VCCI: 'Anti-thin capital regulations have negative impacts on businesses'

Limiting borrowing costs will affect businesses as well as the ability to form economic groups, according to VCCI.

Giving comments to the Ministry of Finance on the Decree on tax management for enterprises with related party transactions, the Vietnam Federation of Commerce and Industry (VCCI) noted the ceiling on interest costs of domestic transactions.

Thin capital is when a business operates mainly on borrowed capital, the ratio of borrowed capital to equity is too high. Limiting thin capital will help ensure financial security, avoiding large businesses from borrowing too much, easily losing liquidity.

However, VCCI believes that this regulation does not ensure reasonableness, causing many negative impacts on Vietnamese enterprises, especially large enterprises. Because, the situation of thin capital is common and necessary in the new stage of industrialization in developing countries.

In fact, in developing countries that industrialize late, the growth momentum depends heavily on the ability to reduce product costs based on capital accumulation and more flexible management. Accordingly, businesses have to rely heavily on loans and assistance from lenders to enhance corporate governance capacity, helping to reduce costs. Along with the fact that financial markets are not really transparent, businesses in late industrializing countries depend more on loans than businesses in early industrializing countries.

Therefore, the application of anti-thin capital rules of developed countries needs to be considered more carefully in the context of Vietnam.

On the other hand, regulations limiting loan costs also negatively impact the formation of domestic economic groups as well as encourage these groups to invest in risky fields, according to VCCI.

Typically, when a corporation wants to invest in a risky field, the parent company will borrow from the bank and then lend to the subsidiary. This is an affiliated transaction and is affected by the interest expense ceiling regulation.

Therefore, VCCI proposed that the drafting agency amend in the direction of exempting the obligation to meet the regulations on limiting interest expenses for related transactions between domestic enterprises with the same tax rate.

In addition, in the proposal sent to the Ministry of Finance, VCCI also said that the regulation that the interest expense of enterprises with related-party transactions cannot exceed 30% of the total net profit from business activities in the period is unreasonable.

The law is applying a fixed rate of 30% without allowing businesses to prove this cost according to the principle of independent transactions as with other types of transactions. That is, even in cases where businesses have completely normal interest costs compared to the general market level, and the parties do not show any signs of pushing interest rates up or down to transfer profits, reasonable costs cannot be recorded when calculating taxes.

According to VCCI, recently, due to macroeconomic fluctuations, interest rates in the market have increased sharply, causing many businesses' interest expenses to increase beyond 30%. Businesses still have to pay the interest expense exceeding 30% to the bank but it is not considered a deductible expense when calculating taxes. Therefore, many businesses, despite suffering large losses due to the sharp increase in interest expenses, still have to pay corporate income tax to the State.

The Ministry of Finance has recently proposed to amend the regulation to exclude the determination of affiliated relationships when the bank does not participate in the management, control, capital contribution or investment in the borrowing enterprise. That is, the enterprise may not be subject to the 30% cost ceiling if the borrowing bank does not manage, control or contribute capital.

According to VCCI, this helps to better define the nature of the relationship and help to resolve the problems. However, this approach will not solve all cases.

For example, in cases where banks and borrowing enterprises have management, control, and capital contribution relationships, but lending transactions with appropriate interest rates are still controlled by the 30% threshold, this is not really consistent with the basic objective of the Decree, which is to combat transfer pricing.

In the above case, the two parties did not change the interest rate to "distort" the price, the transaction still followed the principle of independent transaction. It is unreasonable not to calculate the interest expense exceeding 30% in a transaction that satisfies the principle of independent transaction.

Therefore, VCCI proposed that the Ministry of Finance amend the regulation to allow businesses to prove that their lending transactions are based on the principle of independent transactions by declaring and compiling documents to compare with other lending transactions or with the interest rate level on the market. In case this transaction is in accordance with the principle of independent transactions, the business can deduct all taxable expenses, even if the expenses exceed 30%. According to VCCI, some countries in the world also apply this principle.

The Ministry of Finance is expected to collect comments on the draft Decree in the first quarter of 2024 to submit to the Government for promulgation of amendments in the third quarter of the same year. Previously, the Ho Chi Minh City Real Estate Association (HoREA) also proposed that the Ministry of Finance remove the 30% ceiling on interest expenses because it is unnecessary. HoREA believes that this ceiling on interest expenses should only be controlled for foreign enterprises with related-party transactions and not yet subject to the global minimum tax.

Duc Minh

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