Circular No. 117/2005/TT-BTC dated December 19, 2005 first introduced the comprehensive Transfer Pricing (TP) regulations in Vietnam, which took effect in 2006. The regulations required taxpayers engaged in related party transactions (RPTs) to file an annual TP declaration form and maintain contemporaneous TP documentation proving that the RPTs were conducted at arm’s length.

Since then, the Vietnamese Government and the Ministry of Finance have issued several updates, including: Circular No. 201/2013/TT-BTC (Circular 201) providing guidance on filing Advance Pricing Agreements (APA), and Decree No. 20/2017/ND-CP (Decree 20) and Circular No. 41/2017/TT-BTC (Circular 41), which took effect in May 2017, providing guidance for enterprises with RPTs during the course of their operation. These can be considered the most important developments in Vietnam’s TP landscape over the last 15 years.

Following Action Plan 13 on TP Documentation under the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) program, Vietnam started to make BEPS-driven changes to its domestic tax laws. Here are some highlights of the current regulations:

APA regulation

Circular 201 is Vietnam’s APA regulations and tool, which took effect on 5 February 2014. This enabled taxpayers to apply for unilateral, bilateral, and multilateral APAs. The Ministry of Finance is currently drafting a new Circular to replace Circular 201.   

TP compliance requirements

As stipulated under Decree 20, taxpayers are required to prepare and submit TP disclosure forms (Form 01, 02, 03, and 04) together with their corporate income tax finalization return (i.e. 90 days after the fiscal year-end). Under the Decree, the preparation of a TP documentation package, which includes a Local File, Master File, and Country-by-Country report, is mandatory before the tax finalization deadline. The documentation package must be submitted upon the tax authority’s request within the timeline below:

  • During consultation period prior to an official audit case: within 30 working days, with possible extension of up to 15 working days
  • During audit period: within 15 working days

Taxpayers may be exempted from the requirement to prepare TP reports and documentation requirements if they meet certain conditions. For instance, small-scale businesses and enterprises with insignificant RPTs are exempt from preparing the documentation package. Taxpayers with APAs or with simple functions that have achieved a certain level of operating profit margin are also not required to have the documentation package.

Introduction of ‘substance over form’ principle

Decree 20 introduced the ‘substance over form’ concept for the first time. The regulation requires careful delineation of the actual functions and the associated risks of the parties by comparing the contractual obligations with the actual conduct.

The specific inclusion of this concept in the regulations further enforced the obligation of taxpayers to prove the actual occurrence of intra-group transactions and to demonstrate the benefits received. In addition, taxpayers are required to prove that the transactions are conducted at arm’s length. If taxpayers fail to provide such evidence, the relevant expenses could be denied for a tax deduction.

Introduction of DEMPE functions

With respect to controlled transfers of intangibles, Decree 20 and Circular 41 stipulate activities considered as development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets, and require detailed TP analyses to determine the appropriate profit allocation.

Use of interquartile in determination of arm’s length prices/profit ratios

The regulations prescribe the use of the interquartile range to determine the arm’s length price/profit ratio. In particular, an RPT can be considered arm’s length when the prices of the tested party’s RPTs/profit ratio are from the first quartile to the third quartile of the range.

In case the prices of the taxpayer’s RPTs/profit ratios fall outside the range, the taxpayer is allowed to make a voluntary adjustment, which does not reduce the local corporate income tax liability, to a value that is considered the most comparable to the taxpayer. If no voluntary adjustment is made and a tax audit arises, tax auditors shall adjust towards the median of the range.

Inclusion of Interest Deduction Limitation

The regulations impose a limitation on deductible annual interest expense, which is capped at no more than 20% of earnings before interest, taxes, depreciation and amortization (EBITDA). In addition, the excess may not be carried forward.

On 24 June 2020, Decree 68/2020/NĐ-CP (replacing Clause 3, Article 8, Decree 20) is set to revise the above point. The key changes include using net interest expenses (i.e. total interest expenses minus interest income from bank deposits and lending) for interest cap calculation; the deductible net interest expenses threshold is 30% of EBITDA; and, carrying forward non-deductible net interest expenses for five consecutive years.

TP audit landscape

In the area of audit, there has been a shift in focus – from assessing the taxpayer’s entity-wide financial performance to a transaction-by-transaction analysis. Scrutiny has also moved from contract manufacturers and limited risk distributors to the consumer, hospitality, and financial services sectors. These audits are often triggered by:

  • Consecutive losses or fluctuating profit margins over the years
  • Substantial intra group services and intangible transactions

Penalty for TP non-compliance

Non-compliance with the foregoing requirements may attract the following penalties:

  • The tax authority may determine the transfer prices and impose a TP adjustment
  • Administrative penalties are levied in addition to a TP adjustment, i.e. late payment interest at 0.03% per day currently and penalty for incorrect declaration equivalent to 20% of the under-declared amount
  • Potential penalties for tax evasion may also be imposed from one-to-three times the under-declared tax


With TP audits getting more complicated and tax authorities more aggressive, taxpayers are strongly advised to fully comply with the local declaration and documentation requirements on an annual basis to reduce the risk of transfer pricing adjustments. In addition, local taxpayers are advised to review their existing policies for intragroup transactions, bearing in mind the substance requirements in Decree 20.

The author is a Tax Partner with Deloitte Vietnam and leads the Vietnam transfer pricing services.


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