Tax agencies ramp up anti-transfer pricing measures

Having entered into force on May 1, the government’s Decree No.20/2017/ND-CP provides specific guidance on the tax administration of enterprises with related party transaction. 

The decree is expected to aid the government in combating deceptive transfer pricing reporting, which many multinational firms have reportedly practised in bids to skip their tax duties to the nation.

The new decree is also equipped with new regulations guiding the tax treatment of intra-group service charges, interest, intangibles, purchases of fixed assets, and profit allocation.

A common issue that parent companies and their subsidiaries in Vietnam often encounter, according to EY Vietnam tax consultant Huong Nguyen, is the related party services expense charged on professional services like research and marketing, or supporting services like finance, legal, and HR.

“The value of the bills can be very large, and in recent years, the tax authority has kept an eye on those costs and they have been very strict on the tax deduction on them,” said Huong at an EY tax seminar held last week.

For the expense to be deductible, Huong pointed out a number of requirements and conditions that must be met by the Vietnamese subsidiaries. An example is that the services provided must be directly linked to the business’ operation, and beneficial to the business itself.

“In addition, the business must be able to prove that such services have actually been carried out, with proven records of how and when they were performed,” Huong said. “In cases where the cost of the services is high, yet the supporting documents are insufficient, the business may not receive a full deduction.”

Huong also gave an example of taxpayers that may be refused a tax deduction, when the tax authority deems the services are not designated to benefit the Vietnamese subsidiaries but the parent companies themselves.

For an intra-group service expense to be deductible for tax purposes, it must meet the “substance over form” principle: apart from the services being directly beneficial to the business operation of the tax-payer as previously mentioned, services from related parties will only be allowed if independent companies under similar circumstances will pay for the same services.

The service fees, additionally, must be paid on an “arms’ length” basis, and relevant supporting documents must be fully submitted. The maximum total deductible interest expenses paid to related parties in a tax period, meanwhile, is capped at 20% of earnings before interest, taxes, depreciation, and amortisation.

The new decree, meanwhile, expands and covers more detailed types of related party transactions subject to transfer pricing compliance, including specifically the use of common resources such as group synergies, a shared service centre, and cost sharing between related parties.

The regulation increases the 20% direct or indirect ownership threshold to 25% when determining whether parties are related. In addition, enterprises are also related if they are under the common control of an individual through that person’s contributed capital or direct management.

Decree 20 also removes specific percentages in determining a control element. However, where a firm is in substance controlled or managed by the other party, the parties will generally be considered related for transfer purposes.