A Japanese electronics factory in Ho Chi Minh City. Photo: VNA
The Ministry of Finance has announced a plan to amend Vietnam’s corporate tax law and restrict tax deductions that can potentially affect thousands of companies, including many foreign firms, local media reported.
Under the current law, interest paid on business loans is tax deductible.
But in a draft recently published, the finance ministry seems to have changed its mind on the deductibility rule, which in theory could help many companies reduce their taxable amount significantly if they have huge interest payments to declare.
Now the ministry says companies in the manufacturing sector should only be allowed to write off interest payments if their debt-to-equity ratio is 5 to 1, according to news website Saigon Times Online.
For other companies, the maximum ratio is only 4 on 1, before being lowered to only 3 to 1 after three years. Interest on excessive loans will no longer be tax deductible. If the amendments are passed by legislators next month, they will take effect in 2016.
‘Enormous’ interest payments
When businesses are financed through a high level of debt compared to equity, they are facing huge financial risks, the ministry was quoted as saying.
It seemed to suggest that that some foreign companies may have claimed more deductions than they are truly entitled to, simply by declaring “enormous” interest expense.
Several companies paid up to several trillions dong a year of interest to their own parent companies abroad, the ministry said, adding that they kept reporting losses in Vietnam despite expansion plans.
It is “necessary” to set up more regulations in order to help businesses guarantee their financial safety, increase the economy’s health, and help prevent the law from being abused, the ministry said.
In a comment on the draft, a representative of Earnst & Young Vietnam suggested the ministry delay the new rule to 2018 to prevent it from affecting business activities.
Dang Thi Binh An, chairwoman of tax consultant C&A, meanwhile, said the ministry should not set a different ratio for each sector, but one for all, considering that businesses invest in multiple sectors.