Dealing with difficulties of regulation on controlling the interest rate in Decree No 20 on related-party transactions

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Decree no 20 has a "winning point" of FDI enterprises that continuously expand their business but report continuous losses. Photo: Thuy Linh.

The difficulties in controlling interest expenses

Decree 20 on tax administration regulations for enterprises with related-party transactions comes into effect from May 1, 2017, was assessed as a "winning point" of FDI enterprises that continuously expand their business but reported losses.

According to the General Department of Taxation, since the establishment of Decree 20, the number of enterprises voluntarily declaring related-party transactions has increased over the years. Up to now, the units have changed and markedly changed their awareness of self-compliance in declaring the objects of application and making dossiers for determining prices of related-party transaction.

At the results of the inspection and examination from 2017 to the first half of 2019, the whole industry has conducted inspections, examinations and retrospective collection of over VND 41,000 billion, reducing the deduction of nearly VND 5,000 billion, reducing the loss of VND 86,000 billion. In particular, the inspection and verification of the price of related-party transactions has been effective, collecting over VND 1,400 billion, reducing the loss of over VND 13,700 billion and adjusting the increase of taxable income to nearly VND 12,000 billion.

However, after a period of application, the regulation on controlling interest rates in this Decree is facing some difficulties from domestic enterprises. Accordingly, in Clause 3, Article 8 of Decree 20 regulates that the total interest expenses deducted for tax purposes shall not exceed 20% of the EBITDA index (net profit before tax and interest). According to some businesses, this regulation will create many difficulties, especially for private economic groups with the model of holding and subsidiary companies.

Before these comments, many experts in the field of taxation said that the control of interest expenses for related-party transaction activities is consistent with international practices. This regulation is to avoid price fraud and profit transfer. Since the establishment of Decree 20, in order to prevent price fraud through interest expenses as well as similar expenses, the OECD and G20 have recommended regulations to control interest rates for corporations, holding and subsidiary companies, businesses having related-party transactions with the range from 10% - 30% of EBITDA. For Vietnam, the regulation of controlling at 20% is suitable with international practice.

However, according to Mrs Nguyen Thi Cuc, Chairman of Vietnam Tax Consulting Association (VTCA), through researching and receiving feedback from enterprises, the regulation on controlling interest expenses in Decree 20, the rate is below 20%, there are still some problems for domestic businesses.

"Currently for foreign-invested enterprises, Decree 20 does not cause difficulties or problems or affect the business situation of enterprises. But for Vietnamese enterprises, there are some problems arising in the process of declaring annual tax finalization, including factors to eliminate interest expenses according to the control ceiling, which increases the payable income tax and especially businesses operating in the field of social housing. This field is enjoying preferential tax policy," said Mrs Cuc.

Chairman of VTCA gives an example, in fact, of enterprises operating in real estate may have many branches or operate under the model of holding and subsidiary companies. When the holding company operates its subsidiaries in the same system, there will be related-party transactions. When there is a related-party transaction, any loan, including loans from shareholders, borrowing in the form of bonds, credits are all controlled at 20%. Meanwhile, social housing businesses are ẹnoying tax incentive policies (enjoying corporate income tax rate of 10%) and borrowing preferential loans from the Government through banks.

In fact, most of the social housing project investors have little capital, so they borrow through preferential loans to implement the project to sell at low prices. When borrowing, the interest rate will exceed the ceiling of 20%. The number exceeding this ceiling, according to Decree 20, must be excluded from tax calculation costs. This means businesses borrow and spend real costs, but it can not be counted input costs to determine taxable values.

Decree to replace Decree 20

In response to some enterprises' reflections on regulations relating to controlling interest expenses, the General Department of Taxation has reviewed and evaluated carefully the interest expenses of enterprises regulated by Decree 20 to accurately determine the level of policy influence. Subjects to review such as: Real estate business enterprises, and enterprises operating under the model of corporations. Through review, there are more than 4,000 businesses out of more than 700,000 active businesses subject to declaration under Decree 20. Of this number, about 10% of enterprises declare no profit. The General Department of Taxation will determine the authenticity of the enterprises' feedback, which will report directly to the Ministry of Finance, through which the Ministry of Finance will report and propose the Government to amend in accordance with Vietnam's practice and international practice.

Mr. Dang Ngoc Minh, Deputy Director of General Department of Taxation, said that from now until the end of 2019, the General Department of Taxation will advise to develop legal documents to implement the Law on Tax Administration 2019. In particular, with Decree 20, implementing Directive No. 09/CT-TTg dated 1 April 2019 of the Prime Minister, the Ministry of Finance has reviewed two years of implementing Decree 20 and conducted a review and evaluation of the appropriateness of the provisions on the limit of interest expenses deducted when determining the income subject to Enterprise Income Tax with international regulations, practices and practices of tax collection management.

The General Department of Taxation will acknowledge the comments of associations, industries and enterprises on Decree 20 in general and Clause 3 of Article 8 in particular, this unit will report to the Government and develop a draft Decree to replace the Decree 20 guiding the implementation of the 2019 Tax Administration Law.

Commenting on this Decree, Ms. Nguyen Thi Cuc said that it is necessary to re-study the basis of calculating and controlling interest rates. In addition to learning experiences of other countries around the world, it is also necessary to study more carefully and get more opinions of experts, tax consulting companies and international finance firms, to have suitable bases of calculating tax and interest control.

Interest rates to remain on hold through 2019 The State Bank of Vietnam would hold its benchmark refinancing and discount rate at 6.25 per cent ...

"Tax policy should be synchronous, equal and fair to all subjects. Decree 20 currently only controls interest rates for businesses with related-party transactions, while businesses do not have related-party transactions, the Law on Enterprise Income Tax currently does not regulate the control level. In the future, the Law on Enterprise Income Tax needs to amend and supplement regulations on controlling interest rates for all businesses, ensuring tax equality, not only for related-party transactions,” Ms Cuc said.