VietNamNet Bridge - Vietnamese corporations have complained that the new solution to fight against transfer pricing by controlling loan interest rates is causing problems for their operations.

The government Decree No 20/2017 on tax management on businesses which have related party transactions stipulates that the total accrued expenses on loan interest must not be higher than 20 percent of the total net profit from business, plus loan interest and amortization expenses. 

In an appeal lodged to the Ministry of Finance (MOF), Electricity of Vietnam (EVN) said the regulation has had a big impact on the financial situation of the corporation because it makes it more difficult to arrange capital for electricity projects which require huge capital. 

To implement power development projects, EVN has to borrow money from many different sources and observe market rules. 

EVN also complained that the amounts of taxes EVN and its subsidiaries have to pay have soared after the new policy took effect in May 2017. The amount of corporate income tax that EVN GENCO 1 has to pay is VND339 billion higher than previously, while the figure is VND212 billion for EVN GENCO 3.

Lilama, the nation’s leading machinery installation corporation, has also expressed its dissatisfaction about the regulation. Decree 20 is applied only to enterprises which have related party transactions, which means unfair treatment.

A representative of Lilama said Lilama and its subsidiaries all operate in Vietnam and bear the same corporate income tax rate, therefore, Lilama does not have reason to conduct transfer pricing.

“With the new regulation, the corporation’s situation would be worse,” he said. “It may occur that some companies make plus (+) profits before tax, but have minus (-) profits after tax, and some other companies have minus (-) profits before tax, but still have to pay corporate income tax,” he said.

Commenting about the effects to the national economy, an analyst commented that the influences will be large. Not only state-owned economic groups, but all the companies that have subsidiaries and investment activities will suffer.

Nguyen Van Thuan from the HCMC Finance & Marketing University said the impact would be high on businesses with low profits. 

In particular, the enterprises in their early operation stage will encounter more difficulties, because they have to pay high interest for loans, but the expenses cannot be considered as operation costs.

Thuan also pointed out that there is a conflict among legal documents. “The currently applied Corporate Income Tax (CIT) allows deduction of all reasonable and lawful expenses. So, Decree 20 which sets the ceiling of 20 percent on expenses for loan interest doesn’t come in line with the CIT Law,” Thuan said.

US$1=VND22,000

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