Supporting multinationals to plan out tax strategies

The implementation of advance pricing agreements (APA) is a trend that tax authorities in many countries are applying to enhance income management from cross-border transactions. How do you assess the implementation in Vietnam?

Dinh Mai Hanh, tax partner at Deloitte Vietnam

An APA is a voluntary mechanism, implemented based on a taxpayer’s request and established based on their business plan. In many countries, an APA is an effective tool to minimise transfer price risks by ensuring expected profits are accepted by tax authorities, allowing multinational corporations to plan strategies for the whole group. The APA mechanism also facilitates authorities in managing related party transactions effectively.

Circular No.201/2013/TT-BTC issued by the Ministry of Finance (MoF) in 2013 was the first stipulation on the application of APA. However, after nearly eight years of application, it revealed certain barriers and disadvantages for both taxpayers and tax authorities. The implementation of APA negotiations is complicated, and it is time-consuming for taxpayers to prepare relevant documents.

To strengthen the legal framework on tax administration and for enterprises with related party transactions in particular, over the last two years the tax system in Vietnam has seen many changes in the Law on Tax Administration. Decree No.126/2020/ND-CP provides detailed guidance on certain points of that law, and Decree No.132/2020/ND-CP prescribes tax administration for enterprises with related party transactions.

Under these circumstances, Circular 45 replaces Circular 201 to ensure consistency and in the new regulations. The changes are in line with the resources of tax authorities and payers in Vietnam.

What are the specific updates of Circular 45, and how do these affect the tax strategy of multinational?

Circular 45 helps multinational corporations with subsidiaries in Vietnam to self-identify transactions that are eligible for APA application more appropriately and accurately.

Related party transactions must simultaneously satisfy several conditions: transactions that have already incurred in the taxpayer’s business operation and will still incur during the APA’s covered period; those of which the nature can be determined in accordance with the substance over form principle and the arm’s length principle; transactions not under tax dispute; and transactions not arranged for the purpose of tax evasion, avoidance, and abuse of the tax treaty.

Further, Circular 45 also updates the APA discussion and negotiation process, which helps to increase efficiency in handling APA dossiers and establishes these agreements as a helpful tool for multinationals to ensure compliance in Vietnam.

Previously, the MoF approved the negotiation plan, then the General Department of Taxation (GDT) negotiated with the engaging parties. According to Decree 126, the GDT directly appraises, discusses, and negotiates with taxpayers and the foreign tax authorities the proposed contents in the final APA draft to submit to the MoF for approval.

Circular 45 does not stipulate a specific deadline for APA settlements, which may affect the application process. The maximum covered period is three tax years.

Circular 201 previously stipulated that an APA’s effective period comes no sooner than the date the taxpayer submits in the official APA application. This content is not specifically mentioned in Circular 45, however, according to Law on Tax Administration and Circular 126, an APA shall be established before the corporate income tax finalisation deadline.

Accordingly, the effective period of an APA under new regulations will depend on the progress of appraisal, discussion, and negotiation before being signed.

What would you recommend for the success of the implementation of Circular 45?

To establish Circular 45 as an innovation for APA mechanisms in Vietnam, we hope that competent authorities actively push the review and handling process of current APA applications. The GDT is a key contact that needs to allocate more resources to boost the discussion and negotiation processes effectively, as well as support enterprises in their APA application.

For multinationals, to render the appraisal, discussion, and negotiation with tax authorities effective, they should carefully prepare the dossiers and documents to prove the validity of data and information, as well as proactively calculate appropriate prices and profit level indicators as a basis for determining the taxable income before requesting an APA application to the tax authority.