Decree 132 Addresses Transfer Pricing More Effectively

10:25:55 AM | 20/11/2020

The General Department of Taxation recently held a press conference to introduce the new content of Decree 132/2020/ND-CP dated November 5, 2020 on tax administration for enterprises with affiliated transactions. Our reporter has an interview with Mr. Dang Ngoc Minh, Deputy General Director of the General Department of Taxation under the Ministry of Finance. Le Hien reports.

What are the new contents of Decree 132?

The decree consists of four chapters and 23 articles, inheriting contents of Decree 20/2017/ND-CP of the Government. The new ruling amends and supplements contents, and makes definitions clearer and more transparent.

One of the new contents is the regulation on controlling borrowing interest cost, the first of its kind to be applied in Vietnam. Therefore, there will certainly be difficulties in execution because Vietnamese enterprises are thinly capitalized - The level of debt is greater than its equity capital.

Total deductible interest expense, after deducting deposit interest and loan interest incurred by the taxpayer in the taxing period when taxable income is determined, cannot exceed 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) in the period.

The new regulation on the cap on the tax deductibility of interest has basically addressed shortcomings of the old regulation, with a retroactive regulation in 2017 and 2018. The cap on the tax deductibility of interest increases from 20% to 30% of EBITDA. The refunded or deducted value is estimated at VND4,785 billion.

The new decree also expands the scope of application of subjects excluded from the regulation on the cap of tax deductibility.

The subjects include official development assistance (ODA) loans, preferential loans of the Government sourced from foreign loans; loans for implementation of national target programs (new rural development program and sustainable poverty reduction program); loans for government-funded social security programs and projects (resettlement housing, housing for workers and students, affordable social housing and other public welfare projects).

Is Decree 132 designed for strict and transparent tax administration for businesses?

This policy not only prevents transfer pricing but also demonstrates the general direction and tax administration to restructure the market and reduce thinly capitalized businesses, which excessively rely on loans for investment expansion and cause risks to the system in the long term. The Politburo's Resolution 50-NQ/TW dated August 20, 2019 clearly stated “Studying and making regulations to deal with thin capitalization and transfer pricing” and “Completing and supplementing strict provisions in tax laws to control, manage and prevent transfer pricing.”

It is to ensure the uniformity of legal documents, including Law on Tax Administration  38/2019/QH14 dated June 13, 2019, Law on Corporate Income Tax  14/2008/QH12 and the Law amending and supplementing a number of articles of the Law on Corporate Income Tax; access international principles and practices in tax administration for affiliated transactions, including Vietnam's entry commitments on base erosion and profit shifting (BEPS) to the Organization for Economic Cooperation and Development (OECD) and Vietnam’s contextual conditions.

On November 5, the Government signed Decree 132/2020/ND-CP on tax administration for enterprises with affiliated transactions (replacing Decree 20/2017/ND-CP dated February 24, 2017).

How do FDI enterprises respond to this policy?

When the decree was being drafted, FDI enterprises actively raised their well-prepared opinions through their representatives such as EuroCham (Europe), VJBA (Japan), KORCHAM (South Korea) and AmCham (the United States).

This regulation complies with the BEPS Action Program. During workshops between tax authorities and the World Bank (WB), international experts actively gave comments on the draft from the perspective of foreign enterprises.

FDI enterprises said that provisions in the draft decree of Vietnam are not new, but actually good practices that countries often apply to combat transfer pricing. All companies are obliged to comply with it.

Source:  Vietnam Business Forum