Enterprises may finally be about to wave goodbye to the cap on advertising deductions.
The cap on tax deductible advertising and promotion expenses has long been the bane of enterprises in Vietnam. In a recent survey conducted by the Association of Vietnam Retailers on the issue, nearly all of the 800 enterprises asked said they agreed with a Ministry of Finance (MoF) proposal to remove the 15 per cent cap, which was to be submitted for approval at the end of October. “Removing the cap is like breaking down a barrier for enterprises,” was a commonly expressed belief. If the proposal is approved, enterprises will have more funds at their disposal to more widely promote their brand.
Under the Corporate Income Tax Law, any spending on advertising and promotions that exceeds 15 per cent of total expenses cannot be included as a tax deduction. The cap has been in effect for 14 years under the Corporate Income Tax Law and was originally set at 10 per cent of the total before being increased to 15 per cent. Since it was first introduced it has been met with displeasure by enterprises. The MoF proposal to the National Assembly, if approved, would represent a key reform for the country’s business community.
More to spend
Mr Nguyen Minh Hai, General Director of the Thang Long Air Service Cooperation, likened the imposition of the cap to “locking enterprises in a box”. Advertising is among the most crucial activities of all enterprises. “We have always managed to ensure that our advertising costs do not exceed the 15 per cent, but it has put us at a disadvantage,” he said. “The government needs to allow enterprises to determine for themselves how much they will spend.”
There can be no doubt that the cap has hindered many enterprises in developing their brand, especially small and medium-sized enterprises (SMEs). Many have had to take on the form of advertising that is most suitable to their finances rather than the one that brings the best exposure. Ms Nguyen Vu Huyen Tran from the Marketing Department at the Anh Hong Food Co. said that for a number of reasons, of which the advertising cap was one, the company has only used direct marketing in introducing its products to customers. “We have used mobile phone and email ads as well as catalogues and an interactive website rather then TV commercials and newspaper and magazine advertisements as there is only so much we can spend,” she said.
It’s clear that the cap has created a lot of stress among SMEs because they are forced to get “the biggest bang for their buck”. “Once the cap is removed the burden will be lifted,” said a representative from the Southern Nutrition Food Co. “We will have more opportunities to strengthen our sales and promotion activities in other advertising forms and better compete with famous brands in the market.”
The cap has also created “unfair” competition between domestic companies and foreign-invested enterprises (FIEs). According to Ms Pham Thi Thu Hang, General Secretary of the Vietnam Chamber of Commerce and Industry (VCCI), FIEs have the financial wherewithal to strengthen their brands. Most Vietnamese enterprises, meanwhile, are of small and medium scale. Not being able to outlay similar amounts on advertising, marketing and promotion puts them behind the 8-ball. “The government wishes to support domestic enterprises but the cap is not suitable for domestic enterprises, especially in the context of global integration.”
Although most enterprises look forward to the cap being removed, there are some who are concerned that its removal will see FIEs overwhelm domestic enterprises. Mr Nguyen Van Toan, Vice Chairman of the Vietnam Association of Foreign Invested Enterprises, said that domestic enterprises, especially those of small and medium size, will have to deal with more difficulties than FIEs will. “The stresses, however, will turn into movement,” he added. “Specifically, in the context of ASEAN and ASEAN+1, customs will come down to zero and SMEs must then attempt to find the correct means of promoting their image and competing with famous global brands.”
Vietnam and China are two of just a few countries in the world to impose such a cap. Ms Dinh Thi My Loan, Chairwoman of the Association of Vietnam Retailers, said the cap is in stark contrast to international trends. “China imposes a 15 per cent cap, but on total revenue, with a 30 per cent limit on certain products such as cosmetics and beverages,” she said. “Meanwhile, Vietnam’s cap relates total spending by the company.” The time has come, said VCCI Chairman Vu Tien Loc, to remove the cap completely.
Economic analysts agree that the removal of the cap will allow many domestic enterprises to strengthen their image and brand and compete with FIEs. Mr Vu Viet Ngoan said that no business would spend a huge amount on advertising if it couldn’t afford it. The government should therefore give enterprises the independence to determine what is best to achieve their business ends. “Removing the cap would create a fair competitive environment that permits domestic enterprises to catch up with FIEs,” he believes.
Some, though, express concern that higher advertising costs will simply be passed on to consumers. However, Mr Nguyen Cong Suat, Director of the Vietnam Plant Oil and Food Processing Co., said that consumers shouldn’t harbour such concerns because when the cap is removed companies like his will determine what is the best branding strategy to adopt. His, for example, will focus on investing more in the initial stages and then gradually reduce outlays at some later date to ensure that product prices remain stable.