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Tax incentives for small and medium enterprises: be right and hit the targets to achieve the highest socio-economic benefits

12:02 | 21/04/2019

VCN – “Being right and hitting the targets” to achieve the highest socio-economic benefits is one of the goals set by the Ministry of Finance when drafting the National Assembly's Resolution on corporate income tax policies (CIT) to support and develop small and medium enterprises (SMEs).

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The preferential policy will have a big impact on promoting production development for the SME sector, removing difficulties for businesses, creating a favorable investment environment. Photo: Internet

According to the drafting agency, the proposed solutionsdo not significantly affect the state budget revenue and are specially "designed" to avoid spreading incentives, reducing the effectiveness of the incentive and support policy.

The preferential rates are higher than the previous period

In our country, SMEs currently have dominated the total number of operating enterprises and held a particularly important position in economic development as well as social stability.Therefore, in order for SME support to be feasible, the tax policy is one of the tools to be considered for application.In fact, the State has implemented the policy of tax exemption and reduction for this object in the period from July 1, 2013 to the end of 2015. Since 1/1/2016, SMEs have paidthe CIT at the rate of 20%.

In order to continuously encourage SMEs to develop and concretize the provisions of the Law on Support for SMEs, the Ministry of Finance drafted a Resolution to submit to the Government for submission to the National Assembly for the application of a number of preferential policies on CIT to promote enterprises’ development, expand their production and especially encourage business households and individuals to become enterprises with the goal of 1 million enterprises by 2020.

The first policy is to reduce the CIT rate to 15% - 17%. The drafting agency said that the reduction of CIT rate to 15% - 17% ensured the encouragement for SMEs.This rate is equal to the preferential tax rate applicable to new investment projects in areas with difficult socio-economic conditions, in fields of processing agricultural products and aquatic products, and at this tax rate, the level of encouragement for SMEs is even higher than in 2014-2015.

Based on the provisions of the Law on CIT and Investment Law, to prevent policy abuse through the establishment of subsidiaries and affiliates, the Ministry of Finance has listed a number of cases that are not expected to enjoy these policies.Such entities include: Subsidiaries or companies with affiliated relationships but the enterprises in the affiliate relationships are not belonging to the subjects specified in this Resolution;income from capital transfer, capital contribution transfer; income from real estate transfer (except social housing stipulated in the CIT Law), income from transfer of investment projects, transfer of rights to participate in investment projects, transfer of mineral exploration and exploitation rights;income received from production and business activities outside Vietnam; income from oil, gas and other rare and precious natural resources exploration and exploitation, and income from mineral exploitation activities; income from trading in goods and services under the Special Consumption Tax according to the Law on Special Consumption Tax.

Explaining the selection of beneficiaries, Ms. Nguyen ThiThanh Hang - Deputy Director of Tax Policy Department, Ministry of Finance said: “Currently, in the Laws and guiding documents, SMEs are divided according to many criteria, including capital, sector, industry, revenue, number of employees.However, the use of capital criteria or differentiation by sector, industry as a basis for determining preferential business objects will be inadequate. In the current trend of multi-sector manufacturing and trading enterprises, the total amount of capital recorded in the asset statistics table including registered capital and loan capital does not reflect correctly the company size.In other words, the business registration capital of enterprises varies greatly with the amount of capital invested in their production and business. And in fact, that number does not mean much for the management of the State for enterprises.Therefore, using many different criteria according to each industry, preferential fields will be difficult for both the implementation of enterprises as well as the management of tax authorities.Meanwhile, the use of revenue criteria has the advantage of reflecting the actual production and business situation of enterprises. At the same time, it is suitable with the experience of many countries in the world.”

According to Ms. Hang, in the period of 2008-2015 when the economy was in recession, the National Assembly also had a Resolution to remove difficulties for SMEs and the incentives are then determined based on revenue and labor criteria.

Create motivation for business households and individuals

In parallel with the introduction of direct support policies for operating small and super small enterprises, to create a strong incentive to encourage business households and individuals to transfer to enterprises, The Ministry of Finance also proposed implementing specific policies for these subjects.Specifically: CIT exemption for 2 years from the time of taxable income for newly established enterprises from business households and individuals. After this period of tax exemption, in case that this type of enterprise implements investment projects in industries, tax preferential areas, it continues to enjoy the preferential rates (preferential tax rates and tax exemption and reduction) in accordance with the law on CIT.At the end of the tax exemption period and the duration of tax incentives (if any), the enterprise shall apply the CIT rate corresponding to the actual conditions of the enterprise in accordance with this Resolution and the law on CIT.

This solution will contribute to encouraging business households and individuals to transfer to enterprises in accordance with the Law on Support for SMEs. After transferringfrom business households and individuals to businesses, they will be easier to access to the State's support policies, with official capital mobilization channels.When the legal status is available, goods of enterprises are easily included in the distribution system, global supply chain; facilitating to develop and protect brands, and to raise capital. The transformation into enterprises helps business production scale be bigger, more professional, and more convenient in accessing the market. Besides, the direct support for new businesses transferred from business households will create conditions for them to accumulate capital and develop their production and business activities.Thereby, contributing to realizing the goal of having at least 1 million enterprises by 2020; by 2025 there are more than 1.5 million enterprises and by 2030, there are at least 2 million enterprises; increasing the proportion of private sector contribution to GDP to about 50% by 2020, about 55% by 2025, and about 60-65% by 2030.

More specifically assessing the impact of the above policies, the representative of the Tax Policy Department, the Ministry of Finance said that there would be a great impact on promoting business and production development for the SME sector, removing difficulties for businesses, creating a favorable and transparent investment environment and reforming administrative procedures.The implementation of these solutions might reduce the state budget revenue by about 9,200 billion VND/year. In particular, the solution to reduce tax rates for small and super small businesses reduces about 6,500 billion VND and the tax exemption solution within 2 years for enterprises transferring from business households reducesby about 2,722 billion VND/year.Although the reduction of this obligation in the short term will put pressure on the state budget balance, in the long term, it will facilitatesmall and super small enterprises to increase their accumulation, re-investment and development of production and business, contributing to increase income from CIT for the state budget in the following years.In order to overcome and offset the impacts on the state budget revenue in the short term as well as to ensure the initiative in managing the state budget estimates, the Ministry of Finance will coordinate with the concerned ministries and branches and focus on effectively implementing the tax laws, strengthening the inspection against tax losses.

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Before January 1, 2014, the CIT Law stipulated that the general applicable tax rate was 25%. From January 1, 2014, Law No. 32/2013/QH13 stipulated a roadmap for applying the CIT rate. Accordingly, from January 1, 2014, the standard tax rate of 22% would be applied and from January 1, 2016, it would be 20%; Particularly, small and medium-sized enterprises (annual turnover is not over 20 billion VND) would apply the tax rate of 20% from July 1, 2013, earlier than the above-mentioned schedule. Thus, currently, SMEs are applying the tax rate as for businesses in general, which is 20%.

The draft Resolution will be submitted to the Standing Committee of the National Assembly to submit to the National Assembly for approval to include in the Program of drafting legal documents of 2019. It is expected that by October 2019, it can be submitted to the National Assembly and if all goes well, it will be approved at this meeting and take effect from January 1, 2020.

By Hong Van/ Ha Thanh