The Vietnamese Government issued Decree 68/2020/ND-CP on 24 June 2020 (“Decree 68”), amending interest deductibility for companies subject to Transfer Pricing obligations in Decree 20 /2017/ND-CP (“Decree 20”).
Changes to transfer pricing decree on interest deduction cap.
Increase in interest cap for tax deducibility
Decree 68 increases the deduction cap on interest expenses for companies with related party transactions that are subject to the Transfer Pricing provisions detailed in Decree 20.
Specifically, the total loan interest expense for a tax period (after excluding interest from deposits and from lending) that qualifies as tax deductible for determining Corporate Income Tax (“CIT”) cannot exceed 30% of:
- Total gross profit from business activities, plus
- Net interest expenses (after offsetting interest income), plus
- Depreciation expenses.
Decree 20 previously capped interest deductions at 20% of gross profit.
Carried forward interest expenses
Interest expenses exceeding the 30% cap can be carried forward and deducted in future periods for up to 5 consecutive years. Where interest expense in a year subject to the cap is less than 30%, non-deducted interest carried forward from prior periods can be claimed up to the maximum claim of 30% for that tax period.
Decree 68 is applicable to taxpayers from the 2019 CIT period onwards.
The Decree also allows for retrospective applications for the 2017 and 2018 CIT periods, which require the submission of amended CIT finalisations prior to 1 January 2021. Where there is a credit for overpaid CIT as a result of amended finalisations under this decree, the credit can be offset against future CIT payable for the next 5 years.
Changes to Form 01
The Decree provides an amended Form 01, which details related party relationships and transactions, replacing the Form 01 included in Decree 20.
Decree 68 is effective from 24 June 2020.
We recommend that taxpayers review their previous calculations and claims previously made in accordance with Decree 20, and determine any amendments that they can make arising from Decree 68 and the increased cap. We also encourage taxpayers to review their Transfer Pricing compliance generally and the implementation of laws to their enterprises, as the Vietnamese authorities are continuing to focus on Transfer Pricing in Vietnam as a key are for inspection and compliance.