REGULATIONS ON TRANSFER PRICING IN VIETNAM

Table of Contents Legal framework of transfer pricing regulations Related parties Business transactions between related parties Principle of arm s length pricing Methods of determining market prices in related transactions Comparative analysis Compliance regulations on transfer pricing Risks and challenges Action plan/solution

Legal Framework Circular 117/2005/TT-BTC dated 19 December 2005 Circular 66/2010/TT-BTC dated on 22 April 2010 by the Ministry of Finance provides guidance on determination of market prices in business transactions between related parties Official Letter 3304/TB-CT dated 15 September 2010 of HCM City Tax Department Official Letter 3708/BTC-TCDN dated 9 March 2011 of the Ministry of Finance

Related parties The enterprises shall be determined as related parties if: An enterprise holds at least 20% of owner equity of the other enterprise Both enterprises have at least 20% of owner equity held by a third party Both enterprises hold at least 20% of owner equity of a third party The biggest shareholder who holds at least 10% of owner equity of a joint-stock company An enterprise guarantees a loan or makes a loan to another enterprise where the loan accounts for at least equal 20% of investment capital and more than 50% of the total account of mid-term and long-term liabilities of the enterprise

Related parties An enterprise appoints more than 50% of the total members of the executive board or the control board of the other enterprise, or appoints a member of the other enterprise who has the right to make decisions on financial policies or operations of the enterprise Both enterprises together have more than 50% of members in the executive board or together have a member in the executive board who has the right to make a decision on financial policies or operations and is appointed by a third party Both enterprises are administered or controlled in terms of personnel, finance and operations by members of a family

Related parties Both business establishment have a relationship concerning the headquarters and PE or are PE of a foreign organization or individual An enterprise provides intangible assets and/or intellectual property of another enterprise for more than 50% of the production cost An enterprise provides more than 50% of the total value of raw materials or input products that are used for production or trade of another enterprise An enterprise controls more than 50% of the output products sold by another enterprise Two business establishments have agreed to conduct business cooperation on the basis of a contract

Declarations of related transactions Related party transactions must be declared on Form GCN-01/QLT and submitted annually with the CIT finalization. Specifically, the Company is required to declare: All related parties identified; Any transaction with related parties; The method of calculation of the market price; Contemporaneous documentation of such transactions; and The form must be filed within 90 days from the end of the fiscal year.

Form GCN01/QLT

Part A. INFORMATION ON VALUE OF RELATED TRANSATION AND METHOD OF DETERMINING PRICE

Part B: DECLARATION OF THE RELATIONSHIP WITH EACH RELATED PARTY

Business transactions between related parties Related transactions mean business transactions between related parties Business transactions include: Transactions of buying, selling and/or trading: - Tangible goods: raw materials, finished products, products - Intangible goods: brand, copyright, technology Providing services: management services, support services Financial transaction: loan, loan guarantee Prices in related transactions must be determined by the arm s length price

The principle of arm s length price The principle of arm s length price is that all parties related to business transactions are based on an independent third party transaction, both parties wish to achieve the highest profit Enterprises have to determine prices in related transactions by comparing with prices in uncontrolled transactions which have equivalent conditions Transfer prices in related transactions must be equivalent with the price that enterprises will determine when they participate in equivalent transactions with an independent third party

Methods of determining arm s length price in related transactions There are five methods: Method of comparable uncontrolled price ( CUP ); Method of resale price ( RP ); Method of cost-plus ( CPL ); Method of comparable profit ( CP or TNMM ); and Method of profit-split ( PS ).

Principles of applying the methods of determining arm s length price None of the five methods of determining arm s length price are definitive The most appropriate method, is that which is suitable for the transaction conditions, information and data sources that are used for comparative analysis The enterprise itself selects the method that is most suitable for its conditions Having applied the methods for determining the arm s length price as prescribed, enterprises are still allowed to adjust prices for the products that are affected by unforeseen changes occurring in that year

Comparative analysis The independent transaction selected for comparison must meet the following conditions: Have the nature and context equivalent to those of the related transaction, and Have no disparities that materially affect the price of products Independent transactions of enterprises are priority transactions in selecting for comparison Generally, four effective criteria are selected for the purpose of comparative analysis, as follows: Product features Operative functions of the enterprise The contractual terms when operating a transaction, and The economic conditions when the transaction is happening

Regulations on Transfer Pricing Enumerate related transactions of the year and submit annually together with the settlement of CIT as prescribed Form in GCN- 01/QLT (issued together with Circular 66/2010/TT-BTC attachments) Preparing and saving documents which relate to price determination in related transactions Documents should reflect the transaction s information such as related parties, product features, contractual conditions and which method of determining the arm s length principle has been applied. Documents have to be prepared in Vietnamese language and provided to tax authorities within 30 days from the requesting day

Risks and challenges relating to transfer pricing in Vietnam Enterprises may have to use adjusted or fixed prices in related transactions if: Non declaration or incomplete declaration on information of related transactions as prescribed Failure in providing documents relating to the price s determination in the requested related transaction on time Enterprises can be penalized if the tax authorities make a decision on price adjustment The penalty can be up to three times the adjusted tax rate and for late payment interest is 18.25% per year.

Risks and challenges relating to transfer pricing in Vietnam The definition of related parties is very broad according to Circular 66 There is no regulation on applying the Advance Price Agreement ( APA ), which has been commonly applied throughout the rest of the world though guidance is anticipated in the future There is no official link between TP and customs valuation Limitation on approved information and data sources Complying with the request for preparing and updating documents relating to the determination of transfer price takes longer and costs more The self-assessment mechanism and strict penalties of the Tax Administration Law

Keeping it brief making sure supply is covered Garment manufacturing case study: Client imports material from a related party to be on-sold, material was pre-cut for various different garments Little or no processing takes place in Vietnam Concerns regarding Customs valuation and transfer prices used

Keeping it brief making sure supply is covered Ad hoc distribution system Identifying core products Redundancy Global vs. regional organization Lack of integrated supply chain strategy-no centralization Respecting corporate structures-documentation

Cleantech when is MDF not MDF? MDF manufacturing case study: Client owns a number of subsidiaries involved in the manufacture of MDF, including wood product processors, chemical plants for resin and printing plants for veneer printing MDF with different emissions specifications carry different market values. Emissions are largely a result of the chemical composition of the resins used Chemical subsidiary experiments with different resin compositions, but does not charge for a return on the R&D activities undertaken

Cleantech when is MDF not MDF? Supply chain strategy - evolving Communication between divisions and offices Systems integration Documentation challenges Customs impact Undisclosed related parties

Cleantech when is MDF not MDF? Local vs. international sourcing Location of intellectual property Documentation advantages VAT concerns an integrated approach Customs implications Temporary imports and related issues

Keeping your cool transfer pricing issues for air conditioning components Metal component manufacturing case study: Multinational produces various metal components for use in industrial and domestic machinery under licence from parent entity Royalties are declared at a fixed percentage of turnover under contract Based on benchmarking study, royalty rate is deemed appropriate In practice, the company calculates the turnover figure for the royalty by excluding several revenue streams, under the new turnover royalty rate is not arm s length

Keeping your cool transfer pricing issues for air conditioning components Undisclosed related parties - exposures Lack of methodology-too many hats Unrecognized intellectual property - impact Lack of documentation for royalties reducing risk Customs implication for imports and exports Redundancy of multiple factories in South East Asia

Action plan and solutions Establish an appropriate and feasible transfer pricing plan relating to the transfer pricing of the enterprise Check and analyze all related transactions of the enterprise Prepare documents relating to the determination of transfer price as prescribed Support from experienced consultants

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GRANT THORNTON (VIETNAM) LTD. TAX SERVICE DIVISION 28 floor, SAIGON TRADE CENTER 37 Ton Duc Thang Street, District 1 Ho Chi Minh City Email: Ronald.Parks@vn.gt.com

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