On 5 November 2020, the Vietnam Government released Decree 132/2020/ND-CP (“Decree 132”) in respect of Transfer Pricing in Vietnam, replacing Decree 20/2017/ND-CP and Decree 68/2020/ND-CP.
Decree 132 provides some significant changes to Transfer Pricing regulations in Vietnam, and although it comes into effect from 20 December 2020, it applies to the full 2020 tax year, therefore entities with related party transactions will need to ensure understanding and compliance with these regulations.
Discussion of important elements of Decree 132 follows:
Changes to use of commercial databases
Prior to the release of Decree 132, data sources were restricted to databases maintained by information service providers. Under the Decree, commercial databases are now a valid source of comparable benchmarking and pricing data for both tax authorities and taxpayers.
Tax authorities can still use their internal data for applying Transfer Pricing adjustments, but not for determining compliance with arms length pricing for related party transactions.
Broader definition of related parties
The Decree has introduced a broader definition of related parties, including transactions between enterprises with ownership or control by individuals who meet a broad range of extended personal relationships (including, but not limited to, step-parents/children, in-laws and other connected relationships).
Reducing arm’s length pricing range
Decree 132 has reduced the acceptable arms length range for pricing from between the 25th and 75th percentile under Decree 20, to between the 35th and 75th percentile.
As Decree 132 applies to the full 2020 tax year, taxpayers have limited time to reassess their pricing structures to ensure that they are within the new threshold for the entire year, notwithstanding that they may have been in compliance with the Decree 20.
Deductible interest expense
The Decree continues with the regulations previously introduced in Decree 68 that increased the deductible interest expense cap from 20% to 30% of EBITDA (net profit plus net interest expenses and depreciation). The excess interest expense above the cap is not deductible for Corporate Income Tax calculations, but can be carried forward for up to 5 years.
Country by country report changes
Changes have been introduced in respect of the responsibility for preparing and filing reports.
- For a Vietnamese Ultimate Parent Company with total global revenues of at least VND18,000 billion, the country-by-country report is required to be lodged with tax authorities within 12 months from year end.
- For foreign invested companies whose Ultimate Parent Companies are located outside of Vietnam, they are not required to lodge the country-by-country report where the data is available to Vietnamese authorities through the automatic exchange of information procedures as per international agreements.
- For a company with an Ultimate Parent Companies outside of Vietnam, they are required to submit their country-by-country reports locally within 12 months from year-end in a wide range of circumstances as detailed in Decree 132.
Effective date
Decree 132 is effective from 20 December 2020, but applicable to the full 2020 tax year. However, for taxpayers with a year end earlier in 2020 it does not specifically detail how this Decree will apply.
It should be further noted that the provisions introduced in Decree 68 that permitted taxpayers to amend prior year tax returns for the retrospective increase in interest expense caps from 20% to 30% are still applicable, but they are required to lodge revised returns before 1 January 2021.