Circular No. 117/2005/TT-BTC dated December 19, 2005 of the Ministry of Finance providing guidelines on calculation of market prices in business transactions between affiliated parties

CIRCULAR

PROVIDING GUIDELINES ON CALCULATION OF MARKET PRICES IN BUSINESS TRANSACTIONS BETWEEN AFFILIATED PARTIES

Pursuant to Law on Corporate Turnover Tax 09-2003-QH11 dated 17 June 2003;

Pursuant to Decree 164-2003-ND-CP of the Government dated 22 December 2003 making detailed provisions for implementation of the Law on Corporate Turnover Tax;

Pursuant to Decree 77-2003-ND-CP of the Government dated 1 July 2003 on functions, duties, powers and organizational structure of the Ministry of Finance.

The Ministry of Finance hereby provides the following guidelines for calculation of market prices, which shall be used as the basis for declaration and calculation of the corporate turnover tax obligation of business establishments, in business transactions between affiliated parties:

A. GENERAL PROVISIONS

I. APPLICABILITY AND SCOPE OF APPLICATION

1. Applicability: organizations and individuals engaged in production and business of goods or services (hereinafter referred to as business establishments), conducting all or part of business activities in Vietnam and having business transactions with affiliated parties shall be obliged to declare and calculate the corporate turnover tax obligation in Vietnam.

2. Scope of application: transactions of sale, purchase, exchange, lease, transfer or assignment of goods and services during the course of business (hereinafter referred to as business transactions) between affiliated parties.

II. SCOPE OF NON-APPLICABILITY

Business transactions between a business establishment in Vietnam and affiliated parties related to products which are subject to price control by the State in accordance with the Ordinance on Prices dated 25 December 2001 or legal instruments amending, adding or replacing this Ordinance.

III. DEFINITION OF TERMS

1. Market price means the price of products under an objective agreement between non- affiliated parties (or independent parties) in a business transaction on the market.

2. Product is the term used in general to indicate goods and services which are the object of a business transaction.

3. Purchase price or selling price is the term use in general to indicate the price in transactions of sale, purchase, exchange, lease, transfer or assignment of products.

4. Parties shall be deemed to have a related relation (hereinafter referred to as "affiliated parties") when:

4.1. One party is involved directly or indirectly in administration, control, capital contribution or investment in any form in the other party.

4.2. Both or all parties are directly or indirectly managed or controlled by another [third] party or both or all parties make capital contribution or invest in any form in another [third] party.

4.3. Both or all parties participate directly or indirectly in administration, control of, capital contribution to or investment in any form in another [third] party.

Normally, two business establishments shall be deemed to have a related relation in a tax period if in such period:

(a) Either business establishment directly or indirectly holds at least 20% of the equity or the total property of the other business establishment; or

(b) Both business establishments have at least 20% of their equity or the total property held directly or indirectly by a business establishment or a third party; or

(c) Either business establishment is the biggest shareholder directly or indirectly holding shares with a value of at least 10% of the equity or of the total property of the other business establishment; or

(d) Either business establishment provides the other business establishment with a guarantee or a loan in any form, provided that such loan accounts for more than 50% of the total value of long and medium term loans of the borrower business establishment; or

(e) Either business establishment appoints its members to the board of management or inspection committee of the other business establishment, provided that the number of members appointed by the former accounts for more than 50% of the total members of the board of management or the inspection committee of the latter; or a member appointed by the former has the right to make decisions on financial policies or business activities of the latter; or

(f) Both business establishments jointly have more than 50% of the number of members of their board of management or jointly have a member of their board of management, who has the right to make decisions on financial policies or business activities, appointed by a third party; or

(g) Both business establishments are managed or controlled in terms of personnel, finance or business activities by individuals who are members of a family in a relation between a husband and a wife, parents and children (irrespective of whether they are natural or adopted children, daughters-in law or sons-in-law); siblings of the same parents (irrespective of whether they are natural or adoptive parents); grandparents and grandchildren who have consanguinity; both uncles or aunts and nephews or nieces who have consanguinity; or

(h) Both business establishments have a relation concerning the headquarters and permanent establishment or are permanent establishments of a foreign organization or individual; or

(i). Either business establishment is engaged in production and trading of products using intangible property and/or intellectual property rights of the other business establishment, provided that the payment for the use of such intangible property and/or intellectual property rights accounts for more than 50% of prime cost (or cost) of the products; or

(j) Either business establishment directly or indirectly provides more than 50% of the total value of raw materials, supplies or input products (excluding depreciation of fixed assets) used for production or trading of relevant output products of the other business establishment; or

(k) Either business establishment directly or indirectly controls more than 50% of turnover of sales (calculated on the basis of each type of products) by the other business establishment; or

(l) Two business establishments have agreed to conduct business co-operation on the basis of a contract.

5. Related transaction means a business transaction between affiliated parties.

6. Independent transaction means a business transaction between non-affiliated parties within the normal business context.

7. Significant difference means the difference concerning information and/or data causing an important or material effect on the price of products.

Example 1:

Enterprise V is an enterprise with 100% foreign owned capital in province X, Vietnam and has 2 transactions:

(i) Selling 2000 products to Independent Enterprise A at the selling price being the prime cost of (Z) plus (+) 6% of Z, the delivery term is at Enterprise V; and

(ii) Selling 2000 products to its parent company at the selling price being (Z) plus (+) 6% of Z, delivery term is CIF H. At the same time, the parent company agrees to provide a guarantee for a loan obtained by Enterprise V from Bank N. In practice, such guarantee is a guaranty by reputation (i.e. payment of guarantee charges is not required).

In the two above transactions:

- The difference concerning delivery terms related to costs of transportation and insurance from province X to country H has a material affect on the price of products, so it is deemed to be a significant difference.

- The difference concerning the guarantee by reputation for which the payment of charges is not required is deemed not to be a significant difference.

8. Market price margin is a collection of values of prices, gross profit ratio or profitability ratio of products calculated from independent transactions which are selected for comparison, subject to the provisions on methods of calculation of market price.

9. Tax office's database means information and data related to the calculation of the tax obligation of taxpayers and collected from different sources and analysed, stored, updated and managed by the tax office.

B. GUIDELINES ON CALCULATION OF MARKET PRICES IN RELATED TRANSACTIONS

Price of products in a related transaction stipulated in this Circular shall be calculated in accordance with market prices on the basis of comparison of the similarity between the related transaction and an independent transaction (hereinafter referred to as comparative analysis) to select the most appropriate method of calculation of a price.

I. COMPARATIVE ANALYSIS

1. Principles

1.1 Comparison between a related transaction and an independent transaction shall be construed as a comparison between the related transaction and the independent transaction or as a comparison between the business establishment conducting the related transaction and the business establishment conducting the independent transaction. The comparison shall be carried out on the basis of selection and analysis of data, source documents and materials related to the independent transaction or the related transaction in the same period to ensure their reliability to use for the purpose of tax declaration and calculation in compliance with the laws on accounting, statistics and taxation.

Example 2:

Both Enterprise A being a subsidiary of Multinational Company H and Enterprise B being an independent enterprise retail motorbikes brand HX in 2xxx. The comparison may be carried out in accordance with one of the two following methods:

- Comparison between the transaction of purchase of motorbikes for sale by Enterprise A and the similar transaction of enterprise B.

- Comparison between enterprise A and enterprise B in terms of retailing activities of motorbikes.

1.2 An independent transaction selected for comparison shall be a transaction selected from independent transactions whose nature and context (hereinafter referred to as transaction conditions) are equivalent to that of the related transaction. Then, the price of products in the independent transaction selected for comparison shall be used as the basis for calculation of a price of products in the related transaction in accordance with methods of calculation of prices stipulated in Section II of Part B of this Circular.

1.3 Upon comparison between a related transaction and an independent transaction, the transaction conditions of the related transaction and of the independent transaction selected for comparison need not necessarily be completely identical but they must ensure similarity; they must not have any differences causing a significant effect on the price of products. Where there are significant differences between the transaction conditions of the related transaction and of the independent transaction, the business establishment shall express such significant differences in a monetary value which shall be used as the basis for adjustment and exclusion of such significant differences. Upon comparison between a related transaction and an independent transaction, the similarity shall be determined and differences shall be excluded in accordance with the provisions of clause 2 of Section I of Part B of this Circular.

1.4 The comparison between a related transaction and an independent transaction shall be carried out on the basis of each transaction for each particular kind of product. However, where transactions cannot be separated or the separation of transactions on the basis of each type of product will not be consistent with business practice, the business establishment may merge the following transactions into one transaction:

1.4.1 Transactions which are closely related to and depend on each other such as transactions on the basis of a contract for supply of goods and services, in which services are an integral part of such contract for supply of goods; chain transactions such as transactions of providing or granting the right to use intangible property associated with the supply of raw materials or semi-finished products for production or processing of finished products.

1.4.2 Transactions with respect to products which have the same procedures for production or use the same main raw materials or which are classified in the same category or sub-category in accordance with the criteria for classification of goods or services into categories and sub-categories stipulated in the statistical list of goods and services issued by the authorized State administrative body upon conducting the comparative analysis of criteria of operational functions of business establishments.

Example 3:

Trading Establishment A, being an affiliated party of Multinational Group X overseas, is engaged in wholesale of electrical appliances including electrical irons, electric cookers and ovens in Vietnam. Suppose that A wholesales such items of goods and provides warranty services. Although these items of goods may be produced by affiliated parties in different countries and are sold to A, they are classified into the category of heat equipment for households (under the Vietnam statistical standards). Therefore, upon comparative analysis of the criteria of operational functions of the business establishment, values of transactions for the three types of products may be merged together for application of the most appropriate method of calculation of a price.

1.4.3 Individual small business transactions which can be merged together in order to form a complete transaction.

1.4.4 Independent transactions and related transactions which are conducted by a business establishment but whose turnover or related costs cannot be allocated reasonably to each kind of transaction. In this case, the merged transactions shall be considered as related transactions and the prices of products in the merged transactions shall be the highest price of one of the related products.

Example 4:

Business Establishment A has 2 contracts:

(i) Contract 1 for provision of services of quality control to an affiliated party being Company B; and

(ii) Contract 2 for provision of services of quality control and franchise of the right to use the patent to Independent Company C in which the turnover from franchise of the right to use the patent is 5 times higher than the turnover from provision of services of quality control calculated on the basis of the unit price of products.

Suppose that services of quality control under contract 1 and contract 2 satisfy all conditions for comparison.

- Where Business Establishment A does not separate turnover (or costs) related to the performance of these two contracts (including three separate transactions for two types of products), the entire turnover of Business Establishment A shall be deemed to be the turnover from the related transaction and subject to the provisions on each method of calculation of a market price set out in this Circular, [and] the business establishment must recalculate turnover on the basis of the highest price of products being copyright.

- Where Business Establishment A separates the turnover (or costs) related to the performance of these two contracts, the turnover from contract 1 shall be calculated on the basis of the charge rate for provision of services under contract 2.

1.5 When selecting independent transactions for comparison, a business establishment shall give priority to its own independent transactions for selection provided that such independent transaction is not created or re-structured from related transactions.

Example 5:

Company M overseas establishes Production Enterprise A in Vietnam. Suppose that Enterprise A has two transactions:

(i) Selling 2,000 products to Independent Customer A1 at the price of 10,000 Dong for a product under a contract negotiated and entered into directly by Enterprise A in its normal business conditions;

(ii) Selling 2.000 products to Independent Customer M1 at the price of USD 0.4 for a product under a contract negotiated and entered into directly by Parent Company M which appoints Enterprise A to deliver goods to Customer M1. Company M or customer M1 directly makes payment for goods to Enterprise A. Thus, transaction (i) will be considered as an independent transaction of Enterprise A; transaction (ii) will not be considered as an independent transaction of Enterprise A because, even although the products are delivered from the warehouse of Enterprise A to Customer M1 and the two parties do not have a relation, the parent company has taken part in and controlled the negotiation and execution of the contract and payment.

1.6 After comparative analysis, the minimum number of independent transactions selected for comparison and adjustment of significant differences shall be stipulated as follow:

1.6.1 01 transaction in a case where there is no difference between the independent transaction and the related transaction or there are differences but the business establishment possesses complete information and data which may be used as the basis for exclusion of all of such differences; or

1.6.2 03 transactions in a case where there are differences between the independent transaction and the related transaction but the business establishment possesses complete information and data which may be used as the basis for exclusion of all of the significant differences; or

1.6.3 04 transactions in a case where there are differences between the independent transaction and the related transaction but the business establishment only possesses information and data which may be used as the basis for exclusion of the most significant differences. In this case, the exclusion of the remaining significant differences shall be subject to the guidelines on standard market price margins stipulated in sub-clause 1.2 of clause 1 of Section II of Part B of this Circular.

The application of these provisions is not compulsory in a case where an enterprise applies the method of profit division as the first method of calculation specified sub-clause 2.5.2.1 of clause 2 of Section II of Part B of this Circular.

1.7 Where a business establishment is unable to select any independent transaction for comparison on principles stipulated by sub-clauses 1.1 to 1.6 of clause 1 of Section II of Part B above due to the special or exclusive nature of the related transaction, the business establishment shall specify reasons and implement the matter in accordance with the guidelines provided in Section III of Part B of this Circular.

2. Comparative analysis and exclusion of differences

2.1 Upon comparison between an independent transaction selected for comparison and a related transaction, the business establishment shall analyse and assess influential criteria and adjust significant differences (if any) to make clear the similarity on the basis of the four following criteria (hereinafter referred to as four influential criteria):

2.1.1 Properties of products: including properties which have main effects on the price of products. Elements showing properties of products shall mainly include:

(a) Type of products (describing the nature of products being tangible goods, copyright, technological know-how or services and so on) and physical characteristics of products (materials constituting [the products], mechanical, physical or chemical properties and so on);

(b) Quality and trade name of products;

(c) Nature of the transfer of products (for example: sale/purchase with or without conditions such as exclusive distribution, license, franchise and so on).

Example 6:

Enterprise A is an independent enterprise specialized in production of towels of all types (100% cotton fibres). The wholesale price (VAT- exclusive) of a towel of grade A, 30cm x 70cm, is 15,000 Dong.

Company M is a subsidiary with one hundred (100) per cent foreign owned capital in Vietnam specializing in production of towels of all types (100% cotton fibres) for sale (or export) to its parent company overseas. The export price (FOB) of a towel of grade A, 32cm x 70cm is USD0.7.

Suppose that others elements showing properties of two types of products are similar. Thus, the towel products of Enterprise A and Company M will be deemed to be products with similar properties (the difference of 2 cm in width of towels is deemed to be insignificant).

2.1.2 Operational functions of a business establishment: including elements showing the profitability of activities conducted by the business establishment attached to the use of property, capital and related costs. Upon analysis of the operational functions (hereinafter referred to as "functions"), the business establishment must show main functions in the relation between the use of types of property, capital and costs as well as risks attached to the investment of such property, capital and costs and the profitability [of activities] which are conducted by the business establishment in relation to the business transactions. Main functions of a business establishment shall mainly include:

(a) Research and development;

(b) Design and formation of products;

(c) Production, manufacture and process;

(d) Processing, assembly and instalment of equipment;

(e) Distribution, circulation, marketing and advertising;

(f) Management and supply of materials;

(g) Transport and delivery, provision of warehousing services;

(h) Provision of professional services such as brokerage, consultancy, training, accounting, auditing, personnel management, labour supply and information collection.

Example 7 (a):

Company N is an affiliated party in Vietnam of Multinational Company X; Company N conducts production and trading of medicines for domestic sale and for sale (or export) to its Parent Company X. Suppose that according to its report, Company N produces medicines on the production line invested in by the company and the medicines are produced under licence granted by a company of Group X. The amount of goods exported and sold under signed contracts has been stable since the beginning of the year; at the same time, Company N conducted research and development of brand medicines but such research was unsuccessful and so the company incurred a loss.

However, the analysis of the research and development function shows that the company didn't use its property for this function (there is no laboratory for research and development) and the research and development section of the company only comprises two employees and performs inspection of standards of products before distribution. In that year, Group X conducted a research and development project in practice but such project was unsuccessful but it was the project of the parent company and does not relate to company N. Thus, in fact, Company N didn't perform the research and development function and so in fact Company N didn't take any risk and didn't have any "failure".

The production function of company N is production under contracts and it does not take any risk on research and development of products. Therefore, the comparison of functions shall be conducted on the basis of identifying an independent enterprise which has similar functions to those of Company N (in a case where an independent enterprise has the research and development function, such difference must be excluded).

Example 7 (b):

Continued from the above example 7 (a). Suppose that in addition to the production and trading of medicines, Company N also acts as an import and distribution agent for pharmaceutical products of its parent company in Vietnam. The provision of such agency services was not shown in the analysis of the operational functions of Company N and Company N actually incurred expenses but it was not in fact paid by its parent company any agency commission or for those expenses.

In practice this provision of agency services is an additional function which company N has performed, it has incurred expenses and taken risks of the business of agency services but because of the relation of an affiliated party, company N did not charge any commission payable by its parent company. Therefore, in this related transaction, N must charge commission for provision of agency services in order to increase its turnover in accordance with the methods of calculation of market prices specified in this Circular.

Example 8 (a):

Company M is a multinational company overseas and conducts a transaction of wholesale of T mobile phones, which was in accordance with the international quality standard registered in Vietnam, with Company A being an affiliated company and Company B being an independent company. The comparative analysis of operational functions of company A and of company B shows that:

- Company A distributes and retails T mobile phones, issues a warranty card to each mobile phone sold and directly provides warranty services,

- Company B distributes and retails T mobile phones, issues a warranty card to each mobile phone sold but it does not provide warranty services, instead of that it agrees to pay $5 to Company A for each mobile phone repaired by Company A in the warranty period.

Thus, the operational functions of Company A and of Company B are different in terms of the provision of warranty services for which Company A performs more functions, uses more labour resources and has higher profitability than Company B.

Therefore, to ensure similarity upon comparison between functions of Company A and Company B, the warranty service function shall be adjusted by way of excluding actual costs (or turnover) related to the warranty services provided by Company A.

Where the warranty service function was only performed on several occasions with inconsiderable (insignificant) costs (or turnover), it is not necessary to adjust this difference.

Example 8 (b):

Continued from the above example 8 (a). Suppose that Company A declares its business result with a loss because of the high prime cost, risk resulting from inventory products and unfashionableness of T mobile phones. In practice, Company A has received orders and security deposits from customers before it requests Company M to deliver T mobile phones; the figures on amounts of T mobile phones put into, delivered from or stored in its warehouse were at a normal level (for example: the store-sale cycle is 10 days) and there are no source document showing that customers refused to receive ordered products because they were unfashionable. Thus, the risk claimed by Company A did not exist and the prime cost of T mobile phones purchased by Company A will be compared with the prime cost of T mobile phones purchased by Company B in order to calculate an appropriate price (in order to exclude costs from the prime cost of goods sold).

2.1.3 Contractual conditions when conducting transactions: including provisions or agreements on responsibilities and rights of parties when they are involved in the business transaction. Contractual conditions when conducting a transaction (hereinafter referred to as "contractual conditions") shall mainly include:

(a) Quantity, delivery or distribution terms for products;

(b) Period, conditions for and method of payment;

(c) Conditions for warranty, replacement, upgrading, repair or correction of products;

(d) Terms for exclusive trading or distribution of products;

(e) Other conditions having an economic effect (for example: supportive services, consultancy on quality inspection, instructions for use, support for advertising and promotion and so on).

In all cases, (whether or not the contract is made in writing), the basis for determination of contractual conditions shall be actual facts or financial or economic data showing the nature of the transaction.

2.1.4 Economic conditions when a transaction is conducted: including elements concerning economic conditions, on the market at the time when the transaction is conducted, affecting the price of products. Economic conditions at the time when the transaction is conducted (hereinafter referred to as "economic conditions") shall mainly include:

(a) Size and geographical position of the production or sale market;

(b) Time and nature of activities of the transaction on the market (for example: transaction of wholesale, normal retail, exclusive distribution, market segment on the basis of product consumers);

(c) Competition between products on the market;

(d) Economic elements which affect costs of production or business arising at the place of transaction (for example: taxes, charges, financial incentives);

(e) State policy regulating the market.

2.2 Upon comparative analysis of the four influential criteria referred to in sub-clauses

2.1.1 to 2.1.4, the priority order shall be specified with respect to each method of calculation of a price stipulated in Section II of Part B of this Circular. During the course of analysis, the priority criteria shall be analysed in detail; subordinate criteria may not be required to be analysed in detail, but [such analysis] must ensure it shows all basic characteristics of such criteria.

Example 9:

Suppose that Company M Vietnam (being a subsidiary of International Company M) specializes in trading of product X whose quality meets standards grade I which have been registered in Vietnam. In 200x, the Company selected an independent transaction A (between Company M Vietnam and an independent party) to use as the basis for comparison with related transaction B (between Company M Vietnam and International Company M). The unit selling price in both transactions is USD3.

In this case, analysis of the four influential criteria of transactions A and B shall be conducted as follow:

(i) Properties of products: they are identical (because they are products produced by Company M Vietnam);

(ii) Operational functions: they are identical (because they are the operation functions of Company M Vietnam)

(iii) Contractual conditions: suppose that this criterion of two transactions is identical except that the delivery terms are at the warehouse of M Vietnam in transaction A and at port X of country Y in transaction B and the freight from Vietnam to country Y being USD0.5/product is borne by Company M Vietnam.

(iv) Economic conditions: suppose that this criterion does not effect the price of products (for example: country Y does not apply the policy on price control to the trading of product X; sale terms are wholesale; import duty is paid by and procedures for import of product X are performed by the purchaser).

Thus, the comparison of prices shows that the price in transaction B is not similar to the price in transaction A (there is a difference of USD0.5 per product)

In this case, Company M in Vietnam will select the most appropriate method of calculation of a price to ensure the declaration and payment of tax in respect of turnover from sales of products X in transaction B being equivalent to USD3.5/product (in place of the previous unit price of USD3).

2.3 After comparative analysis, the business establishment shall identify significant differences in transaction conditions between the related transaction and the independent transaction. Where there is no significant difference, the provisions of sub-clause 2.4 of clause 2 of Section I of Part B shall not apply.

2.4 Where there are significant differences, the business establishment shall express such significant differences in a monetary value for adjustment. Subject to each specific case, there may be an increase in or a decrease of the value in order to exclude such significant differences.

Where there are significant differences in operational functions between business establishments, the adjustment shall be made on the following principles:

(a) Where the costs and/or turnover related to the significant difference in functions are separately accounted for, the adjustment shall be made on the basis of each item of the turnover and/or costs related to such significant difference.

(b) Where the costs and/or turnover related to significant differences in functions are accounted for together, the adjustment shall be made on the basis of allocation in order to calculate the relevant share of costs and/or turnover corresponding to such significant difference.

Example 10:

Suppose that there are two transactions of Company A and Company B, which both provide services of processing of garment products, in which Company A processes and delivers the products at its warehouse and Company B processes and carries out procedures for export of the products.

Thus, upon comparison between the processing function of A and of B, we see that Company B performs the additional function of "performing procedures for export". This difference will be separated by way of separately accounting or allocating on the basis of the ratio of costs or turnover arisen from the performance of the procedures for export [to the total costs or turnover] in order to ensure that the comparison between business efficiency in respect of processing functions of Company A and of Company B will be equivalent.

Where company B only performs the function of performing the procedures for export on several occasions at the request of customers with inconsiderable (insignificant) costs or turnover, the adjustment of this difference is not required.

II. METHODS OF CALCULATION OF MARKET PRICES

Methods of calculation of market prices of products in related transactions specified in sub- clause 2 of Section II of Part B shall comprise:

- Method of comparison of prices in independent transactions;

- Method of reselling prices;

- Method of prime cost plus profits;

- Method of profit comparison;

- Method of profit division.

Subject to each specific method mentioned above, the market price of products may be directly calculated on the basis of the unit price of products or indirectly via gross profit ratio or profitability ratio of products. However, in respect of methods of indirect calculation of prices, when calculating business results for the purpose of declaration and payment of income tax, it is not necessary to calculate a specific unit price.

1. Principles of application of methods of calculation of market prices

1.1 The most appropriate method of calculation of a price shall be the method which is selected from amongst the five above methods and conforms with transaction conditions and has the most reliable and complete information and data sources for comparative analysis.

1.2 The business establishment shall itself select the most appropriate value among values of the standard market price margin to use as the basis for adjustment of the relevant value of the related transaction. Where the price of products in the related transaction is not lower than such most appropriate value, the business establishment shall not be required to make any adjustment.

1.2.1 The most appropriate value is the value showing the highest similarity in transaction conditions of the independent transaction selected for comparison with the related transaction.

1.2.2 Standard market price margin is:

(a) Values calculated from independent transactions selected for comparison referred to in sub-clauses 1.6.1 and 1.6.2 of clause 1 of Section I of Part B;

(b) Values falling between the first quartile and the third quartile of the statistical operation of probability of quartile calculated from the market price margin of independent transactions selected for comparison referred to in sub-clause 1.6.3 of clause 1 of Section I of Part B. (see Section C of Appendix 2-GCN-HTQT on methods of quartile or centile calculation)

Example 11:

Enterprise V in Vietnam is a subsidiary company specialized in production and processing of products for its parent company and has to pay annual royalties to another subsidiary company of the group at the rate of N% of the net turnover by four instalments per year. Suppose that Enterprise V has selected 13 independent transactions for comparison with the data on the proportions of royalty to the net turnover of such transactions as follows: 1; 1.25; 1.25; 1.5; 1.5; 1.75; 2; 2; 2; 2; 2.25; 2.5; 2.75; 3. Suppose that the comparative analysis shows that significant differences have been adjusted reasonably to enable them to be excluded. With respect to the period of payment, there is a difference which may affect the value of royalties but information is not sufficient to convert such difference into a monetary value for adjustment. Therefore, the business establishment shall apply the quartile statistical function to select the first percentile and the third percentile to calculate the standard margin being 1.5 2.25; the average value (average value belonging to the second percentile) of the standard margin is 2.

- Suppose that the proportion of royalty to the net turnover of Enterprise V is 2.1%, thus Enterprise V shall not be required to adjust the declared data on royalties which is deductible upon calculation of corporation turnover tax.

- Suppose that the proportion of royalty to the net turnover of Enterprise V is 4% and at the same time, Enterprise V considers that the transaction with the proportion of royalty being 2% has transaction conditions which are closest to its transaction. Therefore, Enterprise V will re-adjust the declared data on royalties which is deductible upon calculation of corporation turnover tax at the equivalent rate of 2% (i.e. multiplying (x) the net turnover and 2% to calculate royalties which are deductible upon calculation of corporation turnover tax).

1.3 Where the business establishment has applied methods of calculation of market prices in accordance with the provisions of this Circular but there has been an occurrence of an event of force majeure in the year such as a natural calamity, fire or explosion affecting its production or business; or the purchase or selling price has been affected by State policies or regulations, the business establishment may adjust the price of affected products to accord with the actual situation.

2. Methods of calculation of market prices

2.1 Method of comparison of prices in independent transactions

2.1.1 The method of comparison of prices in independent transactions shall use the unit price of products in an independent transaction as the basis for calculation of a unit price of products in related transactions when such transactions have equivalent transaction conditions.

2.1.2 The unit price of products in a related transaction shall be compared with the most appropriate value which falls within the standard market price margin for the unit price of products in order to make an appropriate adjustment on the principles provided in sub-clause 1.2 of clause 1 of Section II of Part B of this Circular.

2.1.3 With respect to this method, upon comparative analysis of four influential criteria in accordance with the guidelines provided in Section I of Part B of this Circular, the priority criteria shall be properties of products and contractual conditions and the subordinate criteria shall be economic conditions and functions of the business establishment.

2.1.4 The method of comparison of prices in independent transactions shall be applicable, provided that:

(a) There is no difference which causes a significant effect on prices of products in transaction conditions upon comparison between an independent transaction and a related transaction; or

(b) There are differences causing a significant effect on the prices of products, but these differences are excluded in accordance with the guidelines provided in Section I of Part B of this Circular.

2.1.5 Elements significantly affecting prices of products usually include:

(a) Physical properties, quality and trade names of products;

(b) Contractual conditions on supply and delivery of products (for example: volume (if it affects the price), period of delivery of products, period of payment);

(c) Right to distribute and sell products resulting in an effect on the economic value;

(d) Market in which the transaction is conducted.

2.1.6 The method of comparison of prices in independent transactions is usually applied in the following cases:

(a) Individual transactions concerning each type of product circulated on the market;

(b) Individual transactions concerning each form of services, copyright, loan agreements;

(c) A business establishment conducting both independent transactions and related transactions concerning the same type of product.

Example 12:

Company V is an enterprise with 100% capital funded by Foreign Company S in Vietnam engaged in processing of garment and textile products. In 200x, Company V conducted two transactions of processing of trousers, category code 347 as follows:

- Transaction 1: Processing 1,000 dozens of trousers for the parent company at the price of USD60 per dozen on delivery terms X port of Vietnam (company S was responsible for export).

- Transaction 2: Processing 1,000 dozens of trousers for Company M in Country N at the price of USD100 per dozen on delivery terms port Y of Country N.

Suppose that Company M does not have any relation with Company V and Company S and the two transactions are equivalent in terms of transaction conditions except that the significant difference is costs of transport and insurance for shipment of goods from port X to city Y being USD3 per dozen.

The comparison between transaction 1 (related transaction) and transaction 2 (independent transaction) indicates that transaction 1 did not correctly show the market price. Therefore, Company V must adjust the turnover from the transaction with Company S as follows: (USD100 minus

() USD3) multiplied (x) by 1,000 = USD97,000. As a result, the turnover from the two transactions with Company S and Company M as declared by Company V for tax calculation for 200x is USD197,000, of which the processing charge which enterprise V has declared that it received from S is USD97,000 in place of USD60,000.

2.2 Method of reselling prices

2.2.1 The method of calculation of a reselling price shall use reselling prices (or selling prices) of products sold by the business establishment to independent parties as the basis for calculation of the purchase price (cost) of products paid by the affiliated party.

2.2.2 Purchase prices of products paid by the affiliated party shall be calculated on the basis of the price of products sold in independent transactions minus (-) gross profits minus (-) other expenses (if any) included in the price of purchased products (for example: import duty, customs charges, insurance and costs of international transport).

2.2.2.1 The gross profit shall be calculated on the basis of the ratio of gross profit to the selling price (net turnover) and selling price (net turnover), and shall show a value earned by the business establishment to cover costs of business activities and to earn a reasonable amount of profit. The ratio of gross profit to the selling price (net turnover) shall be calculated on the basis of the different value between the selling price (net turnover) and the prime cost of the purchased products divided by the selling price (net turnover).

2.2.2.2 Where the business establishment has a function of acting as a distribution agent without ownership of products and is entitled to agency commission at a percentage (%) of the selling price of products, such percentage shall be deemed to be the ratio of gross profit to the selling price (net turnover). (See Section B.1 of Appendix 2-GCN-HTQT on the formula of calculation of market prices in accordance with the method of reselling prices).

2.2.3 The ratio of gross profit to the selling price (net turnover) in the related transaction shall be compared with the most appropriate value which falls within the standard market price margin for the gross profit ratio in order to make an adjustment in compliance with the principles stipulated in sub- clause 1.2 of clause 1 of Section II of Part B of this Circular.

2.2.4 With respect to this method, upon comparative analysis of four influential criteria in accordance with the guidelines provided in Section I of Part B of this Circular, the priority criterion shall be the operational functions of the business establishment and the subordinate criteria shall be contractual conditions, properties of products and economic conditions.

2.2.5 Method of reselling price shall be applicable, provided that:

(a) There is no difference in transaction conditions which causes a significant effect on the ratio of gross profit to the selling price (net turnover), upon comparison between an independent transaction and a related transaction; or

(b) There are differences causing a significant effect on the ratio of gross profit to the selling price (net turnover) but such differences are excluded in accordance with the guidelines provided in Section I of Part B.

2.2.6 Elements significantly affecting the ratio of gross profit to the selling price (net turnover) usually include:

(a) Costs expressing the functions of the business establishment (for example: exclusive distribution agent, performance of advertising or promotion programs, warranty and so on);

(b) Type, size, volume, cycle of products purchased for resale and nature of activities of the transaction on the market (for example: wholesale, retail and so on);

(c) Method of cost accounting (i.e. it must ensure that items constituting the gross profit and turnover from the related transaction and from the independent transaction are equivalent and subject to the same accounting standards).

2.2.7 Method of reselling price is usually applied to transactions in respect of products in the phase of provision of simple services and commercial distribution which have a short cycle from purchase to sale and rarely suffer seasonal changes. At the same time, before the products are sold, they are not processed, assembled, changed in their nature or do not bear a trade name in order to considerably increase their value.

Example 13:

Enterprise V, a joint-venture enterprise in Vietnam of Company H overseas, conducts the trading and distribution of watches supplied by Company H. In 200x, Company H delivered 1,000 watches to Enterprise V and requested the latter to pay USD330,000 (including CIF plus (+) import duty and charges incurred by Company H). At the end of the year, the net turnover earned by Enterprise V from sales of the whole amount of such watches to consumers in Vietnam is converted into USD400,000.

Enterprise T is an independent enterprise in Vietnam also engaged in trading and distribution of watches. The following figures are included in the financial statements or corporate income tax return of Enterprise T for 200x:

- Net turnover: USD500,000

- Prime cost of goods sold: USD400,000

Suppose that Enterprise T satisfies all conditions for it being selected for comparison with the gross profit ratio of Enterprise V. Thus, the gross profit ratio shall be calculated as follow: [(500,000 minus () 400,000) divided (:) by 500,000] multiplied (x) by 100% = 20%

Enterprise V will declare and calculate reasonable expenses which are deductible for the purchase of watches from Company H (for the related transaction) as follows: [USD400,000 minus () (USD400,000 multiplied (x) by 20%)] = USD320,000

Thus, Enterprise V only is entitled to deduct reasonable expenses from the prime cost of goods sold (i.e. all expenses for the purchase of watches from Company H) being USD320,000 instead of the payment of USD330,000 (as the request of Company H). (Where FOB of watches which Company H sold to enterprise V is required to be calculated, it will be equal to the total prime cost of USD320,000 minus (-) all expenses arising after export (FOB) such as import duty or charges, expenses of domestic transport, freight and international insurance).

The gross profit of (USD400,000 minus () USD320,000 = USD80,000) earned by Enterprise V shall be used to cover selling expenses, overhead costs and to gain a reasonable profit from the commercial business of watches.

Where Company H provides sale consultancy services and requests Enterprise V to make a payment for such expenses (which are included in selling expenses), this transaction will be separated and will be subject to one of the methods of calculation of transaction prices stipulated in this Circular in order to calculate the reasonable costs deductible for sale consultancy services.

2.3 Method of prime cost plus profit

2.3.1 The method of prime cost plus profit shall use the prime cost (or cost) of products as the basis for calculation of the selling price of such products sold to an affiliated party.

2.3.2 The selling price of products sold to the affiliated party shall be calculated as the prime cost (or cost) of products plus (+) gross profit.

2.3.2.1 The gross profit shall be calculated on the basis of the ratio of gross profit to the prime cost (or to the cost) and the prime cost (or cost), showing a reasonable profit corresponding to the operational functions of the business establishment and market conditions. The ratio of gross profit to the prime cost (or to the cost) shall be calculated as the difference between net turnover and prime cost (or cost) of products divided (:) by the prime cost (or the cost). The prime cost (or cost) of products shall comprise direct or indirect costs of production and shall not include costs for finance activities (for example: royalties, loan interest, and so on). Where the business establishment is unable to account separately for the prime cost (or the cost), selling expenses and overhead costs, the prime cost (or the cost) of products used as the basis for calculation of gross profit shall comprise all of these costs.

2.3.2.2. Where the business establishment has the function of acting as a purchase agent without ownership of products and is entitled to agency commission at a percentage (%) of expenses for purchase of products, such percentage shall be considered as the ratio of gross profit on the prime cost. (See Section B.2 of Appendix 2-GCN-HTQT on formula of calculation of market prices in accordance with the method of prime cost plus profit).

2.3.3 The ratio of gross profit to the prime cost (or to the cost) of the related transaction shall be compared with the most appropriate value which falls within the standard market price margin for the ratio of gross profit to the prime cost (or to the cost) in order to make an adjustment in compliance with the principles stipulated in sub-clause 1.2 of clause 1 of Section II of Part B of this Circular.

2.3.4 With respect to this method, upon comparative analysis of four influential criteria in accordance with the guidelines provided in Section I of Part B of this Circular, the priority criterion shall be operational functions of the business establishment and the subordinate criteria shall be contractual conditions, properties of products and economic conditions.

2.3.5 The method of prime cost plus profit shall be applicable, provided that:

(a) There is no difference which causes a significant effect on the ratio of gross profit to the prime cost (or to the cost) in transaction conditions upon comparison between an independent transaction and a related transaction; or

(b) There are differences causing a significant effect on the ratio of gross profit to the prime cost (or to the cost) but such differences are excluded in accordance with the guidelines provided in Section I of Part B of this Circular.

2.3.6 Elements significantly affecting the ratio of gross profit to the prime cost (or to the cost) usually include:

(a) Costs showing the operational functions of the business establishment (for example: production under a contract, research and development of new products, proportion of added value of the product to the scale of the investment in business);

(b) Obligations to perform contracts (for example: period for delivery of products, costs for quality control, storage or payment terms);

(c) Method of cost accounting (i.e. it must ensure that items constituting the prime cost (or the cost) of the related transaction and of the independent transaction are equivalent to each other or are subject to the same accounting standards).

2.3.7 The method of prime cost plus profit is usually applicable in the following cases:

(a) Transactions in the phase of production, assembly, manufacturing or processing of products for sale to affiliated parties;

(b) Transactions between affiliated parties in order to perform a joint venture contract or business co-operation contract for production, assembly, manufacturing or processing of products or to implement agreements for supply of inputs of production and for off-take of output products;

(c) Transactions of provision of services to affiliated parties.

Example 14:

Enterprise A in Vietnam being a subsidiary company of Group T conducts processing of shoes for export. The parent company is responsible for supply of input raw materials and accessories, technicians in charge of quality control, costs of transportation and international insurance. Enterprise A will be paid processing charges on the basis of a product and will bear costs arising during processing of products in accordance with the design or model provided by the parent company.

The accounting data of Enterprise A is as follows:

- Net turnover (processing charges): 15 billions dong

- Prime cost of goods sold: 13 billions dong

- Selling expenses and overhead costs: 1.8 billions dong

At the same time, a number of other independent enterprises also conduct processing of shoes for foreign organizations or individuals and processing charges are calculated on the following basis: processing charges equal (=) to the total cost (equal (=) to the prime cost of goods sold plus (+) overhead costs plus (+) selling expenses) plus (+) 7% of the total costs. Suppose that this transaction satisfies all conditions for it being selected for comparison.

Enterprise A must declare the turnover from the processing of shoes as follow:

Turnover from the related transaction: (13 billion plus (+) 1.8 billion) plus (+) [7% multiply (x) by (13 billion plus (+) 1.8 billion)] = 15.836 billion dong.

Thus, enterprise A must declare its turnover of 15.836 billion dong (in place of the previous figure being 15 billion dong).

2.3.8 The method of prime cost plus profit may be used to recalculate the prime cost (or the cost) involved in related transactions of a business establishment on the basis of the price of products sold which have been calculated on the basis of the market price and the ratio of gross profit to the prime cost (or to the cost)..

Example 15:

Enterprise V in Vietnam, a subsidiary company with 100% capital funded by Multinational Company P, is specialized in production of household detergent. Input raw materials (namely blank soap and other detergents) are supplied by Subsidiary Company Y. Output of sales of Enterprise V in 200x was 100 tons of which:

- Transaction 1: 60 tons were sold to another subsidiary company of Group P at FOB of USD650 per ton,

- Transaction 2: 40 tons were sold to domestic supermarkets at the price (VAT exclusive) of USD700 per ton.

Books of account of the enterprise in the period show the following data:

- Net turnover: USD67,000

- Total cost: USD65,000

Suppose that transactions 1 and 2 satisfy all conditions for Enterprise V to apply the method of comparison of independent market prices, and the data on ratio of gross profit to the total cost of independent enterprises operating in the household detergent production industry is 15%. Enterprise V will declare its turnover and expenses for calculation of corporate turnover tax as follows:

- Re-adjusting the selling price in the related transaction in accordance with the selling price in the independent transaction: USD700 multiplied (x) by 60 tons = USD42,000

- Re-calculating the net turnover: USD42,000 plus (+) USD700 multiplied (x) by 40 tons = USD70,000

- Re-adjusting total cost (related to the related transaction): [(USD42,000 plus (+) (USD 700 multiplied ( x) by 40 tons)] divided (:) by (1 plus (+) 0.15) = USD60,870.

So Enterprise V must declare and pay tax on the basis of the data on net turnover of USD70,000 (in place of the previous data being USD67,000) and total cost being USD60,870 (in place of the previous data being USD65,000).

2.4 Method of profit comparison

2.4.1 The method of profit comparison shall use the profitability ratio of products in independent transactions selected for comparison as the basis for calculation of a profitability ratio of products in related transactions when the transaction conditions of such transactions are equivalent.

2.4.2 Profitability ratios shall be calculated as a ratio of before-tax profit (income)1 to net turnover, costs or assets for production or business activities in accordance with the regulations on accounting and financial reporting. Any loan interest or depreciation for fixed assets may be included in the before- tax profit (income) of an enterprise in order to calculate results of production or business before payment of such costs. Profitability ratios which are usually used shall include:

2.4.2.1 The ratio of before-tax income2 to net turnover from production or business activities.

Example 16:

Enterprise L is an enterprise with capital invested by two foreign companies in Vietnam, namely Company N and Company S, engaged in manufacture and assembly of four seater cars with brands N and S. All Brand N cars are delivered and sold to independent parties and all Brand S cars are delivered and sold to Enterprise L1 which is a company with one hundred (100) per cent capital funded by Enterprise L. At the same time, Enterprise L1 provides a loan to Enterprise L and loan interest at the market rate of interest is USD100. In 200x, the accounting data of Enterprise L is as follows:

- Net turnover from sales of Brand N cars: USD18,000 (as independent transactions)

- Before-tax profit earned from sales of Brand N cars: USD2,000

- Net turnover from sales of Brand S cars: USD25,000 (as related transactions)

- Before-tax profit earned from sales of Brand S cars: USD1,800

The ratio of before-tax profit to the turnover from sales of Brand N cars: 2,000 divided (:) by 18,000 multiplied (x) by 100% = 11.1%

The ratio of before-tax profit to the turnover from sales of Brand S cars: 1,800 divided (:) by 25,000 multiplied ( x) by 100% = 7.2%

Suppose that differences with significant effects between two transactions of sales of Brand N and Brand S cars have been adjusted to enable the results of transactions with Enterprise L1 to reach a ratio of net profit before payment of taxes and loan interest to the turnover being 11.1% and the loan interest of USD100 is deducted. Thus, Enterprise L must declare its before-tax profit on the turnover from sales of Brand S cars as follows:

Net profit earned from sales of Brand S cars:

25,000 multiplied (x) by 11.1% = USD2,775

Increase in costs (resulting from the payment of loan interest adjusted from the transaction with Company L1): USD100

Net profit earned from production and trading of cars:

2,000 plus (+) (2.775 minus (-) 100) = USD4,675 (in place of the previous data in the books of account being USD3,800 (2,000 plus (+) 1,800)

2.4.2.2 Ratio of before-tax income to the total costs for production or business activities.

Example 17:

Enterprise AVN is a subsidiary company of Company ANB and acts as a forwarding service agent for ANB. Enterprise B is an independent enterprise specializing in provision of forwarding services (to numerous independent clients). The data on turnover and costs of AVN and B are as follows:

Suppose that Enterprise B satisfies all of the conditions for it being selected for comparison with AVN in terms of the ratio of before-tax income to the total costs. The ratios shall be calculated as follows:

- Profitability ratio on the total costs of AVN: (1,650 minus (-) 1,500) divided by 1,500 = 10%

- Profitability ratio on the total costs of B: (2,500 minus (-) 2,000) divided by 2,000 = 25%

Thus, Enterprise AVN must declare profit earned from related transactions in accordance with the profitability ratio on the total costs corresponding to the rate of Enterprise B being 25%.

2.4.2.3 Ratio of before-tax income to assets for production or business activities. This ratio shall be used in the case where fixed assets of a business establishment account for a significant percentage of its total investment capital (for example, enterprises in manufacturing industries or the mining industry).

The value of assets shall be the average value of the beginning balance and ending balance, including fixed assets and current assets, but excluding assets used for investment in or capital contribution to other joint ventures or business co-operation (for example, purchase of State bonds or shares).

Example 18:

- N is a subsidiary in Vietnam of Group P which is specialized in production of alcohol from rice. Its parent company provides most input for production and assumes the off-take of all of its output products. In 200x, the ratio of net profit to assets of Enterprise N was 3%.

- V is an independent company specialized in production of drinks of all types and has plants for production of alcohol from rice, beer and other carbonated soft drinks. In 200x, the ratio of profits to the total assets of the company was 7%, including the ratio of net profit to the assets of the plant for production of alcohol from rice being 7.5%.

Suppose that V satisfies all the conditions for it being selected for comparison with N in terms of the ratio of before-tax income to assets, therefore N must adjust its taxable income in accordance with the ratio of net profit to assets being 7.5%.

2.4.3 Business establishments shall select one of the above profitability ratios for comparison of profitability ratios of related transactions and of independent transactions and may use one or more of other profitability ratios set out in the regulations on financial reporting in order to support the examination of the accuracy of the selected ratio. The selection of a profitability ratio on turnover, costs or assets shall be subject to the economic nature of transactions (see Section B.3 of Appendix 2-GCN/HQT on formulas of calculation of a profitability ratio in order to apply the method of comparison of profits).

Example 19:

- Suppose that a business establishment conducts related transactions in the phase of sales of products, it shall not use the profitability ratio on turnover because the data on turnover from the related transactions is subject to the governing scope of the calculation of market prices.

- Suppose that a business establishment provides services, it shall not use the profitability ratio on assets.

2.4.4 The profitability ratio of related transactions shall be compared with the most appropriate value which falls within the standard market price margin for the profitability ratio in order to make an appropriate adjustment in compliance with the principles set out in clause 1.2 of Section II of Part B of this Circular.

2.4.5 With respect to this method, upon comparative analysis of four influential criteria in accordance with the guidelines provided in Section I of Part B of this Circular, the priority criterion shall be the operational functions of the business establishment and the subordinate criteria shall be contractual conditions, properties of products and economic conditions.

2.4.6 The method of profit comparison shall be applicable, provided that:

(a) There is no difference which causes a significant effect on the profitability ratio in transaction conditions upon comparison between independent transactions and related transactions; or

(b) There are differences causing a significant effect on the profitability ratio but such differences are excluded in accordance with the guidelines provided in Section I of Part B of this Circular.

2.4.7 Elements significantly affecting profitability ratios usually include:

(a) Elements in relation to assets, capital and costs for performance of main functions of a business establishment (for example, production or processing using machinery invested by the business establishment will earn higher profit than production or processing using machinery borrowed from another establishment for processing);

(b) The nature of business lines, category of products and phases of production or sale (for example, finished products are made from raw materials or semi- finished products);

(c) The method of cost accounting and structure of costs for products (for example, products are in the period of depreciation in accordance with the fast depreciation method but not in accordance with usual depreciation methods).

2.4.8 The method of profit comparison shall be considered as a method developed from the method of reselling prices and the method of prime cost plus profit. Therefore, the method of profit comparison is applied widely in the cases referred to in sub- clauses 2.2.7 and 2.3.7 of clause 2 of Section II of Part B of this Circular.

2.5 Method of profit division

2.5.1 The method of profit division shall use profit earned from one related general transaction conducted by several affiliated business establishments (or parties) as the basis for calculation of an appropriate [share] of profit for each of such affiliated business establishments (or parties) in the manner as independent parties would distribute profit in equivalent independent transactions.

A related general transaction in which several affiliated business establishments (or parties) take part means the transaction of the sole and special nature comprising several related transactions which have a close relation with each other in terms of exclusive products, or closed related transactions between relevant affiliated parties.

2.5.2 The method of profit division shall comprise two methods of calculation:

2.5.2.1 First method of calculation:

The profit shall be allocated to each affiliated party on the basis of its ratio of capital (or cost) contribution; whereby the share of profit of each business establishment (or party) to the transaction shall be calculated on the basis of allocation of the total profit earned from the related general transaction in accordance with the ratio of capital (costs) used by such business establishment in the related transaction to the total invested capital for production of final products (see Section B.4 of Appendix 2-GCN/HTQT on the formula of allocation of profit in accordance with ratios of capital contribution).

Example 20:

Enterprise A in Vietnam and Enterprise B overseas are member companies of Group T engaged in production of electronic products. A and B take part in production of new products being TV sets with a liquid crystal picture tube.

A is responsible for designing and manufacturing television cabinets and picture tubes and delivers them to B for assembly together with other parts (such as loops, chips and so forth) invented and manufactured by B, after that finished products are sold to C as an independent distributor at the price of USD550. The total cost of a product delivered by A to B is USD300. B expends USD150 for further production.

Profit allocated to A will be calculated as follows:

[(550 - (300 + 150)) divided (:) by 450] multiplied (x) by 300 = USD66.66

2.5.2.2 Second method of calculation:

Profit will be distributed in two steps as follows:

2.5.2.2.1 First step

Distribution of basic profit: each business establishment (or party) to a related transaction may receive a share of basic profit corresponding to its operational functions. Such share of basic profit shall show the value of profit earned by the business establishment from the related general transaction because of the performance of its operational functions and shall not take account of the sole and special elements (such as exclusive ownership rights or right to use intangible property or intellectual property).

The share of basic profit shall be calculated in accordance with the gross profit ratio or profitability ratio corresponding to the most appropriate value which falls within the standard market price margin for the gross profit ratio or profitability ratio in accordance with the guidelines provided in sub-clauses 2.2, 2.3 and 2.4 of clause 2 of Section II of Part B of this Circular.

2.5.2.2.2 Second step

Distribution of extra profit: each business establishment (or party) to the related transaction may further receive a share of extra profit corresponding to its ratio of contribution related to the total extra profit (i.e. total profit earned minus (-) the total basic profit which has been distributed in the first step) of the related general transaction. Such share of extra profit shall show profit, in addition to its share of basic profit, earned by the business establishment from the related general transaction due to the sole and special elements.

The share of extra profit received by each business establishment shall be calculated by way of multiplying the total extra profit earned from the related general transaction and the ratio of contribution of each business establishment to the following costs or assets:

(a) costs for research and development of products; or

(b) value (after deducting depreciation) of intangible property or of intellectual property used for production or business of products.

Costs for research and development, or value of intangible property or of intellectual property must be calculated on the basis of market prices (in accordance with the methods set out in this Circular) or costs actually incurred by each party in compliance with the principles of cost accounting in respect of costs or property.

Example 21:

Company H and Company M are two companies of the same group engaged in manufacture of mobile phones. Company H manufactures modules and Company M assembles and installs software in complete products for sale to independent distributors. Accounting data of Company H and M related to the related transaction of manufacture of mobile phones are as follows:

Calculation of profit earned by H and M in accordance with the method of profit division:

Step 1: Distribution of basic profit

- Re-calculation of data in general statements on business results:

- Suppose that the ratios of profit to prime cost of H and M,

which are calculated in accordance with the guidelines provided in clause 2.3 of Section II of Part B of this Circular, are 10% and 8%, respectively.

- Calculation of profit of H and M in accordance with the following formula:

Profits = profit ratio multiplied ( x) by cost

Cost = prime cost of goods sold plus (+) R&D costs plus (+) selling expenses and overhead costs

+ Profit of H: 10% multiplied (x) by (100 plus (+) 50 plus (+) 30 plus (+) 10) = 19

+ Profit of M: 8% multiplied (x) by (300 plus (+) 80 plus (+) 60 minus (-) 190) = 20

Extra profit after distribution of basic profit: 60 minus (-) 19 minus (-) 20 = 21

Step 2: Distribution of extra profit in accordance with their respective ratios of contribution to R&D costs

- Calculation of a ratio of contribution of each party to R&D costs:

+ H: 30/80 multiplied (x) by 100% = 37.5%;

+ M: 62.5%

- Calculation of the share of extra profit of H and M:

+ H: 21 multiplied (x) by 37.5% = 8.87

+ M: 21minus (-) 8.87 = 12.13

Conclusion:

- H will declare its profit earned from the related transaction being:

19 plus (+) 8.87 = 27.87 in place of the previous data being 10;

and

- M will declare its profit earned from the related transaction being:

20 plus (+) 12.13 = 32.13 in place of the previous data being 50.

2.5.3 With respect of this method, the comparative analysis of four influential criteria shall be carried out in accordance with the guidelines provided in Section I of Part B of this Circular and conditions for application [of this method] shall be subject to the provisions in respect of the method of reselling prices, method of prime cost plus profits or method of profit comparison, as the case may be, in compliance with the guidelines provided in sub-clause 2.5.2.2.1 of clause 2 of Section II of Part B.

2.5.4 The method of profit division usually is applied in the case where affiliated parties jointly take part in research and development of new products or development of products being exclusive intangible assets or where transactions are in the process of transitional production or business between such affiliated parties from raw materials to final finished products for distribution of products attached to the ownership or use of the sole intellectual property.

III. PROVISIONS ON CALCULATION OF MARKET PRICES IN A NUMBER OF SPECIAL CASES

Where, due to the special or exclusive nature of a related transaction, a business establishment is unable to select any independent transaction for comparison in accordance with the guidelines provided in sub-clauses 1.1 to 1.6 of clause 1 of Section I of Party B of this Circular and the methods of calculation of market prices referred to in Section II of Part B of this Circular, it must specify reasons therefor (including information on its business operation) and take one of the following measures:

1. General measure:

1.1 Expanding the scope of selection of independent transactions (or business establishments) into sub-branches of the national economy (in accordance with the list of branches of the national economy published by the authorized State body) other than the sub-branch in which the business establishment currently operates for the purpose of comparison with conditions in which business establishments with the operational functions equivalent to the former conduct independent transactions; analysing four influential criteria and excluding significant differences on the basis of economic criteria used in sub-branches in order to show objectively results of investment in business, economic growth or added value of products. The number of independent transactions or independent business establishments selected for comparison shall be at least 5 (five).

1.2 Calculating a market price margin in accordance with the most appropriate method of calculation of a price specified in Section II of Part B of this Circular; using the quartile statistical function or similar statistical functions (for example, percentile function) to calculate a standard market price margin and appropriate average value (called the average value) resulting from the market price margin (See Section C.2 of Appendix 2-GCN/HTQT on formulas and guidelines for use of percentile).

1.3 Where the price of products, gross profit ratio or net profit ratio of products in a related transaction is equal to or higher than such average value, the business establishment shall not be required to make any adjustment to its related transaction. Where the price of products, gross profit ratio or net profit ratio of products in the related transaction is lower than such average value, the business establishment shall be required to make an adjustment in accordance with the most appropriate value which falls within the standard market price margin but is not lower than the average value showing the relevant price, share of gross profit or net profit.

1.4 Subject to each specific case, a business establishment may use a combination of the methods of calculation of a price specified in Section II of Part B of this Circular (see Example 15) or concurrently use two methods of calculation of a price to support the examination of the accuracy and objectiveness of the price, gross profit ratio or net profit ratio of products in a related transaction.

1.5 With respect to the method of profit division, the second method of calculation and the guidelines provided in sub-clauses 1.1 to 1.3 of clause 1 of Section III of Part B shall be used as the basis for adjustment of basic profit; business establishments shall carry out the distribution of extra profit in accordance with the guidelines provided in sub-clause 2.5.2.2.2 of clause 2 of Section II of Part B of this Circular.

Example 22:

Company X manufactures integrated circuits and exports all products to its parent company overseas at the selling price (turnover) equal to 1.1 times the total cost. Suppose that no independent transaction or enterprise in this production sector may be selected for comparison in the electronic production sub-branch (in accordance with sub-clause 1.4.2 of Section I of Part B) whose ratio of profit to turnover is 30% (this figure is calculated on the basis of ten (10) enterprises in the electronic production sub-branch). Suppose that upon analyses of economic criteria, the result of investment in the sub-branch shows that the ratio of profit to turnover being 30% is consistent with the actual operation of Company X (i.e. no significant difference is required to be adjusted).

Thus, Company X may examine its price calculation in order to ensure that its ratio of profit to turnover reaches 30% or may re-calculate a ratio of profit to the total cost on the basis of the ratio of profit to turnover for the purpose of comparison and make an adjustment accordingly. (The re-calculation may be conducted as follows: profit/turnover = (turnover minus (-) costs) divided by turnover = 0.3 ⇒ turnover = 1.429 times costs.

2. Method of using figures between periods

A business establishment may use equivalent related transactions, for which a market price is calculated in accordance with the guidelines provided in this Circular, between periods (not exceeding five years from the time when the related transaction arises), prepare a file of competitive analysis of four influential criteria between transactions, adjust significant differences and use objective grounds to adjust economic values on a time basis (for example: average rate of increase in prices, rate of interest, rate of inflation and economic growth) in order to calculate an appropriate price for products, gross profit ratio or profitability ratio of the related transaction conducted in the tax period of the enterprise.

Example 23:

Enterprise A is an enterprise with one hundred (100) per cent foreign owned capital and also is the sole enterprise exploring and processing Metal X ore in Vietnam for export. In 2xx1, the enterprise conducted both related transactions and independent transactions. With respect to related transactions, Enterprise A has used the method of comparison of prices in independent transactions and calculated the unit price of products as USD800 per ton of ore with Metal X content of 35%.

Suppose that in 2xx2, Enterprise A exported one hundred (100) per cent products to its parent company (there is no independent transaction for comparison; the price of Metal X on the international market in 2xx2 increased by 20% compared with 2xx1; other elements affecting the price of products (namely metal content, terms of delivery and payment and so forth) remain unchanged.

Thus, Enterprise A will make a declaration for tax calculation for 2xx2 on the basis of the turnover from sales of Metal X ore at the unit price of USD960 or more per ton.

IV. KEEPING AND PROVISION OF DATA AND SOURCE DOCUMENTS IN RELATION TO METHODS OF CALCULATION OF A MARKET PRICE

1. Selection of data and source documents

1.1 Data, source documents and documents which are used as the basis for comparative analysis must specify their origin to enable the tax office to carry out an examination and verification. Business establishments may use information and data from the following sources:

(a) Information and data which State bodies and branches, institutes, associations and specialized international organizations which are recognized by the State are responsible for publishing or providing upon the request;

(b) Information and data certified or published by organizations and individuals licensed to operate in an independent professional service sector (for example, independent auditing body, registry, quality registration agency, credit rating agency);

(c) Annual or periodical financial statements and reports on investments of companies listed on the securities market, which are announced publicly in accordance with the regulations and charter for operation of the stock market;

(d) Data, source documents and documents on business transactions used for declaration and tax payment which business establishments provide and are responsible for.

Any data, source documents and documents originating from unofficial or unclear sources shall only be used as references.

1.2 Upon selection of transactions for comparative analysis and calculation of gross profit ratios or profitability ratios, business establishments must produce data in a form which is comparable in a period of at least three consecutive fiscal years. Where a business establishment only exists in a period of less than three consecutive fiscal years or carries out seasonal operations in part of the year, the period of time shall be determined on a monthly, quarterly or seasonal basis, accordingly.

1.3 Upon calculation of relative figures (for example, data regarding ratios expressed as a percentage) on the basis of the absolute figures, business establishments must round figures up to the third place after the decimal point. Where a relative figure results from published data without any absolute figure attached and the above principle of rounding is not used, the published data shall be used.

Example 24:

- Where the absolute figure used for calculation of a gross profit ratio has the value of 5.2856, the relative figure will be rounded up to 5.286%.

- Where the published economic growth rate is 7.8%, such figure will not be rounded up.

- Where the published rate of interest is 4.9854%, such figure will be rounded up to 4.985%.

2. Requirements of keeping and provision of information, documents and source documents

2.1 Business establishment conducting related transactions shall be obliged to keep and produce information, documents and source documents which are used as the basis for application of their method of calculation of a market price of products in related transactions upon the request of the tax office for examination and inspection. Information, documents and sources documents related to production and business activities and method of calculation of a market price in related transactions must be prepared at the time of the related transaction and shall be updated during the performance of the transaction and kept in accordance with the regulations on keeping of sources documents and books of account set out in the laws on accounting, statistics and taxation.

2.2 Upon carrying out corporate income tax finalization, business establishments shall be responsible for preparing a declaration of related transactions in Form GCN-01/TNDN set out in Appendix 1-GCN/HTQT issued with this Circular. The deadline for submission of Form GCN-01/HTQT shall also be the deadline for submission of the declaration for corporate income tax finalization.

2.3. Business establishments shall be obliged to prepare a file including the following information, documents and source documents relating to a related transaction.

2.3.1 General information on the business establishment and affiliated parties:

(a) Information on relations between affiliated parties and the business establishment;

(b) Information and updated reports on strategy for development, administration and control between affiliated parties; pricing policy for transactions in relation to each group of products in accordance with the general guidance of affiliated parties and the business establishment;

(c) Documents and reports on the process of development, business strategy, projects, production, business or investment plans; regulations and procedures for financial statements and internal control reports of the business establishment and of affiliated parties to transactions;

(d) Documents describing the organizational structure and operational functions of the business establishment and of affiliated parties to transactions.

2.3.2 Information on transactions of the business establishment:

(a) A diagram of transactions and documents describing transactions including information on parties to transactions, order and procedures for payment, delivery of products and so forth;

(b) Documents specifying properties and technical specifications of products; breakdown of costs (or cost) of one product, selling price of products, total amount of products produced or traded and sold in the period (specifying such items on the basis of the related transaction and an independent transaction (if any)); the quantity of products;

(c) Information, documents and source documents concerning the process of negotiation, signing, performance and liquidation of economic contracts/agreements related to transactions (usually including a description of products, place of transaction, form of transaction, value of transaction, terms of payment, payment documentation, period of performance, minutes of meetings or instructions of the management regarding the process of negotiation, signing and performance of a transaction);

(d) Information, documents and source documents related to economic conditions of the market at the time of related transactions affecting the method of calculation of a price for transactions (for example, changes in exchange rates and policies of the Government affecting prices in transactions and financial incentives and so forth).

2.3.3 Information on methods of calculation of a market price:

(a) Pricing policy for purchase or selling price or exchange of products of the business establishment, procedures for control and approval of prices, list of selling prices of products on sale markets;

(b) Information, documents and source documents which are used as the basis for substantiation for the selection and application of the method of calculation of a most appropriate price in related transactions of the business establishment including information, data and source documents used for comparative analysis and adjustment of significant differences, pricing note for transactions in accordance with the method of calculation of a price applied by the business establishment and for explanation of reasons for selection of such method;

(c) Other information, documents and source documents as references related to the selection and application of the method of calculation of a price for related transactions (if any).

2.4. When the tax office so requests, a business establishment shall be obliged to provide information, documents and source documents within thirty (30) working days from the date of receipt of the request in writing from the tax office. Where the business establishment has a legitimate reason, this period may be extended once for thirty (30) days or less from the expiry date.

2.5 Information, documents and source documents provided by business establishments to the tax office must be in writing and must be the original copies or photocopies as stipulated in the laws on notarisation and authentication. Where a business establishment uses electronic documents, the provision of such documents shall be subject to the Law on Accounting and applicable legal instruments providing guidelines on electronic documents.

Information, documents and source documents in a foreign language must be translated into Vietnamese and [the translation] must be notarised or authenticated in accordance with the applicable regulations. Where notarisation is not required by law, the business establishment shall be responsible for the translation.

C. RIGHTS AND OBLIGATIONS OF TAXPAYERS; RESPONSIBILITIES OF TAX OFFICES AND OTHER PROVISIONS

1. Rights and obligations of business establishments:

In addition to the performance of the rights and obligations in accordance with the laws on taxation as stipulated in legal instruments in relation to taxation and in this Circular, business establishments shall have the following rights and obligations:

1.1 To request the tax office to keep confidentiality of information provided for calculation of market prices in business transactions between affiliated parties for tax calculation purpose;

1.2 To be obliged to present fully necessary data, documents and sources documents to substantiate the selection and application of the most appropriate method of calculation of a price for related transactions.

2. Responsibilities and powers of tax offices

2.1 To keep confidentiality of information provided by business establishments in relation to the calculation of market prices in business transactions between affiliated parties for the purpose of tax calculation in accordance with this Circular when such information does not originate from publicly announced sources. The provision of confidential information by taxpayers to relevant State bodies shall be subject to the laws.

2.2 The nomination of prices shall be used to make a declaration for tax calculation and to fix taxable income or amount of income tax payable (hereinafter referred to as "tax nomination") by a business establishment conducting related transactions in the following cases:

(a) A business establishment calculates prices, gross profit ratio or profitability ratio applicable to its related transactions on the basis of documents, data and source documents which are illegal or improper or originate from an unclear source.

(b) A business establishment creates a false independent transaction or changes a related transaction into an independent transaction and uses such transaction as a selected independent transaction for comparison.

(c) A business establishment fails to declare or declares incompletely Form GCN-01/HTQT in respect of related transactions conducted in the year for which corporate income tax finalization is made; fails to perform strictly requirements in terms of the time-limit for provision of information, data and documents to prove the declaration and accounting of market prices with respect to related transactions.

(d) The tax office suspects that a business establishment fails to apply or intentionally applies improperly the provisions of this Circular and the business establishment fails to produce substantiation within a maximum period of ninety (90) days from the date of receipt of a notice from the tax office.

2.3 The General Department of Taxation shall, on the basis of information obtained from the declaration of tax obligations by respective business establishments engaged in related transactions and the tax office's database, provide guidelines for implementation of tax nomination on the following principles:

(a) Where a business establishment performs fully the accounting regime, invoices and source documents; its turnover, costs or taxable income for calculation of tax obligations shall be fixed in accordance with the methods of calculation of market prices specified in clause 2 of Section II and Section III of Part B of this Circular on the basis of prices, appropriate gross profit ratio or profitability ratio determined by the tax office in compliance with each case or each business line.

(b) In other cases, tax nomination shall be carried out on the basis of the tax office's database in compliance with the regulations on tax nomination applicable to a business establishment which fails to implement fully the accounting regime, invoices and source documents; or in compliance with the regulations on dealing with breaches in relation to taxation.

(c) Upon performance of tax nomination related to the standard market price margin, the most appropriate value for calculation of prices, gross profit ratio or profitability ratios applicable to a business establishment engaged in a related transaction subject to tax nomination shall not be lower than the average value of the standard market price margin determined by the tax office.

2.4 The General Department of Taxation shall provide guidelines on examination and inspection of the implementation of this Circular by business establishments.

3. Dealing with breaches and resolution of complaints

3.1 Business establishments, organizations, tax officers and other individuals in breach of the guidelines provided in this Circular shall, depending on the nature and seriousness of the breach, be dealt with in accordance with law.

3.2 Business establishments shall be entitled to lodge a complaint in accordance with the provisions of the laws on complaints and other relevant laws in relation to time- limits, procedures for resolution and powers to resolve complaints. Pending resolution of its complaint, the business establishment must still comply strictly with the decision of the tax office on payment of tax and fines (if any).

Where a business establishment being a resident of Vietnam and/or of a country which has signed an agreement on avoidance of double taxation with Vietnam has income subject to such agreement, it may lodge a complaint in accordance with such agreement.

4. Organization of implementation

4.1 This Circular shall be of full force and effect after fifteen (15) days from the date of publication in the Official Gazette3.

4.2 If any problems arise during implementation of this Circular, business establishments, bodies and individuals are requested to report them to the Ministry of Finance for consideration and timely resolution.