Financial policy mechanisms to support start –ups experience from a number of countries

Nội dung text: Financial policy mechanisms to support start –ups experience from a number of countries

1. FINANCIAL POLICY MECHANISMS TO SUPPORT START –UPS EXPERIENCE FROM A NUMBER OF COUNTRIES. * Bach Thi Thanh Ha*1 - Bach Thi Thu Huong ABSTRACT: Over the past few years, startups have become a trend and hot topic among young people in Vietnam. The Government has had many solutions to support startup companies such as creating favourable conditions for these entrepreneurs to access capital, innovating science and technology, etc. Experience from other countries shows that the proportion of successful startups is very small. Towards a startup nation with 1 million companies by 2020 for Vietnam, this paper proposes a number of policies supporting startups from the experience of some countries. Keywords: Startup companies; support startups; venture capital funds; KNONEX 1. INTRODUCTION In the recent years, Startups have become a trend and the hot topic among many young entrepreneurs in Viet Nam, especially when the fourth industrial revolution is approaching. Training and support centers for startupsas well as business incubators are established in most of the biggest provinces andcities. Startup companies in Vietnam are gradually transforming and maturing their quality of products, services and vision. We have witnessed a number of startups which already archived a lot of success and well-developed such as VNG, Appota, Tiki, VCCorp, Misfit company, etc. However, not all of these startups succeed because over 90% of startups fail. According to the GEM’s 2016 study, in 3,200 startup companies, only 12 are exist and only one has successfully introduced products and services on the market and continues growing [1]. Another statistics showed that, averagely 70% of startup companies fail in the first year, 20% fail in the second year, and only 10% succeed. (Thanh Giang, 2016). Although the Government has promulgated policies to support startup companies such as tax and capital incentives , startups are facing a lot of difficulties in accessing these resources. The authors will mention all the shortcomings of startup enterprises in the past and propose some solutions. 2. CURRENT SITUATION In these recent years, in order to support and develop startup companies, the Government has issued some financial support policies, specifically as: Firstly, tax incentives help enterprises have more financial resources to invest in wide range of business activities, reduce dependence on bank loans and saves on operating expense. Enterprises with preferential tax rate of corporate income are stipulated at in Article 19, Article 20 and Article 21 of Circular No. 78/2014/ TT-BTC dated 18/06/2014 and amended, supplemented in Article 6 of Circular 151/2014/ TT-BTC dated 10/10/2014 and Circular 96/2015/TT-BTC dated 22/06/2015. Specifically, * Faculty of Corporate Finance, Academy of Finance, Vietnam.
2. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 135 the Government has implemented Company income tax (CIT) incentives at different levels of incentives for startup enterprises that have investment projects in preferential sectors or investment in underdeveloped socio- economic areas, rural areas, remote areas, etc. In which, the maximum incentive level is applied with 10% tax rate in 15 years, tax exemption in 4 years and 50% tax reduction for the next 9 years for biotech development projects; the new investment projects in the field of environmental protection [3] Secondly, capital support through the Policy Bank, The Government has implemented incentives for startup companies, for instances credit interest subsidy, guarantee loans from credit institutions, National technology innovation Funds, National Science and Technology Development Funds, Small Business Support Funds. Thirdly, to promote the training of management capacity for startup enterprises in order to enhance their competitiveness. At present, this has been included in annual plan of Ministries, sectors and localities; Tech-mart market and supported policies in science and technology have helped entrepreneurs in connecting supply and demand, technology innovation and improving products quality. Fourthly, indirect support through incubator models: Promoting incubators to help business operate efficiently increase independence and financial autonomy of the incubators. Startup enterprises have access to credit; improve management experience, thanks to the support programs. Especially after the “Scheme commercialize the technology in the model of Silicon Valley in Vietnam” was approved by the Ministry of Science and Technology under Decision No. 1383/QD-BKHCN dated 04/06/2013 up to now, nine Startup enterprise groups have been selected from more than 90 startup projects across the country to receive intensive training support. After four months of initial training and receive a fund of $ 10,000, four groups have been invested, five groups in the negotiation process with the foreign venture capital funds. For example, Big Time, a company that provides event management tools, received $ 200,000 in advanced and was valued at $ 1.8 million by investors. Besides, Lozi company, which provides diversified information of places to eat and drink for young people, called millions of dollars from foreign venture capital funds [4]. Thus, some Vietnamese startups, after having received intensive training and initial capital, have called for foreign investment. Many of which have been priced up by five to ten times, that shows these enterprises will have the development prospects if they are supported in the right direction. 3. INADEQUATE PROBLEMS IN SUPPORTING MECHANISM FOR STARTUP COMPANIES: Firstly, Startup companies find it difficult to access information. The difficulty that enterprises encounter is that the startup trend has been existing for many years, but only few enterprises get practical support in term of capital or policy mechanism. Although Resolution No. 35 stipulates that the State will give preferential treatment to enterprises in terms of capital and tax [5], many enterprises do not know how to receive these incentives from any entities, which banks are providing preferential loans, and which agencies are providing technical support Secondly, the scale of business support is limited. Currently, the focus is on supporting business incubators, credit guarantees, advisory policy on business administration and production efficiency. The policy is lacking in specific support for rural areas, mountainous areas and in agriculture - forestry – fishery. Thirdly, supporting activities for startup enterprises have not been effective and over lapping. The proportion of SMEs that have access to credit is low; Credit guarantee fund for SMEs is not effective, difficult for accessing land These factors have a great impact on the development of startup companies. The scale of enterprises is very small, the technology level is low, the management ability is poor, and the worker’s skills have not met
3. 136 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA the requirements. In order to meet the needs and operate in a practical way, methods to support enterprises in the coming time should focus on promoting and facilitating mechanism, policy and finance towards synchronous, timely and proper purposes for enterprises to take advantage of. The authors propose some solutions to support the development of startup companies in the coming time as following: 4. RECOMMENDATIONS TO SUPPORT STARTUP COMPANIES. Firstly, more financial resources should be provided to startup companies in the first three to five years through supporting corporate tax rates. Recently, the Ministry of Finance is planning to submit to the Government in the National Assembly session in May 2018 to reduce the CIT rate from the current 20% to about 15-17% for SMEs that conform to certain criteria. In our opinion, this is the right direction to show the interest of the State to SMEs, especially while the initial financial capacity is small, that will help supporting small and medium enterprises with more financial resources to expand production and business activities. According to experience of many countries, there are regulations for SMEs that applied tax rate lower than the common tax rate. For example, Singapore applied the common tax rate of 17%, in the period of 2013-2015, the CIT Rebate was reduced by 30% of the corporate tax payable, subject to a cap of $30,000, the CIT Rebate for Year of Assessments (YAs) 2016 to 2017 was reduced by 50% of the corporate tax payable, subject to a cap of $20,000,the CIT Rebate will be extended to YA 2018 at 20% and to YA 2019 at 40% of the CIT payable, subject to a cap of $15,000 and $10,000 [6]. Mr. Pham Dinh Thi, Director of Tax Policy Department, spoke with news agency that in China, the preferential tax rate for small enterprises is 20% while the common tax rate is 25%. Similarly, in Thailand, the common CIT rate is 20%, but SMEs are also entitled to preferential tax rate at a lower level. Accordingly, a company with a taxable income of 300,000 baht or less is entitled to tax exemption, from 300,001 to 3,000,000 baht a tax rate of 15% and over 3,000,000 baht a tax rate of 20%. In particular, in 2016 - 2017, to promote SMEs development, Thailand has made more preferential treatment for SMEs such as: From 01/01/2016 to 31/12/2016: Complete tax exemption for SMEs; From 01/01/2017 to 31/12/2017: An enterprise with a taxable income of 300,000 baht or less is exempt from tax, An enterprise with a taxable income of more than 300,000 baht is entitled to a tax rate of 10%, [10]. However, as mentioned above, only about 10% of the 100 startups were successful, and the rest of them cannot be on the market in the first year. It proves that, the CIT Rebate is only great for profitable business; otherwise the CIT rebate is meaningless. The most important thing is how to grow startup companies. Specifically, an enterprise that earns $ 100 and pays $ 20 tax (the tax rate of 20%) would be far more meaningful than that earns $ 10 but the tax is reduced to $ 1 (the tax rate is reduced by 10%).According to experience of Singapore, an enterprise that has income at a certain threshold will be exempted from tax. (Specifically: $ 100,000 of first taxable income, 75% of the amount ($ 75,000) will be tax exempt; $ 100,000 of next taxable income, 50% of the amount ($ 50,000) will be exempt; for taxable income up to $ 200,000 or more, the average CIT rate is 17%). In our opinion, the Government should have more supportive tax policies for startup companies, which is to lower tax incentives in addition to tax exemptions, especially in the first phase (3-5 years) so that business could focus on financial resources and survive in the market. Secondly, reducing the personal income tax -PIT for human resources in high technology. There is no preferential policy on tax exemption or tax rebate for individuals who are hi-tech human resources. In addition, the Party and the State have identified the development of science and technology as the top national policy and play a key role in the country’s socio-economic development. In fact, in order to further develop science and technology, it is necessary to have centralized policies to attract highly
4. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 137 - qualified individuals to participate in the field of science and technology, sectors of prior development through PIT rebate. Thirdly, to promulgate policies to upgrade the Unlisted Public Company Market (UPCOM) to become a stock exchange for startup companies. The characteristics of startup companies are to create new products lines or even breakthrough products. Therefore, the most importance is capital support for the development of these enterprises. In addition to issuing policies that allow the formation of Venture capital funds, Angel Funds for startups as other countries, The State can set up a new stock exchange to raise funds for the startup enterprises such as the Korea New Exchange (KONEX) in Korea. Vietnam should upgrade UPCOM to become a dedicated stock market for startup companies to raise capital. In essence, KONEX is similar to a stock market for public companies, but was established specifically for SMEs and startup enterprises. Public disclosure rules of listing conditions, financial capacity and legal records of KONEX is not as close as those of the Korean Securities Dealers Automated Quotation (KOSDAQ). KONEX is designed as a stepping stone for SMEs before they meet the listing requirement of KOSDAQ and KOSPI (Fig.1). Above diagram shows the positioning of KONEX in terms of different entry levels. Companies listing in KONEX are required minimum standards of entry which will be around 1/10 to 1/3 of that is required in KOSDAQ. They will need to have a minimum capital of 500 million won, sales of 3 billion won or more, and an annual net profit of at least 300 million Won. Besides, KONEX plans to reduce the cost of listing maintenance by remission of securities registration statements and quarterly reports. On the other hand, to increase competitiveness, a company that is capable of listing on KOSDAQ is not permitted to register in KONEX. [8] Fig.1 The position of Konex and the other stock markets Source: Although in KONEX the rules for listed companies are softer, there are separate regulations to protect investors. For example, direct investment activities on KONEX is limited to professional investors, including venture capital funds, institutional investors or small investors with a minimum deposit of 300 million Won. Small investors are usually allowed to invest indirectly through funds. KONEX also has the annual investment limit for small investors up to 30 million Won, while professional investors are operating under the Law on Financial Investment Services and Capital Markets. Thanks to strong reforms, after 3 years of establishment, the market capitalization of KONEX that has increased more than 8 times, has reached approximately USD 4.1 billion and had 108 listed companies (Initially, KONEX established only 21 listed companies). Especially, the market capitalization of the first 21 listed companies increased by an average of 20% per year. [11], [12].
5. 138 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Fourthly, to promote the dissemination and propagation of the State’s support policies; names of each priority development, support sector and banks in charge of capital support for startup companies should be clearly stated. It can be seen that the State is very close in supporting business, creating a favourable environment for startup companies through Resolution No. 35/NQ - CP dated 16/05/2016. However, this Resolution is only effective when there are effective loan programs for startup companies. At the same time, it is necessary to reduce interest rates for medium and long term loans, further simplify procedures and conditions for lending, implement new forms of lending such as lending along the production and supply chains, increase financial leasing method, etc. 5. CONCLUSION Based on the experience of some other countries, the policies of direct support through the State budget, credit policy, the model of incubators, and the policies of indirect support through preferential policies on PIT and CIT play an important role in creating financial resources as well as encouraging startup entrepreneurs. Therefore, policy formers need to issue in time support policies to attract venture capital, minimize the risks for Government budget as well as the investors and at the same time, set the scene for startup companies. Comprehensive implementation of the solutions will support startup companies, thereby contributing significantly to the country’s development. REFERENCES Master, Le Minh Huong (2017),“Khơi dòng vốn cho doanh nghiệp khởi nghiệp Việt Nam”, Kỷ yếu Hội thảo Chính sách khuyến khích doanh nghiệp khởi nghiệp, Viện chiến lược và chính sách Tài chính. Thanh Giang (2016), “Khởi nghiệp đang cần vốn”, Báo Đại đoàn kết. dang-can-von/104957. The Ministry of Finance (2015), Circular No. 96/2015/TT-BTC on guidelines for corporate income tax. Vụ chính sách Thuế, Bộ tài chính (2017), “Tình hình doanh nghiệp khởi nghiệp ở Việt Nam trong thời gian gần đây và đánh giá khả năng hỗ trợ doanh nghiệp khởi nghiệp của các chính sách hiện hành”, Kỷ yếu Hội thảo Chính sách khuyến khích doanh nghiệp khởi nghiệp, Viện chiến lược và chính sách Tài chính. The Government (2016), Resolution No.35/NQ-CP dated 16/5/2016 issued by the Government: On enterprise Development Policy to 2020. Inland revenue authority of Singapore–IRAS (2018), Learning the basics of Corporate Income, Tax-Rates Corporate-Income-Tax-Rebates Tax-Exemption-Schemes-and-SME-Cash-Grant/#title3 Ph.D. Trần Thị Vân Anh (2016), “Xây dựng hệ sinh thái khởi nghiệp: Nhìn từ kinh nghiệm của Hàn Quốc”, Tạp chí tài chính, số tháng 10/2016. Hoàng Thị Tư (2016), “Cơ chế, chính sách hỗ trợ đặc biệt cho doanh nghiệp khởi nghiệp”, Tạp chí Tài chính kỳ I tháng 9/2016. Nhật Minh (2016), Hỗ trợ Doanh nghiệp khởi nghiệp: Nghị quyết 35 cần cụ thể hơn nữa, Báo Hải quan, tháng 6/2016. giai-doan-20172020-88288.html