This is the first part in a series of contributions focused on analyzing Vietnam’s current key transfer pricing regulation Decree 132[1] from the perspective of the 2022 Transfer Pricing Guidelines (“TPG”) of the Organization for Economic Cooperation and Development (“OECD”). The purpose is to highlight different experiences, possible differences in approach and emphasis with respect to the practice of transfer pricing in Vietnam compared to OECD countries. To do so, subsequent contributions will discuss various selected key elements of transfer pricing regulation[2], and they can be read together. The focus of each of the contributions is as follows:

Part 1: Related Parties

Part 2:  Comparables

Part 3:  Hierarchy or Most Appropriate Method

Part 4:  CUP, Cost Plus and Resale Price methods

Part 5: Net margin methods (TNMM and Profit Split) and the arm’s length range

Part 6:  Special rules for costs, services and loans

Part 7: Conclusions: differences and similarities between the transfer pricing rules of the OECD and Vietnam

Introduction

Arguably, Vietnam’s first comprehensive regulations on transfer pricing date back to 2005 when a Circular was issued “to guide on the determination of market prices in business transactions between associated parties”[3]. This regulation was fairly quickly updated in 2010[4]. In 2012, the Ministry of Finance ordered new regulations to be designed[5] and in 2013 a regulation was issued on Advance Pricing Agreements[6]. The next milestone came in 2017, when Vietnam introduced Decree 20 on transfer pricing, seeking to follow the Base Erosion and Profit Shifting Program (“BEPS”) of the OECD[7]. The update of Decree 20 came in 2020 with what we will refer to throughout this contribution as Decree 132[8], the present main regulation on transfer pricing in Vietnam. The current regulations are based on a statutory provision in the Law on Tax Administration that gives the authorities the authority to determine the income of taxpayers, when dealing with related parties, as if they had been dealing with third parties[9].

 The OECD has played a very important role on the transfer pricing issue at least since its first report on the subject “Transfer Pricing and Multinational Enterprises” in 1979. The OECD’s work on the issue has been complemented regularly with reports and modifications on various core and related issues such as Thin Capitalization[10], Advance Pricing Agreements and mutual agreement procedures[11], and the BEPS suite of actions[12]. The present most recent version of the OECD’s main report, the “Transfer Pricing Guidelines” (“TPG”) is that of 2020[13][TTL1] .

As a non-OECD country, Vietnam’s transfer pricing regulations, unsurprisingly, never mention the TPG as such[14]. As far as this author is aware, there are no public instructions or rulings from the Vietnam General Department of Taxation (“the GDT”) discussing the relevance, if any, of the TPG for transfer pricing compliance or disputes in Vietnam.

Yet, we can say that Vietnam has demonstrated significant willingness on the public international level to associate itself with OECD solutions and interpretations. Vietnam has consistently agreed to include the OECD version of art. 9 “Associated Enterprises” in its Double Taxation Agreements (“DTA’s”) and it has ratified the OECD’s Multilateral BEPS Convention, an initiative that has many issues in common with transfer pricing[15]. 

Furthermore, even more importantly, the vast majority of key terms, concepts and processes found in Vietnam’s transfer pricing regulations have been and are the same as in the TPG. This is true for the central role of the arm’s length principle, the various comparability factors, the different transfer pricing methods down to processes such as the “country-by-country” reports.  There is no denying that the TPG have been the most important influence of Vietnam’s present transfer pricing framework.

Just because the TPG is influential does not make them binding upon the GDT, or for that matter, the taxpayers. Even in OECD countries, the TPG are generally followed but not per se considered legally binding in nature[16], among other reasons because much in the practice of transfer pricing and in the TPG highly depends on the individual facts and circumstances anyway.

Who is a related party or an associated enterprise?

Vietnam’s Law on Tax Administration provides in a general definition of “related parties”:

“related parties” means parties directly or indirectly participating in the management, control, capital contribution of enterprises; parties under direct or indirect management, control of an organization or individual; parties whose capitals are contributed to by one organization or individual; enterprises managed, controlled by family related individuals”[17].

Decree 132 copies that general principle, but continues with a list of more detailed provisions referring to various specific circumstances, which can be seen as applications of the general rule.

The general rule to define a related party in Decree 132 begins as follows:

“A party is directly or indirectly participating in the management, control or capital in the other party”;

This is very much identical to the concept of “associated enterprises” in art. 9 of the OECD Model Tax Convention. But Decree 132 goes further. In its general definition, it adds:

“ [O]r; a party is directly or indirectly affected by the management, control or capital in the other party” (emphasis added).

The factor “being affected by” is not spelled out in Art. 9 OECD Model Tax Convention.

Decree 132 continues with a lengthy set of situations which are more or less applications of the main principle. A first group of related party applications refers to ownership or capital. Parties are related if:

• There is a direct or indirect participation of 25% of one party into the other;
• A third party holds 25% directly or indirectly in both parties;
• An enterprise has the largest single shareholding in the other enterprise of at least 10%; 
• They are head office and permanent establishment (“PE”), or both are PE’s of the same enterprise;

 A second group of related party applications refers to management and control. Parties are related if:

• One enterprise appoints more than 50% of the board of the other enterprise;
• One enterprise appoints a member of the board of the other enterprise which has the right to decide the financial management of that enterprise;
• Both enterprises are managed or controlled by individuals who are spouses, parents and (natural and adopted) children, siblings, grandparents and grandchildren, uncles and aunts, nieces and nephews.    
• One enterprise de facto manages and controls the other enterprise;

A third and final group of related party applications refers to financing: Parties are related if:

• An enterprise finances or guarantees (including through a third party) the other enterprise for at least 25% of the equity of the borrower and this enterprise constitutes more than 50% of the long and medium term debt of the borrower;
• A loan of at least 10% of the borrower’s equity provided by a person holding executive office or a controlling interest in the borrower or one of the family relationships cited above;

The OECD Model Tax Convention defines “associated enterprises” as follows:

Where

• an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
• the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly[18].

As was already mentioned above, the basic three factors “management”, “control” and “capital” are central in both OECD Art. 9 and in Decree 132. The OECD Commentary or the TPG do not offer much in terms of additional guidance what constitutes “participation in management, control or capital”[19]. It has been argued that this “there is a broad understanding of what is meant” and more detail could be left to the treaty states[20].

It can be argued that Decree 132 mostly offers more detail, a threshold or concrete applications of OECD’s general rule. For example, a participation of 25% in capital obviously falls within the notion of “a participation”. It is merely setting a threshold to be used in Vietnam within the wide range the OECD has established, which can be read as “any participation”. The same can be said for “participation in management”, which is rendered more concrete in Vietnam by setting the threshold at appointment of 50% of board members. Decree 132’s rule on family relationships could be seen as a form of “control” as stated in art. 9 of the OECD Model Tax Convention[21]. 

The Decree’s reference to loans or guarantees as a factor that causes parties to be considered “related” is however as such not found in the OECD context. The OECD refers to capital, which most likely does not easily extend to “debt”. That is not to say that Vietnam’s reference to lenders is necessarily contrary to the OECD definition. It is namely conceivable that the OECD’s “control”, which is not defined in the Commentary or the TPG, is interpreted in Vietnam to include the kind of control a significant lender may have over a borrower.

[1] Decree 132/2020/ND-CP Prescribing Tax Administration for Enterprises with Related Part Transactions dated 5 November 2020.

[2] Not necessarily all elements are systematically compared. Some issues that feature in the TPG but not in Decree 132, such as business restructuring, cost contribution arrangements and documentation, are not discussed. 

[3] Circular 117/2005/TT-BTC of the Ministry of Finance dated 19 December 2005 (this circular was effective from 2006 to 2009).

[4] Circular 66/2010/TT-BTC of the Ministry of Finance dated 22 April 2010

[5] Ministry of Finance issued Decision 1250/QD-BTC dated May 21, 2012, to approve the action program to control the transfer pricing activities in the period of 2012-2015.

[6] Circular 201/2013/TT-BTC Ministry of Finance issued dated 20 December 2013 to guide on the application of Advance Pricing Agreements (APA) in tax administration

[7] Decree 20/2017/ND-CP dated 24 February 2017; For guidance of this Decree, the Ministry of Finance issued Circular 41/2017/TT-BTC dated 28 April 2017.

[8] Decree 132/2020/ND-CP Prescribing Tax Administration for Enterprises with Related Part Transactions dated 5 November 2020. (Duplicated with footnote 2)

[9]Art 50 ,1 The Law on Tax Administration 2019: “(dd) buys, sells, trades goods and record values thereof against their market prices”.

[10] OECD, Issues in International Taxation, Thin Capitalization, 1987.  

[11] Guidelines for conducting advance pricing arrangements under the mutual agreement procedure, 30 June 1999

[12] Report on BEPS Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation; Report on BEPS Action 13 Transfer Pricing Documentation and country-by-country reporting 1 October 2015.

[13] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2020.

[14] Some OECD countries have done so. For example, Hungary in its Decree 22/2009 on the Obligation of Transfer Pricing Documentation, section 11, contains a “harmonization clause” with the TPG.  

[15]https://www.oecd.org/tax/beps/viet-nam-deposits-its-instrument-for-the-ratification-of-the-multilateral-beps-convention.htm

[16] Vega, Alberto, “International Governance Through Soft Law: The Case of the OECD Transfer Pricing Guidelines”, 2012, available on SSRN at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2100341

[17] Art. 3 par. 21 Law on Tax Administration. See also accounting law: Standard 26 on Related Party Disclosures (Issued and promulged in pursuance of the Minister of Finance Decision No. 234/2003/QD-BTC dated 30 December 2003).

[18] OECD Model Taks Convention Art. 9 (1)

[19] Ramon S.J. Dwarkasing, “The Concept of Associated Enterprises”, Intertax, Volume 41, Issue 8/9 (2013) pp. 412 – 429

[20] Vogel, K., Double Taxation Conventions, p. 525

[21] See however Lehner, Martin, “Article 9 Associated Companies”, http://www.steuerrecht.jku.at/ml/de/elemente_site/Kommentare-Sammelwerke/Lehner%20-%20Art%209%20OECD%20MC.pdf who argues that family ties are not taken into account; Vogel, K., Double Taxation Conventions, p. 525