Vietnam taxation and transfer pricing

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VIETNAM Taxation and

Transfer Pricing

Presentation by Oliver Massmann, Partner

[email protected];

mailto:[email protected]�


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).


Enterprise Income Tax (Cont’d.) 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.


Enterprise Income Tax (Cont’d.) 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.


Enterprise Income Tax (Cont’d.) 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.


Value Added Tax (Cont’d.) 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.


Value Added Tax (Cont’d.) 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).


Value Added Tax (Cont’d.) 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.


Personal Income Tax (Cont’d.) 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:


Personal Income Tax (Cont’d.) 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


Personal Income Tax (Cont’d.) 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


Personal Income Tax (Cont’d.) 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.


Personal Income Tax (Cont’d.) 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:


Personal Income Tax (Cont’d.) 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: [email protected];

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