Vietnam taxation and transfer pricing

TAXATION IN VIETNAM
AN OVERVIEW

TAX SYSTEM OF VIETNAM
● Tax system in Vietnam is still under development.
Vietnam is attempting to build up a comprehensive and
diversified tax law system.
● The current tax system of Vietnam is considered rather
complicated with more than a dozen of taxes and fees,
etc.
According to the Word Bank statistics, a company in
Vietnam needs to spend 1,050 hours for 32 tax payments
and the total tax rate reaches the level of 41.6% of the
profit (Source: Doing Business 2007-How to reform).

TAX REFORMS
● All taxes in Vietnam are issued by the National Assembly and
applicable nationwide. No local taxes are issued or applied.
● Since the launching of “Doi Moi” (Renovation) Program in
1986, the country has experienced several tax reforms with
respect to major categories of taxes.
● The next wave of tax reforms is expected to be launched in
early 2009 in an attempt to create more favorable conditions
for Vietnamese investment environment.
Major business-related taxes such as Value Added Tax (VAT),
Enterprise Income Tax (EIT) and Special Consumption Tax (or
luxury tax) (SST) are at the heart of the reform.

TAX AUTHORITY SYSTEM
● The Ministry of Finance manages the tax systems at the
central level and is responsible for guiding the
implementation of tax laws and regulations.
● All taxes are administered by the General Department of
Tax (GDT) other than the import-export duty of which the
General Department of Customs (GDC) is in charge.
● Tax agencies and customs offices are established at
provincial and district level.

TAX AUTHORITY SYSTEM IN CHART
General Department of Customs
MINISTRY OF FINANCE
General Department of Tax
Department of Customs
FIE, SOE, LLC, JSC
Mainly business
households and
individuals
Border Gate Customs
Department of Tax
Tax Agency

TAX MANAGEMENT AND PENALTY
Law on Tax Management
● The Law on Tax Management (LTM) was passed by the
National Assembly on 29 Nov. 2006 and is in effect from 1
July 2007.
● The LTM and its guiding regulations introduce a
comprehensive body of legislation on tax management by
covering inter alias (i) tax filling, (ii) management
taxpayers’ information; (iii) tax audit and inspection; (iv)
settlement of tax violation, etc.

TAX MANAGEMENT AND PENALTY (CONT’D.)
Management of Taxpayers’ information
Though protected in term of confidentiality, taxpayers’
information may be disclosed to relevant state agencies
as required by local laws or tax treaties. Besides, tax
authorities may make public taxpayers’ information on tax
laws violation on mass media.
Tax audit and tax inspection
Tax audit of tax profiles is made either regularly at tax
authorities office or taxpayers’ location (under specific
circumstances). A tax audit takes not more than 5 days.

Tax inspection is conducted on annual basis for multi-
business enterprises or unexpectedly if there is sign of tax
law violations. A tax inspection takes less than 30 days
unless another 30-day period is granted.
Enforcement of tax decision
The enforcement is performed when the taxpayer owns
taxes or tax fines (i) for over 90 days; (ii) over the
extension period or (iii) disperse assets and flees.
Enforcement may take the form of deduction from income,
bank account, assets seizure, withdrawal of business
registration of etc.

Tax violations and penalties
Tax violations may be one of (i) tax procedure violations;
(ii) tax payment delay; (iii) wrong declaration resulting in
reduction of taxes payable or increasing of tax refund; and
(iv) tax evasion.
Taxpayers will be generally subject to different fines
depending on forms of tax violations. In case of tax
payment delay, an overdue interests will be charged. In
case of tax evasion, taxpayers may pay an additional
amount which is 1 to 3 times that resulting from tax
evasion.

MAJOR TAXES IN VIETNAM ON
FOREIGN BUSINESS ACTIVITY

Introduction
● The foreign investor and the foreign invested enterprise
(FIE) may in general be subject to the following taxes:
 Enterprise Income Tax on profits of the corporate itself.
 Value Added Tax on supply of goods and services.
 Personal Income Tax (PIT) on salary and other forms
of incomes
 Import duties on goods imported into Vietnam

Introduction (Cont’d.)
Depending on businesses, other taxes may be applied:
 Natural Resources Tax on the exploitation of some
types of natural resources such as minerals, oil, etc.
 Special Consumption Tax on some items of luxury
goods that the Gov’t. wants to restrict the consumption
 Export duties on exported activities.
 Other taxes and fees

Enterprise Income Tax
Taxpayers
 EIT is levied on corporate and business entity doing
business in Vietnam including the foreign party to a
business co-operation contract (BCC).
Taxable income
 EIT is paid on taxable income (total revenues less
deductible expenses in the relevant fiscal year).

Enterprise Income Tax (Cont’d.)
Standard tax rates
 The standard EIT rates is 28%. For some special
business, EIT rates are higher e.g. 50% in petroleum
exploitation.
However, the Prime Minister may decide a specific rate
at proposal of the Ministry of Finance.
Preferential EIT treatment
 Tax incentives include: (i) preferential tax rates (10%,
15% and 20% for 15, 12 and 10 years respectively); (ii)
tax holidays (from 1 – 4 years); (iii) tax reduction of
50% (from 2 to 9 years).

 Criteria for tax incentives are based on (i) business
sectors and (ii) geographical areas specified by the
Government from time to time.
Abolishment of tax on repatriation of profits
 Profit remittance tax on the return of profits by foreign
investors was abolished from 1 Jan 2004.

Deductible expenses
 Deductible expenses must be reasonable, validly
evidenced and taxable income-related. New
regulations details the list of non-deductible expenses
rather than specifying deductible ones.
 Some expenses are still capped e.g. advertising and
promotion costs must not be higher than 10% of total
expenses for calculation of deductible expense
purpose. Government considers the removal of that
cap in the next taxation reform.

Carrying forward of losses
 Losses can be carried forwards within five-year schedule.
The carrying forward must be registered with relevant tax
authority.
Capital transfer tax
 Profits gained from the transfer of interests in the FIE or the
local company are subject to the EIT rate of 28%. Taxable
income is sale price less (i) registered contributed capital
and (ii) transfer expenses.
 The purchaser is required to withhold the EIT due before
payment.

Withholding Tax
(Foreign Contractor Tax)
Scope of application
 Foreign organizations and individuals earn income in
Vietnam.
 Payment of interests, royalties, contractors’ fees, etc.
may be subject to Withholding Tax (WT).
Tax payment methods
 Foreign contractors (FCs) may choose to adopt
withholding method or Vietnam Accounting System
(VAS method) to pay WT.

Withholding Tax (cont’d.)
 Withholding method means the FC pay EIT and VAT
on “deemed” basis while VAS compliance allows FCs
to enjoy the same tax treatment as any Vietnam-based
companies.
 Due to the burden of paperwork and administrative
procedures, FCs often prefer withholding method.
 Besides, FCs having “permanent establishment” in
Vietnam e.g. branch, operational office, etc. may
employ a “hybrid method”. “Hybrid method” allows the
combination of elements of withholding method and
VAS method where FCs pay VAT under VAS method
and EIT under withholding method.

Withholding Tax (Cont’d.)
Double Tax Agreements (DTA)
 Vietnam signed DTAs with 42 countries which allow
FCs to avoid double taxation in respective jurisdictions.
Agreement between Vietnam and the Government of
the Kingdom of Netherlands for the avoidance of
double taxation and the prevention of fiscal evasion
with respect to taxes on income signed on 20 May
1994.
 However, tax exemption under DTAs is not
automatically applied. The concerned FC must seek
MOF’s approval on such treatment.

Value Added Tax
Scope of application
 VAT is applied to the supply of goods and services that
are deemed to be used for production, business and
other consumption in Vietnam.
 Besides, VAT imposes on duty paid value of imported
goods. Import VAT is paid at the same time of payment
of import duty.
 A considerable number of goods and services are
exempt from VAT.
Tax rates
 10%: Most goods and services.

Value Added Tax (Cont’d.)
 5%: Encouraged goods and services.
 0%: Exported goods and services including
supplied to export processing zones.
VAT 0% vs. VAT Exemption
 VAT 0%: The seller can claim input VAT from tax
authority.
 VAT exemption: Input VAT cannot be claimed.

Payment of VAT
 Deduction method: VAT is computed and paid on
monthly basis as the output VAT charged to customers
less the input VAT that the seller is imposed on the
purchase of goods and services.
Direct method: VAT is assessed directly on the value
added during the supply of goods and services i.e. the
sale prices of goods and services less the value of
goods and service purchased.

Payment of VAT (Cont’d.)
Direct method is mainly applied to local household
enterprises and foreign contractors (i) having income
derived in Vietnam and (ii) not registering Vietnamese
Accounting System (VAS).

Output VAT vs. Input VAT
 Output VAT is computed by multiplying (i) taxable price
by (ii) the relevant VAT rate. Import VAT is calculated
on the import dutiable price and import duty paid.
 Input VAT is claimed on monthly basis and when
proper VAT invoice from the supplier is shown.
Registration of VAT
 Registration of VAT is required for all organizations or
individuals doing business in relation to taxable goods
and services.

Import and Export Duties
Import duty rates
 Three categories of duty rates:
 Preferential rates (PR): Countries that have MFN
(most favored nation) treatment with Vietnam
including WTO members.
 Special preferential rates (SPR): Countries that
have special preferential agreements with Vietnam
such as Asean members under CEPT.
 Normal rates: Other countries.
 In order to enjoy PR and SPR, Certificate of Origin is
required to be shown

Import and Export Duties (Cont’d.)
Duty exemption
 Granted to goods to form fixed assets in projects falling
inside the list of encouraged business sectors or
geographical areas.
 One-off purchased goods for hotels, offices, residential
property, hospitals, etc is also exempted from import
duty.
 Raw materials imported for products to be exported,
payment of import duty is postponed for 275 days.
Customs offices may impose import duty if no finished
products is exported after that period.

Import and Export Duties (Cont’d.)
Export duty
 Applicable to few goods such as minerals, rice, forest
products, etc. with rates vary from 0 – 50% of FOB
prices of exported goods.

Personal Income Tax
Who are taxed?
 All Vietnamese citizens and foreigners residing in Vietnam
or have derived income from Vietnam.
 Foreigners residing in Vietnam for 183 days or mores are
taxed for their total income, whether derived inside or
outside Vietnam.
 Foreigners residing in Vietnam for less than 183 days are
taxed at a flat rate of 25% for income derived in Vietnam.
 Vietnamese citizens, whether working inside or outside
Vietnam, are taxed on world-wide income.

Personal Income Tax (Cont’d.)
Taxable income
 Taxable income is classified into (i) regular and (ii)
irregular income, each category will be subject to
different tax rate scales. A number of income are not
subject to PIT.
 Regular income: salaries, allowances, service fees,
other payments.
 Irregular income: lottery prizes, technology transfer
fees and commissions.
PIT is temporarily exempted for interests from bank
deposits, bonds and shares, income from investment
in securities.

 Non-PIT income: a number of employee’s allowances,
insurance compensation, traveling and
accommodation expenses, social and health insurance
contributions.
Tax rates
 Irregular income: PIT rates of 5% and 10% of total
taxable income is applicable to (i) technology transfer
fees and (ii) lottery prizes respectively.
 Regular income: Foreigners and Vietnam citizens are
subject to different tax rate scales. Specifically:

 Foreigners
No. Average Monthly Income Tax Rate (%)
1 Under 8,000,000 0
2 Over 8,000,000 up to 20,000,000 10
3 Over 20,000,000 up to 50,000,000 20
4 Over 50,000,000 up to 80,000,000 30
5 Over 80,000,000 up to 120,000,000 40

 Vietnamese citizens
1 Under 5,000,000 0
2 Over 5,000,000 up to 15,000,000 10
3 Over 15,000,000 up to 25,000,000 20
4 Over 25,000,000 up to 40,000,000 30
5 Over 40,000,000 40

Tax Credits
 PIT laws allows credit for taxes paid in other countries
but the onus of proof falls on the taxpayer.
 Without comprehensive network of tax treaties, risk of
double taxation remains.

New PIT Law
 The new Law on Personal Income Tax passed by the
National Assembly of Vietnam in December 2007 will
take effect as of 1 January 2009.
Major changes:
 Interests, dividends, gains on investment in securities
will be taxed;
 Single tariff to both Vietnamese citizens and foreigners
without more tax bands. In particular:

Single PIT Tariff
1 Up to 5,000,000 5
2 Over 5,000,000 up to 10,000,000 10
3 Over 10,000,000 up to 18,000,000 15
4 Over 18,000,000 up to 32,000,000 20
5 Over 32,000,000 up to 52,000,000 25
6 Over 52,000,000 up to 80,000,000 30
7 Over 80 35

Special Consumption Tax
Special Consumption Tax (SCT)
 Special Consumption Tax applies to production and
imports of certain goods such as cigarettes, liquor,
automobile with less than 24 seats, etc. and provision
of certain services like discotheque, massage, casino,
etc.
 In addition to Special Consumption Tax, “luxury” goods
and services are subject to VAT and import duty, if
imported.

Other taxes
Business registration tax (BRT):
 Business entities including FIEs are taxed with BRT which
is paid on annual basis.
 BRT paid based on the charter capital of the relevant
company.
For example, a FIE with charter capital of 10 billions VND
(apprx. US$600,000) must pay BRT amount of 3 mil VND
(approx. US$187).
In addition, during its operation, business entities may be
subject to numerous stamp duty/registration

THE NEXT TAX REFORM
The next wave of tax reform is expected to happen
from early 2009 with three major taxes being
changed: (i) Enterprise Income Tax; (ii) Value Added
Tax and (iv) Special Consumption Tax.
Enterprise Income Tax:
+ Standard tax rate reduces from 28% to 25%;
+ More EIT incentives;
+ More flexibilities in determining deductible expenses.

THE NEXT TAX REFORM
 Value Added Tax:
Move some taxable items from VAT rate of 5% to 10% and
vice versa
Add more items to zero VAT rate.
Slight changes in calculating VAT payment and VAT
refund.
 Special Consumption Tax:
Reduction of SST rates for automobiles, cigarettes and
alcohols

TRANSFER PRICING (TP)

Introduction
 As widely realized, TP refers to “the pricing of goods and
services within a multi-divisional organization,
particularly in regard to cross-border transactions”.
Multinational corporations may shift profits within intra-
group companies from high to low tax countries without
strict respective transfer pricing regulations.
 TP is relatively new and undeveloped in Vietnam. Until
recently, the Ministry of Finance issued Circular 117 (19
December 2005) providing a rather details regulations
on transfer pricing.
 Circular 117 generally follows OCED’s TP guidelines.

Introduction (Cont’d.)
 Circular 117 defines major elements of transfer pricing
such as “related parties”, “arm length price”, “related
transactions”, etc. and set outs transfer pricing methods
and respective measures for a transaction not made on
arm-length basis. The Circular applies to both domestic
and foreign related parties.

Related Parties
Related Parties
Broad definition to include capital ownership, supply,
purchase and lending relations between parties. Of note,
entity:
 directly or indirectly hold 20% of equity or total assets of
the other entity;
 guarantee or grant loan to the other entity provided that
that loan accounts for over 50% of total long and
medium term debts of the latter;

Related Parties
 Control 50% or more the BOM’s members or have
power to decide financial policies or business
operations of the other entity;
 Directly or indirectly provide over 50% of total value of
materials or inputs for production and trading of the
other entity;
 Directly or indirectly control over 50% of total sales
turnover of the other entity.

Related Transactions
 Related transactions means transactions between
“related parties”, in contrast with “independent
transactions” between non-related parties within the
frame of normal business. The latter concept is
employed to determine “arm-length price” for a related
transaction and consequently tax obligations.
 Great concerns for multinational corporations
maintaining cross-border supply chains from supplying,
manufacturing, marketing, advertising to distribution.

“ARM-LENGTH PRICES” AND TP METHODS
(FUNCTIONAL ANALYSIS)
 “Arm-length price” is defined as the price as agreed in
“objective” manner in a relevant transaction between
non-related parties.
 Circular 117 introduce 5 methods to determine “arm-
length price” in a related transaction: (i) comparable
uncontrolled price; (ii) resale price; (iii) cost plus; (iv)
comparable profits; and (v) profit split.

 Comparable uncontrolled price: This methods use the
comparison between the price unit charged for goods
transferred in a related transaction and an independent
one in similar circumstances.
 Resale price: The resale price method begins with the
resale price to arm's length party (of a product
purchased from a related party), reduced by a
comparable gross margin.

 Cost Plus Method: The cost plus method begins with
the costs incurred by a supplier of a product or service
provided to a related party, and a comparable gross
mark-up is then added to those costs
 Comparable Profits: The comparable profits method
evaluates whether the amount charged in a related
transaction is arm's length based on objective
measures of profitability (profit level indicators) derived
from independent party that engage in similar business
activities under similar circumstances.

 Profit Split: Total profits earned in a related
transaction is determined and split based on the
relative value of their contributions to the non-related
transactions in relation to what non-related parties
would have received.

 Selection of appropriate method depends on nature of
transaction and the availability, coverage and reliability
of data used for comparison.
 Data and information from the following sources is
acceptable: state agencies, independent inspection
bodies or auditors, financial statements, tax returns, etc.

BURDEN OF DOCUMENTATION AND
DISCLOSURE MANAGEMENT
Taxpayer must:
 identify and declare related transactions on annual
basis together with the tax return;
 maintain contemporaneous records of details related
transactions which serves as basis for calculation of
“arm-length price”. Such records would include
information of the relevant related party, transaction
descriptions, contractual terms and conditions, etc.

BURDEN OF DOCUMENTATION AND
DISCLOSURE MANAGEMENT
 TP documentation is independent from that of
Enterprise Income Tax
 A failure to comply with the above obligations may
subject the concerned taxpayer to an adjustment of
corporate income tax as “deemed” by the tax authority.

PRACTICAL TIPS ON MANAGING TRANSFER
PRICING DOCUMENTATION AND AUDIT
 Engagement of a licensed auditor in planning the price
determination in concerned transactions, preparing
transfer pricing documentation, etc.
 Close contact with the tax authority;
 Advantageous ruling confirmation on case by case
basis.

APPLICATION OF THE ADVANCED PRICING
AGREEMENT
 An APA means an advance agreement between
taxpayer and tax authorities on transfer pricing policy
and methodologies.
 An APA may help taxpayer to avoid the uncertainty of
traditional adversarial process and double taxation.
 Vietnamese law does not provide for application of
APA. It is assumed that taxpayer may seek ruling
confirmation from tax authority as a matter of practice.
However, this approach has not been tested in practice
 Asian countries that currently adopt APAs include
China, Taiwan, Japan, Korea, Australia, Thailand,
Singapore.

CHINESE EXPERIENCE
 Chinese tax authorities are given great autonomy to
make an adjustment where a relevant arrangement is
made “without reasonable commercial purpose”, a very
broad and controversial basis.
 Unlike Vietnam, the conclusion of APA between the
taxpayer and tax authorities is officially acceptable.
 Taxpayer will be, in addition to tax adjustment, subject
to special interests on unpaid taxes as a result of tax
adjustment.

CHINESE EXPERIENCE (CONT’D.)
 Profits of an enterprise “controlled” by a Chinese tax resident
including FIEs is subject to Chinese EIT if such profits are not
distributed or distributed in a reduced amount without
reasonable commercial operating rationale.
 Intra-group Cost Sharing Agreement (CSA) for R&D,
intangible property and services is deductible for tax purpose
if the sharing of revenues and expenses is made on arm-
length basis.
 Secret comparables is used for transfer pricing audits. This
poses a significant problem to taxpayers as they are not able
to ascertain the comparability of the data.

ENFORCEMENT AND PRACTICE IN VIETNAM
 Like China, Vietnam laws give great autonomy to tax
authorities in reviewing transfer pricing activities.
Specifically, the tax authority may make tax adjustment
if it has “doubt” that taxpayer does not comply with
provisions of the laws. This fact can adversely impact
on the taxpayer’s profitability and tax profile.
 Besides, tax authority may impose a penalty for tax
evasion. The newly-issued Law on Tax Management
allows tax authorities to make adjustment on tax liability
and impose penalties if taxpayer fails to lodge a tax
return

ENFORCEMENT AND PRACTICE IN VIETNAM
(CONT’D.)
 No clear provisions on liabilities of tax authority in case
taxpayer’s information is leaked.
 Obtaining ruling confirmation from tax authority would be an
efficient way to reduce risks from transfer pricing regulations.
 The unavailability of data and information may lead to the
employment of database developed by the tax authority
itself.
 Tax authorities have recently carried out an internal review
of the implementation of the transfer pricing rules as well as
ongoing technical capability development for local tax offices
in relation to the application of the transfer pricing rules.

CASE STUDY
 A foreign invested car maker imported spare parts from
offshore affiliated suppliers with high prices.
 Thank to the Government’s protection, Vietnam-
assembled cars are more expensive than those
produced outside Vietnam.
 The GDT finds it difficult to determine “arm-length” price
where special spare parts and accessories is
purchased and sold within a group.
Besides, expenses for IP rights and R&D for cars of
intra-group companies appear quite hard to determined
in term of price.

CASE STUDY
 The GDT is actively reviewing transactions of intra-
group companies to avoid transfer pricing in foreign
owned car-makers in Vietnam.
 Tax authorities recently proposed adjustment for
expenditure deductions related to intra-group car
makers.
 Car-makers having arm-length transactions with related
parties are advised to provide to tax authority with full
documents to avoid high deemed taxation and penalty
imposed by tax authority.

THANK YOU!
AND
Q & A

CONTACT
Oliver Massmann
Partner
Duane Morris Vietnam LLC
● Pacific Place, Unit V1308, 13th Floor
83B Ly Thuong Kiet Street, Hoan Kiem District
Hanoi,
Cell: 84.90 4506167
Fixed line:84.4.9461310
● DID: 84.4.9462205
Email: omassmann@duanemorris.com;

Vietnam taxation and transfer pricing

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (8)

Similar to Vietnam taxation and transfer pricing

Similar to Vietnam taxation and transfer pricing (20)

More from Dr. Oliver Massmann

More from Dr. Oliver Massmann (20)

Vietnam taxation and transfer pricing