There is no provision for any form of consolidated filing or group loss relief in Vietnam.
Decree 20/2017/ND-CP was enacted on 24 February 2017 and shall be effective from 1 May 2017. The guiding Circular 41/2017/TT-BTC was enacted on 28 April 2017 and is effective from 1 May 2017.
Decree 20 is based closely on the existing Circular 66/2010/TT-BTC, and extends the interpretation of existing provisions and introduces additional concepts and principles from the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development (OECD) and BEPS Action Plan.
Related party definition
The ownership threshold required to be a ‘related party’ under Decree 20 is 25%, higher than the prior 20% under Circular 66. In addition, Decree 20 removes from the related party definition of Circular 66 two entities having transactions between them accounting for more than 50% of their sales or purchases. Vietnam’s transfer pricing rules also apply to domestic related-party transactions.
Transfer pricing methodologies
The acceptable methodologies for determining arm’s-length pricing are analogous to those espoused by the OECD in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (i.e. comparable uncontrolled price, resale price, cost plus, profit split, and comparable profits methods).
Transfer pricing documentation
Compliance requirements include an annual declaration of related-party transactions and transfer pricing methodologies used, and a taxpayer confirmation of the arm’s-length value of their transactions (or otherwise the making of voluntary adjustments), which is required to be filed together with the annual CIT return. Decree 20 requires that the transfer pricing method applied must ensure that there is no loss of tax revenue to the state budget, which could imply that no downward adjustments are allowed. Decree 20 also introduces a new transfer pricing declaration form that requires disclosure of more detailed information, including segmentation of profit and loss by related-party and third-party transactions.
Decree 20 gives the tax authorities the power to use internal databases for transfer pricing assessment purposes in cases where a taxpayer is deemed noncompliant with the requirements of the Decree.
Taxpayers engaged in related-party transactions solely with domestic related parties could be exempt from the requirement to disclose information on such transactions in the new transfer pricing declaration form, where both parties have the same tax rate and neither party enjoys tax incentives.
Companies that have related-party transactions must also prepare and maintain contemporaneous transfer pricing documentation. Decree 20 introduces a three-tiered transfer pricing documentation approach to collect more tax-related information on multinational companies’ business operations, specifically a master file, a local file, and country-by-country (CbC) reporting. The three-tiered transfer pricing documentation has to be prepared before the submission date of the annual tax return, which gives taxpayers just 90 days (from the fiscal year-end date) to complete the year’s transfer pricing documentation.
A taxpayer is exempt from preparing transfer pricing documentation (but not all other aspects of the Decree) if one of the following conditions is met:
- has revenue below VND 50 billion and total value of related-party transactions below VND 30 billion in a tax period
- concludes an Advance Pricing Agreement (APA) and submits annual APA report(s), or
- has revenue below VND 200 billion, performs simple functions, and achieves at least the following ratios of earnings before interest and tax to revenue on the following business: distribution (5%), manufacturing (10%), processing (15%).
As of 2017, the GDT is in negotiation with several taxpayers for the first APAs.
Substance over form principle
Decree 20 emphasizes the need for closer scrutiny of all related party transactions to ensure that value creation is actually generated from intra-group transactions. The substance over form principle is especially relevant to CIT deductions and transfer pricing documentation would need provide support for such related party transactions.
20% EBITDA Cap on Total Interest Expense
Decree 20 provided amount 20% EBITDA cap on total interest expense. Whilst Decree 20 is the guiding tax administration applicable to associated enterprises, it seems that the 20% EBITDA cap is applied to both related party and third party loans.
There are no thin capitalisation requirements in the tax legislation. However, the level of permitted debt funding will be limited by virtue of licensing requirements. The maximum amount of debt funding is the difference between the licensed investment capital and charter capital.
Decree 20, however, provides that deductible interest on loans shall be subject to the cap of 20% of EBITDA (as above).
Controlled foreign companies (CFCs)
Vietnam does not have any CFC legislation.