Retroactive tax alterations to buffer cash flow for businesses

Retroactive tax alterations to buffer cash flow for businesses (illustration photo)

In a bid to tackle tax evasion and implement international best practices, the Vietnamese government promulgated 2017’s Decree No.20/2017/ND-CP on providing tax administration applicable to enterprises with related party transactions. Through the decree, Vietnam has taken a significant step forward in dealing with transfer pricing issues in line with international practice. However, the regulations may not be suitable to a number of enterprises in some specific industries, according to experts.

Many businesses in capital-intensive industries such as real estate or construction have said they are facing difficulties with the regulation on the cap on interest. Specifically, under Article 8.3 of Decree 20, a taxpayer’s total loan interest expenses arising within a specified tax period qualified as a deduction from income subject to corporate income tax shall not exceed 20 per cent of total net profit generated from business activities, plus earnings before interest, taxes, depreciation, and amortisation expenses within that period. This regulation is currently applied by the local tax authority to enterprises having transactions with related parties, including domestic and foreign-invested ones.

In Vietnam, many enterprises operating under the parent-subsidiary model often incur lending transactions, in which parent companies borrow from third parties and lend to subsidiaries. Highly-leveraged companies, including those in sectors such as real estate, private equity, or infrastructure are likely to be most significantly affected groups.

Recently, the prime minister requested the Ministry of Finance to complete a draft decree on tax refunds during 2017-2018 for enterprises which incurred huge amounts of “wrongly charged” tax. The reimbursement amount is estimated at nearly VND5 trillion ($217.4 million). The draft amendment is aimed to remove difficulties for enterprises during the implementation of this regulation in practice, while simultaneously reducing capital challenges for those in the pandemic period.

“The interpretation and application of Article 8.3 of Decree 20 has been very unreasonable and controversial and business communities have raised them over the last few years. So it will be welcomed by taxpayers if the government increases the cap and allows offsetting of overpaid tax by retroactive application of the new decree,” Nguyen Thanh Vinh, partner and head of Tax, Customs and Trade in Vietnam at Baker McKenzie told VIR.

Nguyen Tran Nam, chairman of the Vietnam Real Estate Association said, “Vietnamese authorities have gone into great lengths to improve the business climate for the business community. The upcoming draft amendment is slated to benefit those that have been put on a razor’s edge because of wrongly charged tax in that period.”

“Firms would be given a fair crack of the whip thanks to this retroactive assessment, insiders said. Thus, the amendment will help to mitigate obstacles of the parent-subsidiary business model in Vietnam according to the Law on Enterprises,” added Nam.

The prompt action would also buffer businesses’ liquidity, since it would reduce the payable tax amount as well as further boost the ability to balance their cash flow to weather the storm caused by the current pandemic. However, experts also cautioned there would be no one-size-fits-all approach for all taxpayers.

“While this favourable retroactive application is much appreciated and welcome, it may not satisfactorily cover all costs and impacts suffered by taxpayers being subject to the application of Article 8.3 of Decree 20 and overpayment of tax for three years,” Vinh noted.