Vietnam Tax: Vietnam reveals use of secret comparables to make deemed tax adjustments

A recently released Official Letter from the Vietnamese General Department of Tax (GDT)-Tax Policy Department, signals the use of secret comparables to make deemed tax adjustments on audit.

In OL No. 4530/TCT-CS, dated 27 November 2008, the GDT instructs the Phu Yen Province Department of Taxation to make a deemed taxable income or deemed tax adjustment to a Vietnamese auto manufacturer and assembler partially owned by a foreign entity. The company under audit imported components from related parties (as broadly defined in the Vietnamese transfer pricing rules) in China and Malaysia to assemble trucks up to seven-tons and vans of up to 16 passengers in Vietnam. To develop the information for the deemed tax adjustment, the GDT requests that several other provincial tax authorities provide information related to revenue and taxable income of similar companies in the automotive industry. The secret comparable information derived from the prior tax audits will be used to develop the ratio of corporate income tax to revenue and then to make a deemed tax adjustment to the company under audit. The sources the GDT could access to collect such information includes, but not limited to:
- Minutes or reports from tax inspections of other companies;
- Tax finalization profile of similar automobile manufacturers and assemblers; and
- Data from the Vietnam Automobile Manufacturers Association (VAMA).

To obtain comparable data from the other provincial tax offices, the national GDT set the following criteria: similar product models (including size, number of seats, price range), using imported material from the same related providers' countries; and similar operational functions (manufacturing and assembling) for similar years.


Tax policy department

The source of the OL is also significant. The Tax Policy Department (TPD) is one of the offices reporting to the director of the GDT. Its mission is studying and proposing the formulation of strategies to reform government policies on taxes, charges, and fees (collectively referred to as taxes), and elaborating, amending, supplementing, or finalizing legal documents on tax policies and administration under assignment from the Vietnamese Minister of Finance. Consequently, TPD is in charge of assisting the Director of the GDT to provide guidance to and direct local tax authorities at all levels in the uniform implementation of Vietnam's tax laws and regulations. OLs issued by the GDT with TPD's support and addressed to all or several relevant local tax departments could be considered a legal supplement to official tax circulars, which provide guidance for implementation of relevant tax decrees promulgated by Vietnamese Prime Minister.


Recommended taxpayer actions

The two OLs released so far, including the one discussed herein, have both dealt with automotive industry suppliers and assemblers. Automotive industry companies should review their transfer pricing policies for purchase of components and for sales of assembled vehicles and review their transfer pricing documentation. Companies in other industries with recurrent losses from transactions with related parties should also increase the attention paid to transfer pricing policies and documentation.