Significant changes of Decree No. 20/2017/ND-CP
In comparison with the existing Circular No. 66/2010/TT-BTC (“Circular 66”), Decree 20 proposes some significant changes as follows:
Related Party Definition
The Decree eliminates the below definitions of related party determination:
- Two parties simultaneously directly or indirectly participate in the management or control of, contribution of capital to, or investment in a third party.
- An enterprise manufactures or trades in products using intangible assets and/or intellectual property rights of the other enterprise for which it has to make a payment accounting for over 50% of the historical cost (or cost price) of such products.
- Over 50% of the total value of raw materials, materials, supplies or input products used by an enterprise for manufacturing or trading its output products are supplied by the other enterprise.
- Over 50% of products, calculated for each kind of product, sold by one enterprise is directly or indirectly controlled by the other enterprise.
- Two enterprises have a business cooperation agreement on a contractual basis.
Decree 20 adds two more definitions of related party determination as followings:
- One or some enterprises are controlled by an individual due to his/her contribution of capital to or directly participation in the management of the enterprises.
- Other circumstances in which an enterprise is actually managed or controlled over business operation of the other enterprise.
The Decree also modifies the thresholds to define related party relationships as follows:
- An enterprise directly or indirectly holds at least 25% of investment capital of the owner of the other enterprise, or a third party directly or indirectly holds at least 25% of invested capital of the owners of both enterprises shall be considered related parties – relaxing the 20% threshold of Circular 66.
- An enterprise provides the other enterprise with a guarantee or a loan in any forms, provided that such loan is equal to at least 25% of investment capital of the owner of the borrower enterprise and accounts for more than 50% of the total value of long-term and medium-term loans of the borrower enterprise – relaxing the 20% threshold of Circular 66.
Comparability analysis and Transfer Pricing adjustments
The Decree modifieis guidance on comparability analysis and TP adjustments, as below:
- The financial year under review of comparables is required to be the same as that of the tested party, except for specific cases with one financial-year extension.
- The comparability analysis of intangible assets with unique characteristics is prescribed.
- The priority in selection of comparables is stipulated as followings:Comparables from the internal database of taxpayers;
- Comparables residing in the same country or region of the taxpayers;
- Comparables operating in the regions with similar industry conditions and economic development.
Transfer Pricing adjustments
Decree 20 indicates that the TP adjustments are determined on the basis of prices in comparable transactions or “middle point” of the interquartile range, depending on the difference analysis between the selected comparables and the tested transaction/ party.
Transfer Pricing Methodology
The Decree stipulates 03 transfer pricing methods as follows:
- The comparison method between controlled transaction price and comparable uncontrolled price - similar to the “comparable uncontrolled transaction price method” prescribed in Circular 66;
- The comparison method between profitability ratios of taxpayer and those of independent comparable companies – a combination of “resale price method”, “cost plus method” and “comparable profit method” prescribed in Circular 66; and
- The profit split method between taxpayer and the related parties - similar to the “profit split method” prescribed in Circular 66.
Tax Deductibility for Related Party Expenses
The Decree adds new regulations as follows:
Related-party service expenses
In order for an intra-group service to be deductible for tax purposes, it must satisfy all the requirements as below:
- Services have commercial, financial, economic value and benefit the business operation of the taxpayer;
- Services from related parties are only determined as acceptable only if independent companies would agree to pay for such services under similar circumstances; and
- Service fees are paid on arms’ length basis, whereas the TP method or allocation keys are consistently applied amongst the group; the taxpayer is obliged to provide relevant supporting documents and information of delivered services.
On the other hand, the costs incurred in intra-group services are not allowed for deduction for tax purposes include the followings:
- Services rendered only for other related parties’ interests or value creation
- Services rendered only for related parties' shareholder interests
- Service duplication where many related parties simultaneously provide similar services to taxpayers which do not provide added value to the taxpayers;
- Service charges for benefits only derived from being members of a group corporation;
- Service charges that a related party add to the service provided by a third party in which the related party acts as an intermediary and does not contribute any value-added to the service.
- The total interest expenses incurred in the tax period allowed to be deducted for tax purposes must not exceed 20% of earnings before interest, taxes, depreciation and amortization (EBITDA) of the taxpayer. However, the calculation formula of EBITDA has yet to be clarified under this Decree.
Other related-party expenses
The following expenses are proposed to be non-deductible against taxable income:
- Payment to related parties which do not have any business operation related to the taxpayer’s business lines, business operation;
- Payment to related parties which have business operation related to the taxpayer’s business, but the size of asset, number of employees, and business functions of those related parties are disproportionate to the value of transactions;
- Payment to related parties which do not have any interest and responsibility related to the assets, goods or services supplied to taxpayers;
- Payment to related parties which are resident of a country without corporate income tax and create neither revenue nor added value to the taxpayer’s business.
Three-tiered Transfer Pricing Documentation and annual Declaration
Decree 20 introduces three-tiered TP documentation, which is in accordance with the guidelines from OECD’s Base Erosion and Profit Shifting (“BEPS) Action Plans. The required documentation is as follows:
- Local TP documentation (Local file);
- Global Master file; and
- Country by Country report (CbC report), if its overseas ultimate parent company is obliged to prepare and submit such documents to the respective tax authorities, or if taxpayer is a Vietnamese ultimate parent company with worldwide consolidated revenue exceeding VND18,000 billion in a fiscal year.
On the annual declaration of related party transactions (TP forms - appendices to annual CIT return dossiers), Decree 20 requires significantly more information to be filled than previously.
Timeline for Transfer Pricing Documentation
TP documentation, for the first time, is clearly required in the Decree to be available before the year-end corporate income tax return’s filing date (and to be provided to the tax authority upon their request).
Transfer Pricing Documentation compliance exemption
Under the new Decree, the taxpayers having transactions only with the related parties within Vietnam that are subject to the same corporate income tax rate, i.e., none of whom is entitled to tax incentives in the tax period is exempted from completing certain parts of the annual declaration forms on related party transactions.
The Draft also allows taxpayers to be exempt from the TP documentation obligation, though still have to submit annual TP declaration form and prove the arm’s length principles in their pricing with related parties in case of being challenged, in the following cases:
- Where a taxpayer has the total revenue generated in the tax year not exceeding VND50 billion, and the total value of its controlled transactions not exceeding VND30 billion.
- Where a taxpayer has concluded Advanced pricing agreement (“APA”), and complies to submit the APA reports annually.
- Where a taxpayer performs simple functions, does not incur revenue and expenses from exploitation and use of intangible assets, has revenue less than VND200 billion, and achieves the following floor levels of earnings before interest and taxes (EBIT) over revenue ratios:Distribution function: 5%;
- Manufacturing function: 10%; and
- Processing function: 15%.
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