Viet Nam News
The Ministry of Finance is proposing tax solutions to aid enterprises. The proposed reduction of corporate income tax is from the current 20 per cent to 17 per cent for small and medium enterprises (SMEs), or even to 15 per cent for micro enterprises. Vietnam News Agency talks with Associate Professor., Doctor Lê Xuân Trường, Head of In-service Faculty of the Academy of Finance, to explore the impact of reducing corporate income tax on the business investment environment and economic growth.
How do you evaluate the Ministry of Finance (MoF)’s tax cut proposal?
Regarding legal issues, this proposal is essential to ensure the consistency of legal normative documents.
According to Article 10 of the Law on Support for Small- and Medium-sized Enterprises (effective from January 1, 2018), SMEs are allowed to pay a rate of corporate income tax that is lower than the normal tax rate applicable for larger enterprises according to the regulations on corporate income tax.
This means that, in order to put Article 10 into reality, it is necessary to amend the Law on Corporate Income Tax as proposed by the Ministry of Finance.
The Government’s Resolution No 35/ NQ-CP dated May 16, 2016 on business development support up until 2020 also assigned the Ministry of Finance to study and propose amendments to the Law on Corporate Income Tax towards the application of a tax rate for SMEs lower than the ordinary tax rate.
In fact, over 97 per cent of Vietnamese enterprises are small and medium-sized. They have made a significant contribution to the economy, creating most of the jobs in the country; however, they face many disadvantages in business compared to large enterprises.
Therefore, the application of lower tax rates for SMEs is aimed at macro-economic objectives and social objectives. It helps overcome "market failure" - the disadvantages brought about by unperfected factors in the market, such as the difficulty of raising capital through the issuance of shares and bonds; price squeezes due to poor financial strength; and support and protection for weak businesses may affect the viability and development of SMEs compared to large enterprises.
The experience of some countries in the world (such as Japan and South Korea) shows that the application of a tax rate lower than the common tax rate for SMEs has a good impact on economic development.
Thus, in terms of the legal, theoretical and practical aspects, this proposed amendment is very necessary and should be submitted to the National Assembly for consideration and approval.
There are some opinions that we should not apply a different tax rate of 15-17-20 per cent according to size of revenue and labour force because this method is complicated and unreasonable. It can be cheated and manipulated easily. This method also inadvertently encourages businesses to maintain a small scale, which makes it difficult to promote effective advantage and competition. Do you agree with this idea?
In my opinion, the proposed criteria for preferential tax rates for SMEs by the Ministry of Finance are in line with the Law on Support for Small- and Medium-sized Enterprises and the Government’s Decree 39/2018/ND-CP dated March 11, 2018 detailing a number of articles of the law.
All supporting policies for SMEs, including tax policy, should be consistent with these legal documents to ensure the uniformity of the legal system.
Certainly, when discussing the Law on Support for Small- and Medium-sized Enterprises, the National Assembly considered the feasibility of implementation.
Obviously, there are no rules that are fully perfect. All choices have a downside. When defining such criteria, there will be a group of enterprises seeking to take advantage of this to avoid tax.
However, there will be specific guidance so that businesses cannot take advantage of tax avoidance. The fear that such a regulation "inadvertently encourages businesses to maintain a small scale, making it more difficult to promote the advantages of efficiency and competition" is excessive.
It should be noted that the ultimate goal of a business is to maximise profits rather than just reduce tax payments. Of course, in certain conditions, paying less tax means increasing profit. However, it is not always the case that paying less tax means an increase in profits.
Certainly no investor will maintain a small scale to enjoy tax incentives. For example, with a profit of VNĐ10 billion (US$428,000) the business only pays VNĐ1.5 billion of corporate income tax (with a tax rate of 15 per cent). Meanwhile, all the market factors and other necessary conditions will encourage owners to increase the scale of business. If the scale of business is expanded and the firm has the opportunity to earn pre-tax profit of VNĐ100 billion, they will have to pay corporate income tax rate of 20 per cent – but they still get after-tax profit of VNĐ80 billion.
According to the draft law, this tax rate does not apply to enterprises that are organised following the parent-child company model, in which the parent company holds 25 per cent or more of the subsidiary’s equity. Thus, businesses cannot avoid taxation by splitting or setting up many small businesses in a corporation.
How does the reduction of taxes applied to SMEs affect the budget and economic benefits?
The reduction of tax rate for SMEs will not have much impact on the budget, while the economic benefits are considerable.
Although the SMEs are in high volume, their contributions in corporate income tax are less. For example, according to statistics of the General Department of Taxation, enterprises with annual turnover of less than VNĐ50 billion only contribute about VNĐ7 trillion in corporate income tax each year, accounting for only 3.5 per cent of total revenue from corporate income tax.
As a result, the reduction of the tax rate for SMEs by 3 per cent and 5 per cent for micro enterprises will not significantly affect the State budget revenues in the short term. In the long run, the promotion of the SMEs’ development in particular will boost economic growth, thus creating the potential for further State budget revenue increases in the future.
As an expert, what suggestions do you have for the promulgation and implementation of policies that are feasible, effective and widely supported?
There will be many steps to complete, in which the press agencies need to work closely with the Drafting Board and the Ministry of Finance to propagate so that people can correctly understand the contents of the draft law as well as the need to amend the law.
The process of explaining and disseminating the draft law also needs to clarify the impact on relevant groups when it is adopted and enforceable.
The Drafting Board should listen to expert and public opinion to acquire and complete the draft law in the direction of ensuring the harmony of interests of relevant sides and the feasibility of law enforcement. — VNS