Name of recommendations: Recommendation on some contents of the Decree No. 20/2017 / ND-CP dated February 24, 2017 on regulations of tax administration for businesses with associated transactions and the Circular No. 41/2017 / TT-BTC dated April 28, 2017 on guiding some articles

Status: Has not been responded

Recommended by units: The Vietnam Machinery Installation Corporation - Lilama Corporation (LILAMA)

Official letter: No 0477/PTM - VP, dated: 2018-03-19

Recommended contents:

Recently, the Government issued a Decree No. 20/2017 / ND-CP dated February 24, 2017 on the regulation on tax administration for enterprises having associated transactions and the Ministry of Finance issued a Circular No. 20/2017 / 41/2017 / TT-BTC dated April 28, 2017 guiding some articles of the Decree No. 20/2017 / ND-CP

LILAMA has studied the contents stipulated in the Decree and the above Circular to implement. However, in Clause 3 of Article 8, the Decree No. 20/2017 / ND-CP on determination of expenses for tax calculation in a number of specific cases, for businesses having specific associated transactions: ... 3. Total interest expense incurred in the taxpayer's period to be deducted upon determination of income subject to corporate income tax shall not exceed 20% of the total net profit from business activities plus interest expenses, In the period of taxpayers' tax ... ", there are some obstacles when implementation, they will have a big impact on production and business’s results of LILAMA, as follows:

1. Vietnam Machine Installation Corporation - Joint Stock Company and associated companies operate in the territory of Vietnam and jointly pay a corporate income tax rate benefiting from corporate income tax. As a result, the corporation's interest expenses actually incurred from loans at credit institutions, at market prices (equivalent to independent prices), with valid dossiers and vouchers under current regulations of the Law on Corporate Income Tax. As a result, the gap on the total interest expenses deducted (including associated transactions and independent transactions) is not consistent with the nature and purpose of tax administration. for associated transactions.

2. The ceiling interest rate applicable to bonded businesses shall be subject to the Decree. However, other businesses without linkages shall not be liable on this regulation. Meanwhile, the nature of interest expenses from capital mobilizations of businesses (regardless of whether or not there are linkages) at credit institutions is the same. Therefore, this provision is at present unbalanced between affiliate businesses and non-affiliated businesses.

iii. LILAMA is specialized in the field of general contractor, construction and mechanical engineering of medium and large scale industrial projects. Therefore, LILAMA projects have great value with long construction; The time required for acceptance, arranging capital and paying for the investor/main contractor need more time; the investor / main contractor retains payment for warranty obligations. Meanwhile, the gross ratio of the EPC contractor is low (due to the fact that the equipment is mainly imported from foreign countries at the actual cost), the equity of LILAMA is small compared to the scale of operation ( 2016: revenue of the holding company was VND 7.377 trillions, owner's equity is VND 887 billions, consolidated revenue was 11.633 trillion dong, owner's capital was 1.866 trillion dong, 2017: revenue from the holding company was VND 15.811 billions, chartered capital was VND 923 billions), the charter capital of companies was still difficult due to the risk of LILAMA's operation. Therefore, in order to carry out medium and large scale projects, LILAMA has to mobilize large amounts of loans from credit institutions, resulting in high interest expenses which exceed the ceiling rate stipulated by the Decree.

Furthermore, the size of capital of small LILAMA’s companies, each individual company of LILAMA can not win the tender of large and medium scale projects. To create competitive advantages and to implement medium and large scale projects. The holding company and its subsidiaries, affiliations are connected into a combination that included companies doing together . Each company is a chain in the product chain. Accordingly, the holding company or it’s subsidiary has good competitiveness when the bid is awarded to the remaining subsidiaries and associates to perform tasks according to the strengths of each subsidiary and associated company. Therefore, the nature of LILAMA's associated transactions is only aimed at increasing competitiveness, focusing on specialization of products for each company. In the meantime, if LILAMA avoids applying the interest rate ceiling, LILAMA will have to outsource its work to external contractors. Few enterprises besides LILAMA meet the requirements to carry out large and medium scale construction projects), which will make LILAMA reduce its competitiveness, do not orient a development strategy, some companies will reduce the work and lead to the risk of bankruptcy.

In recent years, the domestic market is increasingly fierce competition. In addition, because of the small capital of LILAMA, the financial situation of companies in LILAMA is very difficult. Therefore, in order to ensure the maintenance of the operations of LILAMA companies, to ensure the income of workers, fulfill their obligations to the State budget, LILAMA has  to try to use measures to maximize the operating costs and use the financial resources reasonably. However, if the new regulations on interest expenses as mentioned above, the financial situation of LILAMA will become more difficult, many companies will be difficult to overcome in the current difficult period. This will lead to: There are companies are profitable before tax, but after the tax payment of corporate income tax will be negative after corporate income tax and there are companies accounting profit before tax still have to pay corporate income tax, this leading to more losses.

To overcome the above difficulties and obstacles, and at the same time comply with the Government's guideline in the Government's Resolution No. 35 / NQ-CP dated May 16, 2016 on support and development of enterprises till 2020, LILAMA would like to request the Ministry of Finance to consider the proposal of the Government to amend the policy in line with the characteristics of each business field, especially the field of construction and mechanical engineering.