This is the eight and last 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”).

Conclusions

By way of summary, this is an overview of some comparative notes in transfer pricing guidelines between Vietnam and the OECD:

• Related parties: The central principle of the OECD “participate in management, control or capital” is also adopted in Vietnam. Decree 132 just offers more details and actual thresholds (such as 25% participation in capital, or 50% of the board) which arguably fall within the general principle anyway. One remarkable difference is Vietnam’s characterization of a financing relationship as triggering parties to be “related” if certain thresholds are exceeded.  In the OECD approach, a lender is not normally seen as a related party in and of itself, even if the loan exceeds certain financial thresholds of the borrower.   

• Comparables: It is fair to say that both the TPG and Decree 132 have a preference for internal comparables over external comparables in many situations. But, unlike the TPG, Decree 132 (1) provides in an actual priority for internal over external comparables, and (2) does not offer any specific language to warn against use of minor uncontrolled sales transactions. Therefore, we conclude that in Vietnam reliance by the GDT on internal comparables, where available, may be stronger than in some OECD markets. 

• Foreign data: Both Vietnam and the OECD allow the use of foreign data, for example for the TNMM. The difference is that in Vietnam, the preference for local data is stronger worded and part of an explicit priority of sources. It is possible for a taxpayer in Vietnam to use foreign data, but only if appropriate Vietnam data is lacking[2].

• Hierarchy or Most appropriate Method: The OECD has abandoned the hierarchy of methods in 2010 and calls for taxpayers to use the most appropriate method under the circumstances. Vietnam provides in a (qualified, “soft”) hierarchy with CUP at the top[3], then Cost Plus and Resale Price, and if that is not possible to apply, only then the taxpayer may refer to TNMM and Profit Split. However, this hierarchy in Vietnam is perhaps more theoretical than practical. As the regulations confirm, it is subject to the circumstances of the situation. The taxpayer can justify his method of choice in Vietnam by claiming the data for other methods is lacking. Whether or not that statement on lack of data is acceptable to the GDT of course remains to be seen.  In conclusion it is fair to say that even though in practice often the end result may be comparable, Vietnam imposes in theory more structure when it comes to methods than the OECD, which has real life consequences for challenges.

• CUP Method: The OECD and Vietnam agree that the CUP Method is best used when comparable products or services are freely available on the market, or for goods with “market prices” determined at international exchanges. Decree 132 also mentions interest rate on loans which is comparable to the OECD’s Transfer Pricing Guidance on Financial Transactions. Vietnam includes royalty rates on licenses under the CUP Method, which is not mentioned in TPG, but in many such cases the OECD would come to comparable outcomes for royalties. The OECD has some more explicit detail determining the comparability of a product than Decree 132.   

• Cost Plus Method: The OECD and Vietnam provide both that the Cost Plus Method is often appropriate for services and contract manufacturing. The applications mentioned in Decree 132 are mostly also referred to quite clearly in the TPG.

• Resale Price Method: The OECD and Vietnam provide both that the Resale Price Method is best used for distribution to unrelated parties of goods purchased from related parties, without much added value. Decree 132 is more explicit or detailed in pointing out that this method should not be used if the taxpayer adds value or owns IP, which is in line with the TPG.

• Transactional New Margin Method: Vietnam is in agreement with the TPG in the basic view that a net-margin method such as TNMM is best suited when data about gross margins (for Cost Plus and Resale Price) is not available. The difference is that Vietnam, as was explained above, provides that Cost Plus and Resale Price are more explicitly prioritized over TNMM that is the case in the OECD context.

• Profit Split Method: This method can best be used for transactions which are highly integrated within a group of related enterprises, both Vietnam and the TPG agree. Decree 132 adds more detail and examples which may be consequential in actual practice. Vietnam puts more emphasis on the use of this method with complex financial transactions and development of intangibles.     

• Arm’s length range: One of the more remarkable deviations from the TPG in Vietnam is that the lower limit of the arm’s length range is set at 35% instead of the usual 25% as in the interquartile range referred to in the TPG[4].  

• Related party expenses and service fees: On this issue the text of Decree 132 and the TPG are not similar. Vietnam uses a transfer pricing regulation as an opportunity to provide restrictions on the deductibility of certain costs. Many of these restrictions fall within the scope the arm’s length principle. For example, the mention in Decree 132 of “payments to related parties which have no business or production activities or none that is relevant to the taxpayer’s business”, such payments may very well fail the OECD’s benefit test[5].  

• Interests paid to related parties: Vietnam’s inclusion in the transfer pricing regulations of a general cap in deductibility of interest paid to related parties is noteworthy, and without equivalent in the TPG.  This Vietnam rule is more consequential than in many OECD member countries, because unlike Art. 9 of the Double Taxation Agreements, Decree 132 provides that certain lenders can be deemed related parties simply because the loan amount exceeds certain thresholds based on the equity of the company. From the OECD’s perspective, if the interest is calculated on an arm’s length basis, this would suffice. In Vietnam, even if the interest is at arm’s length, the cap on deductibility may nevertheless (temporarily) eliminate the tax deduction. 

In conclusion, there is substantial alignment between Vietnam’s transfer pricing regulations and the TPG. Decree 132, in following of its predecessors, has clearly been significantly inspired by the TPG when it comes to comparability factors, comparables, documentation, and the operation of the different transfer pricing methods. In several instances, Decree 132 provides more concrete details than the TPG, but the details provided are well within the general meanings set out in the TPG. For example, Vietnam’s concrete definitions for “related parties” are, for the most part, just applications of the OECD’s general rule “directly or indirectly participating in the management, control or capital”. Vietnam’s regulations on services are also very much in line with the OECD’s “benefits test”.  Finally, it is noteworthy that there is substantial alignment between Vietnam and the OECD on which transfer pricing method is best suited for which situation.  But in some instances, Vietnam’s rules are not the same as those set out in the TPG. Where there are differences, Vietnam’s rules are usually stricter than the ones of the OECD. Obviously, one of the eye-catching differences is the determination of the lower limit of the acceptable arm’s length range at 35% instead of the more usual 25%, referred to in the TPG. Furthermore, the Vietnam regime is in theory at least more structured or indeed stricter than the OECD’s when it comes to the fixed hierarchy of transfer pricing methods and the stated priority for internal comparables. To a lesser degree, the same can be said for the use of foreign data. It is the OECD position that the “nationality” of the data does not matter, just the quality. On the other hand, Vietnam’s policy is to prioritize Vietnam data. There are also significant differences on characterizing certain lenders (including individuals who are directors) as related parties and restricting the deductibility of interest paid to such lenders, even if the interest is at arm’s length.

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

[2] Decree 132, art. 17 (3)

[3] Which is similar to the preference the OECD TPG expresses for CUP if it is “equally reliable”; OECD TPG 2022 2.3.

[4] OECD TPG 2020, 3.57.

[5] OECD TPG 2020, 7.6.