MoF, GDT revise derivatives tax

Nguyen Dinh Cu, head of the foreign section of the General Department of Taxation (GDT), said that the GDT has proposed that interest rate swaps and foreign exchange options be exempt from VAT while suggesting that corporate income tax (CIT) consist of a specified fixed amount deducted from the contracts that banks sign with customers.
Interest rate swaps and foreign exchange options satisfy the need of many Vietnam enterprises to hedge against interest rate and exchange rate risks when doing business in fluctuating and complex business environments.
“However, since these products have only just been introduced in Vietnam, there is a lack of specific tax regulations,” said Nguyen Van Phung, deputy head of the Financial Policies Department under the MoF.
The GDT’s proposal would satisfy some of the urgent demands from commercial banks for specific tax guidelines on such derivatives, especially from foreign and foreign-invested joint-venture banks.
Pham Hong Hai, treasurer of the global markets section of the Hong Kong and Shanghai Banking Corporation Limited said that in reality only foreign and foreign-invested joint-venture banks used such derivatives. He said that despite being commonly employed around the world to minimise risks for enterprises, their use is not widespread in Vietnam, due to a lack of financial regulations on accounting and taxation for banks.
Quach Hung Hiep, head of the treasury department of the Bank for Investment and Development of Vietnam, said that many local enterprises were reluctant to sign up for such services with banks due to the fact that they were not allowed to calculate such transactions into deductible expenses.
“It’s fine if they generate a profit when using such derivatives, but if they don’t, they cannot use the losses from such transactions as deductible expenses for tax calculations,” he said. “Banks just don’t know how to account for such transactions as there isn’t an accounting mechanism for these kinds of derivative transactions.”
Phan Thanh Son, head of corporate sales and structuring at Citibank Vietnam applauded the MoF’s move and said that “VAT shouldn’t be applied to premiums paid and received in Vietnam.”
Similarly, Nguyen Hai Ninh from VID Public Bank said that without VAT, fees for their business customers would be cheaper, which would then stimulate enterprises using such derivatives in the economy.
Ninh said that VID Public Bank was temporarily collecting 10 per cent VAT from customers for contracts as the bank feared that new tax guidelines could be released that required such a charge.
Warrick Cleine, a partner in accounting and auditing firm KPMG Vietnam, said that the proposed VAT exemption would be a positive move to encourage the market to use derivatives products.
Huong Vu, senior manager of KPMG’s tax and corporate services, said that tax policies are effective tools for adjusting and stimulating the market. Therefore, any tax policies implemented now should focus on stimulating both banks and enterprises to use such derivatives.
MoF’s Phung said that specific guidelines on tax and accounting on derivatives such as interest rate swaps and foreign exchange options would be released soon, taking into account all comments from banks, financial consultants and experts.