GOVERNMENT
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SOCIALIST REPUBLIC OF VIETNAM
Independence – Freedom – Happiness
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No. 132/2020/ND-CP

Hanoi, November 5, 2020

 

DECREE

PRESCRIBING TAX ADMINISTRATION FOR ENTERPRISES HAVING RELATED-PARTY TRANSACTIONS

Pursuant to the Law on Government Organization dated June 19, 2015; the Law on Amending and Supplementing certain Articles of the Law on Government Organization and the Law on Local Government Organization dated November 22, 2019;

Pursuant to the Law on Tax Administration dated June 13, 2019;

Pursuant to the Law on Corporate Income Tax dated June 3, 2008; the Law on Amendments and Supplements to certain Articles of the Law on Corporate Income Tax dated June 19, 2013;

Pursuant to the Law on Amendments and Supplements to certain articles of the Law on Taxes dated November 26, 2014;

Upon the request of the Minister of Finance;

The Government promulgates this Decree on the tax administration for enterprises having related-party transactions.

Chapter I

GENERAL PROVISIONS

Article 1. Scope

1. This Decree stipulates transfer pricing doctrines, methods and processes for determination of transfer pricing factors; taxpayer’s transfer pricing rights and obligations, declaration procedures; responsibilities of state regulatory authorities for the tax administration over taxpayers having related party transactions.

2. Related party transactions covered by this Decree comprise such transaction activities as purchase, sale, bartering, renting, leasing out, borrowing, lending, transfer or disposal of commodities, provision of services; financial borrowing, lending, financial services, financial guarantee and other financial instruments; purchase, sale, bartering, renting, leasing out, borrowing, lending, transfer or disposition of tangible assets, intangible assets and agreement on purchase, sale and sharing of resources such as assets, capital, labor and sharing of costs between related parties, except business transactions in goods and services subject to price adjustments that the State makes under laws on prices.

Article 2. Subjects of application

1. Entities manufacturing and trading goods and services (hereinafter referred to as taxpayers) are payers of the corporate income tax having transactions with their related parties under Article 5 herein.

2. Tax authorities include General Department of Taxation, Departments of Taxation and Sub-departments of Taxation.

3. State regulatory authorities, other entities and persons related to the application of regulations on the tax administration over related-party transactions.

Article 3. Principles of application

1. Taxpayers having related party transactions must eliminate factors causing reduction in tax obligations that are controlled or affected by related party relations in order to declare and define tax liabilities imposed on related-party transactions which are comparable to independent transactions having the same requirements.

2. Tax authorities should manage, check and inspect prices of related-party transactions performed by taxpayers according to the doctrine of an arm’s length and substance-over-form transaction and the transaction determining the tax liability corresponding to the value created from the substance of transactions and business activities of taxpayers; shall not grant their recognition of related-party transactions in breach of the arm’s length doctrine that cause reduction in tax liabilities of enterprises to the state budget and making any relevant adjustment to these prices so as to duly identify tax liabilities as prescribed in this Decree.

Article 4. Interpretation

Apart from the terms defined in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2016, the terms mentioned below shall be construed as follows:

1. “Tax treaty” is the shortened term indicating the Agreement on avoidance of double taxation and prevention of evasion of taxes on income or assets which is signed between Vietnam and other countries and territories, including Agreements or Protocols providing amendments or supplements to Agreements currently in force in Vietnam.

2. “Agreement of competent regulatory authorities” is the shortened term indicating the Agreement in effect between competent regulatory authorities of countries or territories that are party to international agreements on taxes, and requiring the automatic exchange of information included in International Financial Reports.

3. “International tax agreement”, “tax treaty” are bilateral and multilateral taxation agreements or treaties.

4. “Party tax authority” is tax authorities of countries or territories which are signatories to tax treaties with Vietnam.

5. “Independent comparable” is any arm’s length transaction between independent parties or enterprises performing arm’s length transactions that is selected on the basis of the comparability analysis or the determination of comparables acting in the same or similar conditions to determine the level of price, profit margin, profit allocation rate in order to determine a taxpayer’s tax obligations paid to the state budget and ensure their compliance with provisions set forth in the Law on Tax Administration and the Law on Corporate Income Tax.

6. “Material difference” is any difference in pricing factors that cause significant or substantial effects on the level of price, profit margin and profit allocation rate of parties involved in a transaction.

7. “Database of a Tax Authority” is any information and/or datum that is acquired, developed from various sources by a Tax Authority and put under their control in accordance with the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019, even including databases and information exchanged with overseas tax authorities and competent regulatory authorities.

8. “Arm’s length range” is a set of values for levels of prices, profit margins, or profit split ratios, of independent comparables that are selected by tax authorities and taxpayers based on the databases referred to in Article 17 herein. Values in this range have the same or similar level of reliability comparability. Where necessary, the probability method would be used to calculate the standard arm’s length range and the range of median values having the typical, general and common natures in order to increase the reliability of a set of arm’s length comparables.

9. “Standard arm’s length range” is a set of values ranging from the 35th percentile to the 75th percentile; the median value of this range is the 50th percentile determined according to the probability function.

10. “Authorized reporting entity” is the term used for indicating an entity authorized to act on behalf of the ultimate parent company of a corporation to submit their international financial reports to tax authorities.

Article 5. Related parties

1. Related parties are parties having relationships where:

a) A party is directly or indirectly involved in the management, control of, contribution of capital to, or investment in, the other party;

b) Parties are directly or indirectly affected by the management, control of, contribution of capital, or investment, from the other party.

2. Related parties referred to in Clause 1 of this Article shall be subject to the following specific provisions:

a) An enterprise participates directly or indirectly in at least 25% of the other enterprise’s equity;

b) Both related enterprises own at least 25% of the equity in which a third party participates directly or indirectly;

c) An enterprise is the shareholder having the greatest ownership interest in the other enterprise, or participates directly or indirectly in at least 10% of total share capital of the other enterprise;

d) An enterprise guarantees or offers another enterprise a loan under any form (even including third-party loans guaranteed by financing sources of related parties and financial transactions of same or similar nature) to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise;

dd) An enterprise appoints a member of the executive board responsible for the leadership or control of another enterprise provided the number of members appointed by the former accounts for more than 50% of total number of members of the executive board responsible for the leadership or control of the latter; or a member appointed by the former has the right to decide financial policies or business activities of the latter;

e) Both related enterprises appoint more than 50% of membership of the executive board or have one member of the executive board authorized to decide financial policies or business activities who is appointed by a third party;

g) Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle and nibling;

h) Both business entities have transactions, either between their head offices and permanent establishments or between permanent establishments of overseas entities or individuals;

i) Enterprises are put under control of one individual through either his/her capital participation into that enterprise or his direct involvement in the administration of that enterprise;

k) In other cases where an enterprise has their business activities managed, controlled or decided de facto by the other enterprise;

l) A related enterprise performs the disposition or acquisition transaction in at least 25% of their equity within a tax period; the borrowing or lending transaction in at least 10% of their equity performed at the transaction time falling within a tax period with a person holding the executive office or the controlling interest in the enterprise, or with a person in one of the relationships prescribed in point g of this clause.

Chapter II

COMPARABILITY ANALYSIS, SELECTION OF INDEPENDENT COMPARABLES AND TRANSFER PRICING METHODS

Article 6. Comparability analysis doctrines

1. Transfer pricing analyses shall be carried out according to the substance-over-form doctrine under which a transaction determining tax liability is analyzed to determine the substance of a related party transaction:

a) The substance of a transaction prescribed by a legally binding agreement, a written document or agreement regarding the transaction performed by related parties is compared to the reality of execution of the transaction by these related parties. In case where any taxpayer performs a related party transaction without entering into any agreement in writing or with agreements incompliant with the arm’s length doctrine, or the realistic execution of the transaction does not adhere to the doctrine of arm’s length transactions between unrelated parties, the related party transaction must be determined by the very substance of business transactions between independent parties, i.e. the related party receiving revenue or income from the related-party transaction with the taxpayer shall have the right to own and control risks in trading assets, commodities, services and resources, and the right to create economic benefits and the rights to generate income from shares, stocks and other financial instruments while the taxpayer incurring expenses from the transaction with the related party must either directly receive economic benefits or values, or contribute to creating revenue, values added to business activities of the taxpayer in conformity with the arm’s length doctrine;

b) The substance of the transaction is defined by the method of collecting information, evidence and data on transactions or risks posed to related parties in the reality of business activities.

2. Analysis for the purpose of comparison between related party transactions and arm’s length transactions:

a) Data on and the reality of transactions between related parties that constitute the basis for comparing contracts, written credentials, agreements and economic, commercial and financial relationships in taxpayers’ related transactions with business decisions may be accepted by independent parties under the same or similar conditions. According to the principle of comparison applied in the comparability analysis, the substance and reality of business and risks incurred by related parties shall outweigh written agreements;

b) Comparability analysis must ensure the comparability between enterprises performing arm’s length transactions and those performing related party transactions, or between arm’s length transactions and related party transactions, and none of extrinsic factors causing material impacts on levels of price, profit margins or ratios of profit split between parties. In case where there exists any extrinsic factor causing material impacts on the level of price, profit margin or profit split ratio, it shall be obligatory to analyze, determine, correct and eliminate these factors based on the comparison of the factors referred to in Article 7 and 10 herein, and ensure the comparability analysis is conformable to specific transfer pricing methods prescribed in Article 13, 14 and 15 herein.

Article 7. Selection of independent comparables

1. Selection of internal independent comparables is the selection of transactions between taxpayers and unrelated parties, ensuring the comparability that does not cause any difference causing material impacts on the level of price, the profit margin or the ratio of profit split between parties. In case where there is none of the internal independent comparables, the selection of comparables shall be subject to Point b and c of Clause 3 of Article 17 herein. Comparison between related party transactions and arm’s length transactions shall be made on the basis that each transaction is compared with each comparable product. In case where it is unlikely to make a product-based comparison, the aggregation of transactions must be based on the substance and the reality of business activities, and the application of the transfer pricing method under the provisions of Article 12, 13, 14 and 15 herein.

2. Financial and business data of comparables must be reliable so that they may be used for tax declaration and assessment purposes, and must conform to regulations on accounting, statistics and taxation. Time of execution of a transaction performed by an independent comparable must coincide with the time of execution of a related-party transaction by a taxpayer, or must fall within the same financial year as that of taxpayers, except for special cases in which it is necessary to expand the time frame of comparison under the provisions of Article 9 herein. Data must be properly formatted as the basis for comparing or calculating levels of prices at the transaction time or within the same tax period; the comparability analysis data on profit margin or profit distribution rate must be collected in three consecutive tax periods. Taxpayers shall round decimal values of ratios or comparative rates up to the nearest hundredth at their fractional parts. Where relative values derived from data released without associated absolute numbers and this rounding method is not used, the released data of which reference sources have already been cited shall be accepted.

3. The minimum number of independent comparables shall be selected after completion of the comparability analysis and adjustment of material differences as follows: One comparable which is selected if related-party transactions or taxpayers performing related-party transactions and independent comparables has no difference; three comparables which are selected in the event that there are certain differences existing in independent comparables and there are not sufficient information or data provided as the basis for eliminating all of the material differences, and five comparables which are selected only when there is any information or data used as the basis for eliminating most of the material differences existing in independent comparables.

Article 8. Adjustment of levels of price, profit margins, profit split ratios of taxpayers

1. When successfully finding independent comparables of which levels of reliability comparison are similar, and which do not have difference, or have differences and acquire sufficient information and data used as the basis for eliminating all of material differences:

a) If the level of price, profit margin and profit split ratio of a taxpayer fall within the arm’s length range of arm’s length transactions performed by similar independent comparables, the taxpayer shall not be required to adjust their level of price, profit margin and profit split ratio to determine the transfer price;

b) Unless the price, profit margin and profit split ratio of the taxpayer fall within the arm’s length range of unrelated transactions performed by similar independent comparables, the taxpayer shall be obliged to determine values falling within the arm’s length range that reflect the highest level of comparability to a related party transaction in order to make adjustment to the price, profit rate and profit distribution ratio of the related party transaction in order to adjust the level of price, profit margin and profit split ratio of the related party transaction, but avoid any reduction in taxable income and tax obligations to the state budget of the taxpayer.

2. In case where there is only information or data used as the basis for eliminating most of the material differences of independent comparables, the selection of at least five independent comparables and the application of the standard arm’s length range must follow the instructions given in Appendix V hereto. The selection of values falling within the arm’s length range for the adjustment and redetermination of the level of price, profit margin or profit split ratio of a taxpayer shall be subject to the following requirements:

a) If the level of price, profit margin or profit split ratio of the taxpayer is the value falling within the standard range of arm’s length transactions of similar independent comparables, the taxpayer shall be exempted from the requirement for adjustment of their level of price, profit margin and profit split ratio for the transfer pricing purpose;

b) Unless the level of price, profit margin and profit split ratio of the taxpayer fall within the standard range of arm’s length transactions of similar independent comparables, the taxpayer shall be obliged to determine values falling within the standard arm’s length range that reflect the highest level of comparability to related party transactions in order to make adjustment to the level of price, profit margin and profit split ratio of a related party transaction, and determine taxable income and tax amount payable but avoid any reduction in tax obligations to the state budget;

c) In case where the tax authority adjusts or fixes the level of price, profit margin or profit split ratio of a taxpayer, the adjusted or fixed value is the median falling within the standard arm’s length range.

3. On the basis of the transfer pricing method and independent comparables which are selected, the adjustment in the level of price, profit margin or profit ratio rate of a taxpayer shall be made in order to determine their corporate income tax obligations without causing any reduction in tax obligations to the state budget.

Article 9. Expansion of the comparability analysis scope

1. With respect to particular or sole related party transactions, if it is unlikely to find independent comparables, the scope of comparability analysis in terms of business industries, geographical markets and comparison time should be expanded so as to search for independent comparables. The expansion of the comparability analysis scope shall be carried out in the following manner:

a) Selecting independent comparables by using the industry classification highly comparable to the classification of sectors wherein a taxpayer operates in the same local market, local jurisdiction or country;

b) Expanding the comparison scope to other regional countries where the conditions of the industry and the economic growth level are comparable.

2. In case where the scope of comparability analysis is expanded to cover the aforesaid areas, it is obligatory to make the quantitative and qualitative analysis of comparability and material differences under the provisions of clause 6 of Article 10 and 14 herein, or use figures or data obtained from independent comparables in the previous year as well as adjust material differences resulting from any time-related factor.

Time of expansion of the scope within which figures or data are collected from independent comparables shall be restricted to one financial year in comparison with the financial year of a taxpayer if the transfer pricing method stipulated in Article 14 herein is used.

Article 10. Criteria for comparability analyses, adjustments for material differences

1. Comparability analysis shall be made by using the method of collating, reviewing and correcting material differences affecting comparability factors for the purpose of selecting independent comparables, including specifications of commodities, services and assets (hereinafter referred to as product specification); functions and assets, business risks; contractual terms and economic conditions in case of transactions occurring.

2. Product specifications are defined as properties affecting the product price, i.e. in the case of a tangible property, including the physical features, product type, quality, trademark, reliability, availability and the volume of supply; in the case of a service, including the nature, complexity, expertise and extent; in the case of an intangible property, including the form of transfer, type and form of property, duration and degree of protection, transfer time, transferred rights, anticipated benefits from use of the property.

a) Analysis of intangible property and possibility of distributing profit to parties must not depend solely on legal ownership but take into account all of risk control activities and financial capacity for controlling risks to the entire process of further development, enhancement, maintenance, protection and exploitation of intangible property that involves related parties. The comparability analysis shall be based on certain characteristics of intangible property, e.g. exclusivity, extent and duration of legal protection, rights created by patents, licenses and assignments, geographical extent of intangible property rights, life cycle, growth phase, rights for promotion of value, improvement and update of intangible property, estimated level of profit expectedly obtained from such intangible property;

b) The analysis of characteristics of intangible property aims to determine intangible property used or assigned during the transaction process and specific or material economic risks related to development, development, enhancement, maintenance, protection and exploitation of intangible property; contractual agreements on legal ownership of intangible property, terms and conditions of legally binding agreements, registration, agreements on license and other related contracts, associated risks; the party performing the function of operating and using intangible property, managing risks associated with development, enhancement, maintenance, protection and operation of intangible property; contractual terms and conditions and practical reality of execution by contracting parties; the related party transactions actually connected with development, enhancement, maintenance, protection and operation of intangible property upon examination of the legal ownership of intangible property and other related contractual relationships or rights and process of execution of these transactions by the parties; and price of the transactions appropriate to contribution made and the functions performed, assets employed and risks assumed by the parties.

3. Operational functions, operating assets and risks arising from business activities of each contracting party, and operating assets and risks in relation to opportunity costs, economic conditions, and conditions of the whole industries or sectors, business lines and geographical positions of taxpayers, shall be analyzed to determine factors measuring the capability of gaining profit from business activities and practical situation of those business activities which these taxpayers have performed in connection with their functions and use of associated assets, capital, costs and expenses.

Comparability analysis results must reflect main functions in the relationship between, the use of assets, capital and opportunity costs as well as risks associated with the use of these assets, capital and opportunity costs for investment purposes, and the capability of gaining profit, which are performed by taxpayers in relation to their business transactions, specifically as follows:

a) Certain main functions of the subsidiary in the entire value chain of a multinational enterprise group including the research and development function, e.g. contract-based research and development services, in-house research and development, technical and technological development and product design activities; the manufacturing function, e.g. in-house manufacturing, licensing manufacturing, contract manufacturing, toll manufacturing, assembling and installation of equipment; sale, purchase and management of raw materials and other activities; distribution, e.g. distribution on its own, limited risk distribution, commission agent, wholesale distribution, retail distribution; provision of support services, e.g. legal, accounting and finance, credit and collection, training and personnel management services; provision of transportation and warehousing services; brand development activities, e.g. marketing, advertising, publicity, market research and other functions within the value chain in the industry;

b) Certain key financial assets of a subsidiary including intangible property, e.g. technical know-how, copyright, trade secrets, secret formulas, patents, intangible assets related to commercial and marketing activities, e.g. brands, brand building and identity systems, lists, figures and relationships with customers; tangible assets, e.g. plant, machinery and equipment; financial assets, rights and economic benefits created by these assets during the process of exploitation, use and transfer thereof;

c) Certain major business risks including strategic risks or market risks arising from implementation of business strategies, e.g. market penetration, expansion or maintenance; risks associated with infrastructure or goods inventory; financial risks, e.g. credit risks, bad debt risks, foreign exchange risks; risks associated with transactions, e.g. risks arising from factors such as price and payment terms in commercial transactions; product risks arising from design, development and manufacturing of product, product quality management and after sales services; business risks associated with capital investments, the number of customers and force majeure risks.

Analysis of the taxpayer’s business risks in the entire value chain of the multinational group aims to determine material risks to the entire value chain of the industry, capability of controlling risks such as capability of making decisions on risk management and dealing with risks likely to arise in the reality, e.g. identification of major economic risks, assessment of degree of allocation and arrangement of risks specified in legally binding agreements or documents or arrangements of the taxpayers; analysis of functions of controlling and minimizing risks in legally binding agreements or documents or arrangements; examination and review of performance of these functions, bearing and allocation of risks of the taxpayer in reality. In case where there is any difference between the allocation of risks in legally binding agreements, documents or arrangements and that carried out in the reality, based on the results of risk analysis, tax authorities shall be accorded the authority to decide to re-allocate risks and adjust levels of price, profit margins and profit split ratios of taxpayers.

4. Contractual terms of transactions include certain terms regarding volumes and conditions of the transaction or product distribution; duration, conditions and methods of payment; terms and conditions of warranty, replacement, improvement, update, correction or adjustment of product; terms and conditions of exclusive rights to trade and distribute products; certain other terms and conditions having economic effects such as support and advisory services for quality control, user’s instruction, advertising and promotional activities.

a) In cases where terms and conditions of a legally binding agreement, credential or written agreement do not adequately reflect the reality of execution of such transactions between related parties, the comparability analysis shall be conducted on the basis of carrying out review of events occurring in the reality or financial data in order to identify economic characteristics, nature and risks associated with the practical reality of business of these parties;

b) Unless related parties enter into a legally binding agreement, document or arrangement in order not to recognize sales or expenses derived from technical assistance, synergies in the multinational group, sharing of business know-how or utilization of seconded or dual-contract staff, the comparability analysis is carried out to determine the nature, value of transaction, income generated from these transactions and contribution made by each related party. This is used as the basis for comparison with business decisions that may be accepted by independent parties under the same or similar conditions.

5. Economic conditions of transactions and market conditions at the date and time of execution of these transactions may determine the levels of price, profit margins and profit split ratios of parties.

a) Several economic conditions under which these transactions are carried out, e.g. scale and size, geographic locations of the product manufacturing and consumption market, levels of market such as ordinary wholesale and retail, exclusive distribution; extent of competition of products sold on the market and relative competitive position of the buyer and seller; availability of substitute goods; levels of general supply and demand or location-specific supply and demand; consumer purchasing power; economic factors that may influence costs of production arising at the location of transaction, e.g. tax incentive policies; government regulations of the market; cost of production, land, labor and capital; business cycle and factors having positive influence upon the price, profit rate and profit distribution ratio of the taxpayer, e.g. features of positions, advantages and cost savings achieved depending on locations, local markets, labor forces and synergy and specialization functions centralized on the basis of contributions made by related parties involved in the creation of value;

b) In case where taxpayers and comparables neither reside within the same country, territory nor supply goods and services for the same geographic market, the analysis of economic conditions includes analysis of comparability of markets where the taxpayer and comparables are residing with respect to comparative advantages, location-specific advantages influencing competitive factors such as costs of labor, raw materials, transportation, rent, training, subsidies, financial, tax incentive policies, infrastructure costs, market growth levels and advantageous features of market such as the large population and customer base with increased spending capacity and other comparative advantage features.

6. The comparability analysis for elimination of material differences is an analysis aimed at eliminating quantitative and qualitative differences that may exist in financial information or data materially influencing factors used as the benchmarks for determining prices of related-party transactions according to specific transfer pricing methods referred to in Article 13, 14 and 15 herein. The quantitative difference is defined as the difference determined by absolute numbers in business cycle, number of years of establishment and operation of an enterprise or relative numbers representing differences in financial indicators according to particular investment sectors or operational functions, differences in current capital, while the qualitative difference is defined as information identified based on the specific transfer pricing methods stipulated in Article 13, 14 and 15 herein.

a) Factors causing differences which are considered material, including: Differences in product specifications, contractual terms, functions, assets and risks and business sectors or activities and economic conditions of taxpayers and independent comparables; the differences in investment policies, environment and impacts of input costs in local, domestic and overseas areas;

b) Quantitative and qualitative differences need to be reviewed to adapt to comparability factors causing material impacts on the transfer pricing methods referred to in Article 13, 14 and 15 herein.

7. The results of the comparability analysis shall be considered the basis for selection of independent comparables relevant to specific transfer pricing methods referred to Article 13, 14 and 15 herein. In the event that any taxpayer refuses to make any adjustment for the level of price, profit margin and profit split ratio based on independent comparables by reason of quantitative and qualitative differences causing material impacts, they shall be obliged to search and reselect independent comparables in order to determine the standard arm’s length range in order to ensure the high degree of reliability and similarity, and make an adjustment for the transfer prices under the provisions of this Decree.

Article 11. Steps of the comparability analysis process

1. Identifying the substance of a related-party transaction before analyzing it to find out its comparability with independent comparables.

2. Analyzing, comparing, finding and selecting independent comparables on the basis of identifying comparison time, product specifications and contractual terms and conditions; analyzing the industry, market and economic conditions wherein transactions arise; analyzing related-party transactions and taxpayers performing related-party transactions; databases; transfer pricing methods and adjustments for any potential material difference, specifically as follows:

a) Identifying the comparability extent, subject matters and factors, e.g. comparison time and date, information used for analysis of the taxpayer with respect to comparability factors relating to functions, assets and risks; product specifications; contractual requirements; economic conditions under which transactions occur, analysis of the industry, market, context of business activities and transaction of goods, services and assets of parties, for the purpose of selecting the related party that requires the determination of prices of their related party transactions in accordance with this Decree;

b) Evaluating and searching comparables, e.g. prioritizing examination of internal independent comparables on the basis of verification of the level of their reliability and independence in order to ensure that these transactions are not those arranged in breach of the arm’s length doctrine; setting out criteria for searching and determining database that may be relied on, as referred to in Article 17 herein, in order to search similar independent comparables. On the basis of information that has been subject to the analysis and examination of availability of data of independent comparables, the transfer pricing method appropriate for the substance of business, commercial, financial activities and risks incurred by each related party that requires the determination of the transfer prices must be selected;

c) Analyzing the level of the similarity and reliability of independent comparables that have been selected on the basis of examination and screening of qualitative and quantitative criteria; analyzing information about the economy, industry and financial figures of selected comparables in order to verify the level of similarity; determining and correcting material differences. On the basis of the selection of similar independent comparables, it shall be necessary to use financial data and figures of selected independent comparables to determine bases for adjustment in the levels of price, profit margins and profit split ratios of taxpayers under the provisions of Article 8 herein.

3. Identifying the level of price, profit margin or profit split ratio, based on the results of the analysis of independent comparables, as the basis for the comparison or application thereof for the determination of corporate income tax obligations of taxpayers and avoidance of any reduction in tax obligations to the state budget. Calculation method must be identically applied in the operating and business cycle or stage in agreement with functions and business models as prescribed in Article 12, 13, 14 and 15 herein.

Article 12. Selection of transfer pricing methods

Comparison method for determination of prices of related-party transactions (for the purpose of this Decree, shortly referred to as transfer pricing method) shall be applied according to the arm’s length principle, transaction nature and functions of taxpayers to the extent that this method is assessed and applied in a consistent manner in the entire business cycle or stage; based on financial data obtained from independent comparables, shall be selected according to comparability analysis principles referred to in Article 6, 7, 8, 9 and 10 herein. The transfer pricing method shall be selected amongst the methods prescribed in Article 13, 14 and 15 herein, based on features of related-party transactions and available information.

Article 13. Method of comparison between the transfer price and the arm’s length price

1. Cases of application of the method for comparing the transfer price and the arm’s length price (hereinafter referred to as arm’s length price comparison method):

Taxpayers perform related party transactions in specifically classified products, tangible assets or specified services subject to trading conditions, commonly sold on the market or assigned prices quoted on the domestic and international exchanges of commodities or services; in making payment of royalties on use of intangible assets; payment of loan interest when performing lending and borrowing activities; or perform independent and related-party transactions in products that similar in product specifications and contractual requirements.

2. Principles of application:

a) The arm’s length price comparison method is implemented according to the rule of non-discrimination regarding product specifications and contractual requirements when comparing arm’s length prices with transfer prices which cause material impacts on product prices. In case where there is any difference causing material impacts on product prices, these material differences must be eliminated;

b) Such factors as product specifications and contractual requirements have material impacts on product prices, including characteristics, quality, brands and trademarks of products, and transaction scale and volume; requirements set out under agreements on supply and transfer of products, e.g. amounts, durations of transfer of products, payment deadlines and others; rights to distribute or consume commodities, services or assets, impact economic values and markets where transactions occur and other factors affecting product prices, such as economic conditions and operational functions of taxpayers.

3. Calculation method:

a) The transfer price of a product is adjusted to the arm’s length price of the product or the value within the standard arm’s length range of independent comparables as prescribed in this Decree;

b) In case where the product price is publicly announced on the domestic and international exchange of commodities or services, the transfer price of a product shall be determined according to the product price quoted at the comparable time and under the same or similar conditions;

c) Taxpayers purchasing machinery or equipment from foreign related parties must provide records or documents evidencing purchase prices thereof in accordance with the arm’s length principle at the purchase time. For new machinery or equipment, the price used for comparison purposes is the price on the invoice demonstrating that the related party has purchased such machinery or equipment from an unrelated party. For used machinery or equipment of which the invoice or original document evidencing purchase is issued on the purchase date, revaluation thereof shall be subject to applicable legislation on guidance on management, use and depreciation of fixed assets.

4. Transfer pricing results are the taxable prices used for declaring and determining the corporate income tax amounts payable on condition that they do not cause any reduction in taxpayers’ tax obligations to the state budget.

Article 14. Method for comparing profit margins of taxpayers with those of independent comparables

1. When to apply the method:

Taxpayers do not have database and information in order to apply the arm’s length price comparison method referred to in Article 13 herein; taxpayers are unable to compare product-based transactions on the basis of specific transactions in specific comparable products to the extent that these transactions are aggregated according to the business nature and reality, and then successfully select profit margins of appropriate independent comparables; or taxpayers fail to exercise their autonomy over the entire business and production chain, or fail to participate in the execution of related-party transactions prescribed in Article 15 herein, specifically including:

a) The method for comparison of gross profit to sales (resale price method) shall be applied when the taxpayer sells or distributes products purchased from its related party to unrelated customers and does not create intangible property associated with products sold; does not participate in the process of development, enhancement, maintenance and protection of intangible property under the ownership of its related parties associated with the products sold, carry out processing, manufacturing or installation activities that may lead to any change in the nature and characteristics of these products, or attach trademarks to these products to increase their value. The resale price method shall not be applied to taxpayers acting as distributors that own intra-group valuable product intangibles with respect to brand names, trademarks and other marketing-related intangibles such as customer lists, distribution channels, logos, images and other brand identity elements for market research, marketing or trade promotion, or incurs expenses from establishment, design of distribution channels, brand identities or after-sale costs;

b) The method for comparing the ratio of gross profit to cost of goods sold (cost plus method) shall be applied when taxpayers that do not own its product intangibles and incurs little risk perform their functions of contract manufacturing, make-to-order manufacturing or toll manufacturing, assembly, processing of products, installation of equipment; procurement and supply of products; supply of services or rendering of research and development services agreed upon with related parties. The cost plus method shall not be applied to taxpayers that are independent manufacturing companies, or perform various functions like product research, development, building and creation of product brands, trade names, market strategies and product warranty and customer care services;

c) Net profit margin comparison method: The method for comparing the net profit margin shall be used in the cases where taxpayers do not have information necessary for the application of the arm’s length price comparison method; do not have data and information about the accounting method of independent comparables or, because of failure to search comparables with similar functions and products, do not have sufficient grounds for application of the resale price method or the cost plus method; taxpayers performing distribution or manufacturing functions do not own product intangibles or do not engage in development, enhancement, maintenance, protection and exploitation of product intangibles, or does not fall within the scope of application of the method for distribution of profit between related parties in accordance with clause 1 of Article 15 herein.

2. Principles of application:

a) Profit margin comparison method shall be applied according to the principle of non-discrimination concerning operational functions, assets and risks; economic conditions and accounting and bookkeeping methods taken into consideration in a comparison thereof between taxpayers and independent comparables have material effects on the profit margin. If there is any difference causing material impacts on profit margins, then these material differences must be eliminated;

Factors having material impacts on the profit margin encompass: Assets, capital, costs and expenses; rights to control and make decisions in reality to serve the purpose of performing main functions of taxpayers; nature of business industry and market for production and consumption of products; accounting and bookkeeping method and cost structure of products; economic conditions in which transactions occur; commercial or financial relationships of multinational groups; technical assistance, sharing of trade secrets, know-how, utilization of employees working under single or dual employment regime and economic conditions of business industries or sectors in which taxpayers are operating, product specifications and contractual terms and conditions or requirements.

b) Cases of application of the resale price method: The resale price method is applied to certain differences that may have material impacts upon the ratio of gross profit to price of goods sold (net sales) such as costs reflecting functions of the enterprise that is a sales agent, exclusive distributor or distributor performing marketing functions; growth and development levels of product consumption markets; functions performed by taxpayers within the supply chain such as retailing, wholesale supply and accounting methods of parties;

c) Cases of application of the cost plus method: The cost plus method is applied to certain differences that may have material impacts upon the ratio of gross profit to cost of goods, including costs reflecting functions performed by enterprises such as those functioning as contract manufacturers designated by parent companies or intra-group service suppliers; contractual obligations such as durations for delivery of products, costs of quality control, warehousing, terms of payment, and methods for accounting for cost components of products sold, of taxpayers and independent comparables;

d) The net profit margin comparison method shall be applied in such cases as: The method for comparison of the net profit margin shall be applied to certain differences that may have material impacts upon net profit margins, e.g. differences in functions, assets, risks; economic conditions; contractual terms, conditions or requirements and product specifications referred to in Article 10 herein.

Taxpayers doing business by performing their routine functions, without performing strategic decision-making functions and engaging in transactions of low added value comprise production or distribution enterprises which are not exposed to inventory risk or market risk and do not have sales revenue or costs arising from uses of intangible assets, shall not have to incur operating losses arising from these risks.

3. Calculation method:

The profit-comparison method shall use the gross or net profit margins of selected arm’s length comparables for comparison for identifying the corresponding gross or net profit margins of taxpayers. Selection of profit margins, including gross profit margins or net profit margins based on sales, costs or assets shall depend on the nature and economic conditions of transactions; functions of taxpayers and accounting or bookkeeping methods of related parties. The bases for determination of the profit margin, including accounting data of taxpayers on sales, costs or assets shall not be controlled or decided by related parties.

a) Method for comparing the gross profit to sales (the resale price method):

The purchase price (cost) of a good, service or asset sold by a related party equals (=) the resale price (net sales) of that good, service or asset resold to an unrelated party minus (-) the gross profit divided by the selling price (net sales) of a taxpayer less (-) certain other costs included in the purchase price, such as import duties, customs dues, insurance costs or international transit costs (if any).

The gross profit to the selling price (net sales) of a taxpayer determined by comparing it with that of independent comparables shall equal (=) the selling price (net sales) of the taxpayer multiplied (x) by the gross profit relative to the selling price (net sales) of the selected independent comparables.

The gross profit to the selling price (net sales) of independent comparables shall be calculated as the value falling within the standard arm’s length range of the ratio of the gross profit to the selling price (net sales) of the independent comparables which are selected for adjustments made according to the principles herein stipulated.

The purchase price (or cost) which is adjusted to independent comparables is the taxable price or the cost for tax declaration for determination of corporate income tax obligations of taxpayers.

b) Method for comparing the gross profit to sales (the resale price method):

The selling price (or net sales) of a good, service or asset sold to a related party shall be calculated as the arm’s length cost thereof plus (+) the gross profit to the cost of a taxpayer.

The gross profit to the cost of a taxpayer which is determined based on independent comparables equals (=) the cost paid by a taxpayer multiplied (x) by the ratio of the gross profit to the cost of the selected independent comparables.

The ratio of the gross profit to the cost of the selected independent comparables is defined as the value falling within the standard arm’s length range of the ratio of the gross profit to the cost of the independent comparables which are selected for adjustments made according to the principles herein stipulated.

The selling price to a related party (or net sales) which is adjusted to independent comparables is the taxable price or the cost for tax declaration for determination of corporate income tax obligations of taxpayers.

c) Net profit margin comparison method:

The net profit margin existing before the interest and corporate income tax to sales, costs or assets of a taxpayer engaged in the transfer pricing are deducted shall be adjusted to the ratio of net profit existing before the interest is taken away to sales, costs or assets of the selected independent comparables, based on which tax obligations of a taxpayer is adjusted or determined.

Net profit excludes the difference between sales and costs of financial activities.

The selected net profit margin is the value within the standard arm’s length range of the net profit margin of independent comparables which are selected for adjustment to or determination of taxable income and tax obligations of a taxpayer according to the principles herein stipulated.

Indicators of the net profit margin existing before the loan interest and corporate income tax are taken away shall be computed under the provisions of legislation on accounting, tax administration and corporate income tax.

4. The results of determination of the adjusted profit margin of a taxpayer are the basis for the determination of the taxable income and the corporate income tax payable without causing any reduction in the taxpayer’s corporate income tax obligations to the state budget.

Article 15. Method for splitting or allocating the profits between related parties

1. When to apply the method:

a) A taxpayer engages in a related transaction which is specific, integrated or closed in an enterprise group, or activities related to the development of new products, use of proprietary technologies, takes part in the group’s unique value chain or the process of developing, increasing, maintaining, protecting and utilizing proprietary intangible assets without any basis for determination of prices of transactions between related parties or transactions closely linked or simultaneously performed, or complicated financial transactions related to multiple financial markets across the globe;

b) A taxpayer engages in the digital transfer pricing in the absence of any basis for determination of prices of transactions between related party or participates in the creation of the added value obtained from synergies of resources available within the group;

c) A taxpayer performs its functions to exercise autonomy over their entire production and business process, and is not governed under the provisions of clause 1 of Article 13, clause 1 of Article 14 herein.

2. Principles of application:

This method is defined as the method for splitting or allocating total profit generated from related-party transactions in order to determine the profit of a taxpayer engaged in the value chain. This method shall be applied to total actual and potential profit of related-party transactions referred to in Point a of this Clause which is calculated by using financial data obtained on such bases as reasonable and valid evidencing documents; values and profits of transactions must be determined by using the same accounting method during the whole time length of application of this method.

3. Calculation method:

The adjusted profit of a taxpayer shall be allocated to total profit gained, including actual or potential profits of parties engaged in the transaction chain.

The adjusted profit of a taxpayer is defined as the summation of the primary profit and the extra profit. The primary profit is calculated according to the profit margin comparison method referred to in Article 14 herein. The extra profit is calculated according to the allocation proportion based on one or certain factors such as sales, costs, assets or personnel of related parties engaging in transactions and in conformity with the arm’s length principle.

In case of lack of information or data for apportionment of the adjusted profit stipulated above, such allocation can be based on one or certain factors such as sales, costs, assets or personnel of related parties engaged in the transfer pricing and must conform to the arm’s length principle.

4. The results of determination of the adjusted profit of a taxpayer are the basis for the determination of the taxable income and the corporate income tax payable without causing any reduction in the taxpayer’s corporate income tax obligations to the state budget.

Chapter III

TAXABLE COSTS AND DECLARATION OR DETERMINATION OF TRANSFER PRICES

Article 16. Determination of costs for assessment of taxes on enterprises engaged in related-party transactions

1. Costs of related-party transactions which neither match the substance of arm’s length transactions nor contribute to creating operating sales or income of a taxpayer shall not be charged as deductible costs upon determination of the income subject to the corporate income tax within a specified taxable period, including:

a) Costs of payments to a related parties that does not perform any business or production activity relating to a taxpayer’s industries or business lines; that do not have any associated rights and responsibilities to assets, commodities and services provided to the taxpayer;

b) Costs of payments to a related party that performs business or production activities, but has the scale of assets, number of employees and operating functions incommensurate with the transactional value that this related party has obtained from a taxpayer;

c) Costs of payment to a related party that is a resident entity within a country or territory that does not collect the corporate income tax, and that does not contribute to creating sales or added value for the business and production activities of a taxpayer.

2. Service charges of related parties:

a) Except for payments referred to in point b of this clause, a taxpayer can deduct their service charges from taxable costs within a specified taxable period when meeting the following requirements: services rendered have commercial, financial and economic value and are directly used in their business and production activities; services rendered by related parties are confirmed as already supplied only in the same conditions under which unrelated parties are charged for these services; the arm’s length principle and transfer pricing method or the method of allocation of service charges between related parties must be applied in unison within the entire group to payment of charges of similar services of which the taxpayer must provide a contract, evidencing documents, invoices and information concerning the method of calculation, factors of allocation and pricing policies of the group.

In case where there is a connection with centers performing specialized functions and synergies in creating the added value for the group, a taxpayer must determine the total value created from these functions and identify the level of profit allocation proportionate to the value of participation by related parties from which relevant service charges paid to related parties to perform coordination or service supply functions in arm’s length transactions of same or similar nature have been deducted.

b) Service charges that are not deducted from taxable income encompass costs arising from services rendered for the sole purpose of providing other related parties with benefits or values; services rendered to provide benefits for shareholders of related parties; services of which costs are repeatedly charged due to multiple related parties render the same services, or in which the added value offered to a taxpayer is not specified; services which are, in nature, benefits obtained by a taxpayer as a member of a corporation and costs that a related party adds to third-party services rendered through a related intermediary without adding any value to these services.

3. Total loan interest cost is deducted in case of determining the income subject to corporate income tax of the enterprise engaged in related-party transactions:

a) Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% more than the net profit generated from business activities within the taxable period plus loan interest costs arising after deducting deposit interests and lending interests arising within the taxable period plus depreciation/amortization expenses arising within that period of a taxpayer;

b) The portion of loan interest cost which is non-deductible as prescribed in point a of this clause is carried forward to the next taxable period for the determination of total loan interest cost deductible if total loan interest cost deductible in the next taxable period is lower than the amount prescribed in point a of this clause. The loan interest costs may be carried forward for a maximum consecutive period of 05 years, counting from the year following the year in which non-deductible loan interest costs arise;

c) The provision in Point a of this Clause shall not apply to loans of taxpayers that are credit institutions as defined in the Law on Credit Institutions; insurance companies as defined in Law on Insurance Business; ODA loans and concessional loans of the Government which are granted to enterprises in the on-lending form; loans intended for implementing national target programs (including new rural area development programs and sustainable poverty reduction programs); loans invested in programs or projects for implementation of State social welfare policies (e.g. resettlement housing, worker or student housing and social housing, and other social welfare projects or programs);

d) Taxpayers must declare the rate of loan interest costs arising within a specific taxable period according to Form No. I enclosed herewith.

Article 17. Databases used for declaration, determination and management of transfer prices

1. Databases used for declaration, determination and management of transfer prices, including:

a) Commercial database contains financial and economic information and data that data businesses acquire, collect, standardize, archive, update and provide via their access support software, manage using tools and applications which are readily programmed, provide utilities supporting users in searching, accessing and using financial and economic data of foreign and domestic enterprises operating in Vietnam, and arranged according to business industries and sectors, geographical regions or search criteria meeting other demands to serve the purposes of comparison and determination of comparables in the process of declaration and management of transfer prices;

b) Corporate information or data publicly released on stock exchanges;

c) Information or data available on domestic and international commodity or service exchanges;

d) Information made available to the public by ministries or sectoral administrations, or other official sources.

2. Transfer price management databases of tax authorities, including:

a) The database referred to in clause 1 of this Article;

b) Information or data exchanged with counterparty tax authorities as provided in clause 7 of Article 4 herein;

c) Information made available to tax authorities by ministries or sectoral administrations;

d) Risk management databases of tax authorities.

3. Analysis and selection of independent comparables for analysis and determination of the arm’s length range shall be subject to the principles of comparability analysis and the transfer pricing methods referred to herein, and must conform to the priority order in selecting comparison data as listed hereunder:

a) Internal comparables of taxpayers;

b) Resident comparables residing within taxpayers’ countries or territories;

c) Comparables from other regional states where sectoral conditions and economic growth levels are comparable.

With regard to foreign comparables operating in different geographical markets, it shall be necessary to analyze the comparability, quantitative and qualitative material differences referred to in Article 9 and 10 herein.

Article 18. Rights and obligations of taxpayers regarding the declaration and determination of transfer prices

1. Taxpayers engaged in related party transactions as covered by this Decree shall enjoy the rights stipulated in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019.

2. Taxpayers engaged in related party transactions under this Decree shall be held responsible for declaring and determining transfer prices, and shall be exempted from corporate income tax obligations within the territory of Vietnam in accordance with this Decree.

Taxpayers shall assume responsibility for demonstrating their compliance with this Decree with respect to their comparability analysis and selection of pricing methods upon the request of regulatory authorities.

3. Taxpayers engaged in related party transactions under this Decree shall be held responsible for declaring information about their interrelationships or intra-group relationships and related party transactions by using the Form No. 01 given in Appendix I, II and III to this Decree, and submitting their completed forms together with the corporate income tax finalization returns.

4. Taxpayers shall be responsible for retaining and providing the transfer pricing files comprising information, documents, data and records, including:

a) Interrelationship and related party transaction information provided in the form given in Appendix I hereto;

b) Local files, including information about transfer pricing, transfer pricing policies and methods, prepared and deposited at taxpayers’ offices according to the directory of information and documents prescribed in Appendix II hereto;

c) Master files containing information about business activities of multinational groups, transfer pricing policies and methods of global groups and policies on allocation of income and decentralization of operations and functions in value chains of groups according to the directory of information and documents prescribed in Appendix III hereto;

d) Country-by-Country reports of profits of ultimate parent companies prescribed in clause 5 of this Article and Appendix IV hereto.

5. Taxpayers’ obligations related to Country-by-Country reports of profits:

a) If a taxpayer is an ultimate parent company in Vietnam that generates at least eighteen thousand billions of Vietnam dong in their global consolidated revenue, then they shall take responsibility for preparing a Country-by-Country report of profits included in the transfer pricing file referred to in Appendix IV hereto. The duration of submission of these reports to tax authorities shall be 12 months starting from the ending date of the ultimate parent company’s fiscal year.

b) Taxpayers in Vietnam having overseas ultimate parent companies responsible for submitting a Country-by-Country reports of profits under the host country’s legislation must submit such reports to tax authorities in the following cases:

– Countries, territories where ultimate parent companies are residents enter into international taxation agreements with Vietnam, but do not have any agreement with competent regulatory authorities by the deadline for submission of reports under the provisions of point a of this clause.

– Overseas countries, territories where ultimate parent companies are residents have agreements between competent regulatory authorities with Vietnam, but have terminated the automatic communication mechanism or fail to automatically provide Vietnam with Country-by-Country reports of profits of groups that are residents in these countries or territories.

– In case where a multinational group having more than one taxpayer in Vietnam and an ultimate parent company in an overseas country issues a written notification to designate one of the taxpayers in Vietnam to submit a Country-by-Country report of profits, the designated taxpayer shall be obliged to submit such report to a tax authority. Taxpayer shall be obliged to submit the written notification of designation issued by the ultimate parent company to the tax authority by or on the ending date of the fiscal year of the taxpayer’s ultimate parent company.

c) Regulations laid down in point b of this clause shall not apply to the cases where ultimate parent companies of taxpayers in Vietnam designate other entities to act on their behalf to submit Country-by-Country reports of profits to tax authorities of host countries by or on the date prescribed in point a of this clause, and meet the following requirements:

– Countries, territories where entities entrusted with submission of reports are residents adopt regulations requiring the submission of Country-by-Country reports of profits.

– Countries, territories where entities entrusted to submit reports are residents have agreements between competent regulatory authorities with Vietnam as signatories at the date due for submission of these reports as per point a of this clause.

– Countries, territories where entities entrusted with submission of reports are residents have agreements between competent regulatory authorities with Vietnam, but have not terminated the automatic communication mechanism and provide Vietnam with Country-by-Country reports of profits of groups that are residents in these countries or territories.

– Entities entrusted with submission of reports shall be obliged to show their written notifications stating that they are designated to submit Country-by-Country reports of profits to tax authorities of host countries by or on the ending date of the fiscal year of the group’s ultimate parent companies.

– Written notifications of designation of entities entrusted with submission of reports which are provided by taxpayers in Vietnam to Vietnamese tax authorities under the provisions of point b of this clause.

– Taxpayers in Vietnam must inform Vietnamese tax authorities in writing of names, tax identification numbers and host countries of ultimate parent companies or entities entrusted with submission of reports by or on the ending date of the group’s fiscal year.

d) If taxpayers’ overseas ultimate parent companies are bound to submit Country-by-Country reports of profits under the regulations of host countries, tax authorities must automatically communicate under commitments made under international taxation agreements by Vietnam.

dd) If taxpayers’ ultimate parent companies are not bound to submit Country-by-Country reports of profits under the regulations of host countries, tax treaties must be observed.

6. Transfer pricing files must be compiled before the time of filing corporate income tax finalization returns each year, and must be deposited and presented to meet tax authorities’ requests for provision of information. When tax authorities carry out transfer pricing inspections and audits, the time limit for submission of the transfer pricing files shall be subject to regulations laid down in the Law on Inspection, starting after receipt of information requests.

Transfer pricing files and documentary information or evidencing documents must be provided by taxpayers to tax authorities in compliance with laws and regulations on tax administration. Sources of data, evidencing documents and records used as the basis for comparability analysis and determination of prices of related-party transactions must be clearly cited. In case where data of independent comparables are accounting data and figures, taxpayers shall be responsible for retaining and providing tax authorities with these data represented in a soft copy and in the spreadsheet format.

7. Taxpayers shall be responsible for providing, in a sufficient and accurate manner, and bearing legal responsibility for, information and documents included in the transfer pricing files at the requests of tax authorities during the pre-inspection or pre-audit consultation procedures as prescribed by Article 20 herein. The time limit for submission of the transfer pricing file shall not be longer than 30 working days from the date of receipt of the tax authority’s request. In case where sound reasons are provided by taxpayers, the submission deadline or time limit shall be extended only once to no longer than 15 working days as from the expiry date.

8. Independent consulting or audit companies or tax agent businesses that act on behalf of taxpayers to file the transfer pricing files shall be responsible for complying with legislation on tax administration over enterprises engaged in the transfer pricing as provided herein, and assume legal responsibility in accordance with laws and regulations.

Article 19. Safe harbor rules for taxpayers’ exemption from transfer pricing declaration and documentation requirements

1. Taxpayers shall be exempted from the transfer pricing declaration requirements referred to in Section III and IV of the Appendix I to this Decree, and the transfer pricing documentation requirements prescribed herein only if they are engaged in transactions with related parties that must pay corporate income tax within the territory of Vietnam, are subject to the same corporate income tax rates as applied to these taxpayers and all of them are not offered the corporate income tax incentive within a specified taxable period, but they shall be required to clarify bases for such exemption in Section I, II included in the Appendix I hereto.

2. Taxpayers shall be responsible for making transfer pricing declaration according to the Appendix I to this Decree, but shall be exempted from the transfer pricing documentation requirements in the following circumstances:

a) Taxpayers are engaged in the transfer pricing but their total sales arising within a specified taxable period are less than VND 50 billion, and their total values of the related-party transactions arising within a specified taxable period do not exceed VND 30 billion;

b) Taxpayers already entering into Advance Pricing Agreement (APA) have submitted the annual report in accordance with legislation on Advance Pricing Agreements. For those related party transactions which are not covered by the APA, taxpayers shall be responsible for making transfer pricing declarations as referred to in Article 18 herein;

c) Taxpayers perform business activities by exercising simple functions, neither generating any revenue nor incurring any cost from operation or use of intangible assets, generating the sales of less than VND 200 billion, as well as applying the ratio of net operating profit before deducting loan interest and corporate income tax (exclusive of the difference between sales and costs of financial activities) to net sales, in the following sectors:

– Distribution: 5% or over;

– Manufacturing: 10% or over;

– Processing: 15% or over.

In case where taxpayers keep separate accounting records of their sales and expenses in each sector, the ratios of net profits before deducting loan interest costs and corporate income taxes to net sales in specific respective sectors shall be used for calculation purposes.

In case where any taxpayer manages to keep a separate accounting record of sales but fails to do so with respect to expenses arising in the manufacturing and business sectors, it shall be required to allocate expenses in proportion to sales generated in each sector to use the ratio of net profits before deducting loan interest costs and corporate income taxes to net sales in specific respective sectors for calculation purposes.

In case where any taxpayer fails to keep separate accounting records of sales and expenses in specific manufacturing and business sectors for the purpose of determination of the ratio of net profits before deducting loan interest costs and corporate income taxes to net sales in specific respective sectors, it shall be required to use the ratio of net profits before deducting loan interest costs and corporate income taxes to net sales generated in the sector with the highest ratio.

In case where the taxpayer chooses not to use the ratio prescribe in this point, they must prepare the transfer pricing file under regulations in force.

3. With regard to taxpayers qualified for exemption from transfer pricing declaration and documentation requirements under the provisions of clause 1 and 2 of this Article, the determination of total deductible loan interest costs for the calculation of corporate income taxes of enterprises having related party transactions shall be subject to the provisions of clause 3 of Article 16 herein.

Chapter IV

IMPLEMENTATION PROVISIONS

Article 20. Responsibility and authority of tax authorities for management of transfer prices

1. Apply the risk management for the tax administration of transfer prices under regulations of laws.

a) Managing and using information of taxpayers engaged in related party transactions for risk management purposes;

b) Apply the risk management for the planning of inspection and examination of enterprises having interrelationships and related party transactions;

c) Manage and use Country-by-Country reports of profits of taxpayers for the risk management and communication tasks under regulations and commitments of Vietnam under international taxation agreements, not for tax imposition purposes.

2. Tax authorities shall consult the comparability analysis principles, transfer pricing principles and methods referred to herein as well as information about tax obligations of enterprises engaged in related party transactions in order to carry out tax imposition in the following cases:

a) If taxpayers violate laws on taxation but fully comply with accounting, invoicing and evidencing documentation regulations, setting thresholds of their sales, costs or taxable income for the purpose of determination of tax obligations shall conform to comparability analysis principles, transfer pricing methods and databases used for management of prices of related-party transactions as prescribed by this Decree;

b) In other cases, they shall be subject to clause 2 of Article 50 in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019;

c) Tax authorities shall be responsible for enabling taxpayers to present their evidence and explanation about data and figures of independent comparables used in transfer pricing files.

3. Tax authorities shall be vested with authority to set the levels of price, profit margins or profit split ratios; levels of taxable income or corporate income tax payable for any taxpayer failing to comply with transfer pricing declaration or determination requirements; failing to provide or incompletely provide data and information provided for the purpose of determination of prices of related party transaction in the following cases:

a) Taxpayers do not provide or insufficiently provide information or do not submit the Form given in the Appendix I hereto;

b) Taxpayers provide insufficient information required in the transfer pricing files referred to in the Appendix II and III to this Decree, or do not present the transfer pricing files and data, evidencing documents and records used as the basis for comparability analysis and determination of prices in the transfer pricing files at the tax authority’s request within the time limits prescribed herein. Information included in the transfer pricing file that is proved material or substantial if such information has impacts on results of analyses for selection of independent comparables, transfer pricing methods or results of adjustments for levels of price, profit margin and profit split ratios of taxpayers;

c) Taxpayers use inaccurate or unrealistic information about arm’s length transactions for comparability analyses, declaration and determination of the transfer prices, or rely on data, evidencing documents and records which are illegitimate, invalid or are of unclear origin to determine levels of price, profit margins or profit split ratios applicable to related-party transactions;

d) Taxpayers commits any violation against transfer pricing regulations set forth in Article 19 hereof;

dd) Databases used for tax imposition purposes must be subject to regulations laid down in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019.

4. Tax authorities shall be responsible for securing information provided by taxpayers relating to the transfer pricing in accordance with the provisions laid down herein. Provision of information to other entities or organizations shall be subject to clause 5 of this Article.

5. In case where there is any issue relating to policies or regulations concerning industries and specialized sectors after transfer pricing inspections, examinations or audits, tax authorities shall collect opinions or feedbacks from entities, organizations or individuals involved, specifically including:

a) Sectoral regulatory authorities, specialized organizations or associations;

b) Tax authorities shall be responsible for providing dossiers, information and documents or records relating to the transfer pricing for specialized entities or organizations asked to give their opinions. Entities or units asked to give opinions shall be responsible for securing information in accordance with laws and regulations.

6. Tax authorities shall exchange information with taxpayers and counterparty tax authorities according to the consultation procedures implemented prior to, during and after the transfer pricing inspections, examinations or audits as follows:

a) Where, through the application of risk management measures to the tax administration of prices of related-party transactions, tax authorities find it necessary to exchange information with taxpayers about the Appendix I to this Decree and the transfer pricing files of taxpayers, tax authorities shall send written requests for consultation with taxpayers in order to exchange and provide in advance information about the transfer pricing files of taxpayers in accordance with provisions set forth in this Decree;

b) Where tax authorities need to contact or discuss with counterparty tax authorities about Country-by-Country reports of profits and other relevant information under the provisions of terms and conditions regarding bilateral agreement procedures and information exchange under the relevant tax treaties. Where necessary, tax authorities shall notify taxpayers in writing of the temporary suspension of the transfer pricing inspections, examinations or audits in order to exchange information with counterparty tax authorities in accordance with legislation on taxation.

7. Tax authorities shall carry out automatic information exchange or communication mechanism under international commitments of Vietnam under tax treaties. On a periodic or annual basis, tax authorities shall post the list of foreign tax authorities implementing the mechanism for the automatic information exchange or communication of Country-by-Country reports of profits of taxpayers on their websites.

8. Tax authorities shall make adjustments in the transfer pricing under bilateral agreements under relevant tax treaties.

9. Where tax authorities enter into APA with taxpayers, they shall assume the following responsibilities:

a) Manage, examine, inspect or audit related-party transactions which are not covered by APA according to the risk management principles;

b) Manage, inspect, examine or audit the compliance of taxpayers with APA in accordance with laws and regulations.

Article 21. Responsibilities of ministries, ministry-level agencies and People’s Committees of centrally-affiliated cities and provinces

1. The Ministry of Finance shall, within their remit, have the following responsibilities:

a) Assume responsibility for the state management of prices of related-party transactions in accordance with provisions laid down herein;

b) Undertake and collaborate with the Ministry of Information and Communications in communicating or disseminating the state tax administration over enterprises engaged in related party transactions;

c) Inspect, examine and audit the compliance of enterprises engaged in related party transactions with regulations on taxation under this Decree.

2. The State Bank of Vietnam shall, within their remit, have the following responsibilities:

Cooperate in the provision of information or data on foreign loans and debt repayments of particular enterprises engaged in related party transactions by reference to the lists compiled by tax authorities, including data on loan amounts, interest rates, periods of interest payment and principal repayment, actual fund withdrawal, debt (principal or interest) repayment and other related information (if any).

3. The Ministry of Planning and Investment shall, within their remit, have the following responsibilities:

Cooperate in provision of data for registration of business industries of enterprises; databases concerning investment fund structures at licensing dates and dates of adjustment and amendment to investment registration certificates or enterprise registration certificates and relevant information on investment projects when tax authorities conduct transfer pricing inspections, examinations or audits over enterprises engaged in related party transactions.

4. The Ministry of Science and Technology, the Ministry of Agriculture and Rural Development shall, within their remit, have the following responsibilities:

Collaborate in providing the databases relating to agreements on technology transfer; industrial property right transfer; transfer of plant variety rights; application documents for registration of intellectual property rights after industrial property rights, plant variety rights are established; and providing opinions or feedbacks to tax authorities upon their request in order for them to carry out the tax administration over enterprises engaged in related-party transactions.

5. The Ministry of Information and Communications shall, within their remit, have the following responsibilities:

Cooperate in provision of the databases of enterprises licensed to do business in the sectors within their jurisdiction and information about related-party transactions in the digital economy sector upon the Ministry of Finance’s request.

6. The Ministry of Industry and Trade shall, within their remit, have the following responsibilities:

Cooperate in provision of the databases of transaction prices of commodities available on domestic commodity exchanges and information within its scope of management, or information necessary for the tax administration over enterprises having related party transactions at the requests of tax authorities.

7. The Commission for the Management of State Capital at Enterprises shall, within their remit, have the following responsibilities:

Collaborate in motivating groups, incorporations, groups of related enterprises under their jurisdiction to provide information in accordance with tax authority’s regulations.

8. People’s Committees of centrally-affiliated cities and provinces shall, within the ambit of their duties and powers, have the following responsibilities:

Direct Departments of Planning and Investment, Departments of Finance and other authorities to establish the specialized databases facilitating the tax administration over enterprises having related party transactions.

9. Ministries and sectoral administrations shall, within their remit, have responsibilities for cooperating with the Ministry of Finance in implementing this Decree.

Article 22. Entry into force

1. This Decree shall enter into force on December 20, 2020 and take effect from the corporate income tax term of 2020.

2. The Decree No. 20/2017/ND-CP dated February 24, 2017 and the Decree No. 68/2020/ND-CP dated June 24, 2020 of the Government, regulating the tax administration for enterprises engaged in the transfer pricing, shall be repealed from the effective date of this Decree.

3. Declaration and finalization of 2017 and 2018 corporate income taxes:

a) If taxpayers subject to the requirement for supplements to corporate income tax finalization returns in 2017 and 2018 under the provisions of clause 2 of Article 2 of the Government’s Decree No. 68/2020/ND-CP dated June 24, 2020 have not yet made additional declaration for incorporate income tax finalization returns, they may continue to do so by January 1, 2021;

b) If taxpayers already receiving inspections, examinations or audits of tax authorities or competent regulatory authorities and obtaining conclusions therefrom and handling decisions for the 2017 and 2018 taxable period fall within the cases in which they are qualified for the redetermination of tax amounts payable under point c of clause 2 of Article 2 in the Decree No. 68/2020/ND-CP dated June 24, 2020, but have not yet submitted applications to tax authorities till the effective date of this Decree, they shall be entitled to request directly supervisory tax authorities to redetermine tax amounts payable;

c) In case where taxpayers’ corporate income tax amounts or late payment amounts in 2017 and 2018 already paid to the state budget are greater than redetermined ones, the difference shall be offset against the amounts of corporate income tax accrued for the period from 2020 to end of 2024. After such period expires, tax amounts that remain after such offset shall not be further handled.

4. In case where loan interest costs are carried forward to the following taxable period upon the finalization of corporate income tax in 2019 under the Decree No. 68/2020/ND-CP , the time limit for carry-forward of loan interest costs shall not be longer than 5 consecutive years after the 2020’s CIT period. After expiry of such 5-year period, if such costs are not completely carried forward, the remaining portion of loan interest costs shall not be brought forward to the following taxable periods.

Article 23. Implementation responsibilities

1. The Ministry of Finance shall preside over or cooperate with concerned ministries, sectoral administrations, People’s Committees of provinces and centrally-governed cities in implementing this Decree.

2. Ministers, Heads of Ministry-level agencies, Heads of Governmental bodies, Chairpersons of People’s Committees of provinces and centrally-affiliated cities, other entities and persons involved shall be responsible for implementing this Decree./.

 

 

PP. GOVERNMENT
PRIME MINISTER

Nguyen Xuan Phuc