The Vietnam Federation of Commerce and Industry (VCCI) has just commented on the draft Decree amending and supplementing a number of articles of Decree 126/2020 detailing a number of articles of the Law on Tax Administration of the Ministry of Finance.
Article 7 of the draft Law on Tax Administration is amended in the direction of requiring a deduction of personal income tax immediately at the time of paying dividends in securities. This regulation creates a major change in tax obligations: from the point of only incurring tax when shareholders have real income from selling shares, to having to pay tax immediately upon receiving shares.
According to VCCI, in addition to ensuring correct and sufficient collection, tax policies need to at the same time encourage business investment activities and business development, thereby promoting economic growth and nurturing sustainable revenue sources. From that perspective, the provisions in the draft need to be reviewed in the following aspects:
Firstly, it affects the interests of investors, reducing long-term investment motivation.
According to VCCI, dividing dividends in shares did not create actual income for shareholders at the time of receiving the dividend. In essence, this is only a technical adjustment in the capital structure, increasing the number of outstanding shares but not increasing the total asset value of shareholders.
For example, an individual holding 100,000 shares is worth 30,000 VND/share. When the enterprise divided the dividend in shares at a ratio of 2:1 (ie 2 old shares received 1 new share), this individual received an additional 50,000 shares.
According to regulations, the stock price was then adjusted to 20,000 VND/share. The total value of the individual's assets is still 3 billion VND, not generating income, but that individual still has to pay 25 million VND in personal income tax.
At the time of receiving the shares, shareholders had not really enjoyed any financial benefits. If forced to pay taxes immediately, this will create liquidity pressure and financial risks for investors, both large and small. At the same time, early tax collection also reduces the attractiveness of long-term investment strategies, because investors have to pay taxes before even when they have actual income.
Secondly, it affects reinvestment resources for businesses, because according to the opinions of some businesses, after-tax profits are often handled according to three options:
No profit sharing: Helping businesses retain investment resources, but shareholders are not allowed to share business results;
Cash dividend: shareholders make profits, but the capital scale of the enterprise is reduced, affecting cash flow;
Dividing dividends in shares: enterprises retain capital for production and business, and shareholders increase ownership.
The form of dividend payment in shares is considered a solution to harmonize the interests of enterprises and shareholders, encourage investors to hold for a long time, and accompany the development of enterprises.
The proposal to tax at the time of stock division as in the draft will make this option less attractive, reducing an effective financial tool for businesses to maintain and expand production.
In the context of having to pay taxes immediately, investors will tend to choose cash dividends because they bring real cash flow, serve immediate tax payment and are not at risk of stock price fluctuations in the future.
According to data from the tax authority, in the period of 2016 - 2024, the actual personal income tax collected from securities dividends is only about 1,318 billion VND, while if the collection is applied right from the time of division, the figure is estimated to reach 17,420 billion VND. This shows that the majority of shareholders choose to hold stocks for the long term.
This about more than VND10,000 billion "unrecovered" is actually being held in enterprises, serving reinvestment, creating jobs, contributing to GDP and a stable source of income for the budget. If forced to pay taxes early, this capital flow can be withdrawn, affecting the development ability of enterprises.
Therefore, VCCI recommends that the drafting agency reconsider the regulation on the time of deduction of personal income tax for share dividends in the draft.
