Transfer pricing in Vietnam: Proposed changes of the draft amendments to Decree 132

Decree No. 132/2020/ND-CP (Decree 132) on tax administration for companies with related party transactions, which has been in force since 2020, has led to some restrictions and difficulties for companies. The Vietnamese government therefore presented amendments to Decree 132 in July 2024, which are to be adopted in the 4th quarter and will apply from the 2024 tax period. The Ecovis consultants explain the background and what is changing.

The problems caused by Decree 132

The most significant problem is the case of determining the related-party status based on borrowings in Article 5, Clause 2 d of the decree (including the case where the bank lends an enterprise more than 25% of the owner’s capital contribution and accounts for more than 50% of the total medium and long-term debts of the enterprise’s borrowings). This leads to the enterprise being given related-party status with the bank and related-party transactions which are then subject to a deductible interest expense cap.

However, businesses argue that borrowing from banks to serve production and business activities is a common business practice in Vietnam, as well as a normal business activity of the banks. Businesses and banks are completely independent of each other and there is no control, management, or capital contribution by the bank to the production and commercial activities of the business. The company’s interest expenses are an actual cost serving production and business activities. Therefore, controlling and eliminating interest expenses for businesses in this case is inappropriate.

Are you affected by Decree 132? We will discuss the impact of the changes on your company with you.

Nghia Tran, Partner, ECOVIS AFA VIETNAM, Da Nang City, Vietnam

In addition, Decree 132 also has several provisions that are not consistent with the Law on Credit Institutions published on 18 January 2024 (No. 32/2024/QH15).

In practice, the amendments and supplements to Decree 132 are necessary to ensure compliance and consistency with legal regulations. They will also be better suited to the current situation in Vietnam and meet the requirements of the country’s socio-economic development, while at the same time improving the quality and efficiency in the management of enterprises with related-party transactions.

The changes to the updated Decree 132

In July 2024, the Ministry of Finance publicly released the draft amendments to Decree 132 (the Draft Decree) to gather feedback from ministries and the business community before the official publication. These are some of the most significant changes:

1. The Draft Decree supplements the cases for determining related parties under points a and b of Article 5, Clause 2 of Decree 132 in order to be consistent with the recent changes in the 2024 Law on Credit Institutions in which the charter capital ownership percentage applicable to credit institutions is 20%.
2. The Draft Decree introduces a new case of related parties under point m of Article 6, Clause 2 of Decree 132, including the credit institutions and their associate companies as defined under the new provisions of the 2024 Law on Credit Institutions (see info box).
3. The Draft Decree adds exclusion cases in which an enterprise guarantees or lends to another enterprise under point d of Article 5, Clause 2 of Decree 132. Accordingly, the lender, the guarantor, and the credit institutions will not be considered as related parties if they are not engaged in “operating, controlling, contributing capital or investing activities” of the borrower or the guaranteed enterprise.
4. Moreover, the Draft Decree clarifies the provision regarding the carrying-forward of non-deductible interest expenses from the previous tax periods where an enterprise only has related-party relationship as a result of the borrowings from a credit institution according to point d of Article 5, Clause 2 of Decree 132. If an enterprise does not take part in any related-party transaction in the 2024 tax period, the non-deductible interest expenses of previous tax periods cannot be carried forward to the next five years.
5. The Draft Decree also extends the responsibility of the State Bank of Vietnam in providing information on the related individuals and related enterprises of credit institutions upon request from the tax authority.
6. In addition, the Draft Decree amends Appendix I – Information on related party relationships and related-party transactions – to align with the amended, supplemented regulations mentioned above.

For further information please contact:

Nghia Tran, Partner, ECOVIS AFA VIETNAM, Da Nang City, Vietnam
Email: Nghia.Tran@ecovis.com.vn