From February 5, enterprises can negotiate and reach agreements with tax authorities over the taxable prices of their goods or services, according to a newly-released circular by the Finance Ministry on the implementation of the Advance Pricing Agreement.

Residents pay taxes at the State Treasury branch in Hoan Kiem District, Hanoi. From now on, enterprises can negotiate and reach agreements with tax authorities over the taxable prices of their goods and services.

Under the amended Tax Administration Law, which came into effect last July, the Advance Pricing Agreement (APA) is a binding and written agreement between the tax authority and taxpayers for a period of time with respect to the determination of the ‘basis for tax' calculation, the transfer pricing method and the application of the arm's length principle for transfer pricing.

The APA will be issued before taxpayers submit their tax declaration documents.

In other words, under an APA, enterprises will have to pay a fixed amount of tax, regardless of whether they make a profit or loss on their operations. That is because, under an APA, the price and quantity of the goods are already agreed to by the tax payer and the tax authority. The tax is calculated on that price and quantity, not on the annual business operations of the firm.

According to the ministry, the implementation of the APA will improve tax management, reduce the costs of tax compliance and reduce conflicts in determining market prices for business activities that generate profits for enterprises to meet their obligations of corporate income tax.

The APA is also expected to help in the fight against fraudulent transfer pricing.

Under Circular 201/2013/TT-BCT, an APA can be unilateral, bilateral or multilateral. In particular, when a taxpayer requests an APA for a transfer pricing method or a price based on arm's length pricing for related-party transactions, such a request will be based on an agreement between the tax authority and the taxpayer on a unilateral, bilateral or multilateral basis.

That means the agreement can be between a Vietnamese tax authority, the taxpayer and the tax authorities of relevant countries or territories.

An APA can be enforced for up to five years, and can be extended for a maximum of another five years.

Nguyen Quang Tien, director of the Tax Reform and Modernisation Department under the ministry's General Department of Taxation, told the Hai quan (Customs) newspaper that the APA mechanism is expected to become an effective tool for tax authorities to collect taxes and prevent fraudulent transfer pricing by enterprises.

"It will also make enterprises more careful while drawing up business plans and fulfilling their tax obligations," he said, adding that when applying for an APA, corporate taxpayers need to provide information and evidence to help the tax authority assess a company's method of arriving at a proposed market price.

The tax authority has the right to accept or refuse the applications, he pointed out.

As quoted in Thoi bao Kinh Doanh (Business Times), deputy general director of Ernst&Young Vietnam and member of the Vietnam Tax Consultants' Association Vu Thi Lan Huong said the APA provides a way to simplify tax administration, help the government receive stable income and increase the compliance of companies by ensuring that transfer pricing audits are avoided during the duration of the APA.

The APA will help enterprises reduce some risks that affect their profit, such as paying arrears or fines if they were found to have violated tax regulations, she added.

Bui Ngoc Tuan, deputy general director of Deloitte Vietnam, said that thanks to the APA, companies could estimate the taxable prices of goods and services, as well as their profits or losses.

However, he expressed worries about the application of the APA in Vietnam, noting that it could face challenges due to the country's inefficient tax management system.

For instance, he said, customs officials tend to prefer highly taxed imported goods because that increases their tax collections, but it also leads to lower corporate income tax.

"If the products are sold in Vietnam, Vietnamese tax authorities could have enough evidence to claim an enterprise is resorting to transfer pricing. But if an enterprise imports inputs and then exports its goods, the transaction involves overseas markets and that could make it difficult to prove unfair transfer pricing," he noted.