On 24 June 2020, the Vietnamese Government released Decree 68/2020/NĐ-CP (“Decree 68”), which amended Decree 20/2017/ND-CP (“Decree 20”), concerning tax administration for enterprises with related-party transactions and the relaxing of interest deductibility caps (essentially, updating Vietnamese Transfer Pricing regulations). Further, Decree 68 permits the increased interest deductibility caps to be applied retrospectively, which can result in significant tax savings for many companies.
Transfer Pricing is the general term used when profits are shifted from one country to another, in order to reduce tax exposures, through charging higher prices, in excess of market or arms-length prices, by related companies. The result is lower tax being paid in a country than would have been paid if the market or arms-length prices had been charged. The concept of Transfer Pricing generally places the proof on the taxpayer to prove their pricing and margins are appropriate.
On a high level, the Transfer Pricing rules require additional documentation and justifications of the pricing mechanisms used by multinational companies when undertaking related party transactions (note: a “Related Party” here includes an entity that is connected through direct or indirect ownership of 25% or above, or also where common management control exists). Foreign companies in Vietnam that have related party transactions will need to prepare and lodge a suite of documents each year with the Vietnamese authorities, and which are generally based upon common international documentation standards. These documents (which include a Global Group Master File, a Local Transfer Pricing File, and Country by Country Reports) are comprehensive and show appropriate comparable transactions (or other pricing mechanism) that justify prices and profits between the related parties.
We encourage all foreign-invested businesses, regardless of size, to conduct a regular Transfer Pricing Review. The review seeks to understand exposures to Transfer Pricing laws, identification of related parties and related party transactions/contracts, suitability of documentation, and risks in respect to operations arising. It is with this Review that appropriate risk management and decision making can be made with treasury operations and returns on investments.