The Ministry of Finance on 22 June 2017 published Circular 41/2017 / TT-BTC (28 April 2017), which provides some guidelines for the application of Decree No 20/2017 and this Circular will take effect on 1 May 2017.
Circular 41/2017 introduced some guidelines, principles, methods and procedures for the determination of transfer pricing, including the adoption of guidance and documentation requirements from the OECD project on base erosion and profit shifting (BEPS). The main points of Circular 41/2017 are summarised below:
Comparability analysis: Circular 41/2017 provides a standard formula to calculate the arm’s length range. Where the taxpayer’s related party price, profit margin or profit allocation falls within the arm’s length range no TP adjustment is required. Nevertheless, if the taxpayer is deemed non-compliant with the requirements of Decree 20/2017, the tax authorities have the right to make a TP adjustment to the median point of the arm’s length range. However the question of whether the taxpayer is ‘non-compliant’ could be highly subjective, resulting in potential disputes.
Languages: Decree 20/2017 prioritizes the use of Vietnamese data for benchmarking purposes. In certain circumstances regional data may be used, but only when local data is not available, or not appropriate. Circular 41/2017 gives more detail on this requirement and requires that when regional data is used, it will be necessary to adjust for local factors and considerations. This is understood to mean that adjustments for location and cost differentials are necessary when relying on the use of any regional data.
TP Methods: Circular 41/2017 provides general guidance on the application of the TP methods endorsed by Decree 20. Clarity on the calculation of financial ratios for each of the TP methods has been provided in this Circular.
TP Compliance: One of the more controversial aspects of Decree 20/2017 is the introduction of four new TP declaration forms as part of the annual corporate income tax compliance process and Circular 41/2017 provides detailed instructions for completing these forms. Circular 41/2017 confirms that the ultimate parent company in Vietnam should prepare a country by country report (CbCR) if the consolidated revenue is VND 18 trillion or more.
TP Documentation: The related documentation must be completed by taxpayers by the statutory deadline (i.e. 90 days after the fiscal year end). While Decree 20/2017 requires the taxpayer to prepare a Master File and maintain a copy of the ultimate parent company’s CbCR, it does not clarify which Master File and CbCR should be maintained when the taxpayer has multiple parent companies (i.e. a joint venture). Circular 41/2017 addresses this issue by requiring taxpayers to maintain the Master File and CbCR for each investor or shareholder that consolidates the financial statements of the taxpayer in Vietnam. Additionally, Circular 41/2017 clarifies that if the taxpayer cannot provide the CbCR for any tax year under review, the taxpayer may provide a CbCR for the preceding tax year.
Safe harbor rule: Circular 41/2017 also provides clarification when applying a “safe harbor rule” for companies that perform multiple functions. Specifically, where a taxpayer has multiple businesses divisions, it will be allowed to segment revenue and expenses for each business division to determine if the company achieved a corresponding profit ratio (for each separate business division). Where the taxpayer cannot reliably segment the financial data by business division, the highest safe harbor ratio (i.e., that is relevant to any one of the taxpayer’s separate business divisions) shall be applied to determine whether the company qualifies for exemption.
