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Replacement of Decree 20/2017/ND-CP comprehensively removes difficulties inanti-transfer pricing

09:59 | 11/06/2020

VCN- The development of the decree replacing Decree 20/2017/ND-CP which will remove difficulties for businesses and help regulations in anti-transfer pricing to be consistent with relevant provisions in the Law on Tax administration 38/2019/QH14 will be implemented in the near future.

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It is necessary to promulgate a decree replacing Decree 20/2017/ND-CP . Photo: T.L

Remove difficulties for enterprises

Government Decree No. 20/2017/ ND-CP stipulating tax administration for enterprises engaged in related-party transactions has been implemented for three years. Inthat time, Decree 20 has brought someresults in anti-transfer pricing and revenue loss from interest expenses. It not only contributes to the State budget but also serves the goal of effectively preventing profit earned after the fight against transfer pricing which is disabled by businesses through the loan interest tool because the taxable income of enterprises will include sales, financial expenses (including loan interest) and other income - expenses before calculating corporate income tax.

However, the Ministry of Finance said the provisions on controlling interest expenses in Decree 20 are applied for the first time, so it faces difficulties during implementation.

The first difficulty is that Vietnamese have little capital, mainly loans andlow equity, so theyneed a transition period to grow and take advantage of capital to invest and gradually transfer capital mobilisation structure for production and business activities. Therefore, the application of controlling interest expenses without a deduction of deposit interest and loan interest caused inadequacies for the businesses that are engaged in transferring loan capital, re-lending, fund management, deposit in corporations, groups and securities firms.

Also, the Ministry of Finance, the 20%rate of controlling interest expenses in Decree 20/2017/ND-CP is the average rate within the range of 10%-30% as recommended by the Organisation for Economic Co-operation and Development (OEDC) and assessedby the World Bank. However, in Vietnam, because provisions are newly applied, it has created a reaction by businesses. Thus, it is necessary to stipulate amore appropriate rate. Moreover, the scope of application andregulations on controlling interest expenses for cases such as ODA loans, concessional loans borrowed by the Government for re-lending and for implementation of social welfare policies should be considered forexclusionto ensure the implementation of the State’s policies.

To remove difficulties and problems for enterprises, complying with the Prime Minister’s direction, the Ministry of Finance has submitted to the Government anamendment of Clause 3, Article 8 of Decree No. 20/2017/ND-CP. The rate of controlling interest expenses after deducting loan interest will be increased from 20% to 30%. There will also be regulations on net interest expense andcases out of interest expenses control. The Ministry of Finance proposes the Government apply the regulations to removing difficulties for businesses forthe tax term 2019.

Amend comprehensively

During the development of the decree amending Decree No. 20/2017/ND-CP, the Ministry of Finance recognises that the amendment to Clause 3, Article 8 of this decree only removes some certain difficulties and shortcomings. Meanwhile, in fact, there are other provisions that must be supplemented. Specifically, for the rules of tax administration for enterprises engaged in related-party transactions, the Ministry of Finance said it is necessary to continue supplementing the guidance in the decree to specify contents of the rules on tax administration for these firmsto be consistent with international practices, Vietnamese practices and international treaties Vietnam has signed and multilateral cooperation forums on taxation to combat revenue erosion.

In addition, for record for determination of price of related-party transactions and regulations on information exchange for inter-country financial statementsbetween the Vietnamese tax authorities and foreign tax authorities for transfer pricing management, the Ministry of Finance said the submission ofinter-country financial statements of the supreme parent companies was agreed by the three BEPS member countries in the management policy and towards automated information exchange mechanism for 2019-2020. Therefore, the Ministry of Finance amended and supplemented regulations on declaration of inter-country financial statements in line with international commitments in BEPS forums to which Vietnam is a member.(IF Commitment forum; Global GF information exchange).

Particularly for regulations on commercial databases used in the declaration, management and determination of related-party transaction price, the Ministry of Finance shall supplement commercial database regulations on the basis of inheritance of experience and results of transfer pricing management of advanced countries in the world and summarisingthe application of tax administration for enterprises engaged in related-party transactions in Vietnam.

The General Department of Taxation said out of nearly 4,000 businesses having associated transactions with interest expense, more than 700 businesses have interest expense / EBITDA beyond the threshold of 20%, including more than 450 FDI businesses and more than 250 domestic businesses. Loan interest cost is excluded from the cost for calculating corporate income tax of these businesses at about VND18,000 billion per year. Of which, loan interest cost of domestic enterprises is excluded at more than VND10,000 billion per year. The businesses with loan interest rates exceeding 20% all have large loan sizes, in the fields of processing and manufacturing industries; real estate, construction, production and distribution of electricity, and have high joint venture activities.

By Thuy Linh/Ngoc Loan