Gov't to lower corporate loans to equity ratios
Gov't to lower corporate loans to equity ratios
State-owned and private companies will have to limit their ratio of loans to equity in order to exclude interests from loans from the company's income tax payments.
This is a part of a new tax law that the Ministry of Finance is drafting and plans to submit to the National Assembly's Standing Committee this month.
The ministry plans to set the maximum ratio of loans to equity at 5:1 for those in the production sector and 4:1 for those in other sectors. This allows the interest accrued from loans that a company must pay to be excluded from the income tax collection starting next year. From 2019, these ratios will fall to 4:1 and 3:1, respectively.
The ministry wants to ensure that companies won't borrow too much from banks and reduce the rate of non-performing loans for the banking sector as well improve tax collection for the State.
The finance ministry reported the current Corporate Income Tax Law does not tax interest payments from loans, even when the loans exceeding the company's capital.
In fact, a lot of companies have outstanding loans exceed their capital, causing losses for them and reducing the taxes collected for the State.
The drafting law may cause problems for some listed companies that have very high ratio of loans over equity.
The draft reported that 11 listed companies have the highest ratio of more than 5:1 and about 20 others have a ratio of 2.8:1 to 4:1, most of which are construction companies and construction materials producers, including Vinaconex 5 (VC5) with the ratio of 13.7:1, SMC Trade & Investment (SMC) and Vinavico (CTN) with the ratio of 7:1 and Construction Co 47 (C47) with the ratio of 5.3:1.
Vinh Long Cereal and Food Corp (VLF) topped companies with a loans to equity ratio of 78:1.
In the second quarter of this year, VLF reported VND290 billion (US$12.9 million) of short-term loans while its equity was only VND4 billion ($175,100) due to a loss of VND153 billion ($6.8 million).
VLF reported that it hardly found any financial resources as all banks stopped lending it to buy production inputs, making the company run weakly with most of its activities in collecting receivables, selling stockpiles and inefficiently-used assets to pay bank loans.
VLF was listed as a controlled security on the HCM Stock Exchange as the company suffered a net loss of VND71.7 billion ($3.2 million) in the first half of this year.
The draft also reported that among 57 of 85 State-owned enterprises, two of them have the ratio of more than 2:1, six of them have the ratio of 3-5:1 and the rest have the ratio below 3:1.
In addition, 9,400 foreign-owned companies with total assets of VND2,200 trillion ($105 billion) have the general ratio of loans to equity at 1.2:1 for all sectors and at 3.4:1 for the trading sector only.
Some firms, however, have to make more loans because their capital is not enough to run their business. They will suffer more if their loan interest is included in the tax collection. In order to reduce that ratio, they can reduce the loans or increase the capital, but it seems too difficult for those that have low profits.
