VietNamNet Bridge - Executives of Ernst & Young have recommended Vietnam’s tax authorities consider using advance pricing agreements (APA) with corporate taxpayers as an option to fight transfer pricing at both foreign-invested and domestic companies.

The APA allows the taxpayer and the taxman to avoid future transfer pricing disputes by entering into a prospective agreement on the taxpayer’s transfer prices, the audit and tax services provider said in a statement obtained by the Daily on Thursday.

The firm said such an agreement should specify transactions covered by the APA, transfer pricing method, required APA records and terms, operational and compliance provisions, appropriate adjustments, critical assumptions regarding future events, and annual compliance reporting responsibility.

Luis Coronado, Asia Pacific Area Transfer Pricing Leader at Ernst & Young Solutions LLP, told the Daily that Vietnam’s tax authorities were on their right way when taking action to intensify transfer pricing examinations at foreign-invested companies. But he suggested APAs be in place as an option to counter and manage transfer pricing issues.

In HCMC alone, the Tax Department realized more than 60% of this year’s target for nearly VND110.4 trillion (US$5.32 billion) in the first half of this year. This agency credited a year-on-year increase of over 20% in tax revenue in the year to June on the year earlier period to the fact that more foreign-invested enterprises reported profits after having run at a loss for many years as they heard about transfer pricing probes and crackdowns.

Tax authorities have also attended to possible transfer pricing cheats at local enterprises, which manage to transfer profits to their subsidiaries in areas where there are lower tax rates and more incentives to evade their tax obligations, as locations in the country apply different tax policies.

Nitin Jain, director of tax and advisory services at Ernst & Young Vietnam Limited, said transfer pricing was applicable to local enterprises also.

“APAs can apply to all entities as long as they have related party transactions. For local entities it is generally referred as domestic APAs which generally are unilateral as there are no two governments or tax authorities involved,” he told the Daily in an email on Thursday.

Unilateral APAs involve agreements between only the taxpayer and one government, and taxpayers may also be in bilateral or multilateral APAs with more than one tax authority through the mutual agreement procedure included in most income tax treaties.

Ernst & Young Vietnam said the bilateral APA helped address the inconsistent and evolving interpretation and enforcement of transfer pricing rules in other countries and the risk of double taxation.

The firm said there was no provision on APA in Vietnam’s transfer pricing regulations and there had not been any APA signed in the country. The Prime Minister’s decision in May 2011 on tax reform for 2011-2020 includes issuing regulations on APA among others.

Jain said it was expected that APA regulations would be available in Vietnam in the next few years. The General Department of Taxation recently surveyed taxpayers and tax agencies with queries about implementation of the transfer pricing regulations, how to improve relevant policies and APA introduction.

“This all answers that Vietnamese tax authorities and the Government are looking at APA as a perspective tool for mitigating transfer pricing disputes, and this is something they would like to introduce in the near future,” Jain said.

Ernst and Young’s recent survey with taxpayers around the globe showed transfer pricing was the most important tax issue, as chosen by 33% of the respondents in Europe, the Middle East, India and Africa, 30% of the respondents in Asia Pacific and 21% in North America.

Coronado said 74% of the respondents at parent companies and 76% at subsidiaries believe transfer pricing will be ‘absolutely critical’ or ‘very important’ to their organizations over the next two years. Up to 74% of the parent respondents say transfer pricing documentation is more important now than two years ago.

More nations are adopting APAs and the list of more than 30 countries worldwide include Australia, China, Japan, Korea, New Zealand, Indonesia and others in Asia Pacific, as APAs help save time and cost for both taxpayers and tax authorities.

According to Ernst & Young, the APA process generally takes less time to complete than a transfer pricing examination followed by a dispute resolution mechanism, which can last three to four years and longer in many cases with complex time-consuming and expensive checks.

Therefore, the Ernst & Young survey found that 23% of all respondents want to use APAs as controversy management tools, and up to 90% of those opting for APAs will count on such agreements to solve transfer pricing disputes.

Source: SGT