People's credit funds face difficulties due to taxes and fees.

(Baonghean) - The People's Credit Fund (PCF) system is an important channel for capital flow, providing strong support for people in borrowing and depositing money. However, the operations of PCFs are facing many difficulties due to some new regulations on taxes and fees that must be paid.

Tax upon tax, fee upon fee?

To date, Nghe An province has 55 grassroots People's Credit Funds (PCFs) spread across 14 districts, cities, and towns, with a total mobilized capital of 2,637 billion VND from local residents, a total outstanding loan balance of 2,600 billion VND, good credit quality, and a non-performing loan ratio of less than 1%. PCFs are recognized as a channel providing capital to individuals and households to expand production and business, develop industries and services, create many jobs for members, contribute to poverty reduction, and ensure social security in rural areas. However, the operation of PCFs is facing difficulties due to some policy regulations. According to Circular No. 111/2013/TT-BTC "Guidelines for the implementation of the Law on Personal Income Tax, the Law amending and supplementing a number of articles of the Law on Personal Income Tax…", taxable income includes: Dividends received from capital contributions to purchase shares; Income derived from capital contributions to limited liability companies, partnerships, cooperatives, business cooperation contracts, and other business forms as stipulated by the Enterprise Law and the Cooperative Law; income derived from capital contributions to establish credit institutions as stipulated by the Law on Credit Institutions. The tax rate on income from capital investment is applied according to the full tax schedule with a tax rate of 5%. Regarding this tax collection, the People's Credit Funds argue that since they have already paid 20% corporate income tax, they should pay an additional 5% when distributing dividends to members, thus collecting "double taxation".

In early 2014, the State Bank of Vietnam issued Circular 03/2014/TT-NHNN “Regulations on the Fund for Ensuring the Safety of the People's Credit Fund System”. Accordingly, the annual contribution fee is 0.08% of the average outstanding loan balance of the preceding year ending December 31st of the People's Credit Fund. The amount contributed to the Fund is intended to be used for lending to support People's Credit Funds facing financial difficulties or payment problems, enabling them to recover and resume normal operations. Of particular concern is that the amount contributed to the Fund for Ensuring the Safety of the People's Credit Fund System is considered an expense, meaning the People's Credit Funds lose this money. In reality, People's Credit Funds have already paid a deposit insurance fee of 0.15%, and now they are paying an additional 0.08% to the Fund for Ensuring the Safety of the System, resulting in a double charge. Therefore, many credit unions propose that if they have already paid deposit insurance premiums, they should not have to contribute to the system safety guarantee fund, and vice versa.

Officials at the Nghi Xuan Commune People's Credit Fund (Nghi Loc District) process savings deposits for customers. Photo: Phuong Chi

In a discussion with us regarding personal income tax on capital investment, Mr. Duong Minh Duc – Head of the Taxpayer Support and Propaganda Department, Nghe An Tax Department, stated: Currently, the State's policy regulates these two taxes in two different legal documents. Legal documents on Corporate Income Tax apply to organizations, businesses, cooperatives, etc.; legal documents on Personal Income Tax regulate tax obligations for individuals. In the case of a People's Credit Fund (PCF) having income subject to corporate income tax, however, the personal income tax also originates from this PCF. This inadvertently leads some people to understand it as "double taxation," but in reality, in this case, the credit institution generates income, and therefore its tax obligations stem from the business activities. Individuals who receive profits or dividends on their capital investments are responsible for paying taxes on the generated capital investment (Income from capital investments is subject to personal income tax without deduction).

People's Credit Funds are facing difficulties.

The Hung Dong People's Credit Fund (Vinh City) currently has a total chartered capital of over 3 billion VND (interest paid to shareholders is approximately 9-10% per year). Now, facing the tax policy stipulating that dividends and profits from individual capital contributions are also subject to a 5% tax rate, Mr. Nguyen Dang Khoa - Director of the Hung Dong People's Credit Fund - expressed his frustration: In 2013, the fund had 385 million VND in dividends paid to shareholders, but had to pay over 19 million VND in taxes. Furthermore, there is retroactive tax collection from 2010, while some shareholders have withdrawn their capital and moved elsewhere, or some have passed away, so the People's Credit Fund has to pay the tax itself. In reality, the Fund only collected this tax from shareholders in 2013, and since then, no individuals have contributed to the chartered capital. Therefore, in 2014, Hung Dong People's Credit Fund set a target of increasing its charter capital to 4.5 billion VND, but as of now, it has only reached 3,019 million VND (compared to 3,034 million VND at the end of 2013). Hung Dong People's Credit Fund is located in Vinh City and faces competition from many commercial bank branches. Furthermore, in 2014, Circular 03/NHNN stipulated that the People's Credit Fund must pay 0.08% of the average total outstanding loan balance of the preceding year to ensure the safety of the People's Credit Fund system. For example, in 2013, Hung Dong People's Credit Fund's outstanding loan balance was nearly 63 billion VND, meaning the fee to be paid was over 50 million VND, while it had already paid a deposit insurance fee of 0.15% of the average total deposit balance of the previous quarter. Under challenging operating conditions, mobilized capital has increased but outstanding loans have not, while rising taxes and fees are creating mounting difficulties for credit unions.

Sharing the same view, Mr. Nguyen Duc Hanh - Director of Nghi Huong People's Credit Fund (Cua Lo Town) - argued that: Collecting personal income tax on profits and dividends needs to be reconsidered because it is unreasonable. In reality, most of the capital contributed to the People's Credit Fund comes from members who are agricultural households and small-scale businesses. They save 20-30 million VND and contribute it to support each other in borrowing capital from the People's Credit Fund. Therefore, the annual dividends are insignificant, sometimes even equal to or lower than the interest rate on savings deposits, yet they are subject to an additional 5% tax rate, which is unreasonable. For example, a farmer who becomes a member and contributes shares to establish membership (previously 50,000 VND, now 200,000 VND), if the dividend rate is 10% per year, they would receive 20,000 VND annually, and would still have to pay personal income tax on profits and dividends. This constitutes double taxation because the People's Credit Fund had already paid corporate income tax. In 2013, the Nghi Huong People's Credit Fund's charter capital reached 4.5 billion VND, and total income from capital investment was nearly 404 million VND, resulting in a tax payment of over 20 million VND. Additionally, it had to pay back taxes for three years (2010, 2011, and 2012) totaling 68 million VND. In 2014, the State Bank of Vietnam allowed the Nghi Huong People's Credit Fund to increase its charter capital to 7 billion VND, but by the end of September 2014, it had only reached 5.7 billion VND (with contributions from only the Fund's staff and employees; no external participants). People were not enthusiastic about participating because of the dividend and profit taxes. Some even withdrew their capital and invested elsewhere. Furthermore, like other People's Credit Funds, the Nghi Huong People's Credit Fund had to contribute to the System Safety Fund, even though it had already paid deposit insurance fees.

In the context of general difficulties in credit operations, coupled with the additional taxes and fees that must be paid, the operations of People's Credit Funds (PCFs) face considerable challenges. The main objective of PCFs is to provide capital assistance to their members; therefore, in response to the concerns raised by PCFs, relevant sectors need to carefully study and find appropriate solutions to create favorable conditions for PCFs to operate effectively.

Quynh Lan