Tax experts expect that the cap on interest expense for tax reduction would help prevent transfer pricing and tax evasion. (File Photo) Hanoi (VNA) - Inthe latest draft of Law on Corporate Income Tax, the Ministry of Financehas raised a regulation aimed at preventing multinational companies withrelated-party transactions from evading taxes.
According to the proposedregulation in the amended draft, the part of interest expense that exceeds 20 percentof the company’s earnings before interest, taxes, depreciation and amortisation(EBITDA) will not be subject to tax deduction.
The ministry said severalforeign-invested companies operating in real estate, trade and services, forexample, reported losses despite posting growths in revenue and expanding theirbusinesses.
Looking at their financialreports, the ministry found that one of the reasons for the loss was the hugesum of interest expense the parent companies needed to pay.
Experts said the cap oninterest expense for tax reduction would help prevent transfer pricing and taxevasion.
Economic expert Nguyen Tri Hieusaid the fight against transfer pricing and tax evasion had been a headache formany years. If the regulation was included in the CIT law, tax evasion could beprevented, Hieu said.
He also said the cap oninterest expense for tax reduction should be applied to companies that hadrelated-party transactions and differences in CIT rates among members.
Meanwhile, the latest drafthas removed a proposed regulation about thin capitalisation that was raised inthe previous draft which largely met with opposition because it might havecaused more difficulty for businesses.
The finance ministry hadpreviously proposed that the part of interest expense for loans which exceededfive times the company’s equity would not be deducted from tax.
According to the Vietnam TaxConsultants’ Association, this regulation, if passed, will cause a lot of difficultiesfor companies whose equity was not enough to maintain their business.
The more they borrowed, themore tax they would have to pay. And if they did not borrow, they would nothave capital to do business, the association said.-VNA
VNA
