There is a tendency towards a large increase in business costs every early calendar year, which was causing more headaches for many business owners, notably small and medium-sized ones. Notwithstanding the current instability in foreign currency exchange markets, including China’s sudden and major devaluation of the renminbi that has greatly impacted on the export and import of Vietnamese enterprises, recent changes in Government’s policies, to some extent, have contributed to their worry.
Tax costs may rise steeply
Pursuant to the draft Law on amending and supplementing some articles of the law on taxes dated 13 August 2015 submitted to the Government by the Ministry of Finance, if interest expenses on borrowings greatly exceed the equity, this will not be an allowed deduction when calculating taxable income for corporate income tax (CIT). If the interest expenses on borrowings for loans is five times bigger than the equity (5:1) in the production and manufacturing sector and four times bigger than the equity (4:1) in other sectors, they will be considered as non-deductible expenses when determining taxable income. Since 1 January 2019, the ceiling rate of interest expenses on borrowings exceeding equity is 4:1 in the production sector and 3:1 in other sectors. The ceiling rate that applies to credit institutions and organizations operating in specific business lines will follow the provisions of the specialized law.
Regardless of the feasibility of the aforesaid provisions, once they are passed, enterprises may be expected to pay more for CIT, especially enterprises in production and manufacturing that do not have a large source of working capital goods and mainly rely on loans and initial business start-ups concept.
Social insurance and unemployment insurance premiums will also be on the increase
As provided in Articles 92 and 94.1 of the 2006 Law on Social Insurance, enterprises must spend 18% of the salary fund on paying social insurance (SI) premiums for employees every month, with the salary base for contributing SI premiums only including the salary stated in employment contracts. With the 2014 Law on Social Insurance taking effect and superseding the 2006 Law on Social Insurance from 1 January 2016, the way for calculating the salary base will be modified; the monthly salary as the base for paying SI will include salary and salary allowances.
Enterprises need to be aware that these changes to SI premiums comprising of both salary and salary allowances will affect their current financial planning and structure of the salary scale and payroll. Even the possibility of turning payable amounts into additional payments which are not either salary or salary allowances to reduce the salary base for contributing SI premiums appears quite slim, while salary allowances are construed as compensation for factors such as working conditions, working complexity, living conditions or labour force attraction level that has not yet been added to or have been added partially to the salary corresponding to the job title or title provided in the salary scale and payroll as prescribed in Circular No. 23/2015/TT-BLĐTBXH dated 23 June 2015 of the Ministry of Labour, War Invalids and Social Affairs, and where such definition has not really been explicitly determined.
Given the fact that the salary base for contributing unemployment insurance (UI) under the Law on Employment is the one applied to SI, the increase in SI expenses certainly leads to an increase in UI expenses.
Area minimum wage will accelerate
The Government has just decided that the area minimum wage for the year 2016 will go up a further 12.4%, from VND250,000 to VND400,000 for four areas. As such, the new area minimum wage of Area 1 will be VND3.5 million/month (VND400,000/month higher than the year 2015); Area 2 will be VND3 million/month (an increase of VND350,000/month compared to 2015); Area 3 will be VND 2.7 million/month (rising by a further VND300,000/month than the year 2015); and Area 4 will be VND2.4 million/month (VND250,000/month higher than the year 2015).
The acceleration of the area minimum wage for the year 2016 as stated above makes us believe that we will witness a series of widened expenses that enterprises will have to spend for the benefits of their employees. The salary fund increases, which also make SI and UI expenses go up.
Furthermore, the increased area minimum wage will push up trade union expenses. This result is driven by Articles 4 and 5 of Decree No. 191/2013/ND-CP. Any enterprise is obliged to pay trade union expenses at the rate of 2% of the salary fund as a base for contributing SI premiums independent of whether the trade union is established within that enterprise or not. This arises from the fact that the total salary rate for employees subject to statutory SI forms a part of the salary fund.
How to overcome these difficulties?
Facing up to those accelerated financial expenses, enterprises should proactively look for alternatives to keep their financial operation balanced. For example, they may hire outsourced personnel or use a temporary labour force or labour outsourcing services, as allowed by law. Labour outsourcing services are particularly suitable for those enterprises which engage in “seasonal” manufacturing and business. During the peak season, enterprises can enter into labour outsourcing contracts with labour subleasing companies to serve their production and business cycle in a given period. They may suspend the temporary hiring of outsourced employees when the peak season goes over. Thanks to this, they will optimize their workforce in line with their business cycle.
Additionally, the labour outsourcing companies take the responsibility of paying salary, allowances or payments of statutory SI or UI premiums and thus, enterprises can save salary and SI and UI expenses. Enterprises may also consider raising external capital or issue corporate bonds to other individuals and organizations to overcome such difficulties.
And some advantages
There is, however, a silver lining to the 2016 financial expenses picture. The enterprises can feel optimistic for the future ahead thanks to the Government’s latest policies. If the applicable CIT rate is 22%, as from 1 January 2016 onwards, it will drop to 20% in Article 10.1 of Decree No. 218/2013/ND-CP. If any enterprise has investment projects and enjoys an incentive tax rate of 20% during the first 10 years as prescribed by law, such tax rate will decelerate to 17% for the remaining duration as set forth in Article 15.3 of Decree No. 218/2013/ND-CP.
Export and import enterprises will also be entitled to tax incentives in the upcoming year as Vietnam and some other countries sign Free Trade Agreements (FTAs) which may cut tariffs and other international trade costs i.e. the Free Trade Agreement among Vietnam and the Eurasian Economic Union (EAEU) including Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan dated 29 May 2015, the Free Trade Agreement between Vietnam and Korea dated 05 May 2015 (VKFTA), the Trade Agreement between Vietnam and Laos dated 27 June 2015.
It is most likely that the Trans-Pacific Partnership Agreement (TPP) will be passed, as well as some other agreements that are currently in the negotiation process such as agreements between Vietnam and EU (EVFTA) and between Vietnam and the EFTA union (consisting of Switzerland, Norway, Iceland and Liechtenstein), and hence the tariffs applicable to these items will be significantly reduced.