Vietnam introduces new transfer pricing guidelines

Vietnam's Ministry of Finance recently issued a circular to provide guidelines on the calculation of transfer prices in business transactions between related parties to establish that the pricing is at arm's length. The new guidelines are effective 6 June 2010.

Circular 66/2010/TT-BTC replaces Circular 117, which entered into effect 1 January 2006. Circular 117 provided the first set of comprehensive transfer pricing rules in Vietnam. The new regulations are the first official guidance issued since 2006, and indicate, after a hiatus, a renewed focus by the Vietnamese tax authorities on transfer pricing. This is consistent with recent increased audit activity in the transfer pricing area and official requests by central tax authorities to local tax authorities to focus on foreign-invested loss-making companies suspected of tax evasion through transfer pricing.

Circular 66 essentially reiterates Circular 117, including most of the 24 examples from Circular 117. Therefore, much of Circular 117 is carried forward unchanged into the new Circular 66. However, there are some significant changes, particularly the expansion of the transfer pricing filing requirements and the further expansion of the definition of related parties. We provide below a brief overview of the key changes brought about by Circular 66, compared to Circular 117.


Scope of application

Circular 66 is limited in application to organizations engaged in the production and trading of goods or services (hereinafter referred to as "enterprises") in business transactions with related parties. Unlike Circular 117, Circular 66 does not specifically cover individuals.



Definitions

Definition of affiliated (related) parties

The definition of related parties subject to TP adjustments is expanded and clarified. The term "shareholder's equity or total assets" has been replaced by the term "charter capital," which is not defined in the new circular and presumably refers to investment capital as stated in a company's investment certificate.

Circular 66 also adds two additional tests for affiliation:

- Two enterprises that hold directly or indirectly at least 20 percent of the investment capital of a third enterprise are considered affiliated;

- An enterprise that provides a guarantee or grants a loan that constitutes 20 percent or more of the amount of the investment capital, or that is more than 50% of the total value of the long and medium term loans of another enterprise will be regarded as related.


Definition of material difference

Circular 66 quantifies the definition of "material difference" that would trigger an adjustment to the comparable price or transaction. Accordingly, any factor that triggers at least a 1 percent increase or decrease in the transaction price, or a 0.5 percent increase or decrease in gross profit ratio or other profitability ratios would be considered a material difference; consequently, appropriate adjustments to the comparable price or transaction should be made.


Comparability analysis and adjustments

Circular 117 did not distinguish between sale and purchase transactions, even though both types of transactions have an impact on the taxable income of an enterprise. Circular 66 states that, for aggregated transactions, if it is a sale price, it will be adjusted to the highest price of the aggregated transactions, whereas if it is a purchase price, it will be adjusted to the lowest price among the aggregated transactions.


Interquartile range

The use of an interquartile range is now officially defined in Circular 66.

Circular 66 provides guidance on how to determine arm's length prices in certain sales and purchase transactions; accordingly, the adjustment to the transfer price will be as follows:

- With respect to sale transactions, if the unit price, gross profit ratio, or profitability ratio is lower than the median of the interquartile range, the arm's length value will be a value equal to or higher than the median of the range. This aims to ensure that the enterprise charges the highest possible price within the arm's length range.

- In the case of purchase transactions, if the unit price, gross profit ratio, or profitability ratio is higher than the median of the interquartile range, the arm's length value will be a value equal to or lower than the median of the range. This ensures that the enterprise purchases goods or services at the lowest possible price within the arm's length range.


Dealing with breaches and resolution of complaints

Circular 66 no longer covers this, because enterprises must follow the guidance of the Law on Tax Administration.


Declaration Form of Information on related transactions

Circular 66 requires enterprises to declare on Form GCN-01/QLT information on related-party transactions, and to submit this form with their annual Corporate Income Tax return.

The revised form adds a new requirements: the method(s) of calculation of market prices for each transaction with each affiliated party for each category of transaction must be provided. The revised form also requires disclosure of the type of relationship with affiliated parties in terms of the specific definition of affiliation in Circular 66.