Official Letter No. 271/TCT-TTKT introducing the new contents of Decree 132/2020/ND-CP on tax management for enterprises with related-party transactions.

Dear: Provincial and city tax departments under the central government.

On November 5, 2020, the Government signed and promulgated Decree No. 132/2020/ND-CP regulating tax management for enterprises with related-party transactions (replacing Decree No. 20/2017/ND-CP dated February 24, 2017 and Decree No. 68/2020/ND-CP amending and supplementing Clause 3, Article 8 of Decree No. 20/2017/ND-CP), effective from December 20, 2020 and applicable from the corporate income tax period of 2020.

The General Department of Taxation introduces the new contents of Decree No. 132/2020/ND-CP and requests the Tax Departments to promptly disseminate and inform tax officials and taxpayers in their respective areas of management.

(Detailed content is provided in the attached Appendix)

During the implementation process, if any difficulties or obstacles arise, the Tax Departments are requested to promptly compile and report them to the General Department of Taxation for consideration and resolution.

APPENDIX

INTRODUCTION TO SOME CONTENTS OF DECREE NO. 132/2020/ND-CP DATED NOVEMBER 5, 2020 DETAILING SOME ARTICLES OF THE LAW ON TAX ADMINISTRATION
(Attached is Official Letter No. 271/TCT-TTKT dated January 27, 2021, from the General Department of Taxation)

1. Decree No. 132/2020/ND-CP does not have guiding circulars like Decree No. 20/2017/ND-CP:

Decree No. 132/2020/ND-CP specifies the principles, methods, and procedures for determining the factors forming the price of related-party transactions; the rights and obligations of taxpayers in determining the price of related-party transactions, and the declaration procedures; and the responsibilities of state agencies in tax management for taxpayers with related-party transactions. The Ministry of Finance has not issued any Circulars guiding Decree No. 132/2020/ND-CP.

2. Regarding the explanation of terminology:

a) Add the terms “Agreement of competent authority” and “International agreement on taxation” and “Organization submitting reports on behalf of” to the regulations.

Specifically, Clauses 2, 3, and 10 of Article 4 of Decree No. 132/2020/ND-CP stipulate:

2. “Agreement of Competent Authorities” is a shortened term for an Agreement in effect between the competent authorities of countries and territories that are parties to an international treaty on taxation and require automatic exchange of information on country-by-country profit reporting.

3. “International agreements on taxation” and “international treaties on taxation” are bilateral and multilateral international agreements and treaties in the field of taxation.

10. “The term ‘organization submitting the report on behalf of’ refers to the organization authorized by the parent company of the group to submit the group’s Country-by-Country Report to the Tax Authority.”

b) Amend and supplement regulations on "Tax Authority Database"

Before: Clause 7, Article 4 of Decree No. 20/2017/ND-CP stipulates:

7. “Tax Authority Database” refers to information and data built and managed by the Tax Authority in accordance with the Law on Tax Administration related to determining the tax obligations of taxpayers, collected, analyzed, stored, updated, and managed by the Tax Authority from various sources, including databases and information exchanged with tax authorities and competent authorities abroad.”

New features: Clause 7, Article 4 of Decree No. 132/2020/ND-CP stipulates:

7. “Tax Authority Database” refers to information and data collected, built, and managed by the Tax Authority from various sources as stipulated in the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019, including databases and information exchanged with tax authorities and competent authorities abroad.”

c) Amend and supplement regulations on the standard independent transaction value range:

Before: Decree No. 20/2017/ND-CP and Circular No. 41/2017/TT-BTC stipulate: “The standard independent transaction value range is the set of values ​​from the first to the third quartile; the median of the standard independent transaction value range is the second quartile value according to statistical probability functions.”

New features: Clause 9, Article 4 of Decree No. 132/2020/ND-CP stipulates:

9. “The standard independent transaction value range” is the set of values ​​from the 35th to the 75th percentile; the median of the standard independent transaction value range is the 50th percentile according to statistical probability.”

3. Amendments and additions to regulations concerning related parties:

a) Amend and supplement the provisions in point g) of clause 2, Article 5, Related Parties.

Before: “g) Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse, biological father, adoptive father, biological mother, adoptive mother, biological child, adopted child, biological brother, biological sister, biological sibling, brother-in-law, sister-in-law, daughter-in-law, paternal grandfather, paternal grandmother, grandchild, maternal grandfather, maternal grandmother, grandchild, aunt, uncle, cousin, and niece;”

New features: Point g, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:

“g) Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse; biological parents, adoptive parents, stepfather, stepmother, parents-in-law; biological children, adopted children, stepchildren of the spouse, daughter-in-law, son-in-law; siblings with the same parents, half-siblings, half-siblings; brother-in-law, sister-in-law, daughter-in-law, son-in-law of a person with the same parents or half-siblings; paternal grandparents; grandchildren; aunts, uncles, and nieces/nephews;”

b) Add point 1 to clause 2 of Article 5: Related parties

“l) Enterprises that have transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; or borrowing or lending at least 10% of the owner's capital contribution at the time of the transaction during the tax period with individuals managing or controlling the enterprise or with individuals in a relationship as stipulated in point g of this clause.”

4. Inheriting Decree No. 68/2020/ND-CP amending and supplementing Clause 3, Article 8 of Decree No. 20/2017/ND-CP regulating deductible interest expenses and adding an exclusion for applying the limit on interest expenses to loans for investment in programs and projects implementing the State's social welfare policy, namely social housing.

Specifically, Clause 3, Article 16 of Decree No. 132/2020/ND-CP stipulates:

3. Total interest expense deductible when determining taxable income for corporate income tax purposes for enterprises with related-party transactions:

a) The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer;

b) The portion of interest expense not deductible under point a of this clause shall be carried forward to the next tax period when determining the total deductible interest expense, provided that the total deductible interest expense incurred in the next tax period is lower than the amount stipulated in point a of this clause. The carry-forward period for interest expense shall not exceed 05 years from the year following the year in which the non-deductible interest expense was incurred;

c) The provisions in point a of this clause do not apply to loans of taxpayers that are credit institutions under the Law on Credit Institutions; insurance business organizations under the Law on Insurance Business; official development assistance (ODA) loans, preferential loans of the Government implemented through the method of the Government borrowing from foreign countries to lend to enterprises; loans for implementing national target programs (new rural development program and sustainable poverty reduction program); loans for investment in programs and projects implementing the State's social welfare policies (resettlement housing, housing for workers, students, social housing and other public welfare projects);

d) Taxpayers shall declare the ratio of interest expense in the tax period according to Appendix I issued together with this Decree.”

5. Amendments and additions to regulations on submitting country-by-country profit reports:

Before: Point c, Clause 4, Article 10 of Decree No. 20/2017/ND-CP stipulates:

“c) Report on the country-by-country profit of the ultimate parent company according to Form No. 04 in the Appendix issued with this Decree.

In cases where the taxpayer is the ultimate parent company in Vietnam with consolidated global revenue of 18 trillion VND or more during the tax period, it is responsible for preparing the Country-by-Country Report in the Transfer Pricing Documentation Form No. 04 in the Appendix attached to this Decree.

In cases where the taxpayer has a parent company located abroad, the taxpayer is responsible for providing a copy of the parent company's Country-by-Country Report if the parent company is required to submit this report to the tax authority of the host country, using the declaration form provided by the tax authority of the host country or the declaration form under Form No. 04/ND-GDLK in this Decree. If the taxpayer is unable to provide the Country-by-Country Report, the taxpayer must provide a written explanation of the reasons, legal basis, and specific legal provisions of the partner country that prohibit the taxpayer from providing the Country-by-Country Report.”

New features: Clause 5, Article 18 of Decree No. 132/2020/ND-CP stipulates:

5. Taxpayers have obligations related to the Country-by-Country Report:

a) In cases where the taxpayer is the ultimate parent company in Vietnam with consolidated global revenue of 18 trillion VND or more during the tax period, it is responsible for preparing a Country-by-Country Report in the Transfer Pricing Documentation as per Appendix IV issued with this Decree. The deadline for submitting the Report to the Tax Authority is no later than 12 months after the end of the parent company's financial year.

b) Taxpayers in Vietnam with a parent company located abroad, where the parent company is obligated to prepare a Country-by-Country Report of Profits as required by the regulations of the country of residence, must submit it to the Tax Authority in the following cases:

– The country or territory where the ultimate parent company is a resident has an international tax agreement with Vietnam but does not have an agreement from a competent authority at the time the report is due as stipulated in point a of this clause.

– Foreign countries or territories where the ultimate parent company is a resident, and which have agreements between competent authorities and Vietnam, but have suspended the automatic or non-automatic mechanism for providing Vietnam with the country-by-country profit report of the group residing in those foreign countries or territories.

– In cases where a multinational corporation has more than one taxpayer in Vietnam and the ultimate parent company abroad issues a notification designating one of the taxpayers in Vietnam to submit the Country-by-Country Report, the designated taxpayer is obligated to submit the Country-by-Country Report to the Tax Authority. The taxpayer is obligated to submit the notification of designation from the ultimate parent company to the Tax Authority before or on the end of the fiscal year of the ultimate parent company of the taxpayer.

c) The provisions in point b of this clause do not apply in cases where the ultimate parent company of the taxpayer in Vietnam designates an organization to submit the Country-by-Country Report to the tax authority of the host country on its behalf before or on the date specified in point a of this clause and meets the following conditions:

– The country or territory where the organization submits the report on behalf of the applicant is a resident entity that has regulations requiring the submission of a Country-by-Country Report on Profits.

– The country or territory where the organization submits the report on behalf of another party is a resident entity with an Agreement between the competent authority and Vietnam as a signatory party at the time the report is due as stipulated in point a of this clause.

– The country or territory where the organization submits the report on behalf of the resident entity has an Agreement between the competent authorities and Vietnam, which does not suspend the automatic information exchange mechanism and can provide Vietnam with the country-by-country profit report of the group that is a resident entity in that foreign country or territory.

– An organization acting on behalf of the group that has been notified in writing is designated to submit the Country-by-Country Report to the tax authority of the country of residence before or on the end of the financial year of the group's ultimate parent company.

– The notification document designating an organization to submit the report on their behalf is provided by the taxpayer in Vietnam to the Vietnamese Tax Authority as stipulated in point b of this clause.

– Taxpayers in Vietnam must notify the Vietnamese tax authorities in writing of the name, tax code, and country of residence of the ultimate parent company or the organization submitting the report on its behalf before or on the last day of the group's fiscal year.

d) In cases where the taxpayer has a parent company located abroad that is required to submit a Country-by-Country Report of Profits as stipulated by the country of residence, the tax authorities shall automatically exchange information in accordance with the commitments in Vietnam's international tax agreements.

(d) In cases where the taxpayer has a supreme parent company that is not required to submit a Country-by-Country Report of Profits under the regulations of the country of residence, the provisions of the international tax treaty shall apply.

6. Supplementing regulations on the responsibilities and powers of the Tax Authority in managing transfer pricing.

Supplementing regulations on the management and use of country-by-country reports.

Specifically, point c, clause 1, Article 20 of Decree No. 132/2020/ND-CP stipulates:

"c) Managing and using the taxpayer's Country-by-Country Report for risk management and information exchange in accordance with Vietnam's regulations and commitments under international tax agreements, and not for tax assessment purposes."

7. Regulations regarding effective date:

Article 22 of Decree No. 132/2020/ND-CP stipulates:

“1. This Decree takes effect from December 20, 2020 and applies from the corporate income tax period of 2020.

2. Decree No. 20/2017/ND-CP dated February 24, 2017 and Decree No. 68/2020/ND-CP dated June 24, 2020 of the Government regulating tax management for enterprises with related-party transactions shall cease to be effective from the date this Decree comes into force.

3. Filing and settling corporate income tax returns for 2017 and 2018:

a) Taxpayers who are required to file supplementary corporate income tax returns for the years 2017 and 2018 as stipulated in Clause 2, Article 2 of Government Decree No. 68/2020/ND-CP dated June 24, 2020, but have not yet done so, may continue to do so until before January 1, 2021;

b) Taxpayers who have been inspected or audited by the tax authority or competent state agency and have received inspection or audit conclusions and handling decisions for the tax periods of 2017 and 2018, but fall under the cases where the amount of tax payable is to be recalculated according to point c, clause 2, Article 2 of Decree No. 68/2020/ND-CP dated June 24, 2020, but have not yet submitted a request to the tax authority by the effective date of this Decree, have the right to request the directly managing tax authority to recalculate the amount of tax payable;

c) In cases where the taxpayer's corporate income tax and late payment penalties paid to the state budget for 2017 and 2018 are greater than the recalculated corporate income tax and late payment penalties, the difference will be offset against the corporate income tax from 2020 to the end of 2024. After this period, any remaining unoffset tax will not be processed.

4. For cases where interest expense is carried forward to the next tax period when settling corporate income tax for 2019 as stipulated in Decree No. 68/2020/ND-CP, the carry-forward period for interest expense shall not exceed 05 years from the corporate income tax period of 2020. If the entire amount is not carried forward after 05 years, the remaining interest expense cannot be carried forward to subsequent tax periods.