Today, we will have a discussion about EBITDA. Why is EBITDA used as a criterion to control loan interest in related transactions.

Let’s review the formula firstly.

EBITDA is equal to, Net profit from operations plus Loan interest expense plus Depreciation expense.

EBITDA was born in 1980 in the United States with the purpose of searching enterprises that are in recession, but have overcome the recession, and survived. The researching experts found that enterprises could overcome the recession because they were able to pay 2 important compulsory debts in business, are government tax debt, and bank debt.

In the external liabilities relationship of the enterprise, the first priority is the debt of the tax authority, followed by the debt to the bank. These are two powerful creditors, forcing the Enterprise to pay its debt in full and on time.

From a research perspective, the EBITDA formula is seen as follows.

Firstly, EBITDA excludes accounting depreciation expenses from business results. In the result of net profit from operations, the accountant has calculated depreciation, when summing up, he/she will offset the depreciation.

Secondly, EBITDA removes loan interest expenses from the results of the business. In the result of net profit from operations, the accountant has calculated the loan interest, when summing up, he/she will offset the loan interest.

It is easy to acknowledge that the enterprise has money, they use its money to buy assets, when put such asset into business, the depreciation is included in expenses. The Enterprise does not have money, they will enter into loan agreement, and loan interest expense is included in expenses. EBITDA excludes these two factors in order to search the reality of cash flow from operation activities, excluding depreciation and loan interest expenses. That is the explanation for the reason that business is profitable but still living hand to mouth, and the recession still exists.

In other words, in terms of business results of the two enterprises being equal, the enterprise with high capital, they will be able to suffer the recession better than the one with low capital.

Now, let’s learn about EBITDA Vietnam in related transactions.

EBITDA Vietnam, in depreciation expense excluding prepaid expenses, has account number 242. As for the original EBITDA, it includes prepaid cost. For example, land use rights with duration.

EBITDA Vietnam, in the interest expense deducting interest income and interest expense. The original EBITDA, does not deduct interest income and interest expenses.

Therefore, EBITDA Vietnam is smaller than the original EBITDA. The enterprise wishes EBITDA to be controlled in related transactions larger so that it will better.

Currently, countries throughout the world offer 2 options to prevent erosion of the tax calculation in loan expenses.

Firstly, controlling the times of entering into loan agreement of the enterprise base on their actual capital injection.

Secondly, controlling EBITDA, not exceeding x percent, or y percent, of the deducted expense of calculation of corporate income tax.

Most countries choose the second option, due to many advantages. EBITDA, reflecting net business, limiting low capital, calculating cash flow, limiting loan expense arrangement. As for the first option, it is easy to understand, and limiting low capital.

Vietnam currently regulates and controls loan interest expenses, not exceeding 30 percent of EBITDA in enterprises with related transactions.

Specifically, “Total of deducted interest expense, equal to 30 percent, of the total net profit from operation for the period, plus loan interest expense, after deducting loan interest on deposits and loan interest incurred in the period, plus the depreciation expense incurred in the period, of the taxpayer”.