Applying the ceiling interest rate under Decree No.20/NĐ-CP: Many large businesses are at risk if they have to pay hundreds of billion VNĐ more than tax every year
From the date of Decree 20/2017 /ND-CP regulating tax administration for associated transactions. This Decree comes into force from May 1, 2017 with the goal of managing and combating the loss of corporate income tax with related businesses that limit the valid interest expenses at only 20% of the total net profit generated from business activities. Net profit from business activities plus interest expenses, depreciation expenses in the taxpayer’s period
“Article 8. Determination of costs for assessment of tax in certain specific cases for enterprises engaged in particular related-party transactions
3. Taxpayer’s total loan interest cost arising within a specified tax period qualified as a deduction from income subject to corporate income tax shall not exceed 20% of total net profit generated from business activities plus loan interest costs and amortization costs arising within that period.
This regulation shall not apply to taxpayers who are subjects of application of the Law on Credit Institutions and the Law on Insurance Business.
Taxpayers shall declare proportion of loan interest cost arising within a specified tax period according to the Form No. 01 hereto appended”
One of the key issues of Decree 20 is to control interest rates. Clause 3, Article 8 stipulates: “Taxpayer’s total loan interest cost arising within a specified tax period qualified as a deduction from income subject to corporate income tax shall not exceed 20% of total net profit generated from business activities plus loan interest costs and amortization costs arising within that period” – equivalent 20% EBITDA. In that case, interest expense in excess of 20% will be considered as unreasonable cost and taxable.
One of the most inadequacies of interest rate ceiling control is the impact on borrowing and on-lending activities between the parent company and its subsidiaries, which are common in state-owned corporations and corporations. as well as private companies
The parent company plays a key role in mobilizing loans from domestic and foreign sources, and then transfers this ca pital to subsidiaries. This model is highly advanced and applied by many large businesses around the world, because this helps both increase the efficiency of capital use, and optimize the coordination activities will be focused on a focal point is the parent company. Subsidiaries will only focus on production and business.
One of the best examples is Electricity of Vietnam – EVN. In a document to the Ministry of Finance in April 2018, EVN said:
The nature of associated transactions is “re-lending” between EVN and its member units in accordance with the Government’s regulations and adherence to the market price principle, accordingly, if calculating the interest cost limit If borrowing as stipulated in Decree 20/2017 / ND-CP, the impact of this content on the financial situation of EVN and the Corporations (especially Power Generation Corporations) is very large, causing difficulties. difficulties in balancing EVN’s investment capital when investing in power projects according to the Government’s Planning