Vietnam’s Government has recently released a Transfer Pricing (“TP”) Decree No. 20/2017/ND-CP on 24 February 2017, provided that tax administration applicable to enterprises having controlled transactions’ (Decree 20), which will take effect from May 1, 2017.The new Decree 20 replaces the existing TP regulations (Circular No.66/2010/TT-BTC) and provides following new compliance requirements in Vietnam:
i) Decree 20 introduces a three-tiered TP documentation approach to collect more tax-related information on multinational companies’ (MNC) business operations.
ii) The new decree follows the approach set out in the BEPS Action Plan 13 (Guidance on TP Documentation and Country-by-Country Reporting). Specifically, a taxpayer is required to prepare and maintain three-tiered TP documentation, including a master file, local files, and Country-by-Country Reporting. Accordingly, A Vietnamese ultimate parent company with worldwide consolidated revenue in a fiscal year exceeding VND 18,000 billion must prepare a master file, a local file and a country-by-country report. Other Vietnamese companies must prepare such documents if their ultimate parent companies are required to prepare the three-tiered TP documentation in their home tax jurisdiction.
iii) Under the new decree, two entities are related if a party owns at least 25% (previously, 20%) of the equity of the other party. If related-party services are rendered, the related parties must ensure, inter alia, that the services rendered are beneficial to the recipient and that such services are not duplicative in nature.
iv) Decree 20 extends its scope beyond TP to also provide guidance on the deductibility of intercompany charges. Interest on total loans is capped at 20% of earnings before interest, taxes, depreciation and amortisation.
v) For intercompany services, various criteria for tax deductibility are set out, notably, a taxpayer needs to demonstrate that the services provide economic benefit and provide evidence (supporting documents) on the reasonableness of the service charge calculation method. A tax deduction is disallowed for expenses in which the direct benefit or add value to the taxpayer cannot be determined, such as duplicated services, shareholder costs, etc.
vi) Introduces new TP form: the Forms attached with the Decree 20 includes four forms which require substantial information to be prepared as compared to those in the TP Declaration Form under Circular 156/2013/TT-BTC (“Circular 156”) guiding the determination of market prices in business transactions between associated parties. Taxpayers should prepare and maintain Transfer Pricing documentation report including:
- Information on related party relationships and related party transactions attached with CIT finalisation return No. 03/TNDN based on Form No. 01;
- Local Report with required contents in Form No. 2;
- Group information report with required contents in Form No. 3; and
- Declaration on reported information ab the transnational profit of the Ultimate Parent Company based on Form No. 4.
vii) The Decree 20 introduced a restriction on interest deduction accordingly the new interest restrictions introduce a fixed-ratio rule, limiting tax relief for a company’s total interest costs to 20% of its earnings before interest, tax, depreciation, and amortisation (EBITDA). The fixed-ratio rule generally follows the recommendations of the OECD in its BEPS initiative