Comments on Draft Bill on Amendments to Corporate Income Tax Law

Recently, in Hanoi, the Vietnam Chamber of Commerce and Industry (VCCI) and business associations held a roundtable of "Comments on Draft bill on amendments to Corporate Income Tax Law", attended by over 50 delegates from the Finance and Budget Committee of the National Assembly, related ministries, branches and business associations.

 

The Corporate Income Tax Law over 4 years of implementation has achieved goals as set out gradually to reduce the general tax rate, to help businesses reduce tax obligations, to increase accumulation for business turnover, to create equal tax for domestic enterprises and FDI enterprises, and to encourage technological innovation. However, the Law on Corporate Income Tax is still limited to comply with socio-economic development and international economic integration.

 

Two main issues of general tax rate and ceiling price restrictions on advertising, marketing and promotions raise the most concern from business associations.

 

Principally, each type of tax with an equivalent tax collection rate leads to more agreements between taxpayers and tax collectors. In other words, tax law with many regulations will increase the risk of corruption and have negative impacts on the business environment in general. The corporate income tax of small and medium enterprise that is lower than general tax is inconsistent with flat tax rate applied in the world today.

 

The current law on corporate income tax provides two forms of tax incentives as tax incentives and the time period for tax exemption or reduction for a number of geographical areas to encourage investment.

 

Accordingly, the highest incentives such as tax rate of 10 percent in 15 years, maximum tax-exemption for 4 years, and 50 percent maximum tax payable in the next 9 years, are applied for newly established businesses in the fields of high technology, scientific research and technological development.

 

In fact, compared to other countries in the region, Vietnam's tax system has not created momentum for business development. Therefore, to encourage businesses to restructure investment and handle the inventory, the business associations proposed a reduction of general tax rate of 20 percent.

 

The Ministry of Finance calculated that a one percent decrease of corporate income tax results in a reduction of the state budget to VND6 trillion. The general tax rate reduced by 23 percent and the corporate income tax for small and medium enterprises reduced by 20 percent will decrease the national budget by VND2,081 billion in 2014. Moreover, the state budget revenue in the first quarter of 2013 was estimated at 20.6 percent of total revenue, compared to 27 percent estimated revenue of the same period of the last year. Therefore, some believe that a rapid decrease in corporate income tax as proposed by associations will make it difficult to balance budget revenue.

 

According to Mr Tran Ba Trung from the Association of Financial Investors, the reduction of corporate income tax to 23 percent will cause a reduction of revenue budget to VND2,081 billion in 2014. However, the State budget could be increased by an increase of other taxes such as value added tax and excise tax. As corporate tax income decreases, the businesses will have chance of accelerating investment in production and business operation. The functional authorities nominated to draft new law should quantify the additional budget revenues that may be impacted by the reduction of corporate income tax.

 

Standing Vice President Tran Duc Chinh of the Vietnam Pharmaceutical Companies Association defined a roadmap to remove restrictions on advertising costs.

Chinh said that the product brand is a valuable intangible asset. However, to build up a good brand, a business must develop a long-term plan with major investment before, during and after market penetration. Advertising is a good measure to build up and develop business brands. Spending on advertising will create an intangible asset and grow the business in the future. Therefore, spending on advertising should be seen as a business investment and it should be decided by the business themselves rather than the government. Currently, Vietnam is one of few countries, including China and Lithuania, to regulate and control spending on advertising and promotion. Therefore, it is necessary to determine the roadmap to remove ceiling price restrictions on advertising, marketing and promotion to ensure compliance with international norms. Such monopoly business sectors as electricity, water, petrol require the control rate less than 15 percent. In addition, the controlled expenses on advertising and marketing based on total deductible expenses are not reasonable and still complicated. As suggested, the regulators should make study on limit rate based on percentage of total business revenue (but not on the percentage of deductible expenses).

 

According to Mr Trung, the limit of spending on advertising based on total revenue will be easier determined and implemented than on the total cost of business. The Draft bill on amendments to Corporate Income Tax Law defines that spending not exceeding 15 percent of total business costs on advertising, marketing, promotion, brokerage commissions, reception expenses, conference, marketing supporting fees and other costs directly related to production activities will be deductible from taxable income.

 

"The spending on advertising has been increased, yet not strong enough for a breakthrough. Meanwhile, advertising is a must for business, so businesses are seeking different ways for promotion. On the other hand, in principle, the government should only be involved in the policy making process from the public administrator's point of view and give the business owners rights to decide spending on advertising, because the facts show that businesses do not need big spending on advertising. If the current situation does not allow removing restrictions on advertising spending, the government could take control of 15 percent of total revenue. The limit of spending on advertising based on total revenue rather than on total business cost will be easier for implementation" said Mr Trung.

 

The FDI company pays low advertising costs because the advertising is mostly made by the parent companies abroad. The local company or the permanently established representative office in Vietnam only needs to promote ads locally so the advertising cost of FDI firms are always lower than of domestic firms. In addition, the advertising costs are added to the revenue of advertising firms, which will be taxed after that. Therefore, the government should study the deductible advertising expenses to determine the equivalent taxable income. Through the Draft bill on amendments to Corporate Income Tax Law, the regulators should provide a roadmap to remove the limit of spending on advertising and use this to finance business operation.

 

The business community expects that the Draft bill on amendments to Corporate Income Tax Law will provide the best generate tax rate to facilitate business operations and turnover. Currently, the business community hope that the corporate income tax rate should be adjusted to 20 percent and the effective tax rate for small and medium businesses is 18 percent. Reducing the general tax rate to 20 percent is unlikely to make the state budget revenues decrease, but encourage businesses, especially small and medium enterprises, to be more willing to pay tax and keep business operations on the right track.

 

In addition, advertising expenses an inevitable part of total business costs. The companies must add the advertising costs to its total costs; if the advertising expenditure rate is higher than the turnover rate, the actual taxable value is higher. Therefore, the limit of spending on advertising deductible in determining taxable income will increase the business tax on average by 42 percent to 80 percent compared to the nominal tax cost.