By Tu Ha, Transfer Pricing Director, Duff & Phelps, A Kroll Business, Vietnam
New detailed guidance from Vietnam’s Ministry of Finance on the advance pricing agreement (APA) program came into effect on 3 August, introducing both some new challenges and some welcome developments. The guidance, which was issued 18 June in Circular 45/2021/TT-BTC (Circular 45), replaces the first Circular on APAs (Circular 201/2013/TT-BTC) issued in 2013.
For the past eight years, the Vietnamese Government has been promoting the APA program as a key solution to addressing transfer pricing issues in Vietnam and ensuring arm’s length transfer prices are achieved for tax purposes. However, since the inception of the APA program, no APA cases have been completed, although several APA applications have been submitted, mostly by Vietnamese subsidiaries of multinationals headquartered in Korea, Japan, the US, and New Zealand.
Before the publication of Circular 45, Vietnam’s new Law on Tax Administration and Decree 126/2020/ND-CP (Decree 126), which came into effect on 5 December 2020, provided the key framework for APA applications in Vietnam. Decree 126 has a separate article on APAs, marking the first time in Vietnam that detailed guidance on APAs was provided at the decree level (which is higher than the circular in regulation). Decree 126 also regulates official forms and supporting documentation packages in consultation, official submission, and the mutual agreement procedure (MAP) for bilateral APAs, as well as annual reporting.
Thus, Decree 126 and Circular 45 bring significant changes to the Vietnamese APA regulations, including some limitations as well as greater flexibility in some respects.
Stricter requirements for transactions subject to APA application
Circular 45 lists four conditions, which international related party transactions must meet to qualify for an APA application. First, the covered transactions must have occurred in prior years and will continue to occur during the APA’s covered period. Second, they must be able to be benchmarked using one of the regulated transfer pricing methods. Third, the transactions must not be under any tax dispute. Lastly, they must not be carried out for tax evasion, tax avoidance or abuse of the applicable tax treaty.
From the tax authority’s perspective, these more rigorous requirements could simplify the process of reviewing and negotiating APAs, resulting in a shorter and less time-consuming process. However, the introduction of these requirements is disappointing for Vietnamese taxpayers.
The new conditions do not provide room for any new transfer pricing policy or arrangement to be tested or negotiated under the APA regime. The new provisions also restrict newly established enterprises from seeking an APA, which was a possibility in Vietnam under the old Circular 201. More importantly, enterprises targeting an APA to resolve controversy or disagreements in previous and ongoing transfer pricing audits may be turned down by the APA tax team due to the new regulations, given that the taxpayers’ related party transactions would still be under tax dispute. Further, APAs are unlikely to be suitable for complex, high-risk transactions with limited comparables.
More comprehensive information packages and shorter period of application
Circular 45 refers to Decree 126 on the forms and the detailed documents required for the APA application process. The official APA forms under Decree 126 (i.e., Form 01/APA-TV, 02/APA-CT, 03/APA-MAP, and 04/APA-BC) differ from the corresponding forms regulated in Circular 201. The list of supporting documents required at each stage of the APA process has significantly increased, focusing on the evidence of long-term compliance and more information on the multinational group and overseas related parties.
Some of the critical additional supporting documents include the Vietnamese taxpayer’s full transfer pricing compliance documentation (local file and master file in Vietnamese) for the three consecutive years before the APA covered period. They also include any historical records of transfer pricing adjustments during a tax audit for a period of five years before the APA covered period. Audited financial statements, annual reports, tax returns of the Vietnamese taxpayer, and the counterparty (or counterparties) for the three years before the APA covered period are also critical.
More business information on the local taxpayer, the counter-related party, and the group of the taxpayer in general, such as specific industry aspects, customers, list of suppliers, production processes, may also be required.
Though some of the above information has been generally requested by the APA tax team for reference purposes under the previous APA process, this is the first time the information is listed officially and required to be provided within a specific time frame.
In addition to introducing stricter documentation requirements on the Vietnamese taxpayers, the new APA regulations shorten the maximum APA period from five years to three years. These changes are likely to make APAs less attractive to Vietnamese taxpayers seeking certainty.
Official use of commercial databases
The new APA regime also brings some improvements and flexibility, including through adopting official use of commercial databases.
According to Vietnam’s Law on Tax Administration, tax agencies in Vietnam have the budget to subscribe to commercial databases for tax administration and APAs from 1 July 2020.
Together with the Law on Tax Administration, Decree 132/2020/ND-CP (guiding principles of transfer pricing in Vietnam), effective from 20 December 2020, officially prescribes that commercial databases are to be the standard source of information for all transfer pricing studies for compliance, inspection and APA application purposes.
The applicants and reviewers of APA applications will now have an official legal basis to reach an agreement during the consultation stage (if any), official application stage, and review and negotiation stage of the APA process.
Consultation stage is no longer compulsory
Under previous APA regulations, the consultation stage was compulsory and has become the most critical stage in the APA application process in Vietnam. This is because the consultation stage in Vietnam was usually conducted conservatively, with long meetings, presentations, information and document requests and even pre-negotiation. The new APA regulations have included consultation as an optional stage, meaning taxpayers could move directly to the official APA application stage. This is important because, even though presentations/discussions can still be conducted before the official APA submission, there is no longer a requirement for official approval of consultation completion, which was challenging in the past and one of the key blockages in past APA applications.
Experts’ comments are officially accepted
In the past, the involvement of professional consultants in the APA application was not officially regulated. In most cases, the consultants are just invited to attend the official meeting, and any of the hired consultants’ comments are for reference purposes only. Consultants’ comments are now officially accepted as part of the official discussion and negotiation with the APA officials if taxpayers also sign the minutes of the meeting.
Application of new APA regulations for ongoing applications
For those APA applications that have been lodged but not yet signed, and for which the covered period has not expired as of 3 August, the review and negotiation will be conducted under the new APA regulations.
Overall commentary
In summary, the shorter effective period of an APA and stricter requirements on the applicable transactions and information required could present some roadblocks for the APA process in Vietnam. However, the new APA regulations have some positive aspects for those taxpayers who have relatively stable profit and a transparent pricing policy.
Among the positive developments, the pre-consultation stage becoming optional is the most important as this is expected to cut down the overall application process. Further, the official use of a commercial database, which is regulated in tax law, could help reduce the review and negotiation process time as the applicants and reviewers will have the same basis on which to agree.
The new APA regulations draw a clear line between those taxpayers who are good candidates for an APA and those who are not. The clear intention of the tax authority is that an APA should only be entered into with those taxpayers who have a transparent transfer pricing policy and the recent three years of proven compliance history.
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