Regulations on comparability analysis, selection of transfer pricing method, information declaration, transfer pricing documentation and exemption from transfer pricing

03/05/2017
The Minister of Finance provides guidance on implementation of certain articles of the Government’s Decree No. 20/2017/ND-CP dated February 24, 2017 on tax administration for enterprises engaged in transfer pricing.
This Circular helps instruct subjects of the Decree No. 20/2017/ND-CP to implement certain regulations on comparability analysis, selection of transfer pricing method, information declaration, transfer pricing documentation and exemption from transfer pricing documentation requirements under the provisions of the Decree No. 20/2017/ND-CP.

The nature of related-party transactions prescribed by legally binding agreements, documents or arrangements on transactions of related parties shall be determined and compared to the reality of execution of these transactions by such parties, as provided by Clause 1 Article 6 of the Decree No. 20/2017/ND-CP, under the following guidelines:

a) Collect information about, determine the nature of related party transactions, economic, commercial and financial relationships of the taxpayer that are specified in agreements (including the annexure and amended agreement hereto attached) or in documents or arrangements with the related party in order to determine obligations, interests and liabilities of contracting parties.

b) Analyze the reality of business operations and functions of the taxpayer; compare the reality of execution of such transactions by these parties during their production and business process with those prescribed by legally binding documents, arrangements or agreements; analyze documents, agreements, arrangements and reality of execution of these transactions by such parties by applying codes of conduct on business relationships between independent parties. Analyze comparability factors under the instructions given in Clause 3 of this Article.

In cases where the reality of execution of these transactions by such parties is different from the transactions prescribed by agreements, documents or arrangements, collected information about the reality of execution of these transactions by such parties shall be considered as the basis for conducting comparability analysis and selecting the transfer pricing method of the taxpayer.

Unless the reality of execution of these transactions by related parties conforms to the codes of business conduct between independent parties, the arm’s-length and substance-over-form doctrine shall be used for re-determining related party transactions and business risks incurred by these parties. In cases where related party transactions and distributed risks do not reflect the nature of economic, financial and commercial relationships between unrelated parties, these transactions and risks shall be redetermined and redistributed in order for the taxpayer to carry out comparability analysis and select the transfer pricing method.

c) Data on and the reality of the related party transaction shall be used as the bases for comparison of the taxpayer’s related party transactions prescribed by agreements, documents and arrangements and economic, commercial and financial relationships with business decisions that may be accepted by independent parties under the same or similar conditions. According to principles of comparison applied in the comparability analysis, the nature, practical reality of business and risks incurred by related parties shall be preferred to written arrangements.

The taxpayer shall be exempted from transfer pricing documentation requirements under the provisions of Point c Clause 2 Article 11 of the Decree No. 20/2017/ND-CP if its net profit margin from which loan interest costs and corporate income taxes have not been subtracted yet in the specified tax period is the net profit from which loan interest costs and corporate income taxes (exclusive of the difference between revenue generated and expenses incurred by financial operations) on net sales have not been subtracted yet.

Net sales determined as per regulations of the tax policy and accounting regime is sales of goods sold and services supplied minus (-) sales deductions reported within the tax period of the taxpayer.
This Decree shall enter into force from the date of entry into force of the Decree No. 20/2017/ND-CP. The Circular No. 66/2010/TT-BTC dated April 22, 2010 of the Ministry of Finance providing guidance on determination of the market price for business transactions between related parties and the Form No. 03-7/TNDN appended to the Circular No. 156/2013/TT-BTC dated November 6, 2013 of the Ministry of Finance shall be repealed.