Subsidiaries, affiliates likely not to enjoy preferential corporate income tax in Vietnam

Subsidiaries and affiliates of enterprises in Vietnam might not be eligible for preferential corporate income tax (CIT) rates of 15-17%, in order to prevent abuse of incentives like splitting income for tax avoidance, according to the Financial and Economic Committee under the National Assembly, the country's legislature.

According to the latest draft of the amended Law on Corporate Income Tax, companies are subject to a common tax rate of 20%. The preferential tax rate of 15-17% is applied to firms with a maximum annual total revenue of VND3 billion ($115,150) and VND50 billion ($1.92 million), respectively.

However, these rates do not apply to subsidiaries or affiliates of enterprises.

But many National Assembly members argued that this provision is not appropriate. They said that offering tax incentives based on revenue is also not suitable for small and medium-sized enterprises, especially startups and high-tech companies.

Presenting a report on the draft at the National Assembly Standing Committee's discussion session on Wednesday, Phan Van Mai, Chairman of the Financial and Economic Committee, said that the draft provision aims to ensure strictness of the law and avoid the situation where enterprises abuse the policy by splitting income to enjoy tax incentives.

Mai added that small and medium-sized enterprises (SMEs) that have an affiliated relationship with a large company are not ordinary SMEs by nature.

In addition, they also enjoy incentives and support at a higher level under Resolution 198 of the National Assembly on special mechanisms for private economic development.

The proposal of preferential tax rates based on revenue, the committee chairman noted, is in line with reality and does not contradict current laws, such as the Law on Support for Small and Medium Enterprises.

According to the draft law, expenditure for technology development, innovation, and digital transformation of affiliated enterprises is not exempt from CIT.

Cao Anh Tuan, Deputy Minister of Finance, said that the Government has proposed that the National Assembly's Financial and Economic Committee add tax exemption for this portion of income regardless of whether the enterprise is an affiliate or not, but it has not been accepted.

According to Tuan, the exemption of CIT on funding for digital transformation and innovation of affiliated enterprises aims to reflect the goals of Resolution 57 on breakthroughs in science-technology development and innovation.

"The Government has stipulated that such spendings must be for the right purpose and content. In case of incorrect spending, enterprises will be subject to additional collection and penalties," said Tuan, adding that the exemption of income tax on this kind of spending also aims to create conditions for enterprises to have more resources to develop science and technology.

According to the Deputy Minister, currently, the element of affiliated relationship of businesses is not taken into account when it comes to educational, cultural, artistic, and charity sponsorships.

Spendings on innovation and digital transformation need to be encouraged more, so if they are restricted due to the affiliated relationship, that will not be fair.

Therefore, he suggested that the Financial and Economic Committee consider including this provision in the draft law when finalizing it.

Mai said that the committee will consider supplementing the above provision when finalizing the draft law to submit to the National Assembly.

Commenting on the draft amended Law on Special Consumption Tax, many members of the National Assembly Standing Committee proposed to remove gasoline and air conditioners from the taxable list because these are essential or commonly used products.

For example, for gasoline, Hoang Thanh Tung, Chairman of the Justice and Law Committee, proposed an increase in environmental protection tax instead of imposing special consumption tax (SCT).

According to the draft law, the tax rate for mineral gasoline (such as RON 95 - III) is 10%; E5 biofuel (a fuel mixed with mineral gasoline and 5% ethanol) is 8%, and E10 is 7%. Oil is not subject to this tax.

RON 95-III gasoline (the popular type on the market) is currently at VND19,560 ($0.75) per liter. Thus, each liter of gasoline has more than VND1,950 in SCT (price calculated before VAT). At the same time, this item is also subject to an environmental protection tax of VND2,000, while it is VND1,900 for E5.

Deputy Minister Tuan explained that gasoline is a product of fossil origin, needs to be used economically, and Vietnam has collected SCT on this item for many years. "Imposing SCT on gasoline is encouraging the use of biological products."

In its report, the National Assembly Standing Committee said that in the long term, it is necessary to study amending the SCT and the environmental protection tax to apply a more reasonable tax on gasoline, in accordance with international practices.

However, in the context of Vietnam implementing its commitment to reduce emissions to net zero by 2050, collecting SCT on gasoline is necessary.

Regarding air conditioners, Mai said that the draft law has raised the taxable product capacity to over 24,000 to 90,000 BTU. That is, air conditioners with a capacity of 24,000 BTU or less and those over 90,000 BTU are not subject to SCT.

In fact, air conditioners with a capacity of 90,000 BTU or less are popular, of which the 9,000-18,000 BTU type is commonly used in households, from urban to rural areas. Currently, this product is manufactured with inverter technology which helps to save electricity.

The National Assembly is expected to vote on the draft amended Law on Corporate Income Tax and the draft amended Special Consumption Tax on June 13.