Foreign businesses upset over new Vietnam tax
HANOI - Vietnam has imposed a 10 percent
withholding tax on interest payments on offshore loans that appears
to buck standard business practice by also catching intra-group
lending, lawyers and bankers said on Tuesday.
They said the tax, which took effect on January 1, hit foreign
contractors along with banks and law firms.
If not reversed the tax could add another cost to doing business in a
nation struggling to combat perceptions it is one of the toughest in
the region to make money, they added.
Ministry of Finance Circular 169 concerning tax obligations of
foreign contractors, a copy of which was seen by Reuters, states any
foreign entity that does not fall under the Law on Foreign Investment
must pay the tax.
Besides foreign contractors, such entities include banks and law
firms. Joint ventures and wholly-owned foreign companies normally
come under the Law on Foreign Investment, which already has
withholding tax provisions.
Withholding tax hits interest and dividend payments from firms. It
can be exempt where bilateral tax treaties apply.
Allan Marlin, general manager at ANZ Bank in Vietnam, said
current understanding of the circular was banks that borrowed
money from their offshore parent -- say to increase liquidity -- must
pay withholding tax on the interest payments.
It would also affect any intra-group borrowing by foreign
contractors or law firms.
``As the circular relates to foreign contractors and is not a specific
circular on interest withholding tax it would appear that foreign bank
branches among others have been unintentionally caught,'' Marlin
told Reuters.
A letter dated January 29 from Le Duc Thuy, permanent deputy
governor of the central bank, also appears to make banks
responsible for collecting the withholding tax on offshore interest
payments made by their corporate clients.
Hanoi has 33 dual-taxation agreements, the General Department of
Taxation said on Monday, but bankers said it was unclear how these
would operate in relation to Circular 169.
A tax official said entities affected by the withholding tax would be
exempt or be eligible for a tax reduction if the loan fell under a
dual-taxation agreement.
``This means the new tax will not make business costs increase,''
said the official, who declined to be identified.
Tim Reinold, managing partner at lawyers Freehill Hollingdale &
Page in Hanoi, said it appeared the government would not allow the
banks affected to pass on any extra cost to borrowers in Vietnam.
He said the central bank, the State Bank of Vietnam, had issued a
notice stating the current ceiling of 7.5 percent on U.S. dollar loans
could not be raised to accommodate the tax.
``What they are saying is banks have to build the tax into their
margins which makes the cost of lending that much more expensive
and difficult,'' he said by telephone.
``It's just another cost to doing business and it appears they are
discriminating against foreign lenders.''
It was unclear if foreign banks or chambers of commerce have
attempted to lobby the government over the move.
Reuters - March 08, 1999.
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