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TAX NEWS - may 2010

Vietnam issues new transfer pricing circular

Subsequent to the release of several draft circulars on transfer pricing (Draft Circulars) for public comments, Vietnam's Ministry of Finance (MOF) issued Circular 66/2010/TT-BTC (Circular 66) which amends the current transfer pricing regulation, Circular 117/2005/TT-BTC (Circular 117).

Circular 66 was introduced to ensure the consistency of the existing transfer pricing regulation with the Law on Tax Administration and new Law on Corporate Income Tax, which took effect on 1 July 2021 and 1 January 2009, respectively. Furthermore, since the implementation of Circular 117, some issues and concerns affecting its practical application were raised which Circular 66 hopes to address. We outline below the key changes under Circular 66.


Key changes

Scope of application

Circular 66 has limited the application to enterprises that have transactions with their affiliated parties. Unlike Circular 117, Circular 66 does not cover individuals.


Definition of related parties

Circular 66 clarifies the definition of "related parties" to include limited liability companies. In this regard, the term shareholder's equity (under Circular 117) is now replaced by the term owner's equity to denote that ownership of equity even in companies without shares (i.e., limited liability company) may render the parties affiliated.

Furthermore, the test of affiliation in Circular 117 whereby 20% ownership of total assets in another company will render the parties related, is removed under Circular 66.

Circular 66 also added additional criteria in determining related party relationships. Thus, two companies are regarded as affiliated if one company provides a guarantee or grants a loan which constitutes 20% or more of the owner's equity of the other company and that loan accounts for more than 50% of the total value of long and medium term loans of the latter. Two companies are also related if each of them holds directly or indirectly at least 20% of the owner's equity of a third party.


Definition of material difference

Circular 66 provides details on the definition of material difference. Under the Circular, any factor that triggers at least 1% increase or decrease in the unit price of transacted products or 0.5% increase or decrease in the gross profit ratio or profitability ratio shall be considered as a material difference. Where such factors create a material difference, appropriate adjustments in the financial information of the comparable transactions should be made.


Guidance on comparative analysis

The Circular emphasizes that, for aggregated transactions if it is a sale price, it will be the highest price; and if it is a purchase price, it will be the lowest price among the aggregated transactions.


Guidance on the calculation of market prices in a number of special cases

Circular 66 aims to provide guidance on how to determine arm's length prices in unique sales and purchase transactions. The Circular provides that adjustment of the transfer price will be made as follows:

In case of sales transactions, if the 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 Vietnamese seller is charging the highest possible price within the arm's length range with respect to cross-border controlled transactions.

In case of purchase transactions, if the price 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 limits the purchase price that the Vietnamese buyer can purchase goods or services to a value equal to or lower than the median of the arm's length range with respect to cross-border controlled transactions.

Note that Ernst & Young intends to submit a petition to the Vietnam tax authorities to revisit this particular provision vis-à-vis the OECD Guidelines on Transfer Pricing.


Requirement of supporting documents in foreign languages

Under Circular 66, the notarization of the Vietnamese translation of documents in a foreign language is not required. However, the enterprise will be fully responsible for the translation.


Declaration form of information on related transactions (Appendix 01)

Form GCN-01/TNDN in Appendix 1 - GCN/HTQT attached to Circular 117 will be replaced by Form GCN-01/QLT in Appendix 1 - GCN/CC for consistency with the Law on Tax Administration.

The new form contains the following changes:
- The form requires that the transfer pricing method for each category of related party transaction (including transactions concerning goods that form fixed and non-fixed assets) with respect to each related party be stated.
- The form requires the disclosure of detailed information on the related parties, such as the address and the type of relationship as defined under Circular 66.

The guidance on how to prepare Form GCN-01/QLT has also been changed. One of the changes is the removal of the account numbers (pursuant to the Vietnamese Accounting Standards) as reference for the revenue and expense that will be declared in the Form.


Effective date

Circular 66 will take effect on 6 June 2010. It will replace Circular 117 and Decision 37/2006/QD-BTC dated 4 January 2022 on amendment of the effective day of Circular 117.
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