Following the supposed changes to value-added consumption tax, the MoF tackled national CIT with a tendentious change to the current level of debt over equity ratio, which is commonly considered a financial leverage for firms to shield themselves against unfavourable income taxes.

 

The MoF said the current CIT regulations did not clearly limit the debt-to-equity ratio at which the interest from such debt is no longer considered an allowable expense. This is because the interest is considered business costs deductible from profits before income taxes.

 

More importantly, this trend tends to affect the State budget as firms considers those debts a non taxable capital flow, thus rendering themselves at a loss while continuing to expand business.

 

In a way, this is a form of corporate tax fraud that has been under the radar for quite sometimes, according to the MoF.

 

This also means many firms with meagre owner’s equity have been relying solely on debts to operate; leaving themselves vulnerable to financial risks and ultimately exposing the entire business environment to systematic risks.

 

In order to counter this, the MoF has resorted to imposing a comprehensive, if not rather debatable, set of limits on different sectors’ levels of acceptable debt over equity ratio.

 

According to the MoF’s newly proposed regulations, for manufacturers, interest payment for the loans exceeding five times the amount of their owner’s equity at the same time will not be tax deductible.

 

Financial institutions such as credit organisations or commercial banks will be allowed a 12:1 ratio between debt and owner’s equity due to the nature of their business.

 

Other forms of business will be given a ratio of 4:1 before their debts’ interest payments become taxable.

The MoF suggested that these regulations come into effect from January 1, 2019.

 

In explaining the motivation behind the policy amendments, the MoF said that it had discovered a number of businesses with foreign direct investment in the real estate, retail and service sectors reporting operational losses despite constant growth in revenue through the years, backed by visible business expansion.

 

This common occurrence, coupled with these same foreign firms’ financial reports citing the cause of loss due to accumulated financial expenses including huge annual loan payable in millions of US dollars to a mother company abroad, has led the MoF to believe that these companies have the incentives and instruments to commit tax fraud.

 

That said, the MoF has also inspected 57 of 85 State-owned enterprises to find that the major debt to equity ratio among these companies is less than 3:1, well within the allowed limit, with just one construction company and one oil company exceeding the 5:1 ratio.

 

This may suggest that the new law changes will be more effective as a safeguard against price transferring between foreign companies and their subsidiaries.

 

Regardless, responses to these policy changes from businesses have not been favourable, as some expressed concern over the lack of funding in near future.

 

In particular, the real estate and construction sector defended their need for a high debt to equity ratio as they are constantly in need of financial leverage to invest in large and costly construction projects, according to a representative from the Sài Gòn Real Estate Corporation.

 

Naturally, since these projects require huge capital inflows with a long depreciation period, the majority of real estate companies rely on bank loans, especially the unlisted ones.

 

Furthermore, economic experts voiced their worry over any unexpected impacts these changes may have on Việt Nam’s business environment, despite the MoF’s sole intention to improve the State budget and to ensure the economy’s financial transparency.

 

With the MoF’s new limits in effect, many companies are expected to encounter difficulties carrying on operations as they will now have to contribute to the State budget an amount of capital that could have otherwise been used to increase revenue and pay back dividends.

 

Economist and banking specialist Nguyễn Trí Hiếu said policy makers should base their decision on the actuality of businesses in different sectors, and should not use the debt to equity ratio as a measurement of a firm’s financial capability.

 

The MoF explained that at present, the Organisation for Economic Co-operation and Development (OECD) recommends a relatively low debt to equity ratio of 3:1 for manufacturers, with a laxer limit of 5:1 for the financial sector, and Việt Nam should likely gear towards these internationally accepted standards.

 

 

On a lighter note, experts have shown their approval of the MoF’s proposal for extra small businesses, whose annual revenue is less than $133,700, to receive a CIT level of 15 per cent, whereas small- and medium-sized ones, whose annual revenue range from $133,700 to $2.2 million, will be subjected to a CIT level of 17 per cent.

 

According to Nguyễn Minh Phong, former Head of the Economic Research Section of the Hà Nội Institute for Socioeconomic Development Studies, the MoF’s tax reduction proposal is within the expected and reasonable level, having taken into account current trend of global integration as well as firms’ actual economic capability.

 

Tô Hoài Nam, General Secretary of the Việt Nam Association of Small and Medium Enterprises, said that the MoF’s new CIT regulation is a great sign of support from policy makers in aiding businesses, and it should receive ample welcome from eligible firms.

 

Nevertheless, Phong reminded the MoF that it must closely monitor the implementation of the new CIT to ensure that all qualified enterprises were subjected to the same tax level in the future.

 

The IT law amendments were introduced at a press conference in mid August by the MoF under the chairmanship of Phạm Đình Thi, Head of MoF’s Tax Policy Department, with attendance by ministerial officials, economic experts and business representatives.