Transfer pricing and transfer pricing control have currently become “hot” issues in Vietnam. Vietnam still remains the growth of foreign direct investment (“FDI”) over the years. However, the efficiency of FDI capital is still in question. The significant growth of FDI companies in Vietnam has raised increasingly complicated tax matters. These matters may be raised for various reasons. However, transfer pricing became a common reason due to the fact that many FDI companies in Vietnam have reported continued losses while still carrying out business expansions. Recently, many tax authorities have started to conduct strict inspection processes in companies operating in Vietnam, mostly FDI companies to prevent illegal transfer pricing, as well as to ensure the efficiency of FDI capital. Accordingly, a lot of FDI companies, including big companies are subject to additional tax arrears and administrative fines by conducting illegal transfer pricing. This LBN introduces an update of the recent activities of Vietnamese tax authorities to provide readers an insight view of the recent situation of transfer pricing control in Vietnam.

Besides, Vietnam is one of the countries with advanced laws on transfer pricing which are in compliance with global accounting standards. However, many enterprises doing business in Vietnam find Vietnamese laws on transfer pricing difficult to understand or to be complied with. The LBN also explains the basic principles laid down in Vietnamese laws on transfer pricing with practical advice on transfer pricing documentation requirement.

Tax authorities’ recent activities on transfer pricing control

The “open” policy of attracting foreign investment and the impacts of FDI companies have brought many positive results for the development of Vietnam’s economy, but there are still negative sides being existed, including the significant growth of illegal transfer pricing in Vietnam. Under the report of the State Audit Office of Vietnam (SAV), FDI companies reported losses quite commonly, accounting for 50% of the total number of FDI companies operating in Vietnam while many other Vietnamese companies in the same sector such as textile and footwear reported profits. For instance, in Ho Chi Minh city, over 60% of the 3,500 FDI companies have been reporting annual losses. This fact shows the efficiency of FDI capital is not as expected despite strong investment attraction. Although Vietnam has been continuing to attract record FDI with a large amount of registered capital and companies in recent years, the actual contribution of FDI to the development of Vietnam’s economy is quite limited and not proportional to the preferential policies of the Vietnamese Government. A large number of FDI companies have invested in Vietnam because of Vietnam’s attractive tax advantages and investment incentives, yet some of those companies are carrying out illegal transfer pricing activities in order to avoid paying tax in Vietnam.

To combat this situation, competent Vietnamese tax authorities have been intensifying on transfer pricing inspection on companies having related transactions. The inspections are mainly focused on FDI companies, conducted in 04 big cities namely Hanoi, Ho Chi Minh, Dong Nai and Binh Duong. Specifically, the tax industry inspected over 800 companies mostly FDI companies with more than VND 1.7 trillion (equivalent to US$ 73 million) of administrative fines and tax arrears was collected in 2019, increasing the total taxable income up to VND 7.5 trillion. In addition, according to the Deputy Director of Propaganda Department Supporting Taxpayers – General Department of Taxation Nguyen Duc Huy, in the coming time, tax authorities will continue strengthening investigation, inspection and strictly handling of violations. The investigation will be focused on companies with high tax risks; new business lines; signs of transfer pricing; and companies having reported losses for many consecutive years. Many experts also recommended the Government expand the SAV’s authorities in assessing the effectiveness of FDI capital during the auditing process in order to ensure the efficiency of attracting FDI capital in Vietnam in the current period.

OECD’s BEPS actions

As Vietnamese laws on transfer pricing are based on the OECD’s Base Erosion and Profit Shifting (BEPS) actions, basic understanding of the OECD’s BEPS actions is the first step to comprehend Vietnamese laws on transfer pricing. The following is the OECD’s Action Plan on BEPS published in 2013 that are most relevant to Vietnam’s laws on transfer pricing:

Action 4: Limit base erosion via interest deductions and other financial payments

Action 8: Assure that transfer pricing outcomes are in line with value creation (Intangibles)

Action 9: Assure that transfer pricing outcomes are in line with value creation  (Risks and capital)

Action 10: Assure that transfer pricing outcomes are in line with value creation (Other high-risk transactions)

Action 13: Re-examine transfer pricing documentation

These actions are based on three fundamental principles to address BEPS issues. First, international standards must be designed to ensure the coherence of corporate income taxation at the international level (Action 4). Second, a realignment of taxation and relevant substance is needed to restore the intended effects and benefits of international standards (Actions 8 to 10). Finally, to succeed in countering BEPS needs further transparency, certainty and predictability of business (Action 13).

Summary of transfer pricing laws in Vietnam

Fundamental principles

Vietnam’s laws on transfer pricing are based on two fundamental principles – the arm’s length principle and substance-over-form principle.

The arm’s length principle of transfer pricing is that the amount charged by one related party to another for goods or services must be the same as if the parties were not related. Therefore, the amount charged between related parties would be the price on the open market under the arm’s length principle.

The substance-over-form principle is that the transfer pricing analysis is not confined to contractual arrangements but extends to factual substance of transaction. If contractual arrangements differs from factual substance of transaction, the latter will prevail under the substance-over-form principle.

Related parties

The Decree no. 20/2017/ND-CP issued in February 2017 (Decree 20) provides circumstances where parties are deemed related parties. The following circumstances are some of the circumstances where Party A and Party B are deemed related parties.

  • Party A participates directly or indirectly in at least 25% of equity of Party B.
  • Party A is the shareholder with the greatest ownership of equity of Party B.
  • Party A guarantees or offers Party B a loan that amounts to at least 25% of equity of Party B.
  • Party A appoints more than 50% of board members of Party B.
  • Party A and Party B are managed or controlled by individuals of family relationship.

As the substance-over-form principle is a prevailing principle in transfer pricing laws in Vietnam, if a company is in substance controlled or managed by the other party, the parties will generally be considered related parties for transfer pricing purposes.

Non-deductible transaction between related parties

Once parties are deemed related parties, the arm’s length principle and the substance-over-form principle will apply in determining whether or not transactions between the related parties are deductible. For instance, Party A’s expenses paid to Party B in the following transactions will be generally considered non-deductible expenses if both parties are deemed related parties.

  • Party B does not conduct any business activities relating to Party A’s business activities;
  • Party B conducts business activities relating to Party A’s, but Party A’s business scale (e.g., in terms of its assets or number of employees) does not correspond with the transaction value.
  • Party B is a resident of jurisdiction where corporate income tax is not imposed or collected.
  • Transactions of which the only purpose is to generate benefits and values to Party B.
  • Transactions that only benefit related parties’ shareholders.

The above examples are based on a bilateral transaction simply to make them easier to be understood, but in reality many of these transactions are between multilateral parties.

Transfer pricing documentation requirement

The Decree 20 incorporated principles laid down in the OECE’s BEPS action 13 and requires taxpayers to prepare mandatory disclosure forms which must be submitted with their tax return. These documents consist of a master file, local file and country-by-country report (CbC report).

Master file

The master file should contain information which is relevant to the whole group so that the taxation department has an overview of the group’s value chain and its important drivers of business profit. Thus, the following contents, which are not in no way exhaustive, are some examples that should be included in a master file:

  • Organization structure;
  • Major sources of business profit;
  • A description of the supply chain for the group’s major goods and services;
  • A brief of important contracts and service arrangements among group entities;
  • A list of important intangibles of the group which have significant importance on transfer pricing; and
  • The Group’s financial and taxation policies regarding transfer pricing.

Local file

The local file should contain details of transactions between related parties, functional analysis describing the transactions, and an economic analysis which supports the transactions. Thus, the local file should include, among other things, the following contents:

  • Information of the company’s business that is subject to tax imposition;
  • Detailed information of transactions between related parties; and
  • Financial information of the company.

CbC report

The CbC report should include key financial and tax indicators of the group (e.g., revenue, profit, assets, and number of employees) for each jurisdiction in which the group operates. It should also include information on the main business activities/functions of all subsidiaries in the group.


The tax authorities’ recent move shows the high intension of Vietnam to strictly prevent the State budget losses in general and illegal transfer pricing in particular, especially in FDI sector. This may lead to a negative impact on FDI companies’ operations in Vietnam as they are likely to face administrative fines or criminal liabilities.

The Vietnamese Government has repeatedly shown its concerns on tax evasion of foreign investors and strengthened its regulations and enforcement on transfer pricing. However, laws on transfer pricing can be easily breached not because it is intended to circumvent taxation obligations but because they are breached unintentionally, negligently or inadvertently. Thus, it is advised that professional assistance is desirable when issues related to transfer pricing occur.


This LBN newsletter are NOT legal advice. Readers are advised to retain a qualified lawyer, should they wish to seek legal advice. VCI Legal are certainly among those and happy to be retained, yet VCI Legal is not to be hold responsible should any reader choose to interpret/apply the regulations after reading this LBN without engaging a qualified lawyer.

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