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Foreign investors and transfer pricing in Vietnam: Understanding and protecting risks.

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Foreign investors and transfer pricing in vietnam: understanding and protecting risks

On 24 June 2020, the Vietnamese Government released Decree 68/2020/NĐ-CP (“Decree 68”), which amended Decree 20/2017/ND-CP (“Decree 20”), concerning tax administration for enterprises with related-party transactions and the relaxing of interest deductibility caps (essentially, updating Vietnamese Transfer Pricing regulations). Further, Decree 68 permits the increased interest deductibility caps to be applied retrospectively, which can result in significant tax savings for many companies.


Transfer Pricing is the general term used when profits are shifted from one country to another, in order to reduce tax exposures, through charging higher prices, in excess of market or arms-length prices, by related companies. The result is lower tax being paid in a country than would have been paid if the market or arms-length prices had been charged. The concept of Transfer Pricing generally places the proof on the taxpayer to prove their pricing and margins are appropriate.

On a high level, the Transfer Pricing rules require additional documentation and justifications of the pricing mechanisms used by multinational companies when undertaking related party transactions (note: a “Related Party” here includes an entity that is connected through direct or indirect ownership of 25% or above, or also where common management control exists). Foreign companies in Vietnam that have related party transactions will need to prepare and lodge a suite of documents each year with the Vietnamese authorities, and which are generally based upon common international documentation standards. These documents (which include a Global Group Master File, a Local Transfer Pricing File, and Country by Country Reports) are comprehensive and show appropriate comparable transactions (or other pricing mechanism) that justify prices and profits between the related parties.

Transfer pricing documentation exemption?

Enterprises can be exempted from preparing the “contemporaneous Transfer Pricing documentation” requirements (but not from the application of other obligations) where:

  • Taxpayers having related party transactions, but which have total revenue in a tax year of less than VND50 billion and the total value of related party transactions in the tax year of less than VND30 billion; or
  • Have signed a mutual agreement (an Advance Pricing Agreement or “APA”) with the Vietnamese authorities and annually lodge an APA report; or
  • Operate a “simple function” business with total revenue less than VND200 billion and achieve an EBIT ratio of at least 5% for “distribution”, 10% for “manufacturing” and 15% for “processing” activities.

In certain circumstances, enterprises are further exempted from being required to disclose certain information or calculations in the annual mandatory disclosures when lodging their annual Corporate Income Tax return, including:

  • Entities having transactions with domestic related parties which are subject to Corporate Income Tax (“CIT”) in Vietnam; and
  • Where Both parties apply the same CIT rate, and neither party enjoys tax incentives.

Tax deductions for interest expenses

Decree 68 amended the laws released in Decree 20, increasing the cap on tax deductibility of interest expense from 20% to 30% of EBITDA. This cap applies to net interest expense (i.e. interest income is offset against interest expense before comparing with the cap).

Additional cases that are excluded from application of the interest deduction cap include:

  • Loans by taxpayers which are credit institutions (as defined in the Law on Credit Institutions) or insurance firms (as defined in Law on Insurance Business)
  • Loans by the Government from ODA loans and concessional loans
  • Loans granted for implementing national programs (including New Rural Area Development program and Sustainable Poverty Reduction program), and
  • Loans granted for implementing State social welfare policies (projects on relocation housing, housing for workers and students, and other public welfare projects).

Interest deductions & carry forward interest deductions for future periods

Under Decree 68, interest expenses that are non-deductible in a tax year due to the application of Decree 68 can be carried forward to the following tax years and deducted if the net interest expense/EBITDA ratio is below 30% in those years, for future periods up to five years.

Retrospective application of the increase to the interest deduction cap

Decree 68 was effective from 24 June 2020, and applicabke for corporate income tax periods from 2019.

However, the changes to the cap can be applied retrospectively to the 2017 and 2018 years. For eligible companies, revised CIT returns need to be submitted to the tax authorities by 1 January 2021 in order to apply the amended cap for those years. Resulting tax overpayments arising from such amendments can be offset against CIT due in subsequent years. If these prior years have already been tax audited, companies can still benefit from this retrospective application of the more generous cap.


The timeframes required to complete and submit required documentation with authorities are tight, and not necessarily easy for companies in Vietnam to comply with. Required documents must be lodged at the same time as the annual tax finalisation lodgement is completed. If requested by authorities, taxpayers may have 15 days to lodge these with authorities should an earlier request be received. Keep in mind that these deadlines require full translation of all documentation into Vietnamese prior to submission.

The release of this Decree from Vietnamese Government does provide more commonality for multinational groups when complying with their international transfer pricing documentation, and provides more detailed guidance on the tax deductibility of interest and its retrospective application, enabling companies to asses opportunities for savings.

However, these requiremets still result in significant additional work and cost for many taxpayers and is something that needs to be planned and coordinated with parent entities well in advance. The requirement to translate all documents (including parent company documentation) into Vietnamese is onerous.

Next steps

We encourage all foreign-invested businesses, regardless of size, to conduct a regular Transfer Pricing Review. The review seeks to understand exposures to Transfer Pricing laws, identification of related parties and related party transactions/contracts, suitability of documentation, and risks in respect to operations arising. It is with this Review that appropriate risk management and decision making can be made with treasury operations and returns on investments.

Updated on November 20, 2020

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