Vietnam Set to Update Transfer Pricing Thresholds from 2017
Vietnam’s Ministry of Finance released a draft circular on October 11th which, if passed, is set to become the largest change to transfer pricing (TP) regulation since the implementation of Circular 66/2010/TT-BTC in 2010 – which the draft updates. Touching on conditionality of TP exemption and thresholds for defining related entities, the draft has significant implications for a variety of enterprises operating within Vietnam. Currently receiving public feedback, the circular is widely expected to become effective at the top 2017. Those operating or considering establishment within Vietnam should therefore review the draft and any subsequent changes closely. The brief below outlines key changes proposed by the draft and highlights the increasing risk of non-compliance with TP regulation in Vietnam.
Broadly regulating companies trading with their subsidiaries and partners, the manner in which these relationships are defined under TP legislation is of great importance in assessing which transactions will be scrutinized by Vietnamese officials. Under current policy, related parties are defined by ownership as well as transactions. Parties are considered to be related, and therefore exposed to potential scrutiny by tax authorities, if one of the two parties owns more than 20 percent of the other. Alternatively, parties may be considered related if the more than 50 percent of one of the parties’ sales or purchases are conducted with the other party.
Under proposed changes, both the ownership and transaction thresholds outlined above would be increased. The ownership threshold would be raised to 25 percent while transactions between otherwise unrelated entities would have to meet or exceed 60 percent of one party’s sales or purchases. The increase of both thresholds, if implemented, would provide relief to businesses on the verge of current limits and reduce the likelihood of unrelated entities being caught up in TP compliance.
In addition to adjusting definitions for related parties, proposed updates outline an exemption from TP compliance for small and medium sized enterprises. In contrast to thresholds, which are based on a percentage of ownership or sales, qualification for a TP compliance exemptions can be secured if both the revenue and the value of a company’s related party transactions fall below specific amounts. To qualify, the revenue of a company must be below VND 50 billion (roughly US$2.2 million) and transactions with related parties must be below VND 30 billion (roughly US$1.3 million). It should be noted that calculation of revenue and related party transactions will be based on a given tax year.
Clarifying Transfer Pricing Risks
Understanding if transactions will breach thresholds or if a company will qualify for exemptions from TP related compliance will be of particular importance in 2017. While investigations of transfer pricing cases have lagged in recent years, there are growing signs that upcoming changes will be used as a pretext to jumpstart new audits and investigations. In addition to official sources indicating an interest in increased enforcement, the potentially lucrative nature of TP investigations offers a salient solution to heightened levels of government debt. For established Vietnamese operations, conducting significant purchase and sales transactions with related parties, it will be of utmost importance to assess any and all changes to TP regulations in the context of the following risks posed by non-compliance:
For companies conducting related party transactions, audit and subsequent taxation can be among the most salient risks. Adjustments of income calculation – post audit – can lead to increased income on the part of a company, and therefore expose the entity to greater tax liability. In addition, transfer pricing audits may also lead to a variety of smaller taxation issues including:
- Rejection of VAT refunds
- Late payment fees
- Rejection of VAT credits
- Imposition of capital transfer tax
- Initiation of customs audits and adjustments
Criminal Prosecution for Tax Evasion
In addition to adjustments to taxation, companies found to be out of compliance, due to TP related transactions, may be liable for criminal prosecution adjusted income exceeds the threshold for tax evasion. Currently the threshold for prosecution of evasion stands at VND 300 million (US$15,000). If increased taxes are calculated to be in excess of this amount, the company in question will undoubtedly be exposed to criminal proceedings and additional penalties.
Adapting to a Changing Investment Landscape
With the risks of transfer pricing growing and legislation guiding TP policy within Vietnam in flux, it is more important than even to understand current legislation and to prepare strategies to prevent audits and protect investments. In the event that confusion over the current draft or any subsequent changes arises, it is highly recommended that investors contact relevant government bodies for clarification or, alternatively, seek the advice of seasoned professionals.