Determining prices in related-party transactions is a critical topic as it affects the tax obligations of businesses and multinational corporations operating in Vietnam.
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According to regulations, enterprises engaged in related-party transactions are required to prepare transfer pricing documentation and submit it to tax authorities upon request. Over the past years, numerous businesses have been subject to tax arrears and penalties due to tax authorities identifying signs of transfer pricing in related-party transactions. So, what is transfer pricing documentation? What does it include? If you are exploring this topic, do not miss the essential information provided in the article below.
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Transfer pricing documentation is a set of materials that enterprises (mainly multinational corporations and companies operating in Vietnam) are required by tax authorities to prepare and submit to determine whether the business has engaged in transfer pricing activities. According to Article 18 of Decree 132, transfer pricing documentation (or “related-party transaction documentation” for short) includes:
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• Information on related-party relationships and transactions;
• Local File;
• Master File (Global Group Information); and
• Country-by-Country Report (CbCR) of the Ultimate Parent Company.
‘Local File,’ as referred to in the guidelines of the UN and OECD, contains information on related-party transactions, policies, and methods for determining prices for related-party transactions. This file is prepared and stored at the taxpayer’s headquarters according to the categories of information and documentation specified in Annex II attached to Decree No. 132/2020.
The content of the Local File includes:
1. Information about the taxpayer
Information on the management and organizational structure, including an organizational chart, a list, and a summary of the management positions of the group to which the taxpayer directly reports, along with the addresses of the offices or headquarters of these positions.
Detailed information about the business activities and strategies of the taxpayer, including information on whether the taxpayer is involved in or impacted by the process or decisions regarding restructuring, capital transfers, or asset transfers within the group during the reporting year.
Information about businesses offering similar products or services in both domestic and international markets (major competitors).
2. Financial information of the group
The financial statements for the reporting year of the taxpayer; Information and plans for the allocation and use of financial data when applying the proposed pricing method; A summary description of the relevant financial data used in the comparative analysis and the sources of the data; A summary of the reasons and explanations for the business plan, investment, and development strategies for businesses with losses for 3 consecutive years or more.
3. Information on related-party transactions
A description of significant related-party transactions (e.g., provision of manufacturing services, purchase of goods, provision of services, loans, performance and financial guarantees, franchise agreements, etc.) and the context in which these transactions are carried out.
The value and invoices for payments made and received within the group for each type of transaction related to subsidiaries (e.g., payments for products, services, royalties, interest payments, etc.) that have been adjusted by foreign tax authorities.
Identification of related parties involved in related-party transactions and the relationships between these parties. Copies of agreements and contracts for related-party transactions; Function analysis and detailed comparative analysis for the taxpayer and related parties for each type of related-party transaction, including any changes compared to the previous year.
Explanation of the most appropriate transfer pricing method applied to related-party transactions and the reasons for selecting the proposed pricing method.
Identification of the selected related party for determining transfer prices and explanation of the choice; A summary of significant assumptions made when applying the proposed pricing method; Justification for conducting multi-year data analysis (if applicable); A list and description of independent comparables (both internal and external) and the necessary financial information and indicators for transfer pricing analysis, including a description of the method used to find comparable data and the sources of information; A description of the adjustments made to the comparables, the reasons for the adjustments, and documentation on the results of the adjustments; A description of the reasons and explanations for applying the proposed pricing method in compliance with the arm’s length principle; A summary of the information on quantitative financial indicators, criteria, and reasons for using these indicators in applying the proposed pricing method; Copies of unilateral, bilateral, and multilateral APA agreements, as well as other tax-related agreements concerning the taxpayer’s related-party transactions where the Vietnamese tax authority is not a party to the agreement.
The ‘Master File,’ or ‘Global Group Information File,’ as referred to in the guidelines of the UN and OECD, contains information on the business activities of the multinational group, the group’s global transfer pricing policies and methods, and the income allocation and distribution of activities and functions within the group’s value chain, according to the categories of information and documentation specified in Annex III attached to Decree No. 132/2020.
Enterprises required to prepare the Master File
Taxpayers engaged in related-party transactions, who are not exempt from preparing transfer pricing documentation according to provisions in points a or c, clause 2, Article 19 of Decree No. 132/2020, are required to prepare, maintain, and provide the Master File. The taxpayer must prepare and provide the Master File for the multinational group where the taxpayer’s financial statements are consolidated in Vietnam, in accordance with accounting regulations. In cases where the taxpayer is a subsidiary of multiple parent companies within different multinational groups and the taxpayer’s financial statements are consolidated into multiple groups, the taxpayer must provide the Master File for all of these groups.
Organizational Structure
An illustrative diagram of the ownership structure, the legal structure of the group, and the geographic locations of the subsidiaries within the group that are currently operating.
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• The key factors and important channels that generate business profits;
• A description of the supply chain for the five largest products and/or services of the group by revenue, and any goods and/or services that account for more than 5% of the group’s revenue, including information on the main geographic markets for these goods and services;
• A list and brief description of significant service agreements between group members, excluding research and development (R&D) services, including a description of the capabilities of the headquarters (global and regional levels) providing significant services, transfer pricing policies for allocating service costs, and determining the prices to be paid for internal group services. A summary and justification of the main reasons when the group conducts procurement and marketing activities through centralized procurement and marketing centers;
• A description of the main geographic markets for the group’s products;
• A written description of the functional analysis outlining the contributions of the headquarters to the values created by the group’s local business operations, such as key functions performed, major risks borne, and essential assets used;
• A description of significant business restructuring transactions, mergers, and acquisitions occurring during the fiscal year.
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• A general description of the MNE’s overall strategy for the development, ownership, and exploitation of intangible assets, including the location of the R&D headquarters and the management of R&D activities;
• A catalog of the intangible assets or groups of intangible assets of the group that have a significant impact on transfer pricing policies and are legally owned by subsidiaries;
• A list of significant agreements between related parties related to intangible assets, including cost-sharing agreements, research service agreements for headquarters, and licensing or franchising agreements;
• A general description of the group’s transfer pricing policies regarding R&D activities and intangible assets;
• A general description of any significant transfers of intangible asset benefits between related parties during the relevant fiscal year, including information about the subsidiaries, countries involved in the transfer, and related payments.
Internal financial activities of the group
• A general description of the group’s financial allocation mechanisms, including financial agreements and significant financing agreements with independent lenders;
• Information identifying any member of the group that provides financial functions or centralized capital for the group, including the countries where subsidiaries are incorporated and where their actual operational headquarters are located;
• A general description of the group’s transfer pricing policies regarding financial agreements and financing between related parties.
Business performance and tax obligations of the group
• The consolidated financial statements for the reporting year of the group and the financial reports and internal management mechanisms used for tax calculation purposes by the group;
• The tax rates applied to determine the tax obligations corresponding to the profits generated from business activities of related parties that have related-party transactions with the taxpayer;
• A list with a brief description of unilateral Advance Pricing Agreements (APA) and other tax policies related to income allocation between countries.
The Country-by-Country Report of the Ultimate Parent Company (abbreviated as ‘Country-by-Country Report’), also referred to as the ‘CbC Report’ in the guidelines of the UN and OECD, is a report that provides general information on the global income allocation of the multinational group and the taxes paid in the countries where the group operates. It is prepared according to the regulations outlined in Annex IV attached to Decree No. 132/2020.
Who is required to prepare the Country-by-Country Report?
Ultimate Parent Company in Vietnam
In the case where the taxpayer is the Ultimate Parent Company in Vietnam with consolidated global revenue for the tax period of 18,000 billion VND or more, it is required to prepare a Country-by-Country Report as part of the transfer pricing documentation.
Ultimate Parent Company Abroad
In cases where the taxpayer has an Ultimate Parent Company located abroad, the taxpayer is responsible for providing a copy of the Country-by-Country Report of the Ultimate Parent Company if the Ultimate Parent Company is required to submit this report to the tax authorities of the respective country, either in the tax authority’s prescribed format or the form outlined in Annex IV attached to Decree No. 132/2020.
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