According to recent reports, the Vietnam Ministry of Finance is considering proposed amendments to the country’s interest expense deduction restriction. The Decree No. 20/2017/ND-CP, enacted 24 February 2017 (Decree 20), limits deductions restriction for related party total loan interest to 20% of total net profit generated from business activities plus loan interest and amortization costs arising in that period.
However, the Ministry has received push-back on the implementation of the restriction, especially in relation to local companies and groups that are not foreign invested. Therefore, a draft law on tax and transfer pricing administration is also now being consulted and is expected to be submitted for National Assembly approval with a tentative effective date from 2020.
This draft intends to regulate taxation of related party transactions. Numerous issues in Decree 20 are also elaborated upon in the draft law. The amendments include clearer guidance addressing the tax declaration requirement, related party pricing, and related party transactions. The reporting obligations of the parent company are also addressed. The general principles of the Decree 20 are also reaffirmed.
Noticeably, the new draft provides the tax authorities with authority to review the compliance of taxpayers in declaring and determining the prices of related transactions on the principle of “substance-over-form” with the purpose of preventing transfer of profits through transfer pricing, tax avoidance, and tax evasion.
