On 5 November 2020, the Vietnam Government (the Government) issued Decree 132/2020/ND-CP (Decree 132) on tax administration for companies having transactions with related parties. Decree 132 is effective from 20 December 2020 and is applicable for the corporate income tax (CIT) period 2020 onwards.

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).

Further to the approval 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) providing guidance on implementing a number of articles of the Law on Tax Administration. Some of the guidance relates to transfer pricing (TP). Decree 126 is effective from 5 December 2020.

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 are 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 also 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. In this way, the disallowance of downward TP adjustments is now also introduced into the Law.

Deductibility of loan interest expense for companies having transactions with related parties

Decree 132 sets forth regulations on the deductibility of loan interest expense, specifically:

►  An increase in the deductible loan interest expense cap to 30% of the total net profit from business activities within the period plus (+) net loan interest expenses (after offsetting deposit interest income and loan interest income) plus (+) depreciation expenses incurred in the period

►  The ability to carry forward net loan interest expenses that were not deductible due to the above-mentioned interest expense cap, for a subsequent five years

 ►  Retrospective application of the deductibility of loan interest expenses to the CIT periods 2017 and 2018

 ►  The types of loans excluded from the above cap

These provisions on the loan interest expense deductibility cap are similar to the rules of Decree 68 which were summarized in our July 2020 Tax Alert.