On 5 November 2020, the government issued Decree No. 132/2020/ND-CP (“Decree 132“) providing tax administration for enterprises with related party transactions.
Decree 132 will take effect on 20 December 2020 and it will replace Decree 20/2017/ND-CP (“Decree 20“) and Decree 68/2020/ND-CP (“Decree 68“). Decree 132 is applicable for the corporate income tax year 2020 onward.
Below are some major points of Decree 132.
Arm’s length range tightened
The arm’s length range for related party transactions is from the 35th (increased from the 25th) to the 75th percentiles.
Deductible interest expenses
Decree 132 reconfirms the deductibility of interest expense capped at 30% EBITDA. Deductible interest expenses are net interest expenses after offsetting interest income. The 30% cap is applied from fiscal year 2019 and it is retroactive for fiscal years 2017 and 2018. From fiscal year 2019, interest expenses incurred in a tax period that are not deducted in the same tax period may be carried forward for the subsequent five tax years.
Definition of related parties expanded
Related parties will be extended to the following:
- an enterprise that transfers or receives a capital contribution of at least 25% of an owner’s equity at the time of conducting transactions in the tax year to/from an individual who manages or controls the enterprise or a relative of such individual as prescribed in Article 5.2.g
- an enterprise that offers/receives a loan of at least 10% of an owner’s equity at the time of conducting transactions in the tax year to/from an individual who manages or controls the enterprise or a relative of such individual as prescribed in Article 5.2.g
Exemption from preparing transfer pricing documentation
To relieve the burden of preparing transfer pricing documentation, among other exemptions already prescribed under Decree 20, Article 19.1 of Decree 132 supplements one case where a taxpayer is exempt from preparing documentation (including the Local File, Master File and Country-by-Country Report), provided that the following conditions are met:
- The taxpayer only engages in domestic related party transactions.
- The taxpayer and their related party are subject to the same corporate income rate.
- Neither party is entitled to corporate income tax incentive in the tax year.