Name of recommendations: Article 8, Point 3 of the Decree 20/2017 / ND-CP of the Government issued on February 24, 2017 stipulates the principle of deducting reasonable expenses for associated transactions.

Status: Responded

Recommended by units: TheJapan Business Association

Official letter: No 2099/ PTM - KHTH, dated: 2019-09-16

Recommended contents:

Regarding the Decree 20 (Decree 20/2017 / ND-CP) issued by the Government on February 24, 2017 and effective from May 1, 2017, the Association has some recommendations as follows:

Article 8, Point 3 of the Decree 20 provides for the principle of deducting reasonable expenses for associated transactions, whereby the total interest expenses arising in the taxpayers' period shall exceed 20% of the total net profit. From business activities plus interest expenses, depreciation expenses of taxpayers during the period will not be deducted when confirming income subject to corporate income tax.

 Article 8. Determination of expenses for tax calculation in a number of specific cases for enterprises having specific associated transactions:

The total interest expense incurred in the period of the taxpayer is deductible when determining the income subject to corporate income tax does not exceed 20% of the total net profit from business activities plus interest expenses, expenses depreciation during taxpayer's period.

 Because the Decree 20 does not specify the scope of application, despite the Official Letter 3790 of the General Department of Taxation issued in October 2018, it states that the application of reasonable deduction rules even in the absence of a loan from related parties (in case of borrowing from independent parties only) if there are other transactions with related parties, some official replies of local Tax Departments provide disagreement methods. most with comments above.

First of all, the Association understands that Article 8 is a provision for "enterprises with specific related party transactions", so it can be said that the judgment about just having a transaction with the related party will generate interest. It is unreasonable to comply with the above regulations, and the Association considers that it is necessary to clarify about “special associated transactions”.

Japanese companies operating in Vietnam are concerned about the unclear scope of the regulation as well as the possibility of increased corporate income tax costs due to this deduction provision. The association also heard that many Vietnamese companies have complained about the regulation.

 The loan interest when making a foreign loan will be subject to foreign contractor tax, while the loan interest in the domestic loan will be subject to corporate income tax on the interest received by the lender. If the rule does not allow deduction, there will be double taxation on the same income. The double taxation makes the burden on businesses larger, and from the perspective of fair competition in the market, the Association thinks that is an unexpected thing.

 The implication of fair market competition is that small and medium-sized enterprises with less financial resources will have a high degree of dependence on business loans from the independent party, increasing the cost of tax revenues. Importing enterprises due to these regulations will affect and reduce the competitiveness of small and medium enterprises. This provision favors businesses that are financially strong as well as have low rates of independent borrowing, which goes against the policy of promoting small and medium enterprises and supporting industries being promoted. by the Vietnamese government.

In addition, with heavy infrastructure and industrial projects requiring large sums of money for initial investment, it is indispensable to raise capital by borrowing from independent parties. If this provision leads to the high cost of corporate income tax in infrastructure business, to recover the cost of the business, the unit price of the service will have to be increased, resulting in an additional burden for Vietnamese people in the future. The Association understands that the Vietnamese government is currently on the trend of promoting infrastructure projects via PPP, but as the number of infrastructure projects implemented by PPP, such as BOT, is increasing. the burden of people in the future will be greater.

 Moreover, in many cases, startups need to borrow capital, and even if the company generates a profit before tax, it is probably because of this provision that the after-tax profit is lost. Such regulations in particular reduce the business motivation of new companies and adversely affect the smooth development of the economy.

 It can be seen that the application of this provision to both interest costs from the independent party when in Vietnam still has the need to raise capital as above in practice will have a huge negative impact.

 Therefore, the Association would like to propose as follows:

- From the purpose of the BEPS 4 Action Plan to combat tax base erosion and move large amounts of profits to countries with relatively lower tax rates among the group companies, we think,it is unreasonable to impose this provision on the interest arising from an independent party, so we hope that the Ministry of Finance would like to clarify the exception to the interest expenses incurred on a loan from an independent party. and, as well as a loan from an independent party that is guaranteed by an affiliated party through a decree or letter.

- Regarding the interest of related parties, the application of this law to all businesses will lead to an inequality between businesses with different business characteristics or between businesses in the same industry but in different growth stages. The Association is concerned that this will affect the viewpoint of fair competition market, so we would like to propose the addition of some exceptions in the Amended Law.

+ Not applicable in 5 years from the time of the first revenue generated after establishment.

+ Increase the limit rate of EBITDA to 30%.

+ Allow loan interest expense to be transferred to the next period in case interest expenses are eliminated according to the above provisions.

  In addition, in the latest draft of the amended Tax Law, compared to the previous draft, the regulations on this capital has been abolished. We hope the Ministry of Finance can explain the reasons for the Association.