Transfer pricing and legal consequences for enterprises

On February 24th, 2017, the Vietnamese Government issued Decree No. 20/2017/ND-CP prescribing tax administration for enterprises engaged in related transactions, in effect since May 1st, 2017 (“Decree 20”)

The promulgation of Decree 20 marked an important milestone of Vietnam in economic integration and development, especially for investment promotion activities. This Decree, based generally on concepts and principles from the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development and Base Erosion and Profit Shifting Action Plan, has demonstrated the considerable efforts of Vietnam in improving tax policies, ensuring transparency and minimizing tax erosion

1. Related transactions

According to Clause 3, Article 4 of Decree No. 20/2017/ND-CP: A related transaction is a transaction arising between “affiliated parties“in the process of production, business”. Thus, to determine whether a transaction is the transfer pricing or not, we need to consider 02 factors as follows:

Firstly, ‘affiliated parties’include either (Clause 1, Article 5 of Decree No. 20/2017/ND-CP):

  • One party which participates directly or indirectly in the management, control, capital contribution or investment in the other party; or
  • Parties that are directly or indirectly under the management, control, capital contribution or investment of another party.

Secondly, ‘‘process of production, business’ includes the following transactions or activities [between affiliated parties]

  • Purchase, sale, exchange, rent/lease, borrowing, lending, convert, or transfer of machinery, equipment, commodities, services, tangible and/or intangible assets;
  • Borrowing, lending, or providing financial service, financial guarantee, and other financial instruments;
  • Cooperation in the use of human resources; or
  • Cost-sharing

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2. Responsibilities of enterprises involved in related transactions

Under the provisions of Decree No. 20/2017/ND-CP, enterprises must ensure that they do not reduce their corporate income tax (CIT) liability thanks to their related transactions.

According to Article 10 of Decree No. 20/2017/ND-CP, related enterprises must fulfill the following obligations:

  • Their obligations under the Tax Administration Law.
  • Declaring information about their related transaction according to Form No. 01 of the Appendix enclosed with Decree No. 20/2017/ND-CP (when submitting the declaration of CIT Finalization).
  • Declaring and determining the price of their related transactions.
  • Storing and providing the document for the price of the related transactions (“Document”), specifically as follows:

-Three-tiered documents: Local file; Master file containing information relevant for global corporations; Country-by-Country report of an ultimate parent company prepared by using the forms in the Appendixes of Decree No. 20/2017/ND-CP.

-The time of making Document: Before submitting the annual declaration of CIT Finalization.

– Providing Document: At the request of tax authorities, Enterprises must provide Document within no more than 15 working days after receiving the request of tax authorities

These documents are important to evaluate the arm’s length of related transactions.

3. Legal consequences for enterprises to a related transaction when they violate the responsibilities mentioned in paragraph 2 above

According to Clause 3, Article 12 of Decree No. 20/2017/ND-CP, if enterprises [to a related transaction) do not make the declaration; incomplete declaration of information related to the transfer pricing; Using dishonest or incorrect information, tax authorities may consider the existence of transfer pricing and therefore

  • Impose the level of price; the profit margin; and the profit allocation rate which are used for tax declaration and calculation;
  • Impose the taxable income or the payable CIT for the related transactions arisen within the tax period

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We hope that the information contained in this article is useful to you. If you still have any question about transfer pricing and related transactions, please contact us via our email: or Hotline Call: (+84)86.888.1900 for timely advice and support.

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