Transfer pricing research advised

Analysts are urging relevant companies to undertake the correct processes

At last week’s transfer pricing seminar held by RSM Vietnam, experts discussed the latest regulatory updates on ­related party transactions. The reality is that after two years of implementing Decree No.20/2017/ND-CP dated February 2017 on tax administration of enterprises having transactions with related parties and Circular No.41/2017/TT-BTC dated April 2017 on implementing the decree, many corporate taxpayers in Vietnam still find themselves struggling with compliance rules.

As Vietnam prepares to launch the Law on Tax Administration in July next year, many firms are feeling even more anxious, with a significant number of them subjected to back tax and additional tax penalties. Failure to disclose related party payments, as well as ambiguities regarding transactions abroad, remain a major reason for these fines.

There are currently four statements for declaring related transactions in the country. According to RSM Vietnam, in the first statement, tax specialists at companies often make mistakes on declaring the origin country and the tax number of their related party. The nature of transactions was also often incorrect, leading to higher scrutiny from tax collectors, especially when it concerns countries or areas with a very low tax rate – so-called tax havens.

“Moreover, companies often mistakenly say that they are entitled to exemptions while in the tax collectors’ eyes, they are not. We should keep in mind that tax agencies have the power to decide the amount of taxable income at any company,” said Le Khanh Lam, senior partner in tax and consulting services at RSM Vietnam.

To avoid transfer pricing (TP), tax collectors in Vietnam now also require companies to have the same quotes for their related party dealings and in independent transactions. In general, any discrepancies in pricing, income level, and expenses between independent and related party transactions will be closely monitored by tax agencies. According to the new Law on Tax Administration, the red flags of TP include transactions that do not follow market prices, or disbursements that are different from the registered numbers. The revised law raises the types of TP cases from seven to nine.

In fact, the new rule is plaguing many firms in Vietnam. The fresh law states that they must compare their pricing with other similar players in the market, in order to show that their dealings follow market prices. Ideally, the data should be sourced from independent market participants, from the stock market to government agencies and auditing firms.

However, Lam pointed out that in Vietnam, many companies in the stock market are subsidiaries of the same groups or related in one way or another, which means they fail the independence test. “Many companies also operate in a wide variety of sectors, making them incomparable to each other. Moreover, public data from government agencies might not be sufficient,” said the tax specialist.

To address this problem, Lam advised businesses to seek commercial data from major providers in the world such as BvD or Thomson Reuters, as it is important that they can clearly show the origin of any transactions or data they have. For multinational corporations with a presence in Vietnam, problems also arise from the lack of local and master files. Vietnamese businesses with more than VND18 trillion ($782.6 million) of consolidated profits from overseas are subject to the rule, and companies should also keep in mind rules regarding intra-group payments.