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 OECD and BEPS Action Plan.
On 12 December 2019, a draft decree amending Decree 20 was released for public comment specifically relating to the deductibility of interest cap.
Related party definition
The ownership threshold required to be a ‘related party’ under Decree 20 is 25%. Decree 20 removes the previous 'related party' definition of two entities having transactions between them accounting for more than 50% of their sales or purchases.
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 declaration forms
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 decrease of tax liabilities to the state budget, which could imply that no downward adjustments are allowed. Decree 20 contains a transfer pricing declaration form, which requires disclosure of detailed information, including segmentation of profit and loss by related-party and third-party transactions.
Furthermore, taxpayers are required to make declarations of information contained in the local file and master file. This implies that this information should be available before the transfer pricing declaration forms are submitted to the tax authority. The transfer pricing declaration forms must be submitted as an appendix together with the annual CIT return within 90 days from the fiscal year-end date.
Per the new Law on Tax Administration 38/2019/QH14, which is effective from 1 July 2020, “tax finalization documents” comprise corporate income tax return, financial statements and transfer pricing declaration forms.
Decree 20 gives the tax authorities the power to use internal databases for transfer pricing assessment purposes in cases where a taxpayer is deemed non-compliant with the requirements of Decree 20.
Taxpayers engaged in related-party transactions solely with domestic related parties could be exempt from the requirements to disclose information on such transactions in the transfer pricing declaration forms, where both parties have the same tax rate and neither party enjoys tax incentives.
Transfer pricing documentation
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, master file, a local file, and country-by-country report (CbCR). 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.
If the taxpayer’s ultimate parent resides in Vietnam and has worldwide consolidated revenues in the fiscal year of over VND 18,000 billion, the ultimate parent company in Vietnam is responsible for preparing and submitting the CbCR. However, if the ultimate parent is outside Vietnam, the Vietnamese entity is responsible for obtaining a copy of the ultimate parent company’s CbCR and submitting this upon request by the tax authorities.
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 from the following business: distribution (5%), manufacturing (10%), processing (15%).
According to new Law on Tax Administration 38/2019/QH14, the negotiation and conclusion of APAs must follow the negotiation process of international treaty. This could mean that APAs must be ratified by the President. The APA process is therefore expected to be much more complex. The new guidance on APA is being drafted, but not yet available for public comments.
Decree 20 emphasises 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 will need to provide support for such related-party transactions.
20% EBITDA cap on total interest expense
Decree 20 provided a 20% EBITDA cap on total interest expense. While 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.
As noted above, a draft decree amending Decree 20 was released for public comment. This draft regulation proposes changes relating to deductibility of interest cap (e.g. the cap increased from 20% to 30% of EBITDA, interest expenses are proposed to subject to the cap to include capitalized interest, etc).
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.