New decree tackles transfer pricing in Vietnam
The Vietnamese Government released Decree No.20/2017 on February 24, providing tax administration for enterprises with controlled transactions and which will come into effect on May 1.

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There are many changes related to tax administration for enterprises in the Decree but the highlight is new rule on transfer pricing (TP).

Articles 5 to 8 refer to the TP framework contained in existing regulations and introduces additional concepts and principles from the Organization for Economic Cooperation and Development (OECD) Guidelines, the Base Erosion and Profit Shifting (BEPS) Framework, and other sources.

The Decree provides new transfer pricing compliance requirements, including three-tiered TP documentation, new TP declaration forms, guidance on the deductibility of related party expenses, and interest deductibility, all of which are substantial changes to existing rules.

“Decree No.20 represents the most important development of the transfer pricing regime in Vietnam for the last ten years,” said Ms. Nguyen Huong Giang, Tax Partner at PwC Vietnam. 

“It demonstrates Vietnam’s commitment to align with the global tax framework on transparency and anti-avoidance.”

She added that it is clear that the Ministry of Finance is making concerted efforts to make the legislation clearer and align it with international standards.

The four key changes in the TP administration are as follows:

Related party definition

The ownership threshold is increased to 25 per cent from the current 20 per cent. 

In addition, two entities are no longer treated as related parties by virtue of having transactions between them accounting for more than 50 per cent of sales or purchases. 

The new decree also provides some relief to small businesses that may enjoy exemptions from TP documentation under certain scenarios.

TP documentation

Decree No.20 introduces a three-tiered TP documentation approach to collect more tax-related information on the business operations of multinational companies (MNCs). 

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 a master file, a local file, and a Country-by-Country Report.

The taxpayer is required to maintain Country-by-Country Reporting if the ultimate parent company is also obliged to prepare and submit such documents in its respective tax jurisdiction, or if the taxpayer is a Vietnamese parent company with worldwide consolidated revenue in a fiscal year exceeding VND18 trillion ($790.706 million). 

If a taxpayer cannot provide the Country-by-Country Report, it shall provide a written explanation for the reason, the legal basis, and references to specific provisions in the law of the counterparty jurisdiction that prohibits the taxpayer from providing a copy of the Country-by-Country Report.

Decree No.20 also introduces a new TP declaration form that requires disclosure of more detailed information, including segmentation of profit and loss by related party and third party transactions. 

Any gap between the margins earned on related and third party transactions may increase the taxpayer’s risk profile and trigger queries from tax authorities.

Deductibility of expenses

According to Decree No.20, the tax deductibility of interest on loans is capped at 20 per cent of EBITDA (earnings before interest, tax, depreciation, and amortization). 

While this provision is included in the TP Decree, it applies to both related party and third party loans. 

There is no carry forward or carry back provisions.

For inter-company 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 will not be allowed for expenses where the direct benefit or additional value to the taxpayer cannot be determined, such as duplicated services and shareholder costs. 

Further, the mark-up portion of third party expenses that are recharged to a Vietnam taxpayer are not deductible.


The decree provides detailed guidance on comparability analysis, including the use of data sources, selection of TP methods, minimum number of comparable companies, and other adjustment factors (such as location-specific advantages). 

Comparable data needs to correspond with the same financial year as the tested party/transactions. 

However, data from the preceding year can be used if current information is not available in the database at the time when the benchmarking analysis is conducted.

“Although the compliance obligations of Decree No.20 will be effective on May 1, 2017, taxpayers should take immediate action to assess the impact not only on local tax compliance but also on the business, considering the new decree has potential implications beyond transfer pricing,” Ms. Giang said.

VN Economic Times

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