Ministry of Finance’s proposal on tax reduction included in the program to consult the Standing Committee of the National Assembly
Encourage big business households to become enterprises
The Ministry of Finance stated that the proposal on applying some preferential policies on CIT for small and micro enterprises (including enterprises, cooperatives and other organizations established and operating according to Vietnamese law) to promote enterprises to develop and expand production, especially to encourage business households to switch to operate under the enterprise model in accordance with the target of 1 million enterprises by 2020.
On the other hand, the application of preferential policies for small and micro enterprises is to effectively promote the supporting policies and avoid spreading incentives. In fact, the number of small and micro enterprises amounts to a large proportion of the total number of enterprises in Vietnam and if the number of medium enterprises is included, the group of micro, small and medium enterprises make up over 97% of the total number of enterprises in Vietnam. If the preferential policies are applied to medium enterprises, almost all enterprises in Vietnam will be entitled to incentives, this may lead to unequal competition between medium enterprises and small and micro enterprises, while the medium enterprises has already got more advantages (capital, revenue, market, labour, technology).
Therefore, for small and medium enterprises, the Ministry of Finance proposes to reduce the corporate income tax rate to 15-17 percent, instead of the current rate of 20 percent. Accordingly, the tax rate of 15 percent will be applied to enterprises with annual turnover of not more than VND 3 billion and an average number of employees participating in social insurance of not more than 10. The tax rate of 17 percent will be applied to enterprises with a total annual turnover of between VND 3 billion and under VND 50 billion and an average annual number of employees participating in social insurance of not more than 100.
In addition, the Ministry of Finance proposes to exempt corporate income tax for two consecutive years for small and micro enterprises, which are newly established from business households, since they have taxable income.
These business households must meet the conditions of registration and operation in accordance with the law, and have a continuous production and business time of at least 12 months up to the date of first issuance of the business registration certificate
The Ministry of Finance also stated that newly established enterprises that are exempt from tax under this regulation are enterprises registering their business for the first time, but not newly established enterprises of which legal representative, contributing member or member with highest contributed capital, has engaged in business activities as a legal representative, a contributing member or a member with the highest contributed capital in enterprises which are operating, have been dissolved less than 12 months since the time of dissolution of the former enterprise until the time of establishment of the new enterprise. This provision is designed to avoid the situation that enterprises establish subsidiaries to enjoy the above policy.
Create conditions for enterprises to increase accumulation
The Ministry of Finance said that its proposal on applying preferential policies for small and micro enterprises is based on the calculation of state budget capacity and conditions in the current context. It is estimated that this proposal will reduce the state budget revenue by about VND 9,200 billion per year, of which, the policy on tax exemption within two years for small and micro enterprises converted from business households was 2,722 billion VND per year and the policy on tax reduction for small and micro enterprises was about VND 6,500 billion per year. If we continue to expand the support policy in this draft Resolution to medium enterprises, the state budget revenue may fall by more than VND 19,500 billion per year.
In the current socio-economic context and budget collection, the identification of enterprises to enjoy the above policies must be based on principles – the right support for right enterprises to achieve best economic and social benefits but not affect the state budget revenue, especially avoiding spreading incentives, reducing the effectiveness of incentive and support policies.
Therefore, the Ministry of Finance proposes that the incentives should focus on small and micro enterprises that are vulnerable to changes in the economy, business environment and fierce competition upon international economic integration.
In general, although short-term reduction in revenue will put pressure on the state budget balance, it will promote production and business development for small and micro enterprises, create a convenient and transparent investment environment and reform administrative procedures. In the long term, it will create conditions for small and micro enterprises to increase their accumulation, reinvestment and production and business development, thereby contributing to increasing CIT revenue for the state budget in the following years.
However, in order to overcome and compensate for the impacts on the state budget revenue in the short term as well as to ensure the initiative in managing state budget estimates, the Ministry of Finance will coordinate with concerned ministries, sectors and localities to direct effective implementation of tax laws and strengthen inspection against tax losses.