Regarding procedures and tax considerations when transferring technology that is not restricted or prohibited from being transferred
2024/06/25
- Mai Thi Dung
Introduction
Technology transfers from foreign countries to Vietnam are very common in Vietnam, particularly from foreign parent companies to their Vietnamese subsidiaries. In order to strengthen the management of technology transfer fee payment transactions between domestic and foreign companies, especially between related parties, the government has issued a number of decrees on the registration of technology transfer agreements from 2017 to the present. This article explains tax considerations when transferring technologies that are not on the list of technologies whose transfer is restricted or prohibited (stipulated in Decree No. 76/2018/ND-CP).
1. Important changes to laws and regulations related to technology transfer transactions
1.1. Procedures for registration of technology transfer agreements
Under the previous Decree 133/2008/ND-CP, the parties entering into the contract did not need to register the technology transfer agreement with the competent authority. However, as of July 1, 2018, Law on Technology Transfer 07/2017/QH14 stipulates that any technology transfer from a foreign country to Vietnam or from Vietnam to a foreign country requires a technology transfer contract to be registered. The registration period is 90 days from the date of contract signing. Contracts that occurred before July 1, 2018 must be registered in accordance with this Act when they are extended. Failure to register a technology transfer agreement will result in a fine of between VND30 million and VND40 million, according to Article 25 of Decree 51/2019/ND-CP.
1.2. Technology transfer pricing
According to Article 4 of Decree 76/2018/ND-CP, in the case of technology transfer between parties having a parent-subsidiary relationship, associated companies, etc., if requested by the Tax Department, the technology transfer price must be audited. The audit is carried out from the perspective of whether the technology price is appropriate compared to the market price. Regarding fines for failing to undergo a technology transfer pricing audit, Decrees 64/2013/ND-CP and 93/2014/ND-CP, which came into effect before August 1, 2019, did not stipulate, but Article 22 of Decree 51/2019/ND-CP, which comes into effect after August 1, 2019, stipulates that a fine of 30 to 40 million VND will be imposed.
2. Points to note when drafting a technology transfer agreement
According to Article 16 of Decree No. 132/2020/ND-CP, services provided between related parties are eligible for corporate tax deductions if they meet all of the following conditions.
① The services provided have commercial, financial or economic value and contribute directly to the taxpayer’s production or business activities.
② Services from a related party are provided in the same circumstances as an independent party paying for those services.
③ Service fees are paid based on the arm’s length principle, and the method of calculating the related transaction price for the same services and the method of allocating service fees among the parties involved are applied uniformly within the group. Taxpayers will then be required to provide contracts, invoices, supporting documents, calculation methods, allocation factors and intra-group pricing policies for the services provided.
In addition, in accordance with corporate tax laws, all of the following conditions for deductibility must be met:
① Expenses related to the company’s business activities.
② Complete and legal documentation and invoices are available.
③ Payment is made by means other than cash.
In light of the above, if you do not register your technology transfer agreement for an initial or extended technology transfer agreement after 1 July 2018, you run the risk of being deemed to not have legal evidence. In addition, without a technology transfer certificate, banks will not allow transfers, meaning companies run the risk of not being able to actually make payments and being deemed to not have complete documentation. Furthermore, if the validity of the technology transfer fee cannot be proven, there is a risk that the technology transfer fee will be set by the tax office and will be deemed to be non-deductible for corporate tax purposes.
In order to minimize the above risks, the following documents should be prepared to prove that the technology transfer has actually taken place and that the recipient has received the benefits of the technology transfer.
① The technology transfer agreement contains detailed information regarding the technology to be transferred, the timing of the transfer, and the transfer price calculation, and contains sufficient information required by the Technology Transfer Law.
②Certificate of Technology Transfer
③ Report on the stages and progress of technology transfer (including work content, implementers, etc.)
④ Calculation sheet, invoice and bill for technology transfer fee
⑤ Documents proving that the technology transfer fee is reasonable and that pricing policies within the group are applied consistently
⑥ For payments of 20 million VND or more including VAT, documents or evidence proving that the payment was made by a method other than cash
In addition, when transferring technology from a foreign country to Vietnam, Foreign Contractor Tax (FCT) must be declared and paid. The FCT has a corporate tax rate of 10% and is exempt from Value Added Tax (VAT).
By the way, there are cases where tax bureau officials do not recognize royalty fees on sales from related parties as a deductible expense for corporate tax purposes. The reasons are as follows.
<When the Related Party is the Technology Transferee>
Typically, the technology transferor is the parent company. The parent company is the party that outsources production to its Vietnamese subsidiary and then sells the goods to earn revenue. Therefore, it is not appropriate for a parent company to charge technology royalty fees for products that it has licensed or requested its subsidiary to produce. For example, if the production is outsourced to an independent company rather than a subsidiary, the independent company will produce based on a contract, and no royalties will be paid to the customer. In addition, royalties may have been taken into account when calculating the price of raw materials that the parent company sold to the Vietnamese side for production.
Therefore, the technology transfer royalty fee in this case does not satisfy the “willingness to pay” for the services and does not evidence the benefits received by the subsidiary. When a new subsidiary begins production, many initial costs are incurred, such as depreciation of fixed assets, so the parent company enters into a technology transfer agreement so that it can generate sales with the subsidiary and collect royalty fees. This revenue is offset against expenses incurred by the subsidiary, so the subsidiary does not have to pay tax and the parent company enjoys a profit.
In light of the above, it should be noted that the tax authorities are likely to suspect that technology transfer agreements and the collection of royalty fees are intended solely to transfer profits to the parent company.
<In the case of other related parties>
Products manufactured based on special technological know-how can strengthen Vietnamese enterprises’ bargaining power and bring additional economic benefits when trading with independent companies, but cannot enjoy the economic advantages and benefits of selling to affiliated companies. Manufacturing and sales to other affiliates based on purchase orders are also in line with strategic directions within the group, and affiliates that order products from Vietnamese companies may also have to pay royalties to the parent company when they sell the products to end users. Therefore, the parent company charged royalty fees twice for the same product. Because the services do not add value to the taxpayer but are benefits that the taxpayer receives as a result of being part of a business, the royalty fee is considered a non-deductible expense for corporate tax purposes.
There are differing views on this point in practice, so companies should consider the above risks when entering into technology transfer agreements. To be conservative, we recommend not charging royalties on sales to related parties, but only on sales to independent companies. However, if a company’s pricing policy needs to follow internal group policies and cannot be changed, in order to minimize risk, it should provide evidence (calculation spreadsheets and data) to prove that the profit margins when selling to an associated company are the same as when selling to an independent company.
In conclusion
Technology transfers are large-value transactions that often last for years and have significant implications on a company’s tax liability. Therefore, businesses are required to comply with the law and fully register their licenses to avoid the risk of being deemed non-deductible for corporate tax purposes, which could lead to tax deficiencies and heavy fines.
Reference
・Technology Transfer Law 07/2017/QH14
・Decree 76/2018/ND-CP
・Decree 132/2020/ND-CP
・Circular 96/2015/TT-BTC
・Circular 103/2014/TT-BTC
M000112-183
(Created on June 25, 2024)
