Determining Loan Interest Expenses When Calculating Corporate Income Tax
Corporate income tax is one of the factors that determine the real profit of a business after deducting loan interest. Understanding how interest expense is calculated during the CIT calculation process will help you optimize your business finances and ensure compliance with the law. In this article by Smart Solutions For Business Company Limited (S4B Vietnam), we will guide you on determining loan interest expenses when calculating corporate income tax, please read.
1. Legal basis
According to Circular 78/2014-TT-BTC on expenses that cannot be deducted when calculating corporate income tax.
“2.17. The cost of paying interest on production and business loans of subjects that are not credit institutions or economic organizations exceeds 150% of the basic interest rate announced by the State Bank of Vietnam at the time of the loan.
2.18. Payment of loan interest corresponding to the remaining registered charter capital (for private enterprises, investment capital) according to the capital contribution schedule stated in the enterprise’s charter, including cases where the enterprise has gone into production and business. Loan interest payments have been recorded in the value of the asset and the value of the investment project.”
Interest Expense Formula | Calculator
2. What is the interest expense?
Loan interest expense is the expense that the unit must pay to the lender corresponding to the loan amount and is calculated as the interest rate multiplied by the outstanding debt amount.
Classification of loan interest expenses:
- Long-term loan interest
- Short-term loan interest
- Loan interest on overdrafts
- Interest rates on bonds and convertible debt
- Interest from some other loans.
Interest Expense: Definition, Formula & Example
3. Characteristics of interest expenses
Interest expenses have some of the following characteristics:
- Loan interest expenses must be recorded in production and business expenses in the period in which they arise, unless capitalized.
- Interest costs directly related to unfinished production or construction investment will be included in the value of that asset when all conditions are met.
- Interest costs are capitalized when the business is certain to gain economic benefits in the future.
Interest costs depend on the general interest rate of the economy. If during a period of inflation, interest costs will increase higher than normal because businesses have to shoulder debt with high interest rates.
4. Instructions on how to calculate loan interest expenses
4.1 How to calculate bank loan interest expenses
Bank loan interest rates are almost the default for all customers when borrowing money from banks. The loan interest rate calculation formula that most banks are applying today is calculated based on the decreasing loan balance.
Interest payable (Month) = (Current loan balance x Current loan balance x Actual number of days maintaining the loan balance) / 365
4.2 How to calculate loan interest costs for individuals, businesses, and organizations
Depending on each individual, business, and organization, the way to calculate loan interest is also different. Basically, loan interest will still be calculated based on outstanding debt, loan interest rate and actual time to maintain the debt. Loan interest calculation formula:
Amount of interest payable = Interest paid monthly + Interest paid daily
In there:
- Interest paid monthly = (Current loan balance x Annual loan interest rate x Actual number of days maintaining debt) / 365 days
- Interest must be odd days = (Current loan balance x Loan interest rate per year x Actual number of days maintaining the current loan balance in odd months) / 365
5. Determine reasonable deductible interest expenses when calculating corporate income tax
5.1 In case of full capital contribution
- If a business borrows from an economic organization, there will be no limit on interest rates
- If the enterprise borrows from an entity that is not a credit institution, the loan interest must not exceed 150% of the basic interest rate announced by the State Bank of Vietnam at the time of the loan.
5.2 In case of borrowing to contribute capital
In case an enterprise borrows to contribute capital, the loan interest corresponding to the missing capital contribution will not be included in the enterprise’s expenses.
5.3 In case the enterprise has fully contributed charter capital
During the course of business, if there is interest payment on loans to invest in other businesses, this expense is included in deductible expenses when determining taxable income. In case the loan amount is less than or equal to the missing charter capital, all loan interest is a non-deductible expense.
Above, Smart Solutions For Business Company Limited (S4B Vietnam) has provided information about “Determining loan interest expenses when calculating corporate income tax”. Hope the above information is useful to readers. If you have other questions that need advice or support, please contact us, our team will answer quickly and in the most detail.
>>>Read more: Tax audit income tax 2024
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