Understanding Transfer Pricing Rules in China and Vietnam

In this issue of the Tax Insight, we will provide an overview of the key transfer pricing rules that apply in China and Vietnam. In the past couple of years, both countries have stepped up enforcement of transfer pricing rules. In general, China and Vietnam recognize the Organization for Economic Development and Cooperation (OECD) guidelines and the relevant transfer pricing methods outlined in the guidelines. However, in practice, there are certain requirements to be aware of when dealing with transfer pricing situations in these countries.


In 2009, China issued a tax notice outlining the “intensification” of the administration of transfer pricing (Guoshuihan 2009, No. 188). China’s transfer pricing laws are contained in the People’s Republic of China (PRC) Corporate Income Tax Law, Chapter 6, Articles 41-48. The regulations governing the implementation of the rules can be found in Articles 109-123.

Like the U.S., taxpayers are expected to maintain contemporaneous transfer pricing documentation. The primary components of China documentation are as follows:

  • Organization structure
  • Information of business operations
  • Information on related-party transactions
  • Comparability analysis
  • Selection and application of transfer pricing methods

Companies can be exempt from the documentation requirements if they meet certain transaction criteria. The deadline for documentation is on or before May 31st of the following year and all documentation must be submitted to the tax authorities within 20 days of a request.

Under China’s transfer pricing laws, interest will be applied to under-reported tax based on the base RMB (Renminbi) lending rate of the People’s Bank of China plus an additional 5% interest charge. In addition, penalties of RMB 50k may be levied for failure to provide documentation.

China accepts the common transfer pricing methods. The chart below provides an overview of applicable methods in China and Vietnam.

In terms of practical guidance, there are a few other considerations with respect to China’s transfer pricing requirements. China exercises tight control over transactions with foreign companies by requiring that the agreements be signed and in place prior to transactions actually taking place. For services, an additional 5% “business” tax may be levied bringing the total withholding to 20%.

It is also important to note that the State Administration of Taxation (SAT) generally expects that Chinese comparables be used to benchmark Chinese operations and it prefers that the companies be sourced from local databases, such as the Shenzen database. In addition, the SAT prefers that the documentation be prepared locally. However, such documentation will be accepted if it is in Chinese.

China allows for Advanced Pricing Arrangements (APAs). An APA refers to an arrangement whereby an enterprise applies in advance to negotiate and reach agreement with the tax authorities in respect to the transfer pricing methods and corresponding calculation methods to be applied to its related party transactions for future years in accordance with the arm’s length principle. An APA is advantageous in that it can improve collaboration and help to mitigate disputes between enterprises and tax authorities.


The tax authorities in Vietnam are stepping up enforcement efforts by training provincial officials, issuing guidebooks, and incorporating transfer pricing into routine audits in various industries. Transfer pricing regulations for Vietnam are outlined in Circular 117/2005/TT/BTC (Circular 117) dated Dec. 19, 2005 of the Ministry of Finance. Circular 66/2010/TT/BCT (Circular 66) dated April 22, 2010 of the Ministry of Finance provides Guidelines on the Calculation of Market Prices in Business Transactions between Related Parties. Circular 66/TT-BTC establishes guidelines with respect to the interpretation and application of the arm’s length principle. The various tax authorities issued “Official Letters” in 2010 requiring companies to submit annual transfer pricing declaration forms.

Transfer pricing methods accepted by the Vietnam tax authorities are outlined in the chart below. Double taxation relief is available through Competent Authority but no Advanced Pricing Agreements (APAs) are available as of yet.

Vietnam’s documentation requirements are too numerous to cover in the context of this Tax Insight, but can be found in the Circulars. Failure to comply with the documentation requirements can result in various penalties, which are also contained in the Circulars.

VRC has extensive experience assisting clients with transfer pricing engagements. For more information, contact your VRC representative.