Transfer pricing in the headlines

Hoang Thuy Duong Tax partner and KPMG Vietnam’s head of Global Transfer Pricing Services

The Ministry of Finance (MoF) issued Decision 1250/QD-BTC dated and effective May 21, 2012 (Decision 1250) approving the Action Plan for Transfer Pricing Management during the 2012-2015 period (the Action Plan).  Under Decision 1250, the General Department of Taxation (GDT) shall predominantly take the responsibilities for organising the implementation of the Action Plan.

The Action Plan

Overall, the Action Plan appears comprehensive as a major initiative following the recent inter-ministry meeting on transfer pricing in the foreign-invested sector (chaired by a Deputy Prime Minister in February 2012).  Whilst not purported to create an aggressive transfer pricing/tax regime for inbound investment, the Action Plan is assertive on abusive transfer pricing practices, with a clear focus on transfer pricing audits, the tax authority’s capacity building and the Advance Pricing Agreements (APA) initiative during 2012-2015.

The Action Plan seems to be part of the 2011-2020 tax reform strategy that was approved under the Prime Minister’s Decision 732/QD-TTg dated May 17, 2011.

Five key action points noted from the Action Plan

Transfer pricing audits will be carried out in respect of at least 20 per cent of the cases for annual tax audits and/or inspections at both central and provincial levels (in both audit planning and actual implementation thereof).  A transfer pricing audit manual will be developed.  

It is noted from the Action Plan that the future audits will likely be focused on transfer pricing risk assessment.  For example, corporations with a significant number of affiliates or those engaging in businesses or transactions which are identified with high transfer pricing risks, for example export processing, automotive, construction and real property, will be scrutinised under the Action Plan.

Transfer pricing regulations will be enhanced to introduce specific guidance on management of abusive transfer pricing practices.  The requirements of taxpayers’ statutory transfer pricing disclosures will also be enhanced as part of this initiative. Capacity will be built based on practical audit experiences and international practice.  

It is noted that a specialised transfer pricing task force team was established at the General Department of Taxation and a project on capacity building has been underway.  It is planned that a specialised transfer pricing team will also be established in a number of large provincial tax offices.  The capacity building is aided by international technical assistance, which is welcome as a step toward applying the transfer pricing regulations to international standards.

A database of independent companies operating in high transfer pricing risk sectors, and of prices of certain primary products will be built to be used to analyse transfer pricing risk, among other purposes.  It is noted from the Action Plan that the database will be built comprehensively to comprise both secret comparables (to be collected internally within the revenue authorities and from ministries) and external sources (including independent databases and foreign tax authorities via information exchanges). Co-ordination amongst ministries and international cooperation with foreign tax authorities in relation to transfer pricing management (including the exchange of information, technical assistance for capacity building and implementation of the Agreement for the Avoidance of Double Taxation and Prevention of Fiscal Evasion (with respect to taxes on income).

Other action points outlined in the Action Plan include educating tax payers and tax officers in respect of transfer pricing compliance and analysing indications of transfer pricing abuses by taxpayers during the past implementation of transfer pricing regulations.

The Vietnamese transfer pricing regulations have been applied since 2006 with the current Circular 66/2010/TT-BTC dated April 22, 2010 of the MoF.  The regulations require arm’s length pricing of various business transactions between related party enterprises for Corporate Income Tax purposes and set out the guidance on transfer pricing methodologies and compliance requirements for taxpayers, among others.

Auditing corporate taxpayers’ transfer pricing matters has been active in tax authorities’ audits since early 2012.  The transfer pricing audits, however, have been constrained by various factors, including the lack of capacity which is yet to match the complexity of the matters.  Though, results of the recent tax audits indicate the revenue authorities’ determination to move forward in this challenging area.  

For companies, the key expectation has been there is transparency in the auditing process and application of the rules to international standards.  Needless to say, this is important for certainty of tax outcome in support of business doing in an even more difficult environment.  

From this perspective, the Action Plan is welcome as a step forward in modernising the tax administration.

Advance Pricing Agreements

The draft amendments to the Tax Administration Law to introduce APAs were discussed at the National Assembly in May 2012.  The Action Plan devotes a significant part for the MoF’s plan on this major reform of the transfer pricing regime by specifying a clear path forward to issue regulations on APAs during 2012-2013 to implement the amended Tax Administration Law. 

Whilst the law is yet to be enacted (expectedly by the National Assembly in October 2012), the developments show the revenue authority’s serious determination to enhance the transfer pricing regime with the APA initiatives.  

APAs are noted by the MoF/GDT as a potentially effective tool to manage transfer pricing matters with taxpayers and promote inbound investment.  Advance pricing arrangement is slated as one of the items in the prime ministerial Decision 732/QD-TTg dated May 17, 2011 on tax reforms.
For companies, the benefits of having an APA are clear in terms of certainty for tax authorities’ acceptance of their transfer pricing policy and accordingly tax outcome.  This is needed by many, especially the multinational companies, in making decisions on investment.

Prudent management  is necessary

Never before has transfer pricing been highlighted at the top of the governmental agenda on foreign direct investment in Vietnam.  This requires business managers to undertake prudent transfer pricing management, including the intra-group management of the matter within domestic corporations, into account in their investment decision making.  As an immediate action, preparations for a transfer pricing audit should be made properly.

The Action Plan also creates a number of new avenues of managing transfer pricing planning or controversies via Competent Authority procedures or APAs that corporate taxpayers should be prepared for in advanced transfer pricing compliance.
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The views expressed by the author here do not necessarily represent the views and opinions of KPMG.