Why Vietnam’s tax authorities are strict on Intra-group services

Intra-group services are an integral part of multinational enterprise (MNE) operations, allowing for the efficient allocation of resources and expertise across borders. However, in Vietnam, these transactions are subject to an exceptionally high level of scrutiny. While neighboring countries in Southeast Asia balance enforcement with facilitation, Vietnam’s tax authorities take a more aggressive approach. This analysis delves into the core reasons driving this strict stance, structured around five key factors, and explores the impact of the underutilized Advance Pricing Agreement (APA) framework.

1. Protecting the tax base in a developing economy

In developing economies like Vietnam, Corporate Income Tax (CIT) serves as a cornerstone of national revenue, funding critical public services and infrastructure that support economic growth. With a smaller and less diversified tax base, Vietnam’s government recognizes the inherent vulnerability of its tax system to profit-shifting activities, particularly those facilitated through intra-group service arrangements.

For MNEs, centralized operations such as IT support, management, and marketing in regional hubs is a standard practice to improve efficiency. However, these centralized functions often result in local subsidiaries being charged for services provided by the hub. While such transactions are legitimate under global business practices, they can be misused to inflate or overstate service fees, effectively reducing the taxable income of local subsidiaries, including Vietnam.

In Vietnam, this poses a significant challenge. Unnecessary or inflated service fees mean less tax revenue for the government, jeopardizing the funding of essential projects such as healthcare, education, and infrastructure. As a result, protecting the tax base has become a top priority for tax authorities.

2. “Substance over form” principle

The substance over form principle is a foundational concept in Vietnam’s tax regulations, emphasizing that the economic reality of a transaction must take precedence over its legal or contractual structure. This principle ensures that taxpayers cannot use artificial arrangements to evade tax liabilities or distort the true nature of their economic activities.

Vietnam applies the "substance over form" principle to intra-group service transactions, requiring that the economic reality of a transaction matches its stated purpose. Tax authorities examine whether:

• Services are necessary: The taxpayer must demonstrate that the services provided were essential for the Vietnamese subsidiary’s operations.
• Benefits are measurable: The economic value derived from the services must be clear, such as improved efficiency, cost savings, or enhanced local capabilities. Abstract or passive benefits, like brand recognition or general oversight, are often disallowed.
• Non-duplication is ensured: Authorities ensure that the services provided by a parent company or regional hub are not already performed by local teams or external providers.
• Benchmarking studies: Fees must be benchmarked against comparable market transactions to demonstrate compliance with the arm’s-length principle.

This level of scrutiny reflects Vietnam’s effort to prevent unnecessary outflows of revenue and ensure that every dollar paid for intra-group services is justifiable in the context of the local subsidiary’s operations.

3. Lack of precedents or clear guidelines

Navigating transfer pricing in Vietnam can be challenging due to the limited availability of precedent cases and clear guidance. This scarcity of detailed guidelines and established precedents, common in countries like Singapore or Malaysia, creates uncertainty for businesses and complicates compliance efforts. Tax authorities in Vietnam often adopt conservative interpretations of transfer pricing rules, leading to inconsistent treatment of similar transactions across different cases or audit teams. This unpredictability increases the risk of disputes during audits and prolongs the resolution process. For businesses, the absence of clear benchmarks or established best practices makes it challenging to structure intra-group service arrangements with confidence. Taxpayers must navigate this uncertainty by adopting a cautious approach and preparing for potential challenges from the authorities.

• Develop robust Transfer Pricing documentation: Ensure that all related-party transactions are well-documented, with clear justifications for pricing policies and methodologies used. This includes detailed functional and economic analyses to support the arm's length nature of transactions.
• Align with international standards: In the absence of local precedents, adopting internationally recognized guidelines, such as the OECD Transfer Pricing Guidelines, can provide a framework for compliance and help in defending transfer pricing positions during audits.
• Engage in proactive communication with tax authorities: Establishing open lines of communication with tax authorities can help in understanding their expectations and interpretations, thereby reducing the risk of disputes.
• Seek professional advice: Consulting with tax professionals who have experience in Vietnam's regulatory environment can provide valuable insights and assist in navigating complex transfer pricing issues.

4. Impact of the lack of successful APA Cases

The absence of a robust APA framework in Vietnam has a notable impact on the management of intra-group transactions, creating challenges for businesses seeking certainty and compliance. Without APAs, companies lack the ability to pre-negotiate pricing methodologies with tax authorities, leaving them to determine and defend their intercompany pricing without assurance that their approach will be accepted. This uncertainty increases the risk of disputes during audits, where transfer pricing arrangements may be scrutinized, potentially leading to adjustments, penalties, or double taxation.

The lack of APAs also places a heavy compliance burden on businesses. Companies must prepare extensive documentation to justify the economic rationale behind their intra-group transactions, including functional analyses, comparability studies, and evidence of benefits. This process is both resource-intensive and costly, especially for MNE managing a high volume of intercompany dealings. Furthermore, the absence of clear APA precedents results in inconsistent treatment of similar transactions by different audit teams or tax jurisdictions, further complicating compliance efforts and increasing unpredictability in tax outcomes.

Without the risk mitigation benefits that APAs provide, businesses are left with limited options to proactively address transfer pricing risks. Instead, they must rely on reactive measures, such as defending their arrangements during audits, which can lead to resource-intensive disputes and strained relationships with tax authorities. This lack of certainty also restricts businesses from optimizing their intra-group transactions, as they must prioritize caution over efficiency.

Despite these challenges, the absence of APAs pushes businesses to strengthen their transfer pricing practices. Companies are encouraged to enhance their documentation, align with international standards such as the OECD guidelines, and engage constructively with tax authorities to foster understanding and mitigate potential disputes. For Vietnam, the development of a more accessible APA framework would significantly enhance the business environment, providing much-needed predictability and fairness for taxpayers while safeguarding the country’s tax base. Vietnam’s strict stance on intra-group services is driven by its developmental needs, concerns about tax avoidance, and a cautious regulatory approach. While these policies create challenges for MNEs, they also highlight the importance of aligning business practices with local compliance requirements.