December 14, 2020
Vietnam issues guidance on related party transactions and transfer pricing
The Vietnam Government (the Government) issued, on 5 November 2020, Decree 132/2020/ND-CP (Decree 132) on tax administration for transactions with related parties.1 Decree 132 is effective from 20 December 2020 and is applicable for the corporate income tax (CIT) period 2020 and future years.
Also, following the enactment of the Law on Tax Administration No. 38/2019/QH14 effective from 1 July 2020 (Law on Tax Administration), the Government issued Decree 126/2020/ND-CP dated 19 October 2020 (Decree 126)2 to provide guidance on the implementation of a number of articles of the Law on Tax Administration, including guidance on transfer pricing (TP).
This Tax Alert outlines the key changes in tax administration relating to TP in Decree 132, the Law on Tax Administration and Decree 126.
Introduction of certain TP principles and concepts into the Law
The arm's-length principle and the principle of substance of business operations and transactions were introduced into the Law on Tax Administration to strengthen the legal basis for TP administration. These principles are also included in Decree 132.
In addition, the Law on Tax Administration specifies that TP declarations and adjustments are based on the arm's-length principle, provided that such adjustments do not result in a reduction of taxable income in Vietnam. Accordingly, the disallowance of downward TP adjustments has been introduced into the Law.
Deductibility of loan interest expense for transactions with related parties
Decree 132 sets forth regulations on the deductibility of loan interest expense, providing:
These provisions on the loan interest expense deductibility cap are similar to the rules of Decree 68 which were summarized in EY Global Tax Alert, Vietnam issues decree amending loan interest deductibility cap and draft decree on related party transactions, dated 31 July 2020.
In addition, according to Decree 132, taxpayers who are exempted from TP declaration or TP documentation obligations are still required to comply with the above cap.
Broadening the definition of related parties
Decree 132 broadens the definition of related party relationships to encompass more cases where companies are both under the management or control of individuals with close relationships in the same family.
In addition, companies and individuals are also considered to be related parties under Decree 132 if:
Narrowing the arm's-length range
In accordance with Decree 132, the definition of the arm's-length range has been changed to a set of values from the 35th percentile (previously 25th percentile under Decree 20 and Circular 413) to the 75th percentile with the median value set at the 50th percentile. This accordingly narrows the arm's-length range and may impact the result of a taxpayer's TP analysis compared to the rules of Decree 20 and Circular 41.
The principle to expand the scope for selection of comparables for benchmarking analysis
The priority of selection of comparables remains unchanged. That is, the comparables selected should be in the following order: (i) internal comparables of taxpayers; (ii) comparables residing in the same country and territory with taxpayers; and (iii) comparables in regional countries with similar industry and economic conditions.
However, Decree 132 includes some amendments to the principle related to expanding the scope of selection of comparables for specific and unique related party transactions in the absence of independent comparables as detailed below.
Changes in TP disclosure forms
Appendices are included in Decree 132 relating to TP disclosures for taxpayers to declare and submit together with their CIT finalization returns. The appendices include:
Compliance obligations regarding Country-by-Country (CbC) Reporting (CbCR)
Decree 132 provides detailed guidance on taxpayers' obligations relating to CbCR as follows:
Decree 132 also indicates that the Vietnamese tax authorities will annually post on their tax web portal the list of foreign tax authorities that engage in the AEOI with respect to CbC reports.
Addition to the list of TP documentation exemption cases
In addition to the exemption from the TP declaration in Section III and IV of Appendix 01 as stipulated in Form 01 of Decree 20, Decree 132 states that companies are also exempted from TP documentation obligations where the Vietnamese taxpayers involved in the related party transactions satisfy all of the following conditions:
Deadline for submission of TP documentation
The deadline for submission of the TP documentation upon request in an audit is now subject to the Law on Inspection from the date of receipt of the tax authority's request. Accordingly, the Law on Inspection provides that inspected entities are required to provide timely, sufficiently and accurately the information and documents regarding the inspection contents upon request in an audit. Thus, TP documentation must be submitted upon the tax authority's request in a timely manner during an audit, instead of within 15 working days as prescribed in Decree 20.
Cases subject to deemed tax adjustment
The Law on Tax Administration and Decree 126 specify certain cases where taxpayers are subject to a deemed tax adjustment relating to TP as follows:
Deemed tax adjustments
In accordance with the Law on Tax Administration, Decree 132 and Decree 126, the database of the tax authorities and commercial databases are used for making deemed tax adjustments, including TP adjustments.
Decree 126 also includes a provision on the tax authority's purchase of information, materials and data from database providers to serve the tax administration, including the purchase of a commercial database for TP administration.
Thus, in addition to the tax authorities' own database, commercial databases are now stipulated in the Law on Tax Administration as an official source of data that may be used as the basis for TP comparability analysis and deemed tax adjustments. However, it is important to note that the tax authorities will likely use their own database to evaluate and make TP adjustments in the event of a taxpayer's violation of the tax regulations.
Administrative penalties for TP
The Law on Tax Administration stipulates specific penalties relating to non-compliance on TP as follows:
Appeal against conclusions of State inspectorate, recommendations of State auditor
In accordance with the Law on Tax Administration, taxpayers are entitled to appeal against recommendations of the State auditor and conclusions of the State inspectorate, if the State auditor and State inspectorate directly conduct the audit on the taxpayer and the taxpayer disagrees with such recommendations and conclusions.
Advance Pricing Agreements (APAs)
Decree 126 introduces new forms that are to be used for applying for an APA and sets forth a list of information required for the final draft APA. Decree 126 also provides guidance on extensions, amendments, cancellation and withdrawal of APAs.
Decree 126 also states that the application of an APA must be approved by the Minister of Finance before implementation. For bilateral and multilateral APAs, the Ministry of Finance is required to seek an opinion from the Ministry of Justice, the Ministry of Foreign Affairs and other relevant authorities. It is also required to submit the case to the Government and the Prime Minister for their opinion regarding concluding the APA.
The introduction of the Law on Tax Administration, Decree 126 and Decree 132 has enhanced the Vietnamese legal system with regard to TP administration.
In light of the above developments, companies should carefully review the new regulations on compliance obligations in Vietnam and proactively assess the possible impact of such changes on their business operations for effective planning and compliance. In addition, companies should review the new rules on the accepted arm's-length range and selection of appropriate independent comparables for TP declaration and documentation purposes to mitigate relevant exposures.
1 This Decree replaces Decree 20/2017/ND-CP dated 24 February 2017 (Decree 20) and Decree 68/2020/ND-CP dated 24 June 2020 (Decree 68).
2 Decree 126 is effective from 5 December 2020.
3 Circular No. 41/2017/TT-BTC provides guidance on the implementation of Decree 20.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Vietnam Limited
Ernst & Young Solutions LLP
Ernst & Young Tax Consultants Sdn Bhd
Ernst & Young (Cambodia) Limited
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