Illustrative image (Photo: VNA) Hanoi (VNA) — The interest expense deductionlimit may be raised from the current 20 percent to 30 percent to supportbusinesses, according to a draft decree on tax management for enterprises withrelated party transactions the Ministry of Finance recently made public forcomments.
The draft would replace Decree 20/2017/ND/CP.
The finance ministry said the Decree 20 had contributedsignificantly to the fight against transfer pricing in the past three years butthe 20 percent limit to the deductibility of interest expenses caused alot of difficulties for enterprises.
The regulation meant the deductibility of interest paymentswas limited to 20 percent of the company’s earnings before interest, taxes,depreciation, and amortisation with the excess carried forwardindefinitely.
The ratio of 20 percent was within the corridor of 10 percentto 30 percent recommended by the Organisation for Economic Cooperation andDevelopment (OECD).
However, the cap of 20 percent was not appropriate to Vietnamwhere most firms were thinly-capitalised with the level of debt much greaterthan equity capital, according to the finance ministry.
Increasing the cap to 30 percent aimed to help enterpriseshave more capital for investment and to promote the transition of capitalraising structure for operation, the ministry said.
The ministry said the application on international standardsmust be appropriate to the situation in Vietnam, adding that domesticenterprises needed time to narrow the development gap with the OECD’s membercountries.
The draft also includes regulations about conditions fordeducibility of related party transactions to prevent transfer pricing,the ministry said.
Dinh Mai Hanh, the tax partner of Delotte Vietnam, was quotedby Dau Tu (Investment) online newspaper as saying that the 20 percentratio limit aimed to prevent the thin capitalisation strategy to avoid tax.
However, the regulation caused a lot of difficulties todomestic firms, especially those in the parent-company model or those insectors requiring huge capital like real estate.
Nguyen Duc Nghia, President of HCM City Tax Agent Club, saidthe ratio cap of 20 percent or 30 percent would not be important. How to accuratelyidentify subjects to the regulation was more important, he said, adding thatmost Vietnamese firms were thinly-capitalised and must seek loans for operationand most (around 97 percent) were small or medium-sized enterprises.
Deputy Director of the General Department of Taxation Dang NgocMinh said among nearly 4,000 enterprises with related party transactions andinterest expenses, about 700 had the ratio of interest expense on EBITDA higherthan 20 percent (more than 450 were foreign-invested).
The deducted interest expense was estimated at about 18trillion VND (775.8 million USD) each year, 10 trillion VND was for domesticcompanies.
Domestic firms which had the ratio of interest expense higherthan 20 percent were mainly operating in manufacturing and processing,real estate, construction and power production and distribution.
In 2018, the tax watchdog inspected 593 enterprises withrelated party transactions which helped collect 1.6 trillion VND in tax arrearsand fines, cut losses by 4.8 trillion VND and increase taxable incomes bynearly 7.2 trillion VND.
In 2019, 579 companies were inspected to collect 1.16trillion VND in arrears and fines, reduce losses by 5.8 trillion VND andincrease taxable incomes by 5.9 trillion VND./.
The draft would replace Decree 20/2017/ND/CP.
The finance ministry said the Decree 20 had contributedsignificantly to the fight against transfer pricing in the past three years butthe 20 percent limit to the deductibility of interest expenses caused alot of difficulties for enterprises.
The regulation meant the deductibility of interest paymentswas limited to 20 percent of the company’s earnings before interest, taxes,depreciation, and amortisation with the excess carried forwardindefinitely.
The ratio of 20 percent was within the corridor of 10 percentto 30 percent recommended by the Organisation for Economic Cooperation andDevelopment (OECD).
However, the cap of 20 percent was not appropriate to Vietnamwhere most firms were thinly-capitalised with the level of debt much greaterthan equity capital, according to the finance ministry.
Increasing the cap to 30 percent aimed to help enterpriseshave more capital for investment and to promote the transition of capitalraising structure for operation, the ministry said.
The ministry said the application on international standardsmust be appropriate to the situation in Vietnam, adding that domesticenterprises needed time to narrow the development gap with the OECD’s membercountries.
The draft also includes regulations about conditions fordeducibility of related party transactions to prevent transfer pricing,the ministry said.
Dinh Mai Hanh, the tax partner of Delotte Vietnam, was quotedby Dau Tu (Investment) online newspaper as saying that the 20 percentratio limit aimed to prevent the thin capitalisation strategy to avoid tax.
However, the regulation caused a lot of difficulties todomestic firms, especially those in the parent-company model or those insectors requiring huge capital like real estate.
Nguyen Duc Nghia, President of HCM City Tax Agent Club, saidthe ratio cap of 20 percent or 30 percent would not be important. How to accuratelyidentify subjects to the regulation was more important, he said, adding thatmost Vietnamese firms were thinly-capitalised and must seek loans for operationand most (around 97 percent) were small or medium-sized enterprises.
Deputy Director of the General Department of Taxation Dang NgocMinh said among nearly 4,000 enterprises with related party transactions andinterest expenses, about 700 had the ratio of interest expense on EBITDA higherthan 20 percent (more than 450 were foreign-invested).
The deducted interest expense was estimated at about 18trillion VND (775.8 million USD) each year, 10 trillion VND was for domesticcompanies.
Domestic firms which had the ratio of interest expense higherthan 20 percent were mainly operating in manufacturing and processing,real estate, construction and power production and distribution.
In 2018, the tax watchdog inspected 593 enterprises withrelated party transactions which helped collect 1.6 trillion VND in tax arrearsand fines, cut losses by 4.8 trillion VND and increase taxable incomes bynearly 7.2 trillion VND.
In 2019, 579 companies were inspected to collect 1.16trillion VND in arrears and fines, reduce losses by 5.8 trillion VND andincrease taxable incomes by 5.9 trillion VND./.
VNA
