Vietnam is set to be the
latest country in the Asia-Pacific Region to introduce General Anti-Avoidance
Rules (“GAAR”) into domestic tax laws.
GAAR are statutory provisions designed to combat tax avoidance
arrangements. GAAR can empower the tax authorities to disregard tax
avoidance arrangements and subject the transactions to tax using a substance
over form approach. Most countries have adopted similar anti avoidance
A new draft circular
issued by the Ministry of Finance provides that GAAR will apply in respect to
claiming of tax treaty benefits in Vietnam.
The draft circular will
replace the existing DTA implementation circular (133/2004/TT-BTC). It provides
that tax treaty benefits can be denied by the Vietnamese tax authorities if:
main purpose of an agreement or structure is to obtain treaty benefits;
· It is
determined that the person receiving treaty benefits is not the beneficial
owner of the income.
Although not yet a full
OECD member, Vietnam will likely follow the OECD definitions on ‘beneficial
ownership’ and ‘residency.’A “substance over form”
approach will be adopted under the circular. This allows for beneficial
ownership to be challenged if the applicant:
distribute the majority of its profit to a third country within 12 months of
receipt of the income.
not carry out any particular business operations except for the ownership of
the assets or the right to generate income.
assets, and the size of business or number of employees does not align with the
amount of income received.
not have any power, control or has low risk over the assets and income.
· has a
back-to-back agreement for lending, royalty or a technical service agreement
with a third party.
· is a
resident of a jurisdiction with low or no taxes.
· is an
intermediary solely formed for obtaining treaty benefits.
Further under the draft
circular, where a taxpayer fails to submit an application dossier for tax
treaty benefits within three years from the tax payment due date, the treaty
benefits will be forfeited.
If the circular will be
passed as drafted, we recommend that all existing structures and arrangements
in Vietnam be reviewed.
For further information on how these rules may impact on your existing
structure, please feel free to contact one of our experienced tax
- Tax Partner Jack Sheehan,
- Tax Director Bernard Cobarrubias,
- Tax Senior Manager Phan Thi Lieu,