Businesses to enjoy higher deduction rate of loan interest expenses
The deduction limit of enterprises’ total loan interest expenses will be increased to 30 percent from the current 20 percent of earnings before interest, tax, depreciation and amortization (EBITDA).
Such is a salient point of Government Decree 68, which is enacted to revise Article 8.3 of Decree 20 of 2017, prescribing tax administration of enterprises engaged in transfer pricing.
According to the drafter, the Ministry of Finance, the current ratio of 20 percent prescribed in Decree 20 is within the range of 10 to 30 percent as recommended by the Organization for Economic Cooperation and Development (OECD) and assessed by the World Bank (WB).
However, after three years of implementation of Decree 20, despite numerous achievements recorded in the combat of transfer pricing, this interest expense deduction limit is now considered inappropriate as it has limited revenues and competitiveness of enterprises having transactions with related parties, particularly those engaged in real estate business, high technologies and securities.
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Against the backdrop that most businesses have been toughly affected by the Covid-19 pandemic, Decree 68 is expected to create favorable conditions for enterprises to concentrate their capital on maintaining operation and developing production and business activities.
Specifically, under the new provision, total loan interest expenses (after clearing against deposit and lending interests) arising in a period and allowed to be deducted upon calculation of income liable to corporate income tax must not exceed 30 percent of total net earnings generated from business activities in the period plus loan interest expenses (after clearing against deposit and lending interests) plus depreciation cost arising in the period.
Non-deductible loan interest expenses will be carried forward to the next tax period upon determining total deductible loan interest expenses in case such expenses arising in the next tax period are below the 30-percent limit. Loan interest expenses may be carried forward for a maximum period of five consecutive years, starting from the year following the year in which non-deductible loan interest expenses arise.
Worthy of note, unlike Decree 20, total interest expenses arising in a period and allowed to be deducted from income liable to corporate income tax under Decree 68 will be calculated after clearing against deposit and lending interests.
In a talk with baodautu.vn, Vu Manh Cuong, Director of the Tax Audit-Inspection Department (the General Department of Taxation), said the new method of calculation of loan interest expenses would create favorable conditions for enterprises to raise capital and enjoy tax breaks, which are very significant given the current situation.
However, the new Decree will not apply to loans of taxpayers that are credit institutions defined in the Law on Credit Institutions or insurance firms defined in the Law on Insurance Business, ODA loans, loans on-lent by the Government from foreign loans to enterprises, loans provided for implementation of national target programs on building of a new countryside and sustainable poverty reduction, and loans provided for investment in programs or projects for implementation of the State’s social welfare policies such as construction of resettlement houses, houses for workers and students, and other public-utility projects.
Retroactive effect for the 2017 and 2018 tax periods
Decree 68 will be applied from the 2019 corporate income tax period and retroactively effective for 2017 and 2018.
As required by the Decree, taxpayers will have to make additional corporate income tax declarations for 2017 and 2018 for re-determination of loan interest expenses and payable corporate income tax amounts (if any) before submitting them to tax offices within 2020.
After an additional declaration is made, if there is a corporate income tax reduction, the late-payment interest amount will be reduced accordingly.
If corporate income tax and late payment interest amounts already remitted to the state budget are higher than the determined corporate income tax and late-payment interest amounts, the difference will be cleared against corporate income tax amount payable in 2020. If the corporate income tax amount payable in 2020 is not enough for the difference clearing, the remainder will be cleared against corporate income tax amounts payable in subsequent years until 2024.
From Cuong’s viewpoint, the retroactive effect of Decree 68 for 2017 and 2018 might increase burden for the state budget as the estimated state budget revenue of VND 165 trillion will not be collected. However, this move is appreciated by experts as a prompt action of the Government to help businesses overcome the current tough situation and stabilize their operation.
Sharing Cuong’s viewpoint, Pham Duy Khuong, founder and operator of the ASL Law Firm, said in an interview with the Vietnambiz.vn that the retroactive effect of Decree 68 has shown the spirit of an upright, facilitative and active government in the hard time of the country.
No inspection at enterprises
Under Decree 68, in case tax offices or competent state agencies have made conclusions on payable corporate income tax amounts of enterprises through inspection and examination at such enterprises, the latter may request the former to re-determine their payable corporate income tax amounts as well as late-payment interest amounts for difference clearing in 2020 and subsequent five years.
The re-determination of corporate income tax amounts will be carried out at tax offices without requiring inspection and examination at enterprises, and there will be no revision of examination and inspection conclusions made for 2017 and 2018.
In order to make the new provision suit the reality, lawyer Khuong proposed the Government to take measures to supervise the implementation by enterprises so as to promptly detect law violations, if any, for strict handling, and address problems facing enterprises in practical implementation. By doing so, may the Government find out appropriate points which need to be revised, Khuong stressed.
According to the General Department of Taxation’s statistics, since May 2017, among nearly 4,000 enterprises having transactions with related parties, more than 700 have the loan interest expense ratio higher than 20 percent, of which 450 are foreign-invested enterprises and over 250 are domestic ones. The amount of loan interest expense deducted from income liable to corporate income tax reaches some VND 18 trillion per year.