New decree to prevent transfer pricing, limit thin capitalisation

Real estate is among sectors requiring large investment. Increasing the interest expense deduction limit to 30 percent would help enterprises have more capital for investment in the context that most firms in Vietnam were thinly-capitalised with the level of debt much greater than equity capital (Photo: laodong.vn)

Hanoi (VNS/VNA) - The Government’s recently-issued Decree 132/2020/ND-CP would help prevent transfer pricing and limit thin capitalisation to develop a healthy investment market, Deputy Director of the General Department of Taxation Dang Ngoc Minh said.

Minh spoke at a press conference on November 9 to introduce new points of the decree dated November 5 about tax management for enterprises with related-party transactions, saying the interest expense deduction limit was raised from 20 percent to 30 percent – the highest ratio recommended by the Organisation for Economic Cooperation and Development.

Increasing the cap to 30 percent would help enterprises have more capital for investment in the context that most firms in Vietnam were thinly-capitalised with the level of debt much greater than equity capital, he said.

Minh said that the Decree 132 did not differentiate foreign-invested companies and domestic companies in fighting transfer pricing to ensure fairness and transparency.

“This regulation does not mean to cause more difficulties for enterprises because any companies, foreign-invested or domestic, could use the transfer pricing method.”

The Ministry of Finance’s statistics showed that there were about 16,500 enterprises with related-party relations, 8,000 of which had related-party transactions and 70 percent were foreign-invested.

According to Nguyen Thu Huong from international non-governmental organisation Oxfam in Vietnam, it was necessary to terminate corporate income tax (CIT) incentives and reductions to minimise transfer pricing.

The preferential value was estimated at about seven percent of the total CIT revenue annually, a considerable sum, Huong said. However, she pointed that there was an unfairness because the preferential tax mostly applied to FDI companies.

Preferential CIT policies to encourage investment led to a race to the bottom among localities in the country and among countries in the region, which was not only causing losses to budget revenue but also creating loopholes for transfer pricing, Huong said.

Deputy Director of the finance ministry’s Department of State Budget Nguyen Minh Tan said that transfer pricing often occurred when there were tax incentives.

However, tax incentives were an important factor to attract foreign investment in the context of a global production shift triggered by the COVID-19 pandemic, Tan said.

Vietnam was regarded as an attractive destination for investment but not the only choice, Tan said, adding that it was necessary at the same time to offer tax incentives to attract investment and to fight transfer pricing.

Decree 132 implemented regulations which were appropriate to international practices and the condition of Vietnam to enhance the prevention against transfer pricing, Tan stressed.

The tax watchdog inspected 263 enterprises with related-party transactions in the first 10 months of this year, collecting more than 525 billion VND (22.6 million USD) in fines and arrears, reducing losses by more than 9 trillion VND and increasing taxable income by 4.19 trillion VND.

Last year, 597 enterprises with related party transactions were inspected to collect 1.1 trillion VND in fines, reducing losses by 5.8 trillion VND and increasing taxable income by 5.9 trillion VND.