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The draft Corporate Income Tax Law (CIT), to be tabled at the National Assembly’s fifth session in May, envisages adding a new regulation that interest expenses paid for a loan amount surpassing enterprise’s equity capital by more than four times will not be considered an allowable cost for deduction when calculating taxable incomes. For a credit institution, the interest expense control level is set at 10 times of its equity capital.
Deputy minister of Finance (MoF) Vu Thi Mai argued the proposed move was because there were many firms who have resorted to loans to maintain operations with loan amounts several times higher than their equity capital. This could threaten the financial stability of themselves and their creditors, while causing losses to state budget since the bigger the loan amount is, the higher their interest expense will be, casting a dent in firms’ revenue and profits.
“Averting taxing through capitalising on ‘thin capital’ is commonplace not only in Vietnam, but all over the world,” said Mai.
A MoF survey showed that many countries also set out a regulation that part of the interest expenses of a loan exceeding a certain regulated rate will not be regarded as allowable cost for reduction when calculation CIT.
For instance, in New Zealand, Germany, Australia, Japan and Russia such loan/equity capital control rate is set at three times, meaning that the interest expense for the loan amount more than triple firm’s equity capital will not be taken as allowable cost for reduction in CIT taxing. In some other countries like the US, France and Canada the control rate is even set at one to two times of (a firm’s equity capital.
In China, the control rate for firms is two times and for credit institutions five times for equity capital.
“To ensure financial security for firms and the economy generally, the amended CIT Law should consider controlling the allowable cost towards the amount of interest expense exceeding the regulation,” said Mai.
“However, the MoF proposes the regulation shall be applicable from January 1, 2016 only to support firms in current context of economic hardships, to enable capital thirsty firms to take initiative in business restructuring and balance their capital sources,” Mai added.
Vietnam Tax Consultant Association chairwoman Nguyen Thi Cuc agreed with the MoF proposal saying that the new move could put firms whose operations are mainly based on loans in a pickle in the initial period. But, in the long-term it would help ensure firms’ financial stability, abate risks associated with banks’ bad debts and enhance efficiency of the anti-transfer pricing fight.
“However, further study would be necessary to set out a suitable control rate, may be from four to five times of firms’ equity capital,” Cuc said.