July 31, 2020
Vietnam issues decree amending loan interest deductibility cap and draft decree on related party transactions
In June 2020, the Vietnam Government issued a decree to amend the loan interest deductibility cap and a draft decree to address related party transactions. This Alert summarizes the provisions under both the Decree and the draft Decree.
Amendment to the loan interest deductibility cap under Decree 68/2020/ND-CP dated 24 June 2020
On 24 June 2020, the Vietnam Government (the Government) issued Decree 68/2020/ND-CP (Decree 68) amending Article 8, Clause 3 of Decree 20/2017/ND-CP on tax administration for companies that have transactions with related parties (Decree 20).
Decree 68 is effective from 24 June 2020 and applies for the corporate income tax (CIT) period 2019 onwards. The key amendments are summarized below.
Increase in the loan interest expense cap and change in the method of calculating loan interest expense
The total deductible loan interest expense (after being offset against deposit interest income and loan interest income) is now capped based on the following formula: 30% of the total net profit from business activities within the period + net loan interest expenses (after being offset against deposit interest income and loan interest income) + depreciation expenses incurred in the period.
Carry forward of net loan interest expense to the subsequent CIT periods
To the extent an enterprise has loan interest in excess of the cap in a particular year, it can carry forward the non-deductible interest. If in a future year the deductible loan interest of that period is lower than the cap, it may also deduct the carried forward non-deductible interest up to the cap amount. The time limit to carry forward this excess interest is five years from the year following the year in which the non-deductible interest arises.
Out of scope
Under Decree 20, the loan interest deductibility cap does not apply to taxpayers that fall within the definition of credit institutions under Law on Financial Institution and insurance organizations under Law on Insurance Business. Now Decree 68 also excludes interest under the following types of loans from the cap, including:
Retrospective application for the CIT periods 2017–2018
Decree 68 allows for the retrospective application of the deductibility of loan interest expenses as mentioned above to the CIT periods 2017 and 2018, specifically:
Changes in Transfer Pricing Disclosure Form — 01 (Form 01)
Form 01 regarding information on related party relationships and related party transactions, issued along with Decree 68, shall replace Form 01 provided under the Appendix of Decree 20.
Proposed draft Decree replacing Decree 20 on Tax Administration for companies having transactions with related parties
In addition to the issuance of Decree 68 amending Article 8 Clause 3 of Decree 20 on loan interest expense deductibility, the Vietnam Ministry of Finance (MoF) is finalizing the draft Decree on Tax Administration for companies that have transactions with related parties (Draft Decree).
The following is a summary of the key changes in the Draft Decree dated 4 June 2020 and available at gdt.gov.vn/wps/portal.
The arm's-length range
The definition of the arm's-length range has been changed to a set of values from the 35th percentile1 (previously 25th percentile under Decree 20) to the 75th percentile with the median value set at 50th percentile value. This is a proposed narrowing of the arm's-length range.
The principle to expand the scope for selection of comparables for benchmarking analysis
The priority of selection of comparables remains unchanged i.e., (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, the Draft Decree proposes an amendment 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.
The use of databases to determine deemed tax adjustments in tax audits
The Draft Decree indicates that the databases, to make a deemed tax adjustment, shall be in accordance with Point a, Clause 2, Article 9 of the Draft Decree. Specifically, these are databases used for declaration and determination of pricing of related party transactions of taxpayers, including:
Supplement the transfer pricing (TP) documentation exemption cases
Based on the proposed draft amendments, companies that: (i) only engage in transactions with related party taxpayers in Vietnam; (ii) have the same CIT rate; and (iii) where neither entity enjoys CIT incentives during the CIT period are now exempted from the TP documentation obligations. This is in addition to the exemptions already contained in Decree 20.
Compliance obligations regarding Country-by-Country (CbC) Reporting (CbCR)
The Draft Decree proposes amendments regarding taxpayers' obligations relating to CbCR as summarized below:
According to the Draft Decree, the tax authorities use CbCR for risk management and information exchange in accordance with regulations and commitment of Vietnam under relevant International Tax Agreements. However, CbCR is not used for deemed tax adjustment purposes.
The Draft Decree also indicates that the Vietnamese tax authorities annually announce on their tax web portal the list of foreign tax authorities that engage in the AEOI with respect to CbCR.
Currently, Vietnam is a member of the Inclusive Framework on Base Erosion and Profit Shifting project but has not yet joined the MCAA. However, given the proposed regulations on AEOI of CbCR in the Draft Decree, it is expected that Vietnam would join the MCAA in the future.
The release of Decree 68, together with the proposed issuance of the Draft Decree replacing Decree 20 clearly indicates that the Government is focusing on enhancing the TP regulatory framework to better reflect the actual situation and circumstances in Vietnam as well as to co-operate in addressing issues of taxpayers.
Accordingly, taxpayers should carefully review and comply with Decree 68 and effectively plan and manage relevant risks. In addition, taxpayers need to regularly monitor and keep updated on aforementioned proposed amendments to proactively assess the impacts of such changes on their business operations and better comply with the regulations once the Draft Decree is officially released.
1 A percentile is a statistical measure indicating the value below which a given percentage of observations in a group of observations falls.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Vietnam Limited, Ho Chi Minh
Robert King, Indochina Tax Market Leader | email@example.com
Phat Tan Nguyen, Transfer Pricing Leader | firstname.lastname@example.org
Takahisa Onose, Japanese Business Services | email@example.com
Cheon Ju, Korean Business Services | firstname.lastname@example.org
Ernst & Young Vietnam Limited, Hanoi
Huong Vu, Hanoi Tax Leader | email@example.com
Long Ngoc Pham, Transfer Pricing | firstname.lastname@example.org
Junichi Harada, Japanese Business Services | email@example.com
Kyung Hoon Han, Korean Business Services | firstname.lastname@example.org