An undated photo of a Vietnamese garment factory. Photo: Diep Duc Minh
Businesses and economists are urging the finance ministry to reconsider its proposal to restrict interest write-offs from next year, saying it will badly affect not only businesses but also others like banks and workers.
They raised concern after the Ministry of Finance earlier this month unveiled draft amendments to corporate tax laws that cap tax-deductible interest payments.
The quantum of interest payments that can be shown as legitimate expenditure will be based on the debt-to-equity ratio: manufacturing businesses will not be allowed to write off interests where debts exceed five times their equity.
In other sectors, where no maximum ratios are in place, it will be 4:1, according to the amendments the National Assembly is expected to vote on next month.
The ministry said one of the goals is to help businesses manage their financial situation better, especially those financed through high levels of debt.
But Tran Xoa, director of the Ho Chi Minh City-based Minh Dang Quang Law Firm, told Thanh Nien the limits are not appropriate for Vietnam, where 90 percent of businesses are small and medium-sized and always short of funds.
The rule would discourage businesses from expanding, he claimed.
Pham Ngoc Long, tax director of Grant Thornton Vietnam, said it is "unnecessary" and "unreasonable" and would have a big influence on businesses.
It would make businesses reluctant to borrow and hit their profitability, he said.
Calling the proposal "extremely unreasonable" in an interview with news website Saigon Times Online, Pham Thi Mai Loan, CEO of THE HCMC-based Grain Import Export Joint Stock Company, said it would also affect banks and workers by persuading businesses to limit their operations.
Their other alternative would be to increase prices, she said.
Do Duy Thai, CEO of Pomina Steel Joint Stock Company, said his company, like many other steel businesses, often has to stockpile a huge amount of products and get big loans.
Businesses with a big ratio of working capital, like steel producers, would be "greatly affected" by the limits on debt-to-equity ratios, he said.
But economist Vu Dinh Anh agreed with the ministry proposal, saying such restrictions are necessary to reduce bank’ bad debts and prevent businesses, especially foreign-invested, from taking advantage of the current laws to evade taxes through price transferring.
He, however, admitted he is not sure about its effect on businesses’ financial security since a high level of debt does not necessarily mean high risks.
He added that the ministry should explain why it proposed such ratios, saying they may be too low for certain sectors such as construction and garment where huge amounts of funds are often needed.