A robust legal framework for APAs is crucial

According to Ms. Dinh Mai Hanh, Tax Partner and National Transfer Pricing Leader, Deloitte Vietnam, the completion of a robust legal framework for APAs is crucial, particularly amid ongoing tax law reforms, contributing to creating a transparent investment environment and further attracting foreign investors to Vietnam.

Application of the APA mechanism in Vietnam

APA is based on the principle that tax authorities and taxpayers or Vietnamese tax authorities and other tax authority counterparts, cooperate, exchange information, and negotiate regarding the application of regulations on tax obligations for covered transactions within the scope of APA.

Tax Administration Law No. 38/2019/QH14 issued on June 13, 2019; Decree No. 126/2020/ND-CP issued on October 19, 2020 (“Decree 126”); and Circular No. 45/2021/TT-BTC issued on June 18, 2021 (“Circular 45”), which replaced Circular No. 201/2013/TT-BTC dated December 20, 2013 (“Circular 201”), guiding the application of advance pricing agreements (APA) are the current mechanisms for establishing APA dossiers, supporting the tax strategy planning of multinational corporations.

Despite over a decade having passed since the issuance of Circular 201— the first guiding document on APA application — multinational corporations and enterprises in Vietnam continue to encounter  challenges in implementing and enforcing the APA mechanism. Specifically, to date, no applications for APA mechanism have been approved and formally signed. Most applications remain in the stages of appraisal, discussion, and negotiation.

Difficulties and barriers encountered

Deloitte’s observations reveal several shortcomings in the APA dossier handling process as follow.

Firstly, according to Circular 45, a three-year APA application period, is relatively short compared to some Asian countries such as Korea, and Japan ( five years), China (up to five years) as well as several countries in the region including Singapore, Thailand, Malaysia, and Indonesia (up to five years).

Secondly, Circular 45 lacks specific time limit s for each stage of the APA application process. According to  the Tax Administration Law and Decree 126 mandate that an APA must be established before the deadline for submitting tax finalization. However, the absence of detailed regulations on dossier handling timelines often results in prolonged and stagnant appraisal and negotiation phases between tax authorities and taxpayers, leading to situations where dossiers are pending and no APA concluded yet. Meanwhile, in other countries within region such as Singapore, there have been 23 APA cases concluded within 2023.

Thirdly, there is currently no provision in Vietnamese regulations for the retroactive implementation of APAs, which would allow the application of APA provisions to transactions conducted in years prior to the APA's signing. In practice, some foreign tax authorities, such as those in Japan and Korea, permit retroactive application in bilateral APA requests. Therefore, the discrepancy between Vietnam's regulations and those of other countries may create challenges and obstacles in negotiating bilateral APA agreements.

Fourth, the provisions concerning commercial databases in the application of APA are more stringent than the general provisions on tax administration for enterprises having related party transactions. Specifically, Clause 6, Article 42 of the Law on Tax Administration stipulates that "predetermined taxable price calculation methods shall be applied according to information provided by the taxpayers and legally verified commercial database". However, there are currently no specific regulations or guidelines on how to determine and verify the legality of the commercial databases used.

Thus, the current regulations present certain barriers for both tax authorities and taxpayers in the APA application process. For tax authorities, the ongoing tax system reform leads to increased caution in tax management, particularly regarding APA dossiers. On the taxpayer side, the absence of specific and timely instructions results in confusion and passivity in preparing and follow up the progress of APA dossier processing.

Recommendations for future solutions

For businesses in Vietnam and multinational corporations, in Dinh Mai Hanh’s view, the APA serves as an effective solution for structuring intra-group transactions, forecasting expected profits, optimizing operating costs, and ensuring compliance with tax and related party transaction regulations.

For tax authorities, the APA is a valuable tool for enhancing tax administration efficiency, reducing tax compliance costs, preventing double taxation and tax evasion, and minimizing disputes over transfer pricing.

In particular, in the current context, the implementation of a Global Minimum Tax will significantly affect Vietnam's competitiveness in attracting foreign investment. Therefore, the Government must take decisive and practical steps to reform tax policies, including regulations on transfer pricing management and the APA mechanism, to appeal to large investors.

For the APA mechanism to effectively support the operations of enterprises and multinational corporations in Vietnam, also increasing revenue and promoting Vietnam economic growth, close coordination between businesses and tax authorities is essential.

On the enterprise side, Dinh Mai Hanh  said when planning to apply the APA mechanism, companies must prepare a comprehensive dossier and supporting documents, ready to supplement and clarify as requested by the tax authorities; at the same time proactively engage with tax authorities to discuss the status of the dossier, ensuring timely amendments and supplements. For those seeking to apply bilateral or multilateral APAs, enterprises need to maintain regular communication with their group companies, update them on the dossier's progress, and develop strategies to expedite the process (consulting with business associations, relevant agencies, etc.).

“From the tax authority's perspective, it is crucial to expedite the dossier review process and actively consider feedback from taxpayers, organizations, enterprise associations, as well as authority to gain a deeper understanding of the practical application of the regulations. In many countries, the APA mechanism has proven to be an effective tool for managing related party transactions. Therefore, Vietnamese tax authorities should reassess the effectiveness and feasibility of the APA mechanism, thereby amending and supplementing existing regulations in a more practical manner and contribute to refining the legal framework for taxes and related party transactions in accordance with the process of the tax system reform strategy, bringing tax regulations in Vietnam in line with international practices,” said Dinh Mai Hanh.