Tax Reliefs Aimed at Boosting Investment

This information was revealed by Mr Nguyen Van Phung, Deputy Director of Taxation Policy Department under the Ministry of Finance at the conference entitled “VAT and corporate income tax in other countries and effects” held in Hanoi. The event was organised by the Financial Strategy and Policy Institute under the Ministry of Finance in cooperation with the European Union Delegation.

 

Mr Phung said “thin capital” will be carefully considered by competent authorities when they calculate the new tax rate.

 

Ved P. Gandhi, international tax expert of the EU Delegation, said “thin capital” businesses are those with little equity capital and overwhelming borrowing capital. Hence, the more money they borrow, the more interest they have to pay. But, this interest amount is included into deductible expenses when taxable corporate income tax is calculated. This approach helps many businesses reduce tax obligations. This is why many companies borrow very much money while their owner’s equity is much less. Consequently, the State loses taxes.

 

He said many countries in Asia and Europe are dealing with this type of “"tax evasion”. And, to combat this reality, many countries have adopted regulations on “thin capital”, like debt on equity ratio or a ban to certain borrowing cost deduction.

 

Ms Nguyen Thi Cuc, President of Vietnam Tax Consultants Association, said that it was time the tax reform strategy for 2011 - 2020 needed to be closer to reality, VAT-free subjects needed to be narrowed, and deductable tax calculation method should to be used rather than current direct method. She said 25 groups of goods and services are not subjected to VAT. This practice excludes many companies from deductible input tax and this will lead to non-continuity of value-added tax. Moreover, there are two rates of VAT, 5 percent and 10 percent, in addition to zero tax, are ambiguous. For example, a fresh salted food is levied 5 percent VAT but the rate will be doubled to 10 percent if it is added spices. This tax rate discrimination criterion is unclear and many companies feel unfair with the tax payment.

 

Ms Pham Chi Lan, a senior economic expert, said: In the current context, the State needs to lower corporate income tax. The best rate is 20 percent instead of 25 percent at present. This will create a momentum for companies to accumulate finance for reinvestment. If the tax rate remains as high as now, they will not have enough money for reinvestment, forcing them to borrow from banks with unpleasant interest rates. “If this situation happens, the State will be a big loser because it cannot collect corporate income tax,” she noted.

 

Tom McCleliand, Chairman of the Tax Committee of the European Chamber of Commerce (EuroCham), said: The biggest change in the Corporate Income Tax Law 2009 was slashing the tax rate from 28 percent to 25 percent. Some countries have made much change in tax laws. The average tax rate of OECD countries was down from 33 percent in 2000 to 25 percent in 2011 (nonfinancial sector is levied at 21 percent). European countries also reduced the average tax rate from 40 percent to 23 percent in the period 1995-2012. Recently, many ASEAN countries have trimmed corporate income tax and planned further reductions. Valid tax rates in Singapore and Malaysia are 17 percent and 25 percent, respectively.

 

He said this tax reduction policy will help Vietnam be more competitive. However, the Government of Vietnam will also need a new response strategy because many countries in the region and the world have reduced corporate income tax to even lower rates. In addition, the continued reduction in corporate income tax in Vietnam will be appreciated by international community because this kind of tax is seen as an important indicator to attract foreign investment.