On 5 November 2020, the Government issued Decree No. 132/2020/ND-CP on tax administration for enterprises engaging in related-party transactions (“Decree 132“). This Decree replaces Decree No. 20/2017/ND-CP (“Decree 20”), amending and supplementing some provisions in Decree No. 68/2020/ND-CP (“Decree 68”).

Decree 132 provides principles, methods, and order of determining the factors forming related-party transactions prices; rights and obligations of taxpayers in determining transfer pricing, declaration procedures, and responsibilities of State agencies in tax administration for taxpayers with related-party transactions. In addition, in order to ensure transparency and specificity, this Decree has also supplemented and modified some missing or unclear contents in the previous regulations concerning related-party transactions, for instance:

  • Expanding excluded subjects, including: (i) Official Development Assistance loans (ODA); (ii) concessional loans of the Government implemented in the form of government borrowing from foreign countries for on-lending to the local enterprises; (iii) loans for the implementation of the national target program (i.e new rural program and sustainable poverty reduction); (iv) loans for investment programs, projects to implement the State’s social welfare policies (i.e resettlement housing, housing for workers, students, social housing and other public welfare projects).
  • Deductibility cap which were already enacted under Decree 68: The cap on the tax deductibility of interest increases from 20% to 30% of EBITDA. The cap applies to net interest expense (i.e., interest expense can be offset by interest income before being compared with the cap). Non-deductible interest can be carried forward to subsequent tax years and deducted if the net interest expense/EBITDA ratio is below 30% in those years. The time limit for such carry forward is five years.
  • To ensure the participation of Vietnam in the OECD BEPS forum is consistent with commitments according to international practice. Decree 132 has also supplemented the regulation on reporting international profits received via the form of automatic information exchange. Accordingly, in case the competent authorities of the countries do not sign any agreements, the taxpayer has to submit the international profits report to the tax authorities and vice versa.
  • Tightening of an acceptable arm’s length range: The acceptable arm’s length range is raised from 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%. Thus, taxpayers will need to re-assess their transfer pricing positions effective from financial year 2020 to ensure that their margins fall within this tighter range.
  • Additional exemptions from the three-tiered transfer pricing documentation requirement: The exemptions are broadened to include (i) taxpayers who only have domestic related party transactions; (ii) taxpayers and their related parties who have the same tax rate; and (iii) none of the parties enjoy tax incentives.

Decree 132 takes effect from 20 December 2020 and it will apply retrospectively on 1 January 2021 for enterprises that have a financial year ending 31 December 2020. However, it is unclear whether and how it may apply to enterprises with a financial year ending earlier in 2020.

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