Law on Tax Administration No. 108: Have the “Bottlenecks” in Advance Pricing Agreements (APAs) truly been removed?

Enhancing transparency and consistency in international tax administration

Law No. 108 introduces important updates regarding data sources used in the application of APAs. Accordingly, the application of an APA must be based on information provided by the taxpayer and databases used in tax administration for enterprises engaging in related-party transactions. Notably, commercial databases are formally recognised as legitimate data sources for tax administration, alongside tax administration databases and publicly available market information.

Previously, under Law on Tax Administration No. 38/2019/QH14 (“Law No. 38”), commercial databases were required to satisfy the condition of being “verified to ensure legal validity.” However, there was no detailed guidance at the Decree or Circular level specifying the criteria for such legal verification. As a result, both taxpayers and tax authorities lacked sufficient legal grounds when applying the APA mechanism in practice.

Law No. 108 abolishes the requirement for commercial databases to be “legally verified” and formally recognises them as valid data sources for the preparation and negotiation of APAs. This change aligns with international standards on data transparency for comparability analyses, in accordance with OECD Guidelines and the BEPS framework, as well as prevailing practices in many jurisdictions. As a result, greater consistency in data sources used for APA dossiers is expected.

This substantive and breakthrough reform is anticipated to resolve long-standing legal obstacles in APA negotiations and to accelerate discussions and negotiations between tax authorities in APA cases.

Provisions on the effective date of APAs

Law No. 38 provided that the effectiveness of an APA must be established before the taxpayer submits its tax return. Law No. 108 clarifies that an APA may take effect for the tax year in which the APA is signed, or from the immediately following tax year, depending on the agreement reached between the tax authority and the taxpayer. This clarification helps avoid divergent interpretations and ensures consistency in implementation between tax authorities and taxpayers.

However, two practical issues remain: First, where a taxpayer proposes an APA covering a three-year period (for example, years X, X1 and X2), but the APA is only signed in year X1 after the completion of negotiations, the current provisions indicate that only years X1 and X2 would fall within the APA’s effective period. An open question remains as to whether year X, the first year of the originally proposed APA period, may also be accepted, particularly given that the new rules link the APA’s effectiveness to the signing year or the immediately following year.

Second, it remains unclear whether years preceding the proposed APA period (for example, years X−1 and earlier) may be retrospectively covered, and if so, for how many years. These uncertainties highlight the need for more detailed guidance at the Decree or Circular level to ensure consistent application and to enhance tax certainty for businesses implementing APAs.

International practice: expectations for expanding APA coverage to prior tax years

In addressing the above issues, Vietnam may consider further reference to international practices.

For years included in APA applications, most countries in the region, such as Singapore, Indonesia, Malaysia, the Philippines, Thailand, Japan, and South Korea allow taxpayers to propose APAs covering five years, which is longer than the current three-year period in Vietnam. Furthermore, once an APA is concluded (for example, in year X3), the entire five-year proposed period from year X to year X5 typically takes effect, regardless of the timing of the conclusion of negotiations.

In addition, APA roll-back mechanism is another regulation that needs to be carefully treated. APA roll-back refers to the application of agreed APA outcomes to tax years that have already been filed but fall outside the proposed APA period (i.e., years X−1 and earlier). 

Although APA roll-back is not yet specifically regulated in Vietnam’s legal framework, it is a well-established practice in many jurisdictions with advanced tax administration systems, including the United States, Japan, South Korea, China, Singapore, and various European countries.

Under BEPS Action 14 – Dispute Prevention, Section A provides that “countries with bilateral APA are encouraged to allow for the roll-back of APAs in appropriate cases, subject to any applicable time limits (such as statutes of limitation), where the relevant facts and circumstances of the earlier tax years are sufficiently similar and subject to verification by the tax authorities.”

Adopting rollback mechanisms in line with international standards would not only enhance the international credibility of Vietnam’s tax authorities but also serve as an effective solution to prevent and mitigate disputes related to related-party transactions. More importantly, long-term tax stability and predictability are among the key factors attracting multinational groups to invest, expand operations, and make sustainable contributions to the state budget.

In light of the changes introduced by Law No. 108, businesses should proactively plan and review their APA strategies from this stage. Early assessment of APA feasibility and roadmap, development of an appropriate and effective strategy, and timely preparation of documentation and procedural steps are critical to ensuring transparency, and successful possibility of APA negotiations.