The interest expense deduction limit was raised to 30 per cent from 20 per cent to support businesses, according to the government’s Decree No 68/2020/ND-CP, which took effect on Wednesday.
Decree No 68/2020/ND-CP amended Decree No 20/2017/ND-CP’s regulation on the interest expense deduction limit on enterprises with related party transactions.
Under the new decree, the deductibility of interest payments was limited to 30 per cent of the company’s earnings before interst, taxes, depreciation and amortisation with the excess carried forward indefinitely.
The Ministry of Finance said that the previous cap of 20 per cent was within the corridor of 10 per cent to 30 per cent recommended by the Organisation for Economic Cooperation and Development but was not appropriate for Vietnam, where most firms were thinly-capitalised with the level of debt much greater than equity capital.
The new decree would be applied for the 2019 payable corporate income tax and retroactive for 2017 and 2018.
The finance ministry estimated that the tax which must be refunded or deducted following the new regulation would total around VND4.8 trillion (US$210.13 million).
The ministry’s statistics showed that among nearly 4,000 enterprises with related party transactions and interest expenses, about 700 had the ratio of interest expense on earnings higher than 20 per cent (more than 450 were foreign-invested).
The deducted interest expense was estimated at about VND18 trillion (US$775.8 million) each year, VND10 trillion was for domestic companies.
Domestic firms which had a ratio of interest expense on earnings higher than 20 per cent were mainly operating in manufacturing and processing, real estate, construction and power production and distribution.
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