The article with the title: “Identifying an increase in some corporate costs in 2018” written by Lawyer Nguyen Huu Phuoc, Lawyer Cao Thi Hoang Oanh, and Lawyer Cao Xuan Huyen Trang – Phuoc & Partners is published on Saigon Economic Times dated 07/12/2017.
In 2018, many corporate costs will increase due to the changed regulations on area minimum wages, base salary and social insurance (SI) which were enacted in 2017 and will take effect in early 2018. Besides, the Ministry of Finance lodged Statement No. 10958/BTC-CST dated 17/8/2017 with the Government proposing the formulation of the Law on amending and supplementing some articles of the Laws on value added tax (VAT), special consumption tax (SCT), corporate income tax (CIT), personal income tax and natural resources tax. If these proposals are approved and become effective in 2018, they will be more or less a concern to enterprises in terms of business costs.
An increase in the area minimum wage may enlarge the salary fund, and increase the expenditures of trade union and insurances
The salary fund of an enterprise consists of all salaries, wages and allowances in the nature of a salary, which are paid to employees who are subject to SI contribution. Meanwhile, the salary which serves as a basis for contributing compulsory insurances such as SI, health insurance (HI), unemployment insurance (UI), labour accident and occupational disease insurance (LAODI) is the one paid to employees and certainly cannot be lower than the area minimum wage.
The National Wage Council has lately fixed the option for increasing the area minimum wage in 2018 and submitted it to the Government for approval, which increases by 6,5% as opposed to 2017. Specifically, Area 1: VND3,750,000/month to VND3,980,000/month. Area 2: VND3,320,000/month to VND3,530,000/month. Area 3: VND2,900,000/month to VND3,090,000/month. Area 4: VND2,580,000/month to VND2,760,000/month.
In addition, according to the Resolution on State budget estimates in 2018 approved by the National Assembly on 13/11/2017, the base salary will increase from VND1,300,000/month to VND1,390,000/month from 01/7/2018.
As such, the raise of the two salaries increases not only salary costs but also the costs of SI, HI and UI since the maximum wage to contribute these insurances will also increase (a maximum of 20 months of base salary for SI, HI and 20 months of area minimum wage for UI).
Increasing the SI and LAODI contribution costs
In addition to the possible increase of the area minimum wage in early 2018, the SI and LAODI contribution costs may also increase because the law supplements the subjects who must participate in SI and LAODI, and the definition of the base salary as a basis for contributing SI and LAODI is also interpreted in a broader sense. It will become almost impossible to allocate and restructure the salary into other amounts which are not the salary or its allowance in order to reduce the contribution costs for current compulsory insurances.
Firstly, employees who have not been subject to SI contribution will have to contribute SI from 01/01/2018. They are those who work under contracts with a term of full 01 month to less than 03 months, and especially foreign employees who are working in Vietnam and have work permits or practicing certificates/licenses issued by a Vietnamese competent agency. Besides, employees who work under labour contracts with a term of full 01 month to less than 03 months must also participate in LAODI from 01/01/2018.
Secondly, the monthly salary which serves as a basis for contributing compulsory insurances and currently only includes 2 items as salary itself and salary allowance will, from 01/01/2018, further include “other additional amounts”. Other additional amounts which are agreed in the labour contract can be specifically determined along with the salary agreed therein and be regularly paid at each period of salary payment, or cannot be specifically determined and be paid regularly or irregularly at each period of salary payment, excluding the following amounts which are not deemed other additional amounts: bonuses, bonuses for initiatives, food allowance between shifts, supportive amounts for gasoline, telephone, travelling, house rent, babysitting, baby nursing, supports for employees whose relatives have just died or got married, employee’s birthday, allowances for employees who have difficulty suffering labour accidents, occupational diseases, and other supportive amounts and allowances.
Interest costs for an enterprise’s capital loans which are several times higher than the equity will not be deducted from the taxable corporate income
This matter was proposed to the Government in 2015 but not approved, now the Ministry of Finance once again includes it in a draft amendment for the laws on tax, stating that interest costs of an enterprise’s capital loans which are several times higher than the equity will not be deducted from the taxable corporate income. Any interest cost of a capital loan which is 5 times higher than the equity (5:1) in the area of production, 4 times higher than the equity (4:1) in the remaining areas, will be considered a cost which is not deducted from the taxable corporate income.
The emphasis on this regulation reflects the determination to correct the legal corridor with respect to enterprises which operate in the area of production without having available funding sources and have to rely on capital loans and their initial business ideas. Once this regulation is approved, these enterprises will have to pay higher CIT than before.
Enterprises would be ineligible to borrow foreign currency
Circular No. 31/2016/TT-NHNN dated 15/11/2016 amending and supplementing a number of articles of Circular No. 24/2015/TT-NHNN dated 08/12/2015 of the State Bank of Vietnam regulating the lending in foreign currencies by the credit institutions and foreign banks’ branches to the borrowers as residents in order to meet short-term capital demands for the purpose of implementing the plan for export production and business, which will expire as of 31/12/2017. However, up to now, no legal document (including the draft circular) has shown that this regulation can be further applied.
The prevailing USD lending rate is around 2.8 – 6% per annum depending on the term, while the VND lending interest rate for normal production and business stands at 6.8 – 11% per annum depending on each term. If borrowed in foreign currency, enterprises will benefit from the USD/VND lending interest rate difference, thereby reduce capital costs. Without this legal regulation, it is likely that from the beginning of 2018, enterprises will not be able to borrow in foreign currencies and cannot benefit from the difference in lending interest rates. Reportedly, foreign currency lending regulations will be tightened and leave multiple enterprises troubled in finding another source of capital to recoup.
VAT rate applicable to each group of goods and services can be increased up to 12%According to the draft amendment of the tax law, goods and services corresponding to the VAT rate of 5% will be proposed for an increase to 6%, including clean water for production and living activities, sugar, medical devices and instruments, teaching and learning aids, children toys, etc. and some goods and services at 10% are up to 12%. VAT is an indirect tax levied on goods and services that give rise to added value, so when the VAT rate is increased, the sum of money paid by a buyer of the said items also increases. This affects not only buyers but also producers and sellers. If consumers cut spending, it will considerably affect the business situation of many enterprises.
Supplementing taxable objects and increasing SCT rate for some goods and services
The Ministry of Finance proposes to supplement the item of soft drinks subject to SCT rate of 10%, which includes such drinks as carbonated, non-carbonated, energy, sports, tea and instant coffee packed on the industrial assembly line, except for juice, 100% natural vegetable juice, milk and dairy products. As such, if SCT is applied to soft drinks at 10% and VAT is increased from 10% to 12%, especially the sugar raw material will increase its VAT rate from 5% to 6%, this certainly will exert a great impact on the enterprises that manufacture and trade the said drinks.
In addition, the SCT rate of some goods and services such as cigarettes, cigars and other tobacco products will increase up to 75% from 01/01/2019, alcohol from 20 degrees upwards up to 65% and alcohol below 20 degrees up to 35% from 01/01/2018, beer up to 65% from 01/01/2018, automobiles under 24 seats up to 35 – 75% depending on each type from 01/01/2018.
Some bright spots
Regardless of any previous and future changes in the policies increasing the corporate business cost, the Ministry of Finance also proposes CIT policies with a positive impact on enterprises – corporate income tax down from 20% to 17% for enterprises with the average number of less than 200 employees participating in social insurance and at the same time meeting the condition on a total revenue of VND 3-50 billion and down to 15% for enterprises with a total revenue of less than VND 3 billion.
The prospect of potential growth and favorable conditions will run parallel to the cost challenges exposed to enterprises in 2018. This is the year with an optimistic forecast of economic and trade growth the world over in general and in Vietnam in particular. This global economic development facilitates its export and economic growth if Vietnam takes full advantage of its opportunities regardless of Vietnam’s intrinsic advantages such as developing economy, macroeconomic stability, institutional innovation, administrative reform, gradually stable local currency in the market and legal environment improvement for business operations. Let’s wait and keep ourselves updated about the further cost and tax policies from the Government.Top of Form