Deputy prime minister Vuong Dinh Hue has requested that the regulation on the interest expense ceiling of 20 percent must be promptly amended to overcome the difficulties for businesses in the tax period of 2019.
Decree No. 20/2017/ ND-CP of the government stipulating tax administration for companies with associated transactions effective from May 1, 2017 provides for, the total interest expenses incurred in the taxpayer’s period are deducted when determining the taxable income of the enterprise not exceeding 20 percent of the total net profit from business activities plus interest expenses and depreciation expenses of the taxpayer (Clause 3, Article 8).
This provision is considered an effective method to prevent transfer pricing and tax evasion at multinational companies. However, the practice also shows that many domestic businesses are suffering from the burden of not small taxes.
For example, in 2018, the Vietnam Electricity (EVN) petitioned the Ministry of Finance that this provision caused the corporate income tax of member companies to increase significantly, such as EVN GENCO 1 whose tax payment rose by 339 billion dong; and EVN GENCO 3 increased by about 212 billion dong. This will greatly affect the financial situation of EVN and its subsidiaries, making it difficult to balance the investment capital of the business.
Can Van LucChief economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), said that this provision had not yet taken into account the special industries that require large investment capital, so businesses have to borrow as much as electricity, transport infrastructure, and real estate. The regulations do not distinguish whether the object here is the parent company, group or subsidiary, separately. It is also not clear whether the interest expense is applied only in the associated loan transaction or applies to all loans so it is understood as “all”.
Even many experts say that this provision is both illegal and insufficient for practical basis. Because many domestic enterprises are paying interest expenses higher than the aforementioned ceiling, this provision violates the right to mobilise capital from all sources legally to serve their business and production activities.
According to Vo Tri Thanhformer deputy director of the Central Institute for Economic Management, with the situation that Vietnamese businesses are always short of capital and in the condition that interest rates in Vietnam are always high, it should not control the total interest rates at 20%, even 50%, as long as the costs are real and reasonable, it must also be accepted.
Can Van Luc also said that 20 percent was unconvincing and did not take into account the characteristics of Vietnam, because Vietnamese enterprises always had to borrow heavily and the bond market was not as developed as other countries in the world. “Vietnam should impose a ceiling on interest expenses of about 28-30 percent according to the recommendations of the OECD. Many countries are now setting the rate at 30%,” said Dr Can Van Luc.
Speaking at the recent meeting of the government with a number of ministries, branches and businesses on the revision of Decree No. 20/2017/ ND-CP, Dr Vu Tien LocChair of VCCI frankly pointed out that, according to Decree 20/2017/ ND-CP, it may lead to double taxation on the same transaction, tax overlapping tax, hindering access to increase capital for operations of corporations. At the same time, it also hinders the policy of developing private economic groups, as well as the encouragement of private corporations to invest in agricultural production, education and health in the fields of socialisation of investing in difficult and extremely difficult socio-economic areas.
“Proposal to abolish or suspend the implementation of Clause 3, Article 8 of Decree 20/2017/ ND-CP awaiting impact assessment, and studying international experience. The restriction on interest expenses must be included in the Law on Corporate Income Tax and if there is a cap, it should be at 30%,” emphasized Vu Tien Loc.
In fact, after more than two years of promulgation, Decree 20/2017/ ND-CP has contributed positively in preventing transfer pricing and tax evasion of about 80 percent of transnational transactions between a domestic subsidiary and a foreign parent group, as in the case of Big C, Metro, and Coca-Cola. Therefore, some people think that it is not possible to give up the ceiling on interest expenses, but only consider revising the ceiling interest expenses for a number of domestic enterprises.
However, if only interest rate ceiling is raised for some types of domestic enterprises, it will create discrimination and inequality between domestic and foreign enterprises. Therefore, the interest rate ceiling is generally considered the most suitable option.
