This is the sixt 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”).
In which situations should the Transactional Net Margin Method be used?
Both the OECD TPG and Decree 132 cite some examples of business situations which fit the TNMM. This comparative table provides an overview in that regard.
| Example situations for the TNMM cited in | ||
|---|---|---|
| Vietnam Decree 132[2] | Comparable example in OECD TPG | |
| 1 | Taxpayers do not have the necessary information to apply the CUP method | Somewhat related to this issue, the OECD TPG states that the TNMM method is less vulnerable to transactional differences than the CUP, differences in accounting rules and functionality[3]. |
| 2 | Taxpayers do not have data about the accounting methods of external comparables | |
| 3 | Taxpayers unable to find comparable objects with similar functions and products, so there is not enough basis to apply the methods of comparing gross profit margin on revenue or cost of goods sold. | |
| 4 | Taxpayers engaged in distribution or manufacturing which do not own product IP or do not carry out development, enhancement, maintenance, protection and exploitation of IP, or does not fall in the scope of [profit split]. | |
| 5 | Where there is no or limited publicly available reliable gross margin information on third parties[4] | |
| 6 | Not: “Just because data concerning uncontrolled transactions are difficult to obtain or incomplete in one or more respects”[5]. | |
| 7 | TNNM is unlikely to be reliable if each party makes unique and valuable contributions[6]. TNMM (or Cost Plus or Resale Price) may be applicable where one of the parties makes all the unique and valuable contributions, and the other does not[7]. | |
It is fair to say that in practice, TNMM is the most popular method used by taxpayers. This is also the case in Vietnam. Although the OECD endorses TNMM as one of the valid methods, some tax authorities at times suspicious if the taxpayer really chose TNMM as the “best method”, or just out of convenience. For example, the UK tax authorities state:
“TNMM is the OECD method most commonly used for justifying the transfer pricing of a company. In some cases the case for a TNMM approach is based on little more than a list of supposedly comparable companies, whose results are within a range that encompasses those of the company under review. It is then argued that the company’s prices are arm’s length”[8].
In which situations should the Profit Split Method be used?
The following table compares the situations best suited for the Profit Split Method.
| Example situations for the Profit Split method cited in | ||
|---|---|---|
| Vietnam Decree 132[9] | Comparable example in TPG | |
| 1 | “Taxpayers participate in related, specific, integrated, and closed transactions within the group” | “highly integrated operations”[10] “both parties to a transaction make unique and valuable contributions”[11] “contribute unique and valuable intangibles”[12] “taking into account unique facts and circumstances”[13] “highly integrated operations”[14] |
| 2 | “New product development activities” | |
| 3 | “Use of exclusive technology” | |
| 4 | “Participate in the group's exclusive transaction value chain” | |
| 5 | “developing, enhancing, maintaining or protecting and using proprietary intangible assets and have no basis to determine prices between affiliated parties ” | |
| 6 | “transactions closely linked or simultaneously performed” | |
| 7 | “complex financial transactions related to multiple worldwide financial markets ” | |
| Vietnam Decree 132 art. 15 (1.b) | ||
| 8 | “Taxpayers participating in digital economic transactions and have no basis to determine prices between affiliated parties” | |
| 9 | “Participating in creating added value obtained from synergies within the group; | |
| Vietnam Decree 132 art. 15 (1.c) | ||
| 10 | “Taxpayer exercises functions with autonomy over the entire production and business process, and not resorts under the [CUP method] or the [Cost Plus or Resale Price methods]” | |
The TPG are lengthy but rather general when it comes to setting out the situations where the Profit Split Method is appropriate. Decree 132 provides a longer list and more concrete applications, such as “new product development”, “complex financial transactions” and “developing IP assets”. For all of these applications it is very well possible, maybe even likely, that the Profit Split Method is also possible under the TPG.
Calculation of the arm’s length range
The TPG acknowledge that in many cases, the examination by taxpayers will not result in one single price or profit margin, but rather in a small cloud of data points. The OECD cites the use of the interquartile range as a possible tool to determine not a single acceptable point but a maximum and a minimum range:
“In such cases, if the range includes a sizable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis”[15].
Simply put, the OECD’s interquartile range takes into account the data points which are 25% lower than the median and 25% higher than the median. In Vietnam’s earlier transfer pricing regulations, i.e. before Decree 132 also adopted this 25% to 75% range. But with the introduction of Decree 132, a remarkable change was introduced: the lower range may not be lower than 35% instead of not lower than 25%. Effectively this means that the prices or margins should be higher than with the traditional interquartile cited in the TPG.
[1] Decree 132/2020/ND-CP Prescribing Tax Administration for Enterprises with Related Part Transactions dated 5 November 2020.
[2] Decree 132, art. 14 (1) (c).
[3] OECD TPG, 2022, 2.68
[4] OECD TPG 2022, 2.4.
[5] OECD TPG 2022, 2.5.
[6] OECD TPG, 2022, 2.65
[7] OECD TPG, 2022, 2.65
[8] Internal Manual of the UK Revenue Authority: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm421080
[9] Decree 132 art. 15 (1.a)
[10] OECD TPG, 2022, 2.120
[11] OECD TPG, 2022, 2.119
[12] OECD TPG, 2022, 2.119
[13] OECD TPG, 2022, 2.121
[14] OECD TPG, 2022, 2.120
[15] OECD TPG 2020, 3.57
