In the latest draft of Law on Corporate Income Tax, the Ministry of Finance has raised a regulation aimed at preventing multinational companies with related-party transactions from evading taxes.

Tax experts expect that the cap on interest expense for tax reduction would help prevent transfer pricing and tax evasion. (File Photo)

According to the proposed regulation in the amended draft, the part of interest expense that exceeds 20 percent of the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA) will not be subject to tax deduction.

The ministry said several foreign-invested companies operating in real estate, trade and services, for example, reported losses despite posting growths in revenue and expanding their businesses.

Looking at their financial reports, the ministry found that one of the reasons for the loss was the huge sum of interest expense the parent companies needed to pay.

Experts said the cap on interest expense for tax reduction would help prevent transfer pricing and tax evasion.

Economic expert Nguyen Tri Hieu said the fight against transfer pricing and tax evasion had been a headache for many years. If the regulation was included in the CIT law, tax evasion could be prevented, Hieu said.

He also said the cap on interest expense for tax reduction should be applied to companies that had related-party transactions and differences in CIT rates among members.

Meanwhile, the latest draft has removed a proposed regulation about thin capitalisation that was raised in the previous draft which largely met with opposition because it might have caused more difficulty for businesses.

The finance ministry had previously proposed that the part of interest expense for loans which exceeded five times the company’s equity would not be deducted from tax.

According to the Vietnam Tax Consultants’ Association, this regulation, if passed, will cause a lot of difficulties for companies whose equity was not enough to maintain their business.

The more they borrowed, the more tax they would have to pay. And if they did not borrow, they would not have capital to do business, the association said.-VNA