Vietnam issues Draft Circular providing detailed guidance on the application of Advance Pricing Agreement

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1 23 August 2013 Global Tax Alert News from Transfer Pricing Vietnam issues Draft Circular providing detailed guidance on the application of Advance Pricing Agreement At a glance Draft Circular providing detailed guidance on the application of Advance Pricing Agreement (APA) has been issued for public comments. The Draft is largely in line with international practices on APA application. APA is allowed for prospective five years with renewal option for another five years. With respect to database used for transfer pricing analysis in APA application, the use of public information instead of secret comparables is specifically mentioned. Introduction Subsequent to the introduction of the Amended Law on Tax Administration that serves as a legal basis for the application of Advance Pricing Agreement (APA), Vietnam s General Department of Taxation (GDT) currently is working on a draft Circular providing detailed guidance on APA application. Ernst & Young Vietnam has been requested by the GDT to provide comments/ feedbacks on the Draft for GDT s consideration and finalization. This Alert summarizes some of the salient features of the APA program, departures (if any) from other established APA programs and our comments to the GDT. APA and scope of application The Draft Circular is in line with the universal definition of APA, which defines APA as an agreement between Vietnam s tax authority and a taxpayer (i.e., unilateral APA) or between Vietnam s tax authority, a taxpayer and the tax authority of countries/territories with whom Vietnam has signed double tax treaties (i.e. bilateral and multilateral APA) and the corresponding related taxpayer.

2 The scope of application for APA in the Draft guidance also aligns with the currently effective Vietnamese TP regulations when it comes to covered taxpayer and transactions. That means this Draft Circular applies to organizations producing and/or trading in goods and/or providing services and having business transactions with associated parties. The guidance in this Draft has been broken down into 28 articles under five chapters as stated below: Chapter Article Content I General regulations Articles 1 5 Scope of application, principle and level of authority II APA application process Articles 6 15 Pre-filing consultation Formal application Evaluation by GDT Negotiation between tax authority and taxpayer Sign-off and implementation III APA administration Articles Rights and responsibilities of taxpayer(s) and tax authority(ies). IV & V APA validity and implementation Articles Validity, extension, cancellation and implementation of APA The Draft Circular provides detailed guidance for each stage of APA application, which includes information, data and forms that need to be filed, critical assumptions about future events, processing timeline, circumstances under which the APA may be discontinued and APA post application procedures. Key take-away points in the Draft Circular As per this Draft guidance, the pre-filing consultation is mandatory before a formal application is filed by the taxpayer. This pre-filing process is required with a prescribed form together with an exhaustive list of documents to be submitted. Based on the same, no-name basis discussions are not allowed. Subsequent to the pre-filing consultation step, an eligible taxpayer may make an official application for APA in the prescribed form along with documents required and processing fee. Due to the complicated nature of the APA process and the fact that this is a new ruling in Vietnam, both tax authority and taxpayer have the right to invite or hire independent consultants to assist during the APA process. The taxpayer has an option to withdraw from the APA process anytime during the stage of application before the finalization of APA with the tax authority. Database used for transfer pricing analysis must be publicly recognized information. Companies or transactions selected for transfer pricing analysis are regulated with priority given to local companies. In case of absent local candidates, the analysis can be expanded to those with comparable economic circumstances, then within South East Asia, within Asia-Pacific, or other regions respectively. APA application is subject to application fee. Details of the determination of such fee are not currently provided in the Draft. 2 Global Tax Alert Transfer pricing

3 The rights of taxpayers and tax authorities are embedded in the confidentiality provision in the Draft i.e., where APA application is cancelled, all information and documents provided to tax authority during the APA negotiation process shall be kept confidential and not be used as evidence for further tax audit, tax inspection, and tax imposition on the taxpayers. Once APA is signed-off, during the implementation period, taxpayers are obligated to monitor and adjust taxable income (if required) in line with the margin finalized in the signed APA. Annual APA report is required to be submitted together with corporate income tax finalization return. APA can be applied for a maximum five years and extended a second time for not more than the same length (i.e., five years). During the implementation process, the taxpayer can apply to revise the signed APA where there is a change of material assumptions, change in regulations or in other cases. Our Observations and Comments The Draft Circular providing guidance on APA application is considered a welcome and timely move by GDT in the midst of a recent nation-wide increase in TP audits and exposure of abusive TP practices. While the Draft of APA guidelines is largely in line with international APA program standards, there are some areas that are not included or need further clarification including not allowing no name basis discussion, no roll back, more clarity on taxes covered and timeline for APA process, mandatory reporting, and complete APA templates, etc. The authorities are still considering and collecting the comments on the Draft. We will provide an update once the final Circular is released. With TP audit continuing to be the priority of the Ministry of Finance and GDT for the upcoming years, APA is an essential and proactive approach to mitigate the TP risks and related controversies with more than 30 countries having an effective APA program. 1 APA is the most effective pro-active approach to mitigate TP risk but is not a solution for everyone given the time and resources required. Thus, taxpayers are highly encouraged to give it due consideration for their transfer pricing risk management in the future. Based on experience, it is ideally suited when: When a taxpayer is confronted with recurring TP adjustments or litigation. When the size and complexity of international transactions assumes significant magnitude. When the approach applied/method used is likely to face stiff opposition from the tax authority. When the advantages of an APA outweigh those of other dispute resolution mechanisms/channels. As APA is new in Vietnam, there are still many challenging areas and possible issues to address. Advice from experienced APA professionals is likely to make a substantial difference at all stages of the APA process. If you are considering an APA, EY s experienced team of transfer pricing professionals in Vietnam, with the support of our global network, is available to assist you. Endnote 1. Ernst & Young Global Transfer Pricing Reference Guide. Global Tax Alert Transfer pricing 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young Vietnam Limited, Ho Chi Minh City Christopher Butler christopher.butler@vn.ey.com Nitin Jain nitin.jain@vn.ey.com Nhung Tran nhung.tran@vn.ey.com Takahisa Onose takahisa.onose@vn.ey.com Lea Gracia Molina lea.gracia.molina@vn.ey.com Phat Tan Nguyen phat.tan.nguyen@vn.ey.com Ha Thi Khanh Nguyen ha.khanh.nguyen@vn.ey.com Ernst & Young Vietnam Limited, Hanoi Huong Vu huong.vu@vn.ey.com Nitin Jain nitin.jain@vn.ey.com Trang Pham trang.pham@vn.ey.com Yukihiro Sato yukihiro.sato@vn.ey.com Kyung Hoon Han kyung.hoon.han@vn.ey.com EY Transfer Pricing Global Transfer Pricing, Germany Thomas Borstell, Americas, United States Purvez Captain, EMEIA, Germany Oliver Wehnert, Japan, Tokyo Kai Hielscher, Global Markets, United Kingdom John Hobster, TESCM, Amsterdam Victor Bartels, Asia Pacific, Singapore Luis Coronado, Global Tax Alert Transfer pricing

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