After consulting with businesses and experts, VCCI has proposed an amendment and supplementation of articles in Decree 132/2020 on tax management of enterprises with related-party transactions.

According to VCCI, the limit on loan costs stipulated by Article 16 of Decree 132 is intended to fight against enterprises’ ‘thin capitalization’ problem, aiming to help ensure the financial security of enterprises, and prevent them from borrowing too much. 

‘Thin capitalization’ is understood as a highly leveraged capital structure where a company's debt-to-equity ratio is too high.

However, VCCI believes that the regulation is unreasonable and has had an adverse impact on Vietnam’s businesses, especially large corporations.

VCCI pointed out that the situation is ‘understandable’ and the thirst of capital is common in developing countries under industrialization.

It said that the limits on capital costs have affected the formation of large economic groups. The impact is contrary to the Party’s Resolution 10 released in 2017 on private economic development.

“The limitation has been hindering the development of enterprises into large corporations and discouraging private economic groups to invest in risky business fields,” the VCCI document said.

In general, when a company wants to invest in a risky project, such as large-scale production project, its holding company will come forward to borrow money from banks and re-lend to the subsidiary. This is a ‘third party related transaction’ and is covered by the regulation on loan cost ceiling.

For these reasons, VCCI believes it is necessary to amend the regulation, exempting enterprises from the obligation of satisfying requirements on loan cost limits applied to third-party related transactions among businesses bearing the same tax rates.

High capital costs

Under Decree 132, the loan costs of related parties must not be higher than 30 percent of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization). 

The article imposes a fixed rate of 30 percent, while not allowing enterprises to prove their actual expenses in accordance with ALP (the arm's length principle), i.e. the parties of a transaction are independent and on an equal footing.

In other words, if enterprises’ actual loan costs are higher than 30 percent of EBITDA, the costs won’t be recognized as lawfully deductible expenses when calculating taxable income.

In late 2022 and early 2023, the lending interest rates soared in the credit market because of macroeconomic changes, which then caused the enterprises’ loan costs to exceed 30 percent. As a result, enterprises still had to pay high interest rates for their loans, and expenses were not recognized as lawful expense items.

So, though businesses have to pay a lot for bank loans, they still have to pay high corporate income tax.

In the latest move, the Ministry of Finance (MOF) planned to amend Article 5 by excluding the determination of related parties when credit institutions don’t regulate, control and contribute capital to borrowing businesses, or are not controlled by another party.

VCCI, while commenting that the amendment is necessary, still said the amendment is not enough to cover all possible cases.

If banks and borrowing businesses have relations but they lend and borrow capital at reasonable interest rates (market interest rates), they will still have a limit of 30 percent. This is not in line with the principle of fighting against transfer pricing, the major purpose of Decree 132.

VCCI emphasized that it is unreasonable to not allow businesses to pay more than 30 percent of EBITDA on bank loan interest in a transaction that satisfies requirements to be recognized as ‘arm’s length transaction’.

VCCI believes that it would be better to allow businesses to prove that they make transactions in accordance with the ‘arm’s length transaction’ principle by comparing the transaction with other lending transactions and comparing the interest rates applied in the transaction with the average market interest rates.

If they can prove this, all of their expenses must be recognized and deductible when calculating taxable income.

If MOF accepts the proposal, VCCI wants the principle to be applied from the 2022 taxable year period.

Luong Bang