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 Decree 68 amending Article 8 Point 3 of Decree 20, which relaxes the interest deductibility cap rules. These new rules took effect from the signing date. However, the more generous deductibility cap can be applied retrospectively, which will result in significant tax savings for many companies with debt financing.
In addition, on 5 November 2020, the government issued Decree 132/2020/ND-CP, setting out new rules on transfer pricing in Vietnam. Decree 132 takes effect from 20 December 2020, applies for the financial year 2020 onwards, and replaces Decree 20 and Decree 68.
Related party definition
The ownership threshold required to be a ‘related party’ under Decree 132 is still 25%. Under Decree 132, a new related party definition (Item l Point 2, Article 5 of Decree 132) is introduced. An enterprise and an individual are considered related parties if they have the following transactions in a tax period:
- Transferring, receiving contributed capital equivalent to at least 25% of the capital contributed by the owner of the enterprise.
- Borrowing, lending at least 10% of the capital contributed by the owner of the enterprise at the time of conducting the transaction.
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).
Tightening of the acceptable arm’s-length range
Under Decree 132, the acceptable arm’s-length range is raised to span the 35th percentile to the 75th percentile (tightened from the 25th to the 75th percentile range under Decree 20). As such, the minimum threshold is raised by 10%.
Therefore, taxpayers will need to re-assess their transfer pricing positions for financial year 2020 onwards to ensure that their margins fall within this tighter range. Given these new rules apply for all of calendar 2020, this may pose significant challenges to those companies that have already achieved margins year-to-date that fall below the 35th percentile.
Selection of comparables
Taxpayers must first look for comparables in the same local market or region, and then broaden to other countries in the region which have similar industry circumstances and economic development level.
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).
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 132 introduces a three-tiered transfer pricing documentation approach to collect more tax-related information on multinational companies’ business operations, specifically a master file, local file, and country-by-country report (CbCR). The three-tiered transfer pricing documentation has to be prepared and maintained in house before the submission date of the annual tax return.
If the taxpayer’s ultimate parent resides in Vietnam and has worldwide consolidated revenues in the fiscal year of at least VND 18,000 billion, the ultimate parent company in Vietnam is responsible for preparing and submitting the CbCR. Under Decree 123, the CbCR is required to be filed with the tax authorities within 12 months from the fiscal year-end. However, if the ultimate parent is outside Vietnam, the CbCR is not required to be filed locally, instead such CbCR would be made available to the Vietnamese tax authorities through the automatic exchange of information (AEOI) procedure. A company is, however, required to submit the CbCR and relevant notification locally within 12 months from the year-end in certain circumstances.
Under Decree 132, 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)
- 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%), or
- taxpayers only have domestic related party transactions, taxpayers and their related parties have the same tax rate, and none of the parties enjoy tax incentives.
There has been a marked increase in the number of transfer pricing audits performed in recent years, with these adopting an increasingly sophisticated approach. Common challenges by the tax authorities include questions on the validity of comparables selected in TP documentation, deductibility of intra-group service charges and fluctuations in segmented and/or whole company profit margins over years. Companies in loss-making positions also draw attention from the tax authorities and are expected to be in the position to explain their business circumstances. Most general tax audits will now include a review of the taxpayer’s transfer pricing position.
30% EBITDA cap on total interest expense
Under Decree 132, which amended Article 8 point 3 of Decree 20, 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 from loan and deposit).
Non-deductible interest expenses can be carried forward to the subsequent five years. Certain types of financing are 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.
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, but no APA has been concluded..
On 18 June, the Ministry of Finance issued Circular 45/2021/TT-BTC, setting out new rules on Advance Pricing Agreements in Vietnam. Circular 45 takes effect from 3 August, and replaces the existing APA Circular 201 issued in 2013.
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 123, however, provides that deductible interest on loans shall be subject to the cap of 30% of EBITDA (as above).
Controlled foreign companies (CFCs)
Vietnam does not have any CFC legislation.