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 became effective from 1 May 2017. The guiding Circular 41/2017/TT-BTC was enacted on 28 April 2017 and became effective from 1 May 2017.
Decree 20 and Circular 41 are based generally on concepts and principles from the Transfer Pricing Guidelines of the Organisation for Economic Co-operation and Development (OECD) and Base Erosion and Profit Shifting (BEPS) Action Plan.
Vietnam’s transfer pricing rules also apply to domestic related party transactions.
On 24 June 2020, the government released an amendment to Decree 20 relaxing the interest deductibility cap rules. These new rules took effect from the signing date. However, the more generous cap can be applied retrospectively, which will result in significant tax savings for many companies with debt financing.
In addition, a draft Decree amending the whole Decree 20 has been circulated for discussion.
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). 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 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 finalisation documents' comprise the CIT 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%).
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.
30% EBITDA cap on total interest expense
Under Decree 68/2020, which amended Decree 20/2017, the cap on tax deductibility of interest increases from 20% to 30% of EBITDA. The cap applies to net interest expense (i.e. after offsetting with interest income).
Non-deductible interest expense can be carried forward to the subsequent five years. Certain types of financing are now excluded from the cap, including interest on official development assistance (ODA) loans, various preferential loans made by the government, and loans made for implementing national programs and state social benefit policies.
The new Decree takes effect from the signing date and applies from the tax year 2019. However, interestingly, the provisions relating to the change in interest calculation and the deductibility cap apply retrospectively to 2017 and 2018, and so tax savings may be available to companies with debt financing.
Advance Pricing Agreements (APAs)
Taxpayers have the option to enter into unilateral, bilateral, or multilateral APAs with the tax authorities. The GDT has been in negotiations with the competent authorities of various overseas jurisdictions to conclude the first bilateral APAs for several taxpayers.
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.