The General Department of Taxation needs to listen and address issues promptly.

Businesses facing financial hardship are still waiting for "feedback".

Decree 132/2020 on tax management for related-party transactions, after its issuance, has caused difficulties for many businesses. Mr. Dau Anh Tuan, Deputy Secretary General of the Vietnam Chamber of Commerce and Industry (VCCI), stated that the objective of Decree 132/2020 was to limit related-party transactions between businesses, preventing the risk of transfer pricing and tax evasion. Previously, our focus was often on FDI enterprises with complex financial relationships and differences in tax rates between operating locations.

Meanwhile, the relationship between banks and businesses, if adjusted according to this interpretation, is actually aimed at combating thin capitalization, a completely different objective. This is because the regulation stipulates that related parties, including banks lending to businesses, are also subject to a ceiling on interest expense if the loan is 25% of the borrower's equity and over 50% of the borrower's medium and long-term debt.

In reality, many domestic businesses fall into this situation because their capital is usually medium- and long-term bank loans (unlike many other countries where bank loans are mainly short-term). This regulation is not suitable for practical application because currently in Vietnam, the capital market is not yet fully developed and is not a common channel for raising capital; businesses still rely heavily on banks and survive on bank credit.

Therefore, if we interpret banks as a party in a partnership where the loan amount is at least 25% of the owner's equity and accounts for 50% of the total value of medium and long-term debt, then the scope of businesses currently subject to this regulation is extremely large. Where would businesses find operating capital outside of banks? This is without even considering the disadvantage of higher bank interest rates for Vietnamese businesses compared to competing countries in the region.

Raising the ceiling on interest expense deductions is a way to alleviate difficulties for businesses.

"In previous years, when interest rates were stable at a low average level, the interest expense of most businesses was below this 30% limit. At the end of 2022 and the beginning of 2023, interest rates increased sharply due to macroeconomic fluctuations. The State Bank of Vietnam raised interest rates to curb inflation, prevent the devaluation of the Vietnamese currency, and maintain the safety of the banking system. At this time, the interest expense of many businesses exceeded the 30% limit allowed by Decree 132. As a result, these businesses had their deductible expenses reduced when calculating taxes and had to pay more taxes. The General Department of Taxation should quickly listen to businesses, engage in dialogue with them, and develop timely solutions. This is a solution to support businesses that has a significant and highly effective impact, especially for domestic private businesses that are facing significant difficulties with cash flow," said Mr. Dau Anh Tuan.

The General Department of Taxation should promptly listen to businesses, engage in dialogue with them, and develop timely solutions. This is a highly effective and impactful solution to support businesses, especially domestic private enterprises that are facing significant difficulties with cash flow.

Mr. Dau Anh Tuan , Deputy Secretary General of the Vietnam Federation of Commerce and Industry.

Recently, on its website, the General Department of Taxation announced that it has compiled the difficulties and proposed amendments to regulations on related-party transactions. Specifically, Deputy Director of the Inspection and Audit Department, To Kim Phuong, stated that the General Department of Taxation has drafted a summary report on the implementation of Government Decree 132/2020 and completed the dossier to report to the Ministry of Finance for comments from relevant ministries and agencies. After compiling the feedback from various ministries and agencies, the General Department of Taxation will submit the report to the Ministry of Finance and then to the Government in accordance with the prescribed procedures, thereby implementing the regulations according to the Government's requirements.

Regarding the control of interest expense deductions for enterprises with related-party transactions to limit transfer pricing through interest expenses of enterprises with related-party transactions, this is consistent with international practice and the recommendations of the Organization for Economic Cooperation and Development (OECD) that countries should set a limit on the deduction of interest expense in the range of 10-30% of total pre-tax profit before depreciation and interest.

Accordingly, Decree 132, which stipulates a maximum limit of 30% on interest expense deductions, is consistent with international practice. In practice, many businesses have requested the removal of this regulation regarding the limitation on interest expense deductions when borrowing from banks. Based on feedback from businesses, the General Department of Taxation has conducted research and review. In reality, borrowing from banks to finance business operations is a frequent and common practice in Vietnam. Based on these business recommendations, the General Department of Taxation will compile a report and submit it to the competent authorities for consideration and amendment.

The feedback process is taking too long.

According to Dr. Huynh Thanh Dien from Nguyen Tat Thanh University, a characteristic of domestic businesses is their heavy reliance on borrowed capital when they are still small and in the process of expansion and development. Therefore, the OECD's recommendation of a ceiling on interest expense at 10-30% is not suitable for Vietnam. Furthermore, in the current particularly difficult period, many businesses have not yet been able to restore their operations to pre-pandemic levels, requiring increased support policies. Many forecasts from domestic and international economic organizations and experts also suggest that the economy will continue to face many difficulties in 2024. The government has introduced many policies to support businesses and will continue to implement them in 2024, such as further tax and fee reductions.

Expanding fiscal policy at this time is the right thing to do. Therefore, amending Decree 132, specifically raising the interest rate ceiling from 30% to 50%, is a solution that needs to be implemented immediately. This means the government will not over-collect taxes but will leave money for businesses to operate, especially in the context of a difficult consumer market and many businesses still having difficulty accessing capital from banks. Moreover, amending this decree does not require the lengthy consultation process of developing new policies.

Dr. Huynh Thanh Dien emphasized: Just by looking at the reports of businesses and the GDP of the economy, we can see that the low growth rate highlights the need to immediately address the difficulties faced by businesses in general. This will also contribute to boosting economic growth, and consequently, the budget will increase revenue from various taxes and fees.

Economist, National Assembly representative, and Doctor Vu Tien Loc commented: Currently, the process of gathering opinions to make policies seems too lengthy. Even a single dissenting opinion causes the agency seeking the opinion to hesitate, fearing responsibility and reluctance to make a decision. Previously, when opinions were gathered and a majority agreed, the process was complete. This needs to change, especially as the government continues its vigorous administrative reform and streamlining of procedures. Regarding the amendment of Decree 132/2020 on tax management for related-party transactions, it needs to be done quickly, particularly the raising of the ceiling on interest expense deductions for businesses. Currently, many businesses are experiencing losses, downsizing, and layoffs. Therefore, ministries and agencies need to act more urgently and quickly, especially since the government has agreed to amend regulations that are not in line with reality.

Behind every business lies the fate of countless households, potentially millions of people. A policy aimed at alleviating business difficulties should ensure employment and social security for millions of people, not just the business owner. The longer the delay, the more difficulties businesses face, leading to more negative consequences for the economy and society as a whole.

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