow the principles of arm’s length and substance over form to accurately delineate the controlled transactions before conducting thecomparability analysis of independent comparables.

- Where no written terms exist or these are not in line with the arm’s length principle, the controlled transactions shall be accurately delineated in accordance with the business nature conducted by unrelated parties.

- Delineating the substance of transactions shall be based on gathering factual information, evidence, and data about the transactions and risks assumed by related parties.

b) The adjustment of material differences shall be applied to the comparability factors for selecting reliable independent comparables and making adjustments to the transfer prices in controlled transactions to determine tax liabilities to combat tax loss to the state budget:

- The comparability factors include product characteristics; functions; contractual terms and economic circumstances in which transactions take place.

The functional analysis shall reflect main functions in the relationship betweenthe use of assets, capital, expenses as well as assumption of risks connected with theinvestment of such assets, capital and expenses and the profitability associated with thetransactions.

The analysis of economic circumstances shall include factors such as the characteristics of the location specific advantages and cost savings attributable to geographical factors, the local market and the centralization of functions to create synergies; human resources sharing; cost sharing among related parties.

- The outcome of the analysis shall be the basis for adjustment of price, profit margin or profit split ratio in line with the benchmarking range of comparables selected as specified in Article 7 of this Decree.

2. Subjects of application of substance over form principle

The application of substance over form principle shall cover the following cases:

a) Related parties earning revenues and income from engaging in transactions with the taxpayer must have the title of, and control capability over the risks of the property, goods, services, resources and the rights to create income (shares, stocks and other financial instruments);

b) The taxpayer incurring the costs from engaging in transactions with related parties must receive the benefits, economic value used to directly create or contribute to creating revenueor adding value tothe taxpayer’s operations;

c) The taxpayer incurring the costs which are not in line with the arm’s length nature or do not contribute to creating revenue or adding value to the taxpayer’s operations.

3. Process for conducting comparability analysis

The conduct of comparability analysis shall be applied as follows:

a) Accurately delineate the substance of the controlled transactions before conducting the comparability analysis of independent comparables.

b) The conduct of comparability analysis, search for independent comparables, shall be based on determination of years covered; analysis of industry, market, economic circumstance; analysis of controlled transactions and the taxpayer engaging in controlled transactions; database sources; transfer pricing methods and adjustment of material differences.

The outcome of the analysis shall be the basis for adjustment of price, profit margin or profit split ratio in line with the benchmarking range of selected comparables to determine the taxpayer’s corporate income tax liabilities tocombat tax loss to the state budget

c) The conduct of comparability analysis, search for independent comparables:

- Prioritize internal independent comparables of the taxpayer (these are transactions between the taxpayer and unrelated parties), ensuring the similarities in size, quantity and product characteristics, contractual terms and functions.

- The comparison between associated and uncontrolled transactions shall be made on the basis of each transaction by specific kind of product. However, in case transactions cannot be separated based on each kind of product, the aggregation of transactions shall be in line with the nature and practice of business and apply transfer pricing methods as specified in Article 7 of this Decree.

- Based on the selected transfer pricing method and independent comparables, the adjustment shall be made to price, profit margin or profit split ratio in line with the benchmarking range to determine the taxpayer’s corporate income tax liabilities payable tocombat tax loss to the state budget.

The outcome of comparability analysis shall ensure the similarity, and there is no material difference affecting price, profit margin or profit split ratio, between controlled and uncontrolled transactions. In case there are material differences, the analysis shall be made to identify the materiality of these differences and make adjustments to eliminate material differences based on comparability factors materially affecting each of transfer pricing methods as specified in Article 7 of this Decree.

- The minimum quantity of independent comparables selected after comparability analysis and adjustment of material differences is as follows: 01 comparable in case there is no difference in the controlled transactions or between the taxpayer engaging in controlled transaction and independent comparables; 03 comparablesin case there are differences between the taxpayer and independent comparables but there are sufficient information and data for eliminating all material differences; or 05 comparables in case there are only information and data for eliminating most of material differences.

Benchmarking range shall be used to increase the reliability of the arm’s length range.

- Data, vouchers, documents for comparability analysis shall be ofthe same financial year as that of the taxpayer, except for cases where timingextension needed as specified under this Point. Comparable data shall ensure the reliability to be used for the purpose of tax declaration, calculation and compliance with the regulations on tax, accounting and statistics.

Data of independent comparables shall be provided in appropriate format to calculate price, profit margins, profit split ratio within aperiod of at least 3 consecutive fiscal years. For enterprises which have existed for lessthan 3 fiscal years or carry out seasonal business activities which do not take placethroughout the year, such period may be a month, a quarter or a season as appropriate.

With respect to relative figures of margins orratios, the taxpayer shall round such figures to the second digit following thedecimal point. In case a relative figure is disclosed with no absolute figures to comply with this rounding principle, the disclosed figureshall be used.

- In case due to the unique or distinctive characteristics of controlled transactions,the scope of comparability analysis shall be broaden in term of industry, years covered and unique factors of controlled transactions.

The selection of independentcomparables may be broaden to other sub-sectors of the national economy (according to the list of nationaleconomy sectors promulgated by the competent state agency)which differfrom the sub-sector of the taxpayer.

Timing of data and information of independent comparable may be extended up to 03 (three) financial years prior to the time the controlled transactions occurred.

The unique comparability factors of intangibles include the legal ownership, the right to exploit and benefits, exclusive rights with respect to the exploitation of intangibles. The analysis of intangibles shall be based on the ownership; potential benefits from intangibles; geographical restrictions with respect to the use, exploitation of rights in intangibles; rights, exclusivity and non- exclusivity with respect to rights transferred; involvement of the transferee in the development of intangibles and actual functions performed, ability to control over risks of each related party based on the whole process of development, enhancement, maintenance, protection and exploitation of intangibles.

The scope of comparability analysis shall be broaden according to principles of application as specified in Point b Paragraph 1 of this Article.

4. The Ministry of Finance guides the comparability analysis as specified in this Article.

Article 7. Transfer pricing methods

The transfer pricing methods include:

- The comparable uncontrolled price method;

- The resale price method;

- The cost plus method;

- The transactional net margin method;

- The profit split method.

The selection of transfer pricing method to determine tax liabilities to be paid to the state budget shall be based on substance of the method rather than the name itself.

The most appropriate transfer pricing method is the one selected from the 5 methods mentioned above in line with the arm’s length principle and hassufficient and the most reliable information, data and figures for comparability analysis.