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THE GOVERNMENT
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THE SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
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No. 20/2017/ND-CP
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Hanoi, February 24, 2017
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DECREE
Prescribing tax administration of enterprises having transactions with related parties[1]
Pursuant to the June 19, 2015 Law on Organization of the Government;
Pursuant to the November 29, 2006 Law on Tax Administration and November 20, 2012 Law Amending and Supplementing a Number of Articles of the Law on Tax Administration;
Pursuant to the June 3, 2008 Law on Enterprise Income Tax and June 19, 2013 Law Amending and Supplementing a Number of Articles of the Law on Enterprise Income Tax;
Pursuant to the November 26, 2014 Law Amending and Supplementing a Number of Articles of the Tax Laws;
Pursuant to the November 26, 2014 Law on Investment;
Pursuant to the November 26, 2014 Law on Enterprises;
Pursuant to the November 20, 2015 Law on Accounting;
At the proposal of the Minister of Finance;
The Government promulgates the Decree prescribing tax administration of enterprises having transactions with related parties.
Chapter I
GENERAL PROVISIONS
Article 1. Scope of regulation
1. This Decree prescribes principles, methods, order and procedures for determining prices of transactions with related parties; obligations of taxpayers in the declaration and determination of prices of transactions with related parties and in tax declaration and payment; responsibilities of state agencies for tax administration, examination and inspection of taxpayers having transactions with related parties.
2. Transactions with related parties (below referred to as related-party transactions) regulated by this Decree are those arising from production and business activities of taxpayers having transactions with related parties defined in Article 5 of this Decree, excluding business transactions involving goods and services whose prices are controlled by the Government in accordance with the price law.
Article 2. Subjects of application
1. Goods production and trading or service provision organizations (below referred to as taxpayers) that are liable to pay enterprise income tax by the declaration method and have related-party transactions defined in Article 5 of this Decree.
2. Tax agencies, including the General Department of Taxation, provincial-level Departments of Taxation and district-level Departments of Taxation.
3. Other state agencies, organizations and individuals involved in the application of regulations on management of prices of related-party transactions, including also tax agencies of the countries and territories that are parties to tax treaties which are effective for Vietnam.
Article 3. Principles of application
1. Taxpayers having related-party transactions shall declare such transactions; eliminate factors causing reductions in tax obligations that are controlled or affected by relationships with related parties in order to determine tax obligations for such transactions to be equivalent to those for arm’s length transactions under same conditions.
2. Tax agencies shall manage, examine and inspect prices of taxpayers’ related-party transactions on the arm’s-length and substance-over-form principles in order to reject related-party transactions that reduce tax obligations of enterprises to the state budget, and adjust prices of these transactions in order to correctly determine tax obligations in accordance with this Decree.
3. The arm’s-length principle shall be applied in the same manner as the principle applied to transactions between independent, unrelated parties in tax treaties in force in Vietnam.
Article 4. Definition
1. “Tax treaty” is the shortened term of the agreement on avoidance of double taxation and prevention of tax evasion with regard to income taxes which is concluded between Vietnam and another country or territory, and its amendments and supplementations currently in force in Vietnam.
2. “Counterpart tax agency” means the tax agency of a country or territory which has concluded a tax treaty with Vietnam.
3. “Related-party transaction” means a transaction arising between related parties in the course of production or business, including purchase, sale, exchange, lease, rent, free-of-charge borrowing and lending, delivery and transfer of machinery, equipment and goods and provision of services; borrowing, lending, financial service, financial security and other financial instruments; purchase, sale, exchange, lease and rent, free-of-charge borrowing and lending, delivery and transfer of tangible assets, intangible assets and agreement on common use of resources such as synergy and cooperation on the use of employees and sharing of costs between related parties.
4. “Arm’s length transaction” means a transaction between unrelated parties.
5. “Independent comparable” means an arm’s length transaction or an enterprise performing arm’s length transactions that is selected on the basis of comparability analysis and identification of comparables in order to determine levels of price, profit ratios and profit allocation rates with a view to assessing taxpayers’ tax obligations toward the state budget in compliance with the Law on Tax Administration and Law on Enterprise Income Tax.
6. “Material difference” means the difference in information or data that significantly or substantially affects prices, profit ratios and profit allocation rates of the parties to a transaction.
7. “Database of the tax agency” means information and data that are developed and managed by a tax agency in accordance with the Law on Tax Administration, relate to the determination of tax obligations of taxpayers, and are collected from various sources, analyzed, stored, updated and managed by the tax agency, including also databases and information exchanged with foreign tax and competent agencies.
8. “Substance-over-form principle” is the principle used to analyze production and business activities of taxpayers in order to determine the nature of related-party transactions for comparison with similar arm’s length transactions, ensuring that related-party transactions correctly represent the commercial, economic and financial nature of transactions performed between unrelated parties, and that related-party relationships do not affect taxpayers’ tax obligations to the state budget. On this principle, data about and realities of transactions between related parties shall be compared with those of arm’s length transactions under similar conditions, without taking into account forms of transactions expressed in contracts or documents between related parties. Identification of the nature of economic, financial or commercial relationship of a related-party transaction shall be based on comparison with arm’s length transactions under similar conditions.
9. “Range of arm’s length transaction values” means a collection of values being prices, profit ratios, or profit distribution rates of independent comparables that are selected by the tax agency and taxpayers on the basis of the database prescribed in Article 9 of this Decree. Values in this range have similar levels of reliability for comparison. In case of necessity, the statistical probability method may be used to identify the standard range of arm’s length transaction values and the mean value of typical, universal and common nature in order to increase the reliability of a collection of independent comparables.
10. “Ultimate parent company” is a term used to refer to a legal person that directly or indirectly owns equity capital in other legal persons of a multinational corporation and is not owned by any other legal person. A consolidated financial statement of an ultimate parent company of a corporation is not consolidated into any financial statement of any other legal person around the globe.
Chapter II
SPECIFIC PROVISIONS
Article 5. Related parties
1. Related parties are parties having relationships in any of the following cases:
a/ A party participates directly or indirectly in the management, control, contribution of capital to or investment in the other;
b/ The parties are directly or indirectly subject to the management or control by or have capital contributed by or investment from a third party.
2. Related parties defined in Clause 1 of this Article are specified as follows:
a/ An enterprise directly or indirectly holds at least 25% of equity capital of the other enterprise;
b/ Two enterprises have at least 25% of their equity capital directly or indirectly held by a third party;
c/ An enterprise is the biggest shareholder of equity capital of the other enterprise, holding directly or indirectly at least 10% of the latter’s total shares;
d/ An enterprise guarantees or grants another enterprise a loan in any form (even including third-party loans secured with financial sources of the related party and financial transactions of similar nature) which equals at least 25% of equity capital and accounts for over 50% of the total value of medium- and long-term debts of the borrowing enterprise;
dd/ An enterprise appoints members of its leadership to manage or hold control of another enterprise who account for over 50% of total members of the leadership responsible for the management or control of the latter; or appoints a member who has the power to decide on financial policies or business activities of the latter;
e/ Two enterprises have over 50% of members of their leaderships or have one member of their leaderships who have/has the power to decide on financial policies or business activities be appointed by a third party;
g/ Two enterprises are managed or controlled in terms of their personnel, finance and business activities by individuals who have one of the following relationships with the other: wife, husband, natural or foster father, natural or foster mother, natural or foster child, natural sibling, brother or sister-in-law, maternal or paternal grandfather or grandmother, maternal or paternal grandchild, and maternal or paternal aunt, uncle or nephew or niece;
h/ Two business establishments have the relationship of head office and resident establishment or are both resident establishments of a foreign organization or individual;
i/ One or more than one enterprise is/are under the control of an individual who either contributes his/her capital to such enterprise(s) or personally participates in managing such enterprise(s);
k/ In other cases in which an enterprise is under the de facto management or control of its production and business activities by the other enterprise.
Article 6. Comparability analysis, selection of independent comparables for comparison and determination of prices of related-party transactions
1. The principle of comparability analysis with arm’s length transactions and the substance-over-form principle shall be used to determine whether related-party transactions are similar in nature to independent comparables.
a/ The nature of transactions shall be determined by comparing legally binding contracts or documents or agreements on transactions between related parties to the reality of performance of these transactions by such parties. In case a taxpayer has a related-party transaction without a written agreement or with a written agreement incompliant with the arm’s length principle, or which is performed in reality not in compliance with the principle of arm’s length transactions between unrelated parties, such related-party transaction shall be determined based on the nature of business between independent parties. Specifically, the related party receiving revenues or profits from the related-party transaction with the taxpayer must have the rights to own and control business risks related to assets, goods, services and resources, and the right to create economic benefits and the rights to generate income from shares, stocks and other financial instruments, and the taxpayer incurring expenses from the transaction with the related party must receive direct economic benefits or values or contribute to generating revenues and added value for the taxpayer’s production and business activities in conformity with the arm’s length principle;
b/ The nature of transactions shall be determined by the method of collecting information, evidence and data on transactions and risks posed to related parties in the reality of production and business activities.
2. Comparability analysis must ensure similarity between independent comparables and related-party transactions and must not allow any difference to materially affect the price, profit ratio or profit distribution rate between parties. In case there exists a difference materially affecting the price, profit ratio or profit distribution rate, it is necessary to analyze, determine and eliminate that material difference based on comparable factors prescribed in Clause 3 of this Article in conformity with each method of determining prices of related-party transactions prescribed in Article 7 of this Decree.
Comparability analysis to find similar independent comparables:
a/ Selection of internal independent comparables that are transactions between the taxpayer and unrelated parties, ensures similarity and no difference materially affecting the price, profit ratio or profit distribution rate between parties. If there is no such internal independent comparable, comparables shall be selected under Points b and c, Clause 3, Article 9 of this Decree. Comparison between related-party and arm’s length transactions shall be made for each transaction involving each similar product. Where it is impossible to compare transactions by product, the aggregation of transactions must ensure conformity with the nature and reality of business activities, and the application of the method of determining prices of related-party transactions must comply with Article 7 of this Decree;
b/ Financial data of comparables must be reliable for use for tax declaration and calculation purposes, and conformable with regulations on accounting, statistics and taxation. The time of transactions of independent comparables must coincide with the time of related-party transactions or must be in the same financial year with that of the taxpayer, except for special cases where it is necessary to expand the period of comparison under Point d of this Clause. Data format must enable comparison and calculation of prices at the transaction time or in the same tax period; data used for comparison of profit ratios or profit distribution rates must be collected in three consecutive tax periods. Decimal values of relative ratios or rates shall be rounded up to the hundredth. If relative values are derived from data released without accompanying absolute numbers and this rounding method is not used, these data may be used with their sources quoted;
c/ The minimum number of selected independent comparables after completion of comparability analysis and adjustment of material differences is as follows: One comparable in case the related-party transaction or the taxpayers performing the related-party transaction and independent comparables have no difference; three comparables in case independent comparables have differences but there are sufficient information and data for eliminating all material differences; and five or more comparables when there are information and data for eliminating most of the material differences of independent comparables;
In case selected comparables are not equally reliable, the statistical probability method shall be applied to determine the standard range of arm’s length transaction values and select the mean value of the range in order to adjust and re-determine the price, profit ratio or profit distribution rate of the taxpayer by the methods of determining prices of related-party transactions prescribed by Article 7 of this Decree;
d/ In case it is impossible to find independent comparables for related-party transactions of particular or sole nature, the scope of comparability analysis may be expanded in terms of the sector, geographical market and comparison time so as to find independent comparables. Expansion of the scope of comparability analysis shall be carried out as follows: selecting independent comparables by economic subsectors that are most similar to the subsector in which the taxpayer is operating in the same geographical market; expanding the geographical market to regional countries that have similar sectoral conditions and economic development levels.
In case of expansion of the scope of comparability analysis to different geographical markets, it is necessary to analyze quantitative and qualitative similarities and material differences under Point e of this Clause and Clause 2, Article 7 of this Decree; or to use figures or data of independent comparables in the previous year and adjust material differences resulting from the time-related factor (if any).
The extended time for collection of figures and data of independent comparables must not exceed one financial year in comparison with the financial year of the taxpayer if the price determination method prescribed in Clause 2, Article 7 of this Decree is used.
dd/ On the basis of the price determination method and selected independent comparables, to adjust the price, profit ratio or profit distribution rate of the taxpayer in order to determine the enterprise income tax obligation of the taxpayer without reducing its tax obligations to the state budget.
3. Comparability analysis shall be made by using the method of comparing, reviewing and adjusting material differences in comparable factors in order to select independent comparables.
a/ Factors determining comparability include characteristics of goods, services and assets (below referred to as product characteristics); operational functions and assets and production and business risks; contractual terms and economic circumstances under which transactions occur;
b/ Analysis of operational functions and assets and production and business risks must determine main functions associated with the use of assorted types of assets, funds and expenses, including cooperation in the use of human resources, sharing of costs between related parties and risks from investment in assets and funds as well as risks associated with profitability in relation to business transactions. Functional analysis shall provide the basis for determining and re-distributing risks actually arising from production and business activities of related parties;
c/ Analysis of particular comparability factors of intangible assets must review and analyze the rights to generate economic benefits stipulated in contracts or agreements, and non-contractual relationships that generate economic benefits to parties. Analysis of intangible assets shall be based on ownership of assets, potential profits from intangible assets, restrictions on the geographical coverage in the use of the rights to intangible assets; life cycle of intangible assets; rights and relationships that generate economic benefits; the right of franchisees participating in developing intangible assets, and operation functions or capability of controlling actual business risks of each related party relating to the entire process of developing, increasing, maintaining, protecting and utilizing intangible assets;
d/ Analysis of economic circumstances under which transactions arise must cover cost advantages based on the factors of geographical position and specialized function; level of market development and economic circumstances of the business line or field of the taxpayer;
dd/ Comparability analysis for elimination of material differences is an analysis aimed at eliminating quantitative and qualitative differences in financial information or data that materially affect the factors used as the basis for determining prices of related-party transactions by each specific pricing method prescribed in Article 7 of this Decree. Material differences shall be determined in qualitative and quantitative terms. Quantitative difference is the difference determined by absolute numbers indicating business cycles, number of years of establishment and operation of an enterprise or by relative numbers representing differences in financial indicators according to particular investment sectors or operation functions and differences in working capital. Qualitative difference is information identified based on each specific method of price determination.
Information regarded as material includes the difference in product characteristics, contractual terms, functions, assets and risks and business line and economic circumstances of the taxpayer and independent comparables; differences in investment policies and environment and impacts of input production and business costs in different geographical markets.
Quantitative and qualitative differences shall be reviewed and adjusted corresponding to comparability factors materially affecting the method of determining prices of related-party transactions prescribed in Article 7 of this Decree.
e/ The analysis results shall be used for selection of independent comparables in conformity with each method of determining prices of related-party transactions prescribed in Article 7 of this Decree.
4. The comparability analysis process involves the following steps:
a/ Identifying the nature of the related-party transaction before analyzing its similarity with independent comparables;
b/ Analyzing, finding and selecting similar independent comparables on the basis of determining the comparison time, product characteristics and contractual terms; analyzing the sector, market and economic circumstances under which the transaction arises; analyzing the related-party transaction and taxpayer performing the related-party transaction; database sources; method of determining the price of the related-party transaction, and adjusting material differences (if any);
c/ Identifying the price, profit ratio or profit distribution rate based on results of analysis of independent comparables for use as the basis for comparison or application to determine the enterprise income tax obligation of the taxpayer without reducing its tax obligations to the state budget. The computing method shall be applied consistently in the production and business cycle or stage suitable to the business functions and model as prescribed in Article 7 of this Decree.
Article 7. Comparison methods to determine prices of related-party transactions
Comparison methods to determine prices of related-party transactions (below referred to as methods of determining prices of related-party transactions) shall be applied in conformity with the arm’s length principle, nature of transactions and functions of taxpayers on the basis of calculation and consistent application in the entire production or business cycle or stage and of financial data of independent comparables selected according to the comparability analysis principles prescribed in Article 6 of this Decree. The method of determining the price of a related-party transaction shall be selected among the following methods on the basis of characteristics of the related-party transaction, availability of information and data and nature of the price determination method.
The methods of determining prices of related-party transactions are prescribed below:
1. The method of comparing the price of a related-party transaction with that of an arm’s length transaction (below referred to as arm’s length transaction price comparison method):
a/ The arm’s length transaction price comparison method is applied in the following cases: The taxpayer performs related-party transactions for each type of goods, tangible asset or service under trading and circulation conditions common on the market or with prices quoted on the domestic and international exchanges of commodities or services; pays royalties for use of intangible assets; or pays loan interest in lending and borrowing activities; or the taxpayer performs both arm’s length and related-party transactions involving products that have similar characteristics and are subject to similar contractual terms;
b/ The arm’s length transaction price comparison method may be applied on the principle that there is no difference in product characteristics and contractual terms upon comparison between prices of arm’s length transactions and those of related-party transactions, which materially affects product prices. If there are differences materially affecting product prices, these differences shall be eliminated.
The factors of product characteristics and contractual terms which materially affect product prices include characteristics, quality, brands and trademarks of products, and transaction scale and volume; terms of contracts on supply and delivery of products: amount, time of delivery, time of payment and others terms; rights to distribute or sell commodities, services or assets that affect the economic value and the market where such transaction occurs, and other factors affecting product prices such as economic circumstances and operation functions of the taxpayer.
c/ Method of determination: The price of products in the related-party transaction shall be adjusted based on that in the arm’s length transaction or the mean value in the standard range of arm’s length transaction values of independent comparables as prescribed in this Decree.
In case the price of products is quoted on the domestic and international exchanges of commodities or services, the price of products in the related-party transaction shall be determined according to the price of products quoted at the same time and under similar conditions.
A taxpayer purchasing machinery or equipment from a foreign related party shall provide documents proving that the purchase prices comply with the arm’s length principle at the purchase time. For brand-new machinery or equipment, the price for comparison is the price on the invoice showing that the related party has purchased such machinery or equipment from an independent party. For used machinery or equipment, there must the original invoices or documents issued at the time of purchase; in this case, the assets shall be re-valued under current regulations on management, use and depreciation of fixed assets.
d/ The result achieved from the determination of the price of the related-party transaction shall be used as the taxable price for declaring and determining the payable enterprise income tax, which, however, must not reduce the taxpayer’s tax obligations to the state budget.
2. Method of comparing the profit ratio of taxpayers with that of independent comparables:
a/ The method of comparing the profit ratio of taxpayers with that of independent comparables shall be applied in the following cases: The taxpayer has no database and information for the application of the arm’s length transaction price comparison method prescribed in Clause 1 of this Article or the taxpayer cannot compare product-based transactions on the basis of each transaction involving each similar product; the aggregation of transactions is carried out in order to ensure conformity with the business nature and reality, and selection of profit ratios of appropriate independent comparables; or the taxpayer fails to exercise autonomy over the entire production and business chain or to participate in performing general or specific related-party transactions under Clause 3 of this Article;
b/ Application principle: The profit ratio comparison method shall be applied on the principle that there is no difference in operation functions, assets and risks; economic circumstances and accounting and bookkeeping methods when making comparison between the taxpayer and independent comparables, which materially affects the profit ratio. If there are differences materially affecting profit ratios, these material differences shall be eliminated.
The factors of functions, assets and business risks and economic circumstances that materially affect profit ratios include factors related to assets, capital and costs; right to control and make decision in reality to serve the performance of main functions of the taxpayer; nature of the business line and market for production and consumption of products; accounting and bookkeeping method and cost structure of products; economic conditions in which the transaction occurs.
Other affecting factors shall be determined based on the reality of performance of transactions between related parties, including commercial or financial relationships of multinational corporations; technical assistance; sharing of trade secrets; use of seconded or part-time employees and economic conditions of the business line or field of the taxpayer. Other comparability factors include product characteristics and contractual terms.
For taxpayers doing business with simple functions, making no strategic decisions and engaged in transactions creating low added value, including production or distribution enterprises which do not bear inventory risk or market risk and generate no revenues or incur no costs arising from the operation of intangible assets, they do not have to incur losses arising from these risks;
c/ Method of determination: The profit ratio comparison method uses the gross or net profit ratios of selected independent comparables to determine the taxpayer’s corresponding gross or net profit ratio. Whether to select the gross profit or net profit ratio to revenues, costs or assets depends on the nature and economic conditions of transactions, functions of the taxpayer and accounting or bookkeeping methods of related parties. The bases for determination of the profit ratio including revenues and costs or assets are accounting data of the taxpayer which are not controlled or decided by related parties regarding prices of related-party transactions.
- The method of comparing the ratio of gross profit to revenue (the resale price method):
The purchase price (cost) of a commodity, a service or an asset sold by a related party equals (=) the sale price (net revenue) of that commodity, service or asset resold to an independent party less (-) the gross profit to the sale price (net revenue) of the taxpayer less (-) other costs included in the purchase price: import duty, customs fee, insurance cost and international shipping cost (if any).
The gross profit to the sale price (net revenue) of the taxpayer, which is determined based on that of independent comparables, equals (=) the sale price (net revenue) of the taxpayer multiplied (x) by the ratio of gross profit to the sale price (net revenue) of selected independent comparables.
The ratio of gross profit to the sale price (net revenue) of selected independent comparables is the mean value within the standard range of arm’s length transaction values of the ratios of gross profit to the sale price (net revenue) of independent comparables which are selected for adjustment in conformity with the principles prescribed in this Decree.
The purchase price (cost) of such commodity, service or asset sold by a related party, which has been adjusted based on independent comparables, is the price for taxation or declaration of costs and determination of enterprise income tax obligations of the taxpayer.
- The method of comparing the ratios of gross profit to the cost (the cost plus profit method):
The sale price or net revenue of a commodity, a service or an asset sold to a related party equals (=) the cost thereof sold by an independent party plus (+) the gross profit to the cost of the taxpayer.
The gross profit to the cost of the taxpayer, which is determined from that of independent comparables, equals (=) the cost paid by the taxpayer multiplied (x) by the ratio of gross profit to the cost of selected independent comparables.
The gross profit to the cost paid by selected independent comparables is the mean value within the standard range of arm’s length transaction values of the ratios of the gross profit to the cost paid by independent comparables which are selected for adjustment in conformity with the principles prescribed in this Decree.
The sale price (or net revenue) applied to the related party, which has been adjusted based on independent comparables, is the price for taxation, declaration of costs and determination of enterprise income tax obligations of the taxpayer.
- The net profit ratio comparison method:
The ratio of net profit before loan interest and enterprise income tax to revenue, costs or assets of a taxpayer engaged in related-party transactions shall be adjusted according to the ratio of net profit before loan interest to revenue, costs or assets of selected independent comparables, based on which tax obligations of the taxpayer shall be adjusted and determined.
Net profit excludes differences in revenues and costs of financial activities.
The ratio of net profit to be selected is the mean value within the standard range of arm’s length transaction values of the ratios of net profit of independent comparables which are selected for adjustment or determination of taxable income and tax obligations of the taxpayer in conformity with the principles prescribed in this Decree.
The ratio of net profit before loan interest and enterprise income tax shall be determined in accordance with the laws on accounting, tax administration and enterprise income tax.
3. Method of distribution of profits between related parties:
a/ The method of distribution of profits between related parties shall be applied to the following cases: The taxpayer participates in a related-party transaction which is general, specific, sole or closed within a corporation, or develops new products, uses proprietary technologies, takes part in the value chain of exclusive transactions within a corporation or the process of developing, increasing, maintaining, protecting and utilizing proprietary intangible assets in the absence of bases for determination of prices of transactions between related parties or transactions closely connected or simultaneously performed, or complicated financial transactions relating to multiple financial markets around the globe; or the taxpayer participates in a digital economic transaction in the absence of bases for determination of prices of transactions between related parties or participates in the creation of added value from synergy within a corporation, or exercises its autonomy over the entire production and business process, and is not regulated by Clauses 1 and 2 of this Article;
b/ Application principle: This method distributes total profit generated from related-party transactions in order to determine the profit of the taxpayer. This method shall be applied to total actual and potential profit of related-party transactions referred to at Point a of this Clause which is calculated based on financial data from proper and valid documents; the value and profit of the related-party transactions shall be determined by using the same accounting method in the whole period of application of this method;
c/ Method of determination: The adjusted profit of the taxpayer shall be distributed based on total profit of related-party transactions, including actual and potential profits likely to be made by parties to the related-party transactions.
The adjusted profit of the taxpayer is the total of basic profit and extra profit. The basic profit is calculated by the profit comparison method prescribed in Clause 2 of this Article. The extra profit is calculated by the distribution rate based on one or some factors such as revenues, costs, assets or manpower of related parties to the related-party transaction and in conformity with the arm’s length principle.
In case of lack of information and data for distribution of the adjusted profit under the above provision, such distribution may be based on one or some factors such as revenues, costs, assets or manpower of related parties to the related-party transaction and in conformity with the arm’s length principle.
d/ The adjusted profit of the taxpayer shall be used as the basis for determining taxable incomes and payable enterprise income tax amounts, but must not reduce the taxpayer’s tax obligations toward the state budget.
Article 8. Determination of costs for tax calculation in some specific cases for enterprises having special related-party transactions
1. For related-party transactions which neither accord with the nature of arm’s length transactions nor contribute to creating revenues or incomes of production and business activities of a taxpayer, their costs shall not be deducted for the tax calculation purpose in a period, including:
a/ Payments to a related party that does not perform any production or business activity related to the production or business activities of the taxpayer;
b/ Payments to a related party that performs production or business activities but has a scale of assets, number of employees and operating functions incommensurate with the transaction value this related party has obtained from the taxpayer;
c/ Payments to a related party that does not have any interest or responsibility relating to assets, commodities or services provided to the taxpayer;
d/ Payments to a related party that is a resident in a country or territory that does not collect enterprise income tax, and that does not contribute to creating revenues or added value for production or business activities of the taxpayer.
2. Transactions of provision of services between related parties:
a/ Except for the payments specified at Point b of this Clause, a taxpayer may deduct its service costs for tax calculation purposes within a period when all the following conditions are met: The provided services have commercial, financial and economic value and directly serve production and business activities of the taxpayer; services provided by related parties are confirmed as having been already provided only under the same conditions under which independent parties pay for these services; the service charges which are paid on the basis of the arm’s length principle and related-party transaction method or the method of distribution of service charges between related parties are applied consistently in the entire corporation to similar services, and the taxpayer shall provide a contract, documents, invoices and information concerning the method of calculation, factors of distribution and policies on prices applied to the provided services in the corporation.
For cases related to centers performing specialized functions and synergies in creating added value for the corporation, the taxpayer shall determine total value created from these functions and determine the level of profit distribution proportionate to the value of contribution by related parties after deducting relevant service charges paid for the related party to perform coordination or service provision functions in arm’s length transactions of similar nature.
b/ Service costs that are not deducted from taxable incomes include costs arising from services provided for the sole purpose of providing benefits or creating values for other related parties; services to provide benefits for shareholders of related parties; services which are repeatedly charged because multiple related parties provide the same services, or in which the added value offered to a taxpayer cannot be determined; services which are in nature benefits obtained by the taxpayer as a result of being a member of a corporation and costs that a related party adds to third-party services provided through a related intermediary do not add any value to these services.
3. The taxpayer’s total loan interest cost arising in a period eligible to be deducted from income subject to enterprise income tax must not exceed 20% of total net profit generated from business activities plus loan interest cost and depreciation cost arising in that period.
This provision does not apply to taxpayers that are subjects of application of the Law on Credit Institutions and Law on Insurance Business.
Taxpayers shall declare the rate of loan interest cost arising in a period according to Form No. 01 in the Appendix to this Decree.
Article 9. Database used in declaration, determination and management of related-party transaction prices
1. Database used in the declaration and determination of related-party transaction prices of taxpayers includes:
a/ Database provided by information business organizations, including financial information and data of enterprises collected from public information sources and stored, updated, managed and used by these organizations (below referred to as commercial database);
b/ Information and data of enterprises publicized on the stock exchanges;
c/ Information and data publicized on domestic and international commodity and service exchanges;
d/ Information publicized by ministries and sectors or other official information sources.
2. Database used in the management of related-transaction prices by tax agencies includes:
a/ The database specified in Clause 1 of this Article;
b/ Information and data exchanged with counterpart tax agencies;
c/ Information provided to tax agencies by ministries and sectors;
d/ Database of tax agencies.
The database of tax agencies shall be used for managing risks and setting related-party transaction prices in the violations specified in Clause 3, Article 12 of this Decree.
3. Analyzing and selecting independent comparables in order to analyze and determine the arm’s length transaction range must comply with the principle of comparability analysis and the methods of determining related-party transaction prices prescribed in this Decree according to the following priority order in selecting comparison data:
a/ Internal comparables of taxpayers;
b/ Comparables residing within the taxpayer’s country or territory;
c/ Comparables of other regional countries with similar sectoral conditions and economic growth levels.
With regard to foreign comparables in different geographical markets, it is necessary to analyze similarities and quantitative and qualitative material differences under Point e, Clause 3, Article 6, and Clause 2, Article 7, of this Decree.
Article 10. Rights and obligations of taxpayers in declaration and determination of related-party transaction prices
1. Taxpayers having related-party transactions regulated by this Decree have the rights prescribed in the Law on Tax Administration.
2. Taxpayers having related-party transactions regulated by this Decree shall declare and determine related-party transaction prices without reducing their enterprise income tax obligations in Vietnam in accordance with this Decree.
Taxpayers shall prove their compliance with this Decree in the selection of a price determination method at the request of competent agencies.
3. Taxpayers having related-party transactions regulated by this Decree shall declare information about related-party relationships and transactions according to Form No. 01 in the Appendix to this Decree and submit the completed form together with the enterprise income tax finalization return.
4. Taxpayers shall preserve and provide related-party transaction price determination dossiers, including:
a/ Local file, prepared according to Form No. 02 in the Appendix to this Decree;
b/ Master file containing information about global corporations, prepared according to Form No. 03 in the Appendix to this Decree;
c/ Country-by-country profit report of an ultimate parent company, prepared according to Form No. 04 in the Appendix to this Decree.
If a taxpayer is an ultimate parent company operating in Vietnam and generating at least eighteen trillion of Vietnam dongs in global consolidated revenue, it shall prepare a country-by-country profit report in the related-party transaction price determination dossier according to Form No. 04 in the Appendix to this Decree.
If a taxpayer has an overseas ultimate parent company, it shall submit a copy of its ultimate parent company’s country-by-country profit report in case its ultimate parent company is required to submit this report to the tax agency in the host country, which is made according to the declaration form set by that tax agency or declaration form No. 04 in the Appendix to this Decree. If the taxpayer fails to provide a country-by-country profit report, it shall provide a written document stating the reason for such failure, legal bases, and specific regulations of the counterpart country prohibiting taxpayers from providing country-by-country profit reports.
5. Related-party transaction price determination dossiers shall be prepared before the time of filing in enterprise income tax finalization returns each year, and shall be preserved and presented to meet the tax agencies’ request for information. When a tax agency carries out an inspection or examination of the taxpayer, the time limit for provision of the related-party transaction price determination dossier is 15 working days from the date of receipt of a request for information.
The related-party transaction price determination dossier and information, materials and documents provided by taxpayers to the tax agency must comply with the law on tax administration. Data, documents and materials used as the bases for comparability analysis and determination of related-party transaction prices must have their sources clearly indicated. For data of independent comparables being accounting figures, taxpayers shall preserve them in the spreadsheet format files for provision to the tax agency.
6. Taxpayers shall provide in a sufficient and accurate manner and bear responsibility before law for information and documents included in the related-party transaction price determination dossiers at the request of the tax agencies in the course of consultation prior to an inspection or examination prescribed in Article 12 of this Decree. The time limit for submission of the related-party transaction price determination dossier is 30 working days counting from the date of receipt of the tax agency’s request. In case a taxpayer has a plausible reason, the dossier submission deadline may be extended only once for no more than 15 working days.
7. Independent external consultancy or audit companies or tax clearance service companies which act on behalf of taxpayers to prepare related-party transaction price determination dossiers shall comply with the provisions of the law on tax administration applicable to enterprises having related-party transactions prescribed in this Decree and take responsibility before law in accordance with regulations.
8. The Ministry of Finance shall provide specific guidance on information used for filling in Forms No. 01, 02, 03 and 04 in the Appendix to this Decree.
Article 11. Cases of exemption from declaration and preparation of dossiers for determination of related-party transaction prices
1. A taxpayer shall be exempted from making declaration for determination of related-party transaction prices referred to in Sections III and IV in Form No. 01 in the Appendix to this Decree only if it has transactions with related parties that are liable to pay enterprise income tax in Vietnam, subject to the same enterprise income tax rate as applied to the taxpayer, and neither of them is entitled to enterprise income tax incentives in a tax period, but shall provide bases for such exemption in Sections I and II in Form No. 01 in the Appendix to this Decree.
2. A taxpayer shall make declaration for determination of related-party transaction prices according to Form No. 01 in the Appendix to this Decree but shall be exempted from preparing a dossier for determination of related-party transaction prices in the following cases:
a/ The taxpayer has related-party transactions but the total revenue arising in a tax period is less than VND 50 billion and the total value of the related-party transactions arising in the tax period is less than VND 30 billion;
b/ The taxpayer has entered into an advance pricing agreement (APA) and submitted the annual report in accordance with the law on advance pricing agreement. For related-party transactions which are not covered by the APA, the taxpayer shall make declaration for determination of the prices of these transactions in accordance with Article 10 of this Decree;
c/ The taxpayer does business with simple functions, generating no revenue and incurring no cost from the operation or use of intangible assets, generating revenues of under VND 200 billion, and applies a ratio of net profit before loan interest and enterprise income tax to revenue in one of the following fields:
- Distribution: At least 5%;
- Manufacturing: At least 10%;
- Toll processing: At least 15%.
A taxpayer that does not apply a ratio of net profit as prescribed at this Point shall prepare a dossier for determination of related-party transaction prices as required.
Article 12. Duties and powers of tax agencies in management of prices of related-party transactions
1. To apply risk management measures in tax administration for prices of related-party transactions in accordance with the tax law.
2. In pursuance to the comparability analysis principle, principle and methods for determining related-party transaction prices prescribed in this Decree and on the basis of information about tax obligations declared by enterprises having related-party transactions, to assess tax in the following cases:
a/ If enterprises fully comply with accounting, invoicing and documentation regulations, the tax agency shall assess revenues, costs or taxable incomes for the purpose of determination of tax obligations by the comparability analysis principle, method of determining related-party transaction prices and databases used in the management of prices of related-party transactions as prescribed by this Decree;
b/ For other cases, the tax agency shall assess tax on the basis of its database in accordance with regulations on tax assessment for enterprises that have not fully complied with accounting, invoicing and documentation regulations or regulations on handling of tax-related violations.
3. To set the price; profit ratio; profit allocation rate which is used for tax declaration and calculation; to set taxable income or enterprise income tax amount to be paid by taxpayers having related-party transactions in a tax period, based on information, data and analysis of assessment of the tax agency in case taxpayers commit violations of regulation on determination of related-party transaction prices as follows:
a/ Failing to provide or sufficiently provide information or to submit completed Form No. 01 in the Appendix to this Decree;
b/ Providing insufficient information required in the related-party transaction price determination dossier according to Forms No. 02 and 03 in the Appendix to this Decree or failing to present such dossier together with data, documents and materials used as the basis for comparability analysis and determination of prices in the dossier at the tax agency’s request within the time limit prescribed in this Decree;
c/ Using inaccurate or untruthful information about independent transactions to carry out comparability analysis, declare and determine prices of related-party transactions, or relying on materials, data and evidencing documents which are unlawful, invalid or are of unclear origin to determine the price, profit ratio or profit distribution rate for related-party transactions;
d/ Violating the provisions on pricing of related-party transactions in Article 11 of this Decree.
4. To keep confidential information provided by taxpayers relating to the pricing of related-party transactions in accordance with this Decree. Provision of information to other agencies and organizations must comply with Clause 5 of this Article.
5. If finding any issues relating to mechanisms and policies concerning specialized fields or sectors through inspections and examinations of the pricing of related-party transaction, to consult related agencies, organizations or persons as follows:
a/ Specialized management agencies, specialized organizations and associations;
b/ The tax agency shall provide dossiers, information and documents relating to the pricing of related-party transactions specialized agencies or organizations consulted, which shall keep confidential information in accordance with law.
6. To exchange information with taxpayers and counterpart tax agencies according to the consultation procedures implemented prior to, during and after the inspection or examination of prices of related-party transactions as follows:
a/ In case, through application of risk management measures in tax administration of prices of related-party transactions, the tax agency finds it necessary to exchange information with the taxpayer about Form No. 01 in the Appendix to this Decree and the related-party transaction pricing dossier of the taxpayer, the tax agency shall send a request for consultation with the taxpayer in order to exchange and provide in advance information about the dossier in accordance with this Decree;
b/ In case the tax agency needs to contact and discuss with the counterpart tax agency about the country-by-country report and other relevant information under the provisions on bilateral agreement and information exchange formalities in a relevant tax treaty. When necessary, the tax agency shall notify the taxpayer in writing of suspension of the inspection or examination in order to exchange information with the counterparty tax agency in accordance with tax law;
c/ The tax agency shall create conditions for the taxpayer to prove and explain figures and data of independent comparables used in the related-party transaction pricing dossier.
7. In case the tax agency has signed an APA with a taxpayer, it shall:
a/ Manage, examine and inspect related-party transactions which are not covered by the APA by the risk management-based pricing method;
b/ Manage, examine and inspect the taxpayer’s compliance with the APA in accordance with regulations.
Article 13. Responsibilities of ministries, ministerial-level agencies and provincial-level People’s Committees
1. The Ministry of Finance shall:
a/ Perform the state management of prices of related-party transactions in accordance with this Decree;
b/ Assume the prime responsibility for, and coordinate with the Ministry of Information and Communications in, communicating and disseminating information about state management of prices of related-party transactions;
c/ Examine and inspect the implementation of the provisions of this Decree on related-party transactions.
2. The State Bank shall coordinate in the provision of information and data on borrowing of foreign loans and repayment of foreign debts of specific enterprises having related-party transactions on the basis of the list requested by the tax agencies, including data on loan amounts, interest rate, periods of interest and principal payment, actual fund withdrawal, loan (principal and interest) repayment and other relevant information (if any).
3. The Ministry of Planning and Investment shall coordinate in the provision of data on registration of business lines of enterprises; database on investment capital structures at the licensing time and time of modification of investment certificates or enterprise registration certificates and relevant information on investment projects when the tax agency conducts examinations and inspection to identify signs of transfer pricing for tax evasion or avoidance purposes at the tax authority’s request.
4. The Ministry of Science and Technology and the Ministry of Agriculture and Rural Development shall, within the ambit of their tasks and powers, coordinate in the provision of database relating to technology transfer contracts; industrial property rights transfer contracts; transfer of plant variety rights; dossiers of registration of intellectual property rights after establishment of industrial property rights or plant variety rights, and provide information when being consulted for the tax agency to perform tax administration of related-party transactions.
5. The Ministry of Information and Communications shall coordinate in the provision of database on enterprises licensed to do business in the fields under its management and information about related-party transactions in the digital economy at the Ministry of Finance’s request.
6. The Ministry of Industry and Trade shall coordinate in the provision of database on prices of commodities on domestic commodity exchanges and information within its scope of management as required for management of transaction prices by the tax agency.
7. Provincial-level People’s Committees shall direct their Departments of Planning and Investment, Departments of Finance and related departments and sectors to build up databases under their specialized management to serve the management of related-party transactions.
Chapter III
IMPLEMENTATION PROVISIONS
Article 14. Effect
This Decree takes effect on May 1, 2017.
Article 15. Implementation responsibility
1. The Ministry of Finance shall guide in detail Articles 6 and 7; Clause 8 of Article 10; and Point c, Clause 2, Article 11; and assume the prime responsibility for, and coordinate with related ministries and sectors and provincial-level People’s Committees in, implementing this Decree.
2. Ministers, heads of ministerial-level agencies, heads of government-attached agencies, chairpersons of provincial-level People’s Committees and related organizations and individuals shall implement this Decree.-
On behalf of the Government
Prime Minister
NGUYEN XUAN PHUC
* The Appendix to this Decree is not translated.
Vietnamese
