In the context of increasing global economic integration, Vietnam, as one of the fastest growing economies in Southeast Asia, has become increasingly important in terms of transfer pricing regulations. Transfer pricing is not only related to the tax compliance and risk management of multinational companies in Vietnam, but is also an important tool for the Vietnamese government to protect tax revenue and maintain a fair competition environment.

In recent years, with the continuous growth of foreign direct investment, the Vietnamese tax authorities have significantly increased their attention to transfer pricing issues. For multinational companies operating in Vietnam, understanding and complying with the latest transfer pricing regulations has become one of the core tasks of financial management and tax planning. A reasonable transfer pricing policy can not only help companies reduce tax risks, but also optimize the global supply chain and improve overall operational efficiency.

For the Vietnamese government, a sound transfer pricing regulatory system is a key measure to combat base erosion and profit shifting (BEPS). By continuously updating and refining transfer pricing regulations, Vietnam aims to ensure that the profits of multinational companies in the country match their economic activities and value creation, thereby safeguarding the country’s tax rights.

Vietnam’s transfer pricing regulatory system has undergone significant changes in recent years. 2017 was a major turning point when the government issued Decree No. 20/2017/ND-CP (“Decree 20”) and Circular No. 41/2017/TT-BTC (“Circular 41”), which laid the foundation for Vietnam’s modern transfer pricing regulatory framework.

The latest regulatory updates are mainly reflected in the following aspects:

Extension of the definition of related parties:The new regulations expand the scope of identification of related parties to include more forms of control and influence relationships.

Enhanced documentation requirements:A three-tier document structure has been introduced, including master file, local file and country-by-country report, which is consistent with the OECD’s BEPS Action Plan.

Emphasis on the principle of substance over form:Pay more attention to the substance of the transaction rather than just the legal form.

Refinement of comparability analysis: Provides more detailed comparability analysis guidance, including clarification of the criteria for selecting comparable companies.

Introduction of a limit on interest expense deduction:A cap is placed on the pre-tax deduction of related-party interest expenses to prevent tax base erosion caused by excessive interest deductions.

Improvement of Advance Pricing Arrangement (APA) Procedures:The application and approval process for APA has been simplified to encourage more companies to participate.

These updates reflect Vietnam’s determination to actively respond to international tax trends, especially the OECD BEPS Action Plan. At the same time, it also shows that Vietnam’s tax authorities are constantly improving the professionalism and sophistication of their transfer pricing management.

It is crucial for multinational companies operating in Vietnam to understand and adapt to these regulatory changes in a timely manner. Companies need to reassess their existing transfer pricing policies and practices to ensure compliance with the new regulatory requirements, while also preparing for possible transfer pricing investigations.

In the following chapters, we will explore in detail the specific content of these regulatory updates and how companies should respond to these changes to ensure that their business activities in Vietnam comply with regulatory requirements while optimizing tax efficiency.

Recent changes in Vietnam’s transfer pricing regulations

In recent years, Vietnam has continued to improve its transfer pricing regulations to adapt to changes in the international tax environment and strengthen supervision of multinational companies. This section will detail the latest changes in Vietnam’s transfer pricing regulations, focusing on the contents of Decree 20/2017/ND-CP, Notice 41/2017/TT-BTC, and the latest regulatory revisions.

1. Main contents of Decree 20/2017/ND-CP

Decree 20/2017/ND-CP was issued on February 24, 2017 and came into effect on May 1, 2017. It is the cornerstone of Vietnam’s transfer pricing regulations. The main contents of the decree include:

The definition and identification criteria of related parties are clarified, and the scope of related relationships is expanded.

A three-tier transfer pricing documentation structure has been introduced, including the master file, local file and country-by-country report, in line with the OECD’s BEPS Action Plan.

It provides for the selection and application of transfer pricing methods, including the comparable uncontrolled price method, the resale price method, the cost-plus method, the profit split method and the comparable profit method.

A limit on interest expense deduction has been introduced, and related-party interest expenses shall not exceed 20% of EBITDA.

The time requirements for the preparation of contemporaneous documentation are clarified, and taxpayers must prepare transfer pricing documentation before filing income tax returns.

Transfer pricing investigations and penalties have been strengthened, and the investigative powers of tax authorities have been increased.

2. Supplementary provisions of Notice 41/2017/TT-BTC

Notice 41/2017/TT-BTC was issued on April 28, 2017, providing more detailed implementation guidelines for Decree 20. The main supplementary provisions include:

The specific content requirements for transfer pricing documentation are detailed, including the information that should be included in the master file, local file and country-by-country report.

The specific steps and considerations for comparability analysis are clarified, and the importance of local market comparable data is emphasized.

The priority order of transfer pricing methods is stipulated, and the use of comparable uncontrolled price method is encouraged.

A calculation method for the profit margin range is provided, using the interquartile range method.

Detailed description of the application process and requirements for an Advance Pricing Arrangement (APA).

The specific procedures for transfer pricing investigations and the taxpayers’ obligations to cooperate are stipulated.

3. Key points of the latest regulatory revisions

Recently, Vietnam has further revised and improved its transfer pricing regulations. The main revisions include:

The transfer pricing documentation requirements for some small and medium-sized enterprises have been relaxed to reduce the compliance burden.

The interest expense deduction limit has been adjusted from 20% of EBITDA to 30% to ease corporate financing pressure.

The pricing principles for intangible asset transactions are clarified, requiring consideration of the DEMPE (development, enhancement, maintenance, protection and utilization) functions.

Strengthened supervision of transactions in low-tax countries or regions and required additional information disclosure.

The advance pricing arrangement system has been improved, and taxpayers are encouraged to actively apply for bilateral or multilateral APAs.

Transfer pricing regulations related to e-commerce and digital economy have been introduced to address the challenges brought by new business models.

The coordination mechanism between transfer pricing and customs valuation has been strengthened, and the two departments are required to strengthen information sharing and joint investigations.

These latest changes reflect the Vietnamese tax authorities’ continued attention to transfer pricing issues and their efforts to align with international practices. Enterprises need to pay close attention to these regulatory changes and adjust their internal policies and practices in a timely manner to ensure compliance and effectively manage transfer pricing risks.

In general, Vietnam’s transfer pricing regulations are being gradually improved and refined, and supervision is being strengthened. When conducting related-party transactions in Vietnam, enterprises need to fully understand these regulatory requirements, establish a sound transfer pricing management system, prepare contemporaneous documentation, and consider adopting risk management tools such as advance pricing arrangements to cope with the increasingly complex transfer pricing environment.

Definition of related parties and scope of related transactions

Vietnam’s latest transfer pricing regulations, in particular Decree 20/2017/ND-CP, provide detailed definitions of related parties and the scope of related-party transactions. Accurate understanding of these definitions is crucial for corporate compliance.

The identification criteria for related parties cover many aspects. Direct or indirect shareholding of more than 25% is the most common criterion. In addition, control relationships, family relationships, and loan relationships are also important considerations. For example, if one party has substantial control over the operating decisions of the other party, or there is a direct family relationship between the actual controllers of the enterprise, they will be identified as related parties. It is worth noting that business dependence and intellectual property dependence are also taken into consideration. If more than 50% of the purchases or sales of one party are controlled by the other party, or one party has the right to use intangible assets that are vital to the other party, it will also be regarded as a related party.

The types and scope of related-party transactions are also clearly defined. This includes commodity transactions, service transactions, financing transactions, intangible asset transactions, fixed asset transactions, etc. It is particularly noteworthy that the Vietnamese tax authorities have given extra attention to certain specific types of related-party transactions, such as transactions with entities in tax havens, transactions involving large amounts of intangible assets or service fees, and transactions between long-term loss-making enterprises and related parties.

When identifying and reporting related-party transactions, enterprises should not only consider the transaction amount, but also pay attention to the nature and potential impact of the transaction. Even if the transaction amount is small, if it has a substantial impact on the overall tax status of the enterprise, it should be included in the scope of related-party transactions for analysis and reporting.

In general, Vietnam’s definition of related parties and the scope of related-party transactions are quite comprehensive and strict. Enterprises need to establish a sound internal identification and monitoring mechanism to ensure that all related-party relationships and related-party transactions can be accurately identified to meet regulatory requirements and reduce potential tax risks. This is not only a compliance requirement, but also an important measure to effectively manage cross-border business risks.

Transfer pricing documentation requirements

Vietnam’s transfer pricing regulations require companies to prepare and maintain complete transfer pricing documentation to prove that their related-party transactions comply with the arm’s length principle. According to the latest regulations, transfer pricing documentation includes three parts: master file, local file and country-by-country report.

The Master File is a description of the overall situation of a multinational enterprise group. It should include information such as the group’s organizational structure, business description, intangible assets, financing activities and financial status. The Master File is intended to provide an overview of the group’s global business and help tax authorities understand the overall operations of multinational enterprises.

The Local File focuses on the specific situation of Vietnamese enterprises. It should describe in detail the organizational structure, business strategy, main competitors, details of related-party transactions and pricing policies of local enterprises. The Local File is a key document to prove the compliance of related-party transactions of enterprises and needs to include detailed comparability analysis and reasons for the selection of transfer pricing methods.

Country-by-Country Report is applicable to large multinational enterprise groups. If the group’s consolidated revenue in the previous fiscal year exceeds VND18 trillion (approximately US$753 million), a country-by-country report is required. The report needs to list the group’s revenue, profit, number of employees, assets and other information in various tax jurisdictions.

The requirements for document preparation and submission time are relatively strict. Enterprises must prepare transfer pricing documents within 90 days after the end of the fiscal year. Although the documents are usually not required to be submitted with the annual tax return, the tax authorities may require the enterprise to provide them within 15 working days during an audit or investigation. For the country-by-country report, if the Vietnamese enterprise is the ultimate holding company, it must submit it within 12 months after the end of the fiscal year; if it is a subsidiary, it must notify the tax authorities of the submission of the country-by-country report within 30 working days after receiving the group’s notification.

Enterprises should attach great importance to the preparation of transfer pricing documents to ensure that the content of the documents is complete, accurate and in compliance with regulatory requirements. Timely and comprehensive documentation is not only a compliance requirement, but also an important tool for enterprises to protect themselves in possible tax disputes.

Comparability Analysis and Transfer Pricing Methods

Comparability analysis and the selection of transfer pricing methods are the core content of transfer pricing compliance in Vietnam. Enterprises need to prove that their related-party transactions comply with the arm’s length principle through rigorous analysis.

The key factors of comparability analysis include multiple aspects. First, the characteristics of the product or service are important considerations, such as quality, brand, function, etc. Second, the functions, risks and assets used by the parties to the transaction are also key factors, which directly affect the economic substance of the transaction. Market conditions, such as geographical location, market size, degree of competition, etc., are also not to be ignored. In addition, contract terms, economic environment and business strategy must also be taken into consideration.

The transfer pricing methods allowed in Vietnam are basically consistent with the OECD Guidelines. These include the Comparable Uncontrolled Price Method (CUP), the Resale Price Method (RPM), the Cost Plus Method (CPM), the Transactional Net Profit Method (TNMM) and the Profit Split Method (PSM). Enterprises can choose the most suitable method based on the specific circumstances of the transaction.

The selection criteria for the most appropriate method are mainly based on data availability, degree of comparability and complexity of the transaction. The comparable uncontrolled price method is generally considered the most direct and reliable method, but it has the highest requirements for comparability. In the absence of highly comparable transactions, companies may need to consider other methods. The transactional net margin method is widely used in practice because it is less sensitive to product differences.

When selecting and applying a transfer pricing method, enterprises need to explain in detail the reasons for the selection and the calculation process. The Vietnamese tax authorities pay special attention to whether the enterprise has considered all possible methods and explained why other methods are not applicable. At the same time, the enterprise also needs to prove that the selected method can produce results that comply with the arm’s length principle.

It is worth noting that the Vietnamese tax authorities encourage enterprises to use multiple methods for cross-verification to enhance the reliability of the conclusions. In some complex transactions, such as those involving intangible assets, it may be necessary to use a combination of multiple methods.

In general, comparability analysis and the selection of transfer pricing methods are complex processes that require professional judgment. Enterprises should devote sufficient resources to ensure the comprehensiveness and accuracy of the analysis in order to cope with increasingly stringent tax audits.

Profit margin range and benchmark analysis

Profit margin range and benchmark analysis are important aspects of transfer pricing practice in Vietnam and play a key role in proving the rationality of related-party transactions. The Vietnamese tax authorities usually refer to these analysis results when evaluating the transfer pricing policies of enterprises.

The application of the interquartile range is widely adopted in Vietnam’s transfer pricing practice. This method sorts the profit margin data of comparable companies from low to high and then divides them into four equal parts. Generally, profit margins within the interquartile range (i.e. between the 25th and 75th percentiles) are considered acceptable. If the profit margin of an enterprise falls within this range, it is generally considered to comply with the arm’s length principle.

However, it is worth noting that the Vietnamese tax authorities tend to use the median as the adjustment point. If the profit margin of an enterprise is lower than the median, the tax authorities may require the enterprise to make adjustments. Therefore, when setting the transfer pricing policy, enterprises should consider setting the target profit margin at or above the median.

The selection criteria of comparable companies are the key to benchmark analysis. The Vietnamese tax authorities require that the selected comparable companies should be similar to the tested party in terms of functions, risks and assets. Factors usually considered include industry category, company size, geographical location, product or service type, etc. It is particularly noteworthy that the Vietnamese tax authorities give priority to local or regional comparable companies, believing that these companies can better reflect local market characteristics.

The implementation process of benchmark analysis usually includes the following steps: First, determine the party to be tested and the appropriate financial indicators. Second, set the screening criteria for comparable companies and conduct preliminary screening in the commercial database. Then, conduct a detailed analysis of the preliminary results and eliminate unsuitable companies. Finally, calculate the financial indicators of the remaining comparable companies and determine the quartile range.

In practice, companies should keep complete documentation of the benchmark analysis process, including company screening criteria, data sources, reasons for exclusion, etc. This information is crucial for responding to possible tax inquiries.

In addition, Vietnam’s tax authorities require companies to regularly update their benchmark analysis, usually annually or at least every three years. This is to ensure that the analysis results reflect the latest market conditions.

In general, profit margin range and benchmark analysis is one of the core contents of transfer pricing compliance in Vietnam. Enterprises should devote sufficient resources to ensure the accuracy and reliability of the analysis. At the same time, they should also pay attention to maintaining good communication with the tax authorities and promptly explain any abnormal situations to reduce transfer pricing risks.

six,Advance Pricing Arrangement (APA) System

Advance Pricing Agreement (APA) is an important system in Vietnam’s transfer pricing management. It aims to enable taxpayers and tax authorities to reach advance agreement on the pricing principles and methods of future related-party transactions, thereby increasing tax certainty.

The APA application process usually includes the following steps: First, the company needs to submit a letter of intent to apply to the tax authorities, stating the types and duration of transactions it hopes to cover. After that, a preliminary meeting is held to discuss the feasibility of the application. If the tax authorities agree to proceed, the company then needs to submit a formal application, including a detailed transfer pricing analysis and a proposed solution. The tax authorities will review the application, which may require multiple rounds of negotiations. Finally, if both parties reach an agreement, an APA agreement will be signed. The whole process usually takes 12-18 months, and complex cases may take longer.

Vietnam allows unilateral, bilateral and multilateral APAs. Unilateral APAs only involve Vietnamese tax authorities and taxpayers, and the procedures are relatively simple, but they cannot eliminate the risk of international double taxation. Bilateral and multilateral APAs involve tax authorities of two or more countries. Although the procedures are more complicated and time-consuming, they can better resolve tax issues in cross-border transactions and reduce the risk of double taxation.

The advantages of APA mainly include: increasing tax certainty and reducing future transfer pricing disputes; simplifying compliance procedures and possibly exempting the preparation of annual documents; and improving relations with tax authorities. However, enterprises also need to pay attention to some matters: APA application requires the disclosure of a large amount of information, and enterprises should assess the sensitivity of information; once APA is reached, enterprises must strictly abide by it, and changes in the business environment may make APA no longer applicable; APA application takes a long time, and enterprises need to have enough patience.

In general, APA is an effective risk management tool, especially suitable for enterprises with large, complex or long-term related-party transactions. However, when deciding whether to apply for APA, enterprises need to consider their own situation and various factors and weigh the pros and cons. As the transfer pricing environment in Vietnam becomes increasingly complex, it is expected that more enterprises will consider adopting APA to manage transfer pricing risks in the future.

Transfer pricing investigations and penalties

In recent years, Vietnam’s tax authorities have paid more and more attention to transfer pricing issues, and the intensity of investigations and penalties has also increased accordingly. Enterprises should fully understand the relevant situation in order to effectively manage risks.

The triggers for transfer pricing investigations usually include multiple aspects. Companies with persistent losses or low profit margins are likely to become targets of investigation, especially when their related parties remain profitable. Companies that have a large number of transactions with tax havens or low-tax regions are also likely to attract the attention of tax authorities. A company’s profit level is significantly different from the industry average, or it suddenly fluctuates significantly, which may also trigger an investigation. Failure to submit transfer pricing documents on time or submitting incomplete transfer pricing documents is also an important trigger.

The investigation process usually begins with an information request from the tax authorities. The company needs to provide relevant documents and explanations within a specified time (usually 15 working days). If the tax authorities believe that further investigation is necessary, they may arrange an on-site audit. During the investigation, tax officials will focus on the substance of related-party transactions, the rationality of pricing policies, the accuracy of comparability analysis, etc.

Key areas of focus include intra-group service fees, royalties, intangible asset transactions and other areas that are easily used for profit transfer. For these transactions, the tax authorities will carefully review their necessity, pricing basis and actual benefits. In addition, the function and risk analysis of the enterprise is also a focus of investigation. The tax authorities will assess whether the functions and risks assumed by the enterprise match the profits it obtains.

The penalties for non-compliance are clearly defined in Vietnam’s transfer pricing regulations. If the tax authorities determine that a company’s related-party transactions do not comply with the arm’s length principle, transfer pricing adjustments may be made. After the adjustment, the company will not only have to pay the tax but will also face late payment fees and fines. Late payment fees are usually calculated on a daily basis, at 0.03% of the unpaid tax per day. The fines may be as much as 20% of the underpaid tax or even higher.

It is particularly important to note that if an enterprise fails to provide or provides incomplete transfer pricing documentation, the tax authorities have the right to make presumptive adjustments. In this case, the adjustment may be larger and the enterprise’s bargaining space will be greatly reduced. In addition, Vietnam has also implemented a public disclosure system. For enterprises with major transfer pricing violations, the tax authorities may disclose their names and violations on official platforms.

Facing possible transfer pricing investigations, enterprises should actively prepare to ensure that the documents are complete and the evidence is sufficient. Upon receiving the investigation notice, they should respond promptly and provide the required information. In case of disputes, they may consider seeking assistance from professional consulting agencies and, if necessary, initiate relevant dispute resolution mechanisms.

Compliance Recommendations and Best Practices

Vietnam’s transfer pricing environment is becoming increasingly complex and companies need to take proactive steps to ensure compliance. Below are some key compliance recommendations and best practices.

The formulation and implementation of transfer pricing policies are the foundation of compliance. Enterprises should establish a comprehensive transfer pricing policy to ensure that it complies with Vietnamese regulatory requirements and the overall group strategy. The policy should clearly define the pricing principles, method selection criteria and pricing process. It is important that the policy is not only formulated but also implemented. It is also necessary to review and update the policy regularly to adapt to the changing business environment and regulatory requirements.

Internal control and risk management are crucial to transfer pricing compliance. Enterprises should establish a dedicated transfer pricing management team and clarify the division of responsibilities. Regular risk assessments should be conducted to identify potential transfer pricing risk points. An internal review mechanism should be established to ensure that the execution of related-party transactions complies with policy regulations. At the same time, communication and collaboration between departments should be strengthened, especially coordination between finance, taxation and business departments.

The best practices for document preparation and management include several aspects. First, establish a systematic document preparation process to ensure timely and accurate collection of required information. Second, the content of the document should be comprehensive and consistent, covering all required content and consistent with the actual operation of the enterprise. Third, pay attention to the quality of the document to ensure in-depth analysis and clear logic. It is also important to update the document regularly, especially when there are major changes in the business model or market environment.

In addition, companies should consider the following points:

Actively communicate with tax authorities and maintain good relations.

Consider applying for an Advance Pricing Arrangement (APA) to increase tax certainty.

Use technological tools to assist transfer pricing management and improve efficiency and accuracy.

Continue to pay attention to regulatory changes and adjust compliance strategies in a timely manner.

Invest in employee training to enhance transfer pricing awareness and professional capabilities of relevant personnel.

By taking these steps, companies can significantly improve their transfer pricing compliance and reduce potential risks. Importantly, transfer pricing compliance should be viewed as an ongoing process that requires long-term investment and attention from companies.

Conclusion

Vietnam’s transfer pricing environment is undergoing rapid change and development. As international tax rules evolve and Vietnam’s economy continues to grow, we can foresee some future trends.

Future trends in Vietnam’s transfer pricing environment may include: regulations will become more detailed and stricter, and further aligned with international standards. Digital economy and intangible asset transactions will become the focus of supervision. Cross-border information exchange mechanisms may be improved, increasing the information acquisition capabilities of tax authorities. Tax authorities are expected to make greater use of big data and artificial intelligence technologies for risk identification and auditing. At the same time, dispute resolution mechanisms, such as advance pricing arrangements (APAs) and mutual agreement procedures (MAPs), may be further improved and widely used.

In the face of these trends, companies’ response strategies should include the following:

First, companies should continue to improve their transfer pricing management capabilities and regard it as one of their core competitive advantages. This includes investing in professional talent training and the application of advanced technology tools.

Secondly, companies need to pay more attention to the coordination between transfer pricing policies and overall business strategies, ensuring that transfer pricing arrangements not only comply with regulatory requirements but also support the company’s long-term development goals.

Furthermore, companies should establish a more proactive tax risk management system, including regular self-assessments to proactively identify and resolve potential issues.

In addition, it is also important to strengthen communication and cooperation with the tax authorities. Consider participating in the discussion of policy formulation, express the demands of the enterprise, and also keep abreast of policy directions.

Finally, companies should pay attention to changes in the global tax environment, especially the latest developments in the Base Erosion and Profit Shifting (BEPS) action plan promoted by international organizations such as the OECD. This will help companies better manage transfer pricing risks globally.

In general, Vietnam’s transfer pricing environment is becoming increasingly complex and strict. Enterprises need to take a proactive attitude, continuously invest resources, and continuously optimize transfer pricing management practices. Only in this way can they reduce risks and achieve sustainable development in an increasingly stringent regulatory environment. Transfer pricing compliance should not be seen as a burden, but as an opportunity to enhance the overall management level and international competitiveness of enterprises. Through effective transfer pricing management, enterprises can not only ensure tax compliance, but also optimize global resource allocation and create greater value for shareholders.