The impact of the new Law on Tax Administration on Transfer Pricing

The new Law on Tax Administration (“LTA”), effective from 1 July 2020, strengthens the tax enforcement in Vietnam. Regulations on Transfer
Pricing (“TP”) and the basic principles on viewing related-party transactions for the first time are included in a law. Previously, TP regulations
were to be found in guiding documents linked to the laws, namely Decree 20, Circular 41. Some essential innovations in the LTA include:

>> The declaration of related-party transactions (TP declaration form) are made a mandatory component of the Annual Tax finalization. All
enterprises must complete and file this form when filing the CIT finalization.

>> The principles for declaring and determining taxable prices in related-party transactions (TP) are reiterated, including independent transactions
comparison, substance-of-operation rules, advance-pricing-agreement (“APA”) regime. The new law clarifies that APAs must be approved by the
Ministry of Finance prior to their application.

>> Incentives for small-sized taxpayers with low tax risks are made through simplified procedures for declaration and the determination of
related-party transaction prices.

According to the draft of the new guiding decree following the LTA’s implementation, Vietnam tax authorities will enhance the exchange of
information with foreign tax authorities regarding related-party transactions in accordance with international tax agreements. The taxpayers
obligation to provide information in that context will be reduced. Specifically, the tax authority will automatically exchange information in the
event that the parent company of the taxpayer registered in a foreign country is required to submit a Country-by-Country Report (“CbCR”) in
that country of residence.

Change in deductible loan interest cost

On 24 June 2020, the Government has issued Decree No. 68/2020 amending and supplementing Article 8.3 of Decree 20 on the deductible
loan interest cost. This took effect immediately and is applied retrospectively for the tax year 2019, in certain cases for the tax years 2017 and
2018 and onwards. The main amendments are:

>> The cap on loan interest cost deduction is increased from 20% to 30% of the earnings before interest, tax, depreciation and amortisation
(“EBITDA”). The taxpayer may carry forward the non-deductible interest expenses in excess of the 30% cap for a maximum of 5 years.

>> Certain types of financing are now excluded from the cap, including official development assistance loans, various concessional loans made
by the government, and loans made for implementing national programmes and state social benefit policies.

>> For amending the Corporate Income Tax (“CIT”) finalisation of the tax years 2017 and 2018, the taxpayer must submit the supplement 2017
and 2018 for CIT returns by 1 January 2021 to apply the new cap. The overpaid amount will be offset against the payable CIT in 2020 and
carried forward up to 5 years from 2020.

The new LTA must be viewed in the context of the declared intention of the tax authorities to enforce tax compliance and increase tax revenue.
Because not so few foreign invested companies are continuously declaring a loss but continue operations, they are in the focus of future tax audits.
The tax audits in these cases will very likely focus on TP issues. It is highly recommended to conduct a TP health check within 2020.

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