At issue was whether a Vietnamese company, P Ltd, had an affiliated relationship with PI UK, and whether that relationship justified the Vietnamese tax authorities’ transfer pricing adjustments and corporate income tax reassessment for the years 2014 to 2016.
The tax authorities alleged that PI Company effectively controlled more than 50% of P Ltd’s hotel room capacity and that both entities were subsidiaries of the same foreign group, PT Group. Based on this assumption of affiliation, the tax authorities applied the TNMM to determine arm’s length profitability and issued decisions requiring P Ltd to pay over VND 48 billion in corporate income tax, penalties, and late payment interest.
P Ltd challenged the legal basis of the related-party determination. It argued that the tax authorities had wrongly applied Circular 66/2010/TT-BTC, which defined related parties to include cases where more than 50% of product output is consumed by one party. P Ltd contended that this criterion had already been eliminated under Decree 20/2017/ND-CP, which took effect before the tax audit began and should apply retroactively according to the Law. P Ltd emphasized that PI UK had no shareholding, management control, or contractual rights over it and that their relationship was purely commercial. It further asserted that its declaration of a related-party relationship and its submission of a transfer pricing report were made only under pressure from the tax auhorities, which insisted on such filings.
The court of first instance ruled in favour of P Ltd finding that there was insufficient evidence to establish an affiliated relationship. It held that the tax authories failed to provide proof of ownership, management control, or binding contractual obligations between P Ltd and PI UK. The court also determined that PI UK’s booking of over 50% of hotel rooms did not constitute control or affiliation under the applicable legal framework. Moreover, it noted that P Ltd’s transfer pricing report and self-declaration had no evidentiary value, as they were prepared under coercive conditions. The comparables used by the tax authorities to calculate the arm’s length profit margins were found to be inadequate, failing to adjust for significant differences in operating characteristics, asset structures, and market conditions, especially given that P Ltd’s hotels had only recently commenced operations and primarily served a Russian clientele during a period of economic and geopolitical downturn.
An appeal was then filed by the tax authorities with the High Court.
Judgment
The High Court upheld the lower court’s judgment, annulling the tax authorites conclusion, the decision determining the net income ratio before corporate income tax, and the related penalty decision. It ruled that the tax authorities had no sufficient legal or factual grounds for asserting an affiliated relationship or for making transfer pricing adjustments. The appeal of the tax authorities was rejected, and the administrative decisions concerning the assessment of additional corporate income tax were invalidated.