© 2017 KPMG Limited, KPMG Tax and Advisory Limited, KPMG ... · Important drivers of business profit 2.2: A description of the supply chain for the group’s five largest products

1© 2017 KPMG Limited, KPMG Tax and Advisory Limited, KPMG Legal Limited, all Vietnamese limited liability companies and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification: KPMG Confidential



Transfer Pricing in Vietnam Webinar Agenda

10:00 - 10:05 Introductions

10:05 – 10:30

• OECD and US BEPS Developments – A brief update

• BEPS and the New Transfer Pricing Decree in Vietnam

• Key considerations for investors and companies

10:30 -11:00 Question & answer session

11:00 End of Webinar, Questionnaire



Question and Answer Session

Please submit questions in the chat window (bottom right corner of the screen) at any time during the presentation.

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I will compile the questions and submit them to the speaker in the last 30 minutes of the webinar, as time permits



Key Presenters

Duong HoangHead of International Integrated Tax

KPMG Vietnam

Nhan HuynhPartner, Transfer Pricing Services

KPMG Vietnam

BEPS and the New Transfer

Pricing Decree in Vietnam



Executive Summary— Vietnam is among several dozen countries re-writing international tax and transfer

pricing regulations based on the OECD’s Base Erosion and Profit Shifting (BEPS) actions, including the U.S. The reforms generally aim at increasing transparency in tax matters between MNCs and tax authorities, coherence and consistency of tax laws

— Decree 20 on management of transfer pricing, applicable from FY2017, requires Vietnamese tax payers to maintain and submit (CbyC), besides enhanced annual disclosures of transactionsMaster File, Local File and Country-by-County report.

The Decree also provides new standards for:

• Redefinition of related party ‘relationship’

• Clarification on the use of commercial database vs. tax authorities’ secretcomparables data

• New principles: substance over form, comparability, DEMPE functions for intangible,and basically aligning transfer pricing outcome to value creation

• New tax deduction rules for inter-company services and interest expenses (nowcapped at 20% of EBITDA)

— Corporate structure involving tax havens and favorable tax jurisdictions under increasing scrutiny



OECD and US BEPS Developments- Brief Update



TransparencySubstanceCoherence

Hybrid mismatch arrangements

Strengthen controlled foreign corporation (“CFC”) rules

Limit base erosion via interest deductions and other financial payments

Counter harmful tax practices taking into account transparency and substance

Prevent treaty abuse

Prevent artificial avoidance of taxable nexus/permanent establishment status

Challenges of a digital economy

4

3

6

5

2

1 Assure transfer pricing outcomes are in line with value creation – intangiblesAssure transfer pricing outcomes are in line with value creation – risks and capitalAssure transfer pricing outcomes are in line with value creation – high risk transactions

Establish methodologies to collect and analyze data on BEPS

Require disclosure of aggressive tax planning arrangements

Re-examine transfer pricing documentation

Make dispute resolution mechanisms more effective14

Multilateral Instruments15

12

11

13

7

8

9

10

Vietnam’s Steering Committee was set up, led by the Director General of the General Department of Taxation, with a mandate to work on all BEPS actions.

OECD’s BEPS Actions



BEPS Action 13 - Objective and Approach

Aid tax authorities in performing a tax and transfer pricing risk assessment

A three-tiered approach for documentation

CbC Report (“CbCR”)

Objectives

Ensure taxpayers give appropriate consideration to setting prices consistent with the arm’s-length principle

Provide information needed for tax authority audit

CbC goes beyond what is required for a transfer pricing

risk analysis

Approach

Master File (“MF”)

Local File (“LF”)These three

documents must be consistent



Key: Implemented Draft bills/Public discussion draft intentions to ImplementSource: KPMG International member firms

Canada

CbCRFinal Legislation

United States


Mexico

CbCR/MF/LFFinal Legislation

Bermuda

CbCRintentions

Colombia

Peru


Chile

Brazil


Uruguay

CbCR/MFDraft Legislation

South Africa

CbCRFinal

MF/LFintentions

Israel

CbCR/LFDraft

MFintentions

Switzerland

CbCRDraft

MF/LFintentions

Germany

Norway

CbCRFinal

MF/LFintentions

United Kingdom

CbCRFinal

MF/LFintentions

Belgium


Ireland


Luxembourg


Denmark


Netherlands


Iceland

CbCRFinal

MF/LFintentions

France


Spain


Portugal

CbCRFinal

MF/LFintentions

Nigeria

CbCRintentions

Italy

CbCRDraft Legislation

Malaysia

Indonesia


Australia


India

CbCRFinal

MF/LFDraft

China


Poland


Austria


Sweden


Finland


Russia

Japan


South Korea


Hong Kong

CbCR/MF/LFPublic Consultation

Vietnam

CbCR/MF/LFDraft Legislation

Singapore

CbCRDraft Legislation

New Zealand

CbCR/MF/LFintentions

Costa Rica

CbCRintentions

CbCR/MF/LFDraft Legislation


CbCRFinal

LFintentions


Gabon


CbCRFinal

MFintentions

BEPS Action 13: Country Implementation (as of March 2017)



BEPS Transfer Pricing Decree In Vietnam

- What’s new? …- What’s coming?



Transfer Pricing in Vietnam - Overview

BUYERS (BANK)

Action 4Limit base erosion via interest deductions and other financial payments (Decree sets at 20% of EBITDA)

Decree 20/2017/ND-CP dated 24/2/2017 (on the management of transfer pricing in related partytransactions) shall take effect from 1/5/2017.

Advance Pricing Agreements (APAs) are allowable under Circular 201/2013/TT-BTC dated 20 December2013 of the Ministry of Finance.

Tax transfer pricing management is in accordance with the Tax Administration Law and Double TaxationAgreements (DTAs).

Action 8Assure transfer pricing outcomes are in line with value creation–intangibles

Action 9Assure transfer pricing outcomes are in line with value creation –risks and capital

Action 10Assure transfer pricing outcomes are in line with value creation – high risk transactions

Action 13Re-examine transfer pricing documentation, including CbyC (Country by Country)

BEPS actions are considered in the

Decree



— Article 5: Related parties

— Article 6: Comparability analysis, seclection of independent comparables

— Article 7: TP methods

— Article 8: Determining the taxable expenses with respect to some special related party transactions

— Article 9: Database used in declaration, determination and management of TP

— Article 10: Rights and obligations of taxpayers

— Article 11: Safe harbour

— Article 12: Responsibilities and powers of tax authorities

— Article 13: The responsibilities of Ministries, ministerial-level agencies

— Article 1: Scope

— Article 2: Subject of application

— Article 3: Principles for application

— Article 4: Interpretation of terms

Structure of the DecreeChapter I GENERAL PROVISIONS (4 Articles)

Chapter II DETAILED PROVISIONS (9 Articles)

Chapter III IMPLEMENTATION (2 Articles)

– Article 14: Effectiveness – Article 15: Responsibilities for implementation



What’s new – TP documentation packageTP Documentation Package – more precise and stricter

- Master File in accordance with Form No. 03 (file included in presentationpackage);

- Local File in accordance with Form No. 02 (file included in presentationpackage); and

- Country by Country (CbC) report in accordance with Form No. 04 (file includedin presentation package).

- The ultimate parent of the MNE group will be required to file the CbC Report inits resident jurisdiction

- CbC required for Vietnamese taxpayers with an annual consolidated grouprevenue of more than VND 18 trillion (approx. €750 million)

- Taxpayers with an overseas ultimate parent company are required to submit acopy of their ultimate parent company’s CbC Report where available.

The Decree is applicable from 1 May 2017, meaning it will have an effect fromthe 2017 financial year.



What’s new – TP documentation packageMaster File – Content

No. Content

1 Organization Structure:

1.1 Chart illustrating the MNE's legal and ownership structure and geographical location of operating entities

2 Description of MNE's business(es):2.1 Important drivers of business profit

2.2A description of the supply chain for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram;

2.3

A list and brief description of important service arrangements between members of the group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services. A brief description of the main reason in case the group implement marketing service via shopping center and marketing center;

2.4 A description of the main geographic market of the Group's products mentioned in Section 2.2

2.5A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used;

2.6 A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year.



What’s new – TP documentation packageMaster File – Content (cont.)

No. Content

3 MNE’s intangibles:

3.1 A general description of the MNE’s overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management.

3.2 A list of intangibles or groups of intangibles of the Group that are important for transfer pricing purposes and which entities legally own them.

3.3A list of important agreements among identified related parties involved in intangibles,including cost contribution agreements, provision of research service for principal location and licensing agreements.

3.4 A general description of Group's transfer pricing policy in R&D activities and Intangibles

3.5A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved.

4 Group's internal financial activities

4.1 A general description of how the group is financed, including important financing arrangements with unrelated lenders.

4.2The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organised and the place of effective management of such entities.

4.3 A general description of the MNE's general transfer pricing policies related to financing arrangements between associated enterprises.



What’s new – TP documentation packageMaster File – Content (cont.)

No. Content

5 MNE's financial and tax positions

5.1

The MNE's annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes.The applicable tax rate determines the tax positions which associate with profits gained from business activitives of related parties which have transactions with tax payers.

5.2A list and brief description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.



What’s new – TP documentation packageLocal File – Content

No. Content1 Information on taxpayer

1.1 A description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the countries in which such individuals maintain their principal offices

1.2 A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year.

1.3 A detailed description of the businesses which have similar products, services in domestic and global market ( key competitors)

2 Related-party transactions: For each material category of related-party transactions in which the entity is involved, provide the following information:

2.1 A description of the material related-party transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licenses of intangibles, etc.) and the context in which such transactions take place.

2.2 The amount of intra-group payments and receipts for each category of related-party transactions involving the local entity (i.e. payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payer or recipient).

2.3 An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them.

2.4 Copy of related parties transactions agreements and contracts.



What’s new – TP documentation packageLocal File – Content (cont.)

No. Content

2.5 A detailed comparability and functional analysis of the taxpayer and related parties with respect to each documented category of related party transactions, including any changes compared to prior years.

2.6 An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method.

2.7 An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection

2.8 A summary of the important assumptions made in applying the transfer pricing methodology2.9 If relevant, an explanation of the reasons for performing a multi-year analysis.2.10 A list and description of selected comparable uncontrolled transactions (internal or external), if any,

and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information

2.11 A description of any comparability adjustments performed, the reason for these adjustments, documents in relation to these adjustment results.

2.12 A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method.

2.13 A summary of financial information used and the reasons for using such information in applying the transfer pricing methodology.

2.14 A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above



What’s new – TP documentation packageLocal File – Content (cont.)

No. Content

3 Financial Information

3.1 Annual local entity financial accounts for the fiscal year concerned

3.2 Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements

3.3 A summary of financial data in relation to the comparability analysis and sources of data

3.4 A summary of reason and explanation for the causes, business operation, investment and development strategy of corporate having more than three-consecutive-year loss.



What’s new – TP documentation packageCountry by Country Report– ContentI. Overview of allocation of income, taxes and business activities by tax jurisdiction

Tax Jurisdiction

Revenues Profit (Loss)beforeIncome

Tax

Income Tax Paid (on

CashBasis)

Income Tax Accrued –

Current Year

Stated Capital

Accumulated Earnings

No. ofEmploy-

ees

Tangible Assets other

than Cash and Cash Equivalent

s

Unrelated Party

Related Party Total



What’s new – TP documentation packageCountry by Country Report– Content (cont.)II. List of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction

Name of MNE

Tax Jurisdiction

Constituent Entities

Resident in the Tax

Jurisdiction

Tax Jurisdiction of Organisation or

Incorporation if Different from Tax Jurisdiction of

Residence

Business activities

R&D

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What’s new – TP documentation Timeline— Timeline for preparation and submission of TP documentation package

o TP documentation package to be prepared before the annual CIT finalization deadline and maintained and submitted in accordance with the tax authorities’ request to provide information. In the event of a tax audit, the TP documentation package is required to submitted within 15 working days from receiving the request to provide information.

o Timeline for submission of TP documentation package is no longer than 30 working days from receiving the written request during the Consulation Procedure prior to the audit. If an acceptable reason is provided, the submission deadline may be extended only once with an additional 15 working days upon the expiry date.



What’s new – Safe harbor— Safe harbor for TP documentation

o Thresholds for the exemption of documentation of small taxpayers:

• Annual revenue not exceeding VND50 billion (approx. US $2.27 million); and

• Total value of RPTs not exceeding VND30 billion (approx. US $1.36 million)

o Threshold of profit margin for a taxpayer who performs routine functions and does not generate revenue or incur expense from exploitation and use of intangibles:

• Taxpayer’s annual revenue not exceeding VND200 billion (approx. US $9.08 million); and

• Ratio of net operating profit before interest and CIT to net sales revenue (i.e. operating margin) exceeding: 5% for distributors; 10% for manufacturers; and 15% for toll manufacturers.

o Taxpayer that signed an Advance Pricing Agreement (APA) is required to submit an annual APA report in accordance with the APA regulations.



What’s new – Mandatory disclosures— Mandatory disclosures – Form No. 01– (file included in presentation package)

o Taxpayers entitled to safe harbor for TP documentation are still required to comply with the mandatory disclosures under Form No. 01.

o The most significant change to Form No. 01 is the addition of a requirement to disclose any voluntary TP adjustment.

o Requirements for the exemption of the disclosure of Section III and IV of Form No. 01:

• RPTs are between related parties in Vietnam only; and

• All related parties are subject to a similar CIT rate in Vietnam and none of the parties are eligible for a CIT incentive rate in the financial year.



What’s new – Tax authorities’ TP assessment— Clearer bases for the tax authorities to make TP assessment if taxpayers:

o Fail to declare, fail to declare sufficiently or fail to submit Form No. 01;

o Fail to provide sufficient information on TP documentation in accordance with Form No. 02 (i.e. Local File) and Form No. 03 (i.e. Master File) or to present TP documentation/ data/ document/ source documents used as a basis of comparative analysis, determination of transfer price of RPTs in TP documentation upon the request of tax authorities within the permitted timeline;

o Use dishonest and untruthful information of the independent transactions to perform comparability analysis and determine the transfer prices of RPTs or use illegal or improper or unreliable sources to determine the price, the basis of profit ratio or profit split ratio applied in the RPTs; or

o Violate Article No. 11 of the New Decree.

— Year-end TP adjustment allowed, but likely applied for upward adjustment only.



What’s new – New principle and rules— New principles and rules

o New principle of “substance over form” whereby the TP analysis can be beyond the review of contractual arrangements to an analysis of the substance linked to value creation;

o Measure for the comparability of RPTs against independent transactions (the arm’s length requirement); and

o Consider the development, enhancement, maintenance, protection and exploitation (DEMPE) functions with respect to intangibles.



What’s new – Related party relationship— Revision of related party relationship definition

o Related party relationship in cases of input and output control is eliminated.

o Thresholds for some types of relationship are revised:

• Threshold on direct or indirect contributed capital ratio increases from 20% to 25%;

• Threshold on the debt to equity ratio in case of intercompany guarantees or loans decreases from 20% to 25%; etc.

o Additional types of relationship:

• Enterprises that exercise actual management and control in relation to the operations of the other enterprise;

• Individuals who have controlling power based on the capital contributed to the other enterprises or directly manage the operation of the enterprises.



What’s new – TP methods— Five (5) TP methods categorized in three (3) groups:

o Comparision of prices in controlled transactions with those in uncontrolled transactions:

• Comparable Uncontrolled Price Method (CUP)

o Comparision of margin of taxpayers with comparables:

• Resale Price Method (RPM)

• Cost Plus Method (CPLM)

• Comparable Profit Method (CPM)

o Profit Split Method (PSM)

— The use of interquartile range:

o The median value of the interquartile range to be used in CUP, RPM, CPLM and CPM analysis for TP adjustment purposes.



What’s new - Comparables— The hierarchy of comparabes used for benchmarking purposes

o Internal comparables of the taxpayers;

o Comparables located in the same country, territory of the taxpayers; and

o Comparables located in the region which have similar industry condition and economic development level.

— Clarifications on use of secret comparables versus commercial databases and public information/data

o The use of secret comparables is being considered for tax risk assessments by the tax authorities only, with the consideration for the use of commercial databases and public information to prevail in case of a proposed tax assessment during a TP audit.

o However, in some TP audit cases, where taxpayers fail to submit the forms or the TP documentation within the statutory timeline, the tax authorities will have absolute power to assess the price and/or profits of the taxpayers based on their secret comparables.



What’s new – Specific rules for tax deduction — Additional guidance for tax deduction of RPTs

Applied for transactions which are considered as harmful tax practices by the local tax authorities in Vietnam:

— RPTs not in line with the nature of independent transactions shall be deemed as non-deductible expenses

o Expenses paid to the related party that does not conduct any business activities relating to the taxpayer’s business activities;

o Expenses paid to the related party that conducts business activities, however its scale of assets, number of employees and functions performed are not corresponding with the value of business transactions and the income that such related party receives from the taxpayer.

o Expenses paid to related parties who do not have the right to and responsibility for the assets, goods and services provided to taxpayer; and

o Expenses paid to related parties which are residents of a country or jurisdiction that does not collect corporate income tax, and do not contribute to generating revenue or added values to taxpayer’s business activities.



What’s new – Specific rules for tax deduction (cont.) — Provision of services between related parties

o Service expenses are considered as deductible expenses if:

• The provided services have economic, financial and commercial value and directly benefit taxpayer’s production or business activities;

• Intra-group services are determined as already rendered only under similar conditions where independent parties are willing to pay for such services;

• The service fee is calculated based on the arm’s length principle and sufficient supporting documents should be made available.

o Cases where service expenses are considered as non-deductible:

• Expenses incurred from services which are only used for the purpose of generating benefits and values to other related parties;

• Services which benefit related parties’ shareholders;

• Duplicative services; etc.— Loans between related parties

o Total interest expenses incurred in the tax period, which are deductible should not exceed 20% of taxpayer’s net profit before interest, taxes, depreciation and amortization (EBITDA).



Key considerations for

investors and companies



Your Risk on Heat Map Le

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Not

in

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Medium Risk High Risk High RiskS

ome

com

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Low Risk Medium Risk High Risk

Full

com

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Low Risk Low Risk Medium Risk

Above the median Within range Below range/Losses

Profitability



Expected TP Audit program for 2017Enterprises are manually selected by tax officers and/or selected by tax risk assessment software to be targets for tax and transfer pricing audits.

Targets for transfer pricing audit cases may include:

1) Key industry players;

2) Enterprises which have persistent losses and are still expanding;

3) Enterprises which have not been audited for a long period;

4) Enterprises with high tax incentives;

5) Enterprises which have had several tax issues or high adjustments during previous audits;

6) Enterprises which have significant related party transactions; and

7) Others.



What Should Companies Do? 1) Run a comprehensive risk assessment and readiness analysis for the regulatory

change: Master File, Local File, CbC report - How would the new Decree apply to my case?

2) Ensure the proper TP filling and documentation for FY2016 and prior years

3) Consider an APA as an alternative to transfer pricing reporting compliance requirements under the new Decree

4) Undertake a review of the corporate structure and potential risks, specially when conducting transactions with preferential tax regimes and reduce the risk of double taxation

5) Intercompany agreements will be reviewed in the event of a tax audit and form part of the suite of transfer pricing documentation. Companies should ensure that absent or insufficient intercompany agreements do not adversely impact intended tax position


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2017 KPMG Tax and Advisory Limited, a Vietnamese limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo are registered trademarks or trademarks of KPMG International.

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Documents

© 2017 KPMG Limited, KPMG Tax and Advisory Limited, KPMG ... · Important drivers of business profit 2.2: A description of the supply chain for the group’s five largest products