The recent proposal by Vietnam’s Ministry of Finance to amend tax regulations on related-party transactions represents a milestone in Southeast Asian tax policy and reflects global trends. This initiative should not be interpreted as an isolated administrative amendment, but rather as a technical response to the challenges of base erosion and profit shifting (BEPS), discussing three key areas: the rigor of supporting documentation, the economic substance of the functions performed, and transparency in selecting valuation methodologies.
The Core of the Proposal: Transparency and Alignment with the OECD
Vietnam seeks to close the loopholes that allowed multinational groups to optimize their tax burden through the intra-group mispricing. The technical sticking point of this new regulation lies in the requirement for a robust functional analysis that accurately identifies:
- The economically significant functions within the local supply chain.
- The employed tangible and intangible assets for income generation.
- The actual risk allocation among related entities.
Technically, the Vietnamese tax administration proposes that the election of the Transfer Pricing method is not a confidential issue of taxpayers. Similar to European and Latin jurisdictions, the method that best reflects the economic reality of the transaction will be eligible, requiring a thorough support for net margin-based methods, such as the TNMM (Transactional Net Margin Method) instead of the CUP (Comparable Uncontrolled Price) method.
Economic substance: the challenge of “low-risk” entities
One of the most crucial contributions of the reform is the scrutiny of the characterization of entities. Vietnam has observed a trend in which local subsidiaries describe themselves as “low-risk service providers” or “maquiladoras” to justify minimal profit margins.
Conversely, the new guidelines suggest that if the local entity de facto assumes market, inventory, or credit risks, or if it contributes to the development of local intangibles, the reported margin must be proportional to such exposure. This recharacterization by the tax authority is one of the biggest risks for multinational groups, as it can lead to significant tax adjustments based on economic reality rather than contractual legal form.
Comparability and Burden of Proof: Standards for Technical Defense
The Vietnamese proposal also raises the standard for comparability. In emerging markets, the lack of local financial data is often an obstacle. Conversely, the new regulations emphasize that the analysis of comparables cannot be reduced to a mechanical selection of industry codes. The expected standard requires consistency:
- Market adjustments recognize differences in operating costs and regional economic conditions.
- Methodological consistency explains why certain comparables are disregarded and how technical reports are weighted.
Regarding the burden of proof, the reform emphasizes the importance of Transfer Pricing documentation as a supporting and decisive tool, rather than merely a formality. Insufficient or inconsistent documentation empowers the tax authority to determine the tax base using presumptive methods, shifting the complex task of challenging such adjustments to the taxpayer in administrative or judicial proceedings.
Implications for Groups Operating in Emerging Markets
This development in Vietnam reminds groups operating across multiple jurisdictions that accuracy-based audits are no longer exclusive to the most developed economies. Tax authorities in emerging markets are rapidly adopting the OECD guidelines and technological monitoring tools.
The practical lesson shows that consistency among functional analysis, intra-group contractual policy, and observed financial results must be verifiable and defensible. Any inconsistency among these elements increases the likelihood of audits and international double taxation.
Methodological Consistency as a Mitigation Strategy
At TPC Group, we understand that the true robustness of an intra-group policy is tested under the technical scrutiny of an audit in transfer pricing. The correct selection of the method and a well-structured evidentiary strategy are key factors in ensuring the tax stability of a global organization.
Specialized advisory services are not only about compliance with local regulations; they are also a strategic measure of risk management. We support our clients in structuring and defending their Transfer Pricing policies, providing a solid legal perspective along with cutting-edge economic analysis to navigate today’s complex tax environment successfully.
Source: Vietnam.VN