Investing In Vietnam - Taxation

General Overview

Most business activities and investments in Vietnam will be affected by the following taxes:

• Corporate Income Tax (“CIT”)

• Value Added Tax (“VAT”)

• Personal Income Tax (“PIT”)

• Foreign Contractor Tax (“FCT”)

• Special Sales Tax (“SST”)

• Import and Export Duties (“IED”)

There are various other taxes that may affect certain specific businesses, including:

• Natural resources tax

• Property taxes

• Environment protection tax

• Social insurance, unemployment insurance and health insurance contributions

All taxes are national taxes and administered locally. There are no local, state or provincial taxes in Vietnam.

Tax Incentives

Preferential CIT rates of 10%, 15% and 20% for 15 years, 12 years and 10 years, respectively. From 1 January 2016, enterprises previously entitled to the preferential CIT rate of 20% will enjoy a rate of 17% instead. When the preferential rate expires, the CIT rate reverts to the standard rate. Certain socialized sectors (e.g. education, health) enjoy a 10% rate for the life of the project.

Tax holidays with a complete exemption from CIT for a certain period generally beginning after the enterprise first makes profits, followed by a period where tax is charged at 50% of the applicable rate:

• 4 years of tax exemption and 9 subsequent years of 50% reduction

• 4 years of tax exemption and 5 subsequent years of 50% reduction

• 2 years of tax exemption and 4 subsequent years of 50% reduction

"The Law on CIT applies to all domestic and foreign entities that invest in Vietnam. The Law expands the taxpayer pool to include all foreign enterprises that have income from Vietnam, regardless of whether they have a permanent establishment in Vietnam or not.

A Corporate Tax-payer can elect to adopt a calendar year, or a fiscal year ending on a quarter of a calendar year, as the basis for the tax year."

Corporate Income Tax (“CIT”)

Tax Rates

Currently, the CIT standard rate is 20%.

The companies which are classified into the following certain industries are liable to a higher tax rate:

• Companies operating in the oil and gas industry are subject to rates ranging from 32% to 50%, depending on the location and specific project

• Any companies engaging in prospecting, exploration and exploitation of mineral resources are subject to CIT rates of 40% or 50% depending upon location

CIT may be reduced under investment incentive schemes.

Tax Incentives

Preferential tax treatments such as tax exemption, tax reduction, and preferential rates (17%, 15% or 10%) are limited to:

• Encouraged sectors such as: healthcare, education, training, sports, art activities, environment, scientific research, high-tech, infrastructure development and software

• Economic zones, industrial zones with favorable conditions or locations with difficult socio-economic conditions

In particular, CIT rate of 10% for 15 years will be applied to:

• Income of enterprise from performance of new investment project in the area with extremely difficult socio-economic conditions

• Income of enterprise from performing new investment project in the high technology field

• Income of enterprises from performing new investment projects in the field of environmental protection

• High-tech enterprises and agricultural enterprises applying high-tech

The income of an enterprise from the implementation of a new investment project in production if the conditions on scale of investment, disbursement time and total annual revenue or labor usage are satisfied.

Enterprises currently applying a CIT rate of 20% as mentioned above will apply a CIT rate of 17% from 1 January 2016. Tax exemption for 4 years and a 50% reduction of tax payable for 9 subsequent years will also be applied in certain cases.

And, a CIT rate of 17% for 10 years will be applied to:

• Income of an enterprise from performing a new investment projects in the areas with difficult socio-economic conditions

• Income of an enterprise from performing a new investment project in production of equipment, high-quality steel and other products

Tax exemption for 2 years and 50% reduction of tax payable for the 4 subsequent years will be applied in certain cases.

Effective from 1 January 2012, following Vietnam’s WTO commitments, export-based tax incentives are no longer available to exporters. Exporters who have lost export-based tax incentives may elect an alternative tax incentive scheme (if eligible) and must notify the tax authorities of the election. The taxpayer must self-assess the applicable incentives in accordance with the current tax regulations.

Calculation of Taxable Profits

Taxable profit is calculated as the difference between total taxable revenue, whether domestic or foreign sourced, and deductible expenses, plus other assessable income.

Taxpayers are required to prepare an annual CIT return which includes a section for making adjustments to accounting profit to arrive at taxable profit.

Deductible Expenses

In general, deductible expenses for corporate income tax purposes are reasonable expenses actually incurred that relate to the activities of production and business of the enterprise and are accompanied by legal and complete invoices and vouchers as required by law.

Non-Deductible Expenses

The non-deductible expenses include following items:

• Depreciation of fixed assets which is not in accordance with the prevailing regulations

• Employee remuneration expenses which are not actually paid, or are not stated in a labour contract or collective labour agreement

• Staff welfare (including certain benefits provided to family members of staff) exceeding an annual cap of one month’s average salary

• Reserves for research and development not in accordance with the prevailing regulations

• Provisions for severance allowance and payments of severance allowance in excess of the prescribed amount per the Labour Code

• Overhead expenses allocated to a PE in Vietnam by the foreign company’s head office exceeding the amount under a prescribed revenue-based allocation formula

• Interest on loans corresponding to the portion of charter capital not yet contributed

• Interest on loans from non-economic and non-credit organizations exceeding 1.5 times the interest rate set by the State Bank of Vietnam

• Provisions for stock devaluation, bad debts, financial investment losses, product warranties or construction work which are not in accordance with the prevailing

regulations

• Unrealized foreign exchange losses due to the year-end revaluation of foreign currency items other than accounts payable

• Donations except certain donations for education, health care, natural disaster or building charitable homes for the poor

• Administrative penalties, fines, late payment interest

• Contributions to voluntary life, pension insurance funds for employees exceeding VND 3 million per month per person

• Certain expenses directly related to the issuance, purchase or sale of shares

• Creditable input value added tax, corporate income tax and personal income tax

For certain businesses such as insurance companies, securities trading and lotteries the Ministry of Finance provides specific guidance on deductible expenses for CIT purposes.

Losses

Tax losses may be carried forward for a maximum of five (5) consecutive years.

Losses arising from incentivised activities can be offset against profits from non-incentivised activities, and vice versa.

Losses from the transfer of real estate and the transfer of investment projects can be offset against profits from other business activities, but not vice versa.

Carry-back of losses is not permitted. There is no provision for any form of consolidated fi ling or group loss relief.

Administration

CIT taxpayers are required to make quarterly provisional CIT payments based on estimates. If the provisional quarterly CIT payments account for less than 80% of the final CIT liability, any shortfall in excess of 20% is subject to late payment interest (currently as high as 11% per annum), applying from the deadline for payment of the Quarter 4 CIT liability.

CIT returns are filed annually. The annual CIT return must be filed and submitted not later than 90 days from the fiscal year end (typically 31 December). The outstanding tax payable must be paid at the same time.

The standard tax year is the calendar year. Enterprises are required to notify the tax authorities in cases where they use a tax year (i.e. fiscal year) other than the

calendar year.

Taxpayers must pay tax in the province where their main head office is located. If an enterprise has a “dependent accounting production establishment” in another province or city, then the amount of CIT assessable and payable will be determined in accordance with a ratio of expenses incurred by each manufacturing establishment

over the total expenditure of the company.

Profit Remittance

Foreign investors are acceptable to remit their profits annually at the end of the financial year or upon termination of the investment in Vietnam. Foreign investors are not permitted to remit profits if the investee company has accumulated losses.

The foreign investors or the investee enterprises are required to notify the tax authorities of the plan to remit profits at least 7 working days prior to the scheduled remittance.

Transfer Pricing

Vietnam’s transfer pricing (“TP”) regulations are governed by Decree 20/2017/ND-CP which came into force on 1 May 2017, replacing the previous Circular 66/2010/TT-BTC.

Decree 20 extends the interpretation of existing provisions and introduces additional concepts and principles from the Transfer Pricing Guidelines of the Organization

for Economic Cooperation and Development (OECD) and BEPS Action Plan.

Related Party Definition

The ownership threshold required to be a “related party” under Decree 20 is 25%, higher than the 20% under Circular 66. In addition, Decree 20 removes from the related party definition of Circular 66 two entities having transactions between them accounting for more than 50% of their sales or purchases. Vietnam’s transfer pricing rules also apply to domestic related party transactions.

TP Methodologies

Acceptable methodologies for determining arm’s length pricing are analogous to those espoused by OECD in the Transfer Pricing Guidelines for Multinational Enterprises

and Tax Administrations, i.e. comparable uncontrolled price, resale price, cost plus, profit split and comparable profits method.

TP Documentation

Compliance requirements include an annual declaration of related party transactions and transfer pricing methodologies used, and a taxpayer confirmation of the arm’s length value of their transactions (or otherwise the making of voluntary adjustments), which is required to be filled together with the annual CIT return.

Decree 20 requires that the TP method applied must ensure that there is no loss of tax revenue to the State Treasury, which could imply that no downward adjustments are allowed. Decree 20 also introduces a new TP declaration forms which requires disclosure of more detailed information, including segmentation of profit and loss by related party and third party transactions.

Decree 20 gives the tax authorities the power to use internal databases for TP assessment purposes in cases where a taxpayer is deemed noncompliant with the requirements of the Decree.

Taxpayers engaged in related party transactions with domestic related parties may be subject to different rules.

Year 2015 to 2018 saw significant developments in transfer pricing initiated by the tax authorities. In July 2015, a Transfer Pricing Audit Department was established within the General Department of Taxation (“GDT”). Soon afterwards, in November 2015, local Transfer Pricing Audit departments were also established in the Hanoi, Binh Duong, Dong Nai, and Ho Chi Minh City tax authorities.

In July 2016, the GDT announced the establishment of a BEPS Working Group which is responsible for preparing action plans to implement the OECD BEPS Initiatives and

overseeing the implementation process.

Foreign Contractor Tax (“FCT”)

Foreign organizations and individuals carrying out permitted businesses in Vietnam without a legal entity are subject to Foreign Contractors Tax (“FCT”) comprising VAT and CIT/ PIT.

Applicable tax rates vary depending on whether a foreign contractor registers to use the Vietnamese Accounting System (“VAS”) or not. The standard FCT rate is 10% but different rates can apply depending on the transactions and taxpayer’s tax filing status.

There are three methods of FCT payment at the FC”s selection:

Deduction Method

This method allows the FC declaring: (i) VAT under the approach of crediting the input VAT against the output VAT, and (ii) CIT based on the declaration of revenue and

expense similar to the local enterprises” application. Of note, FC is required to meet some criteria, including FC”s adoption of the Vietnamese Accounting System.

Direct Method

Under this method, FCT is the mechanism to withhold taxes. The FC”s VAT and CIT/ PIT will be withheld by the Vietnamese customers at prescribed rates from the payments

made to the FC. Various FCT rates are regulated under the nature of activities performed.

Hybrid Method

This method is a mixed-up between the deduction method and direct method, i.e. allows the foreign contractor declares VAT based on the creditable approach and CIT at

direct method.

Double Taxation Agreements (DTAs)

The application of CIT (including via FCT rules) may be affected by a relevant DTA. For example, the 5% CIT withholding on services supplied by a foreign contractor may be eliminated under a DTA if the foreign contractor does not have profits attributable to a PE in Vietnam.

Vietnam has signed more than 70 DTAs and there are a number of others at various stages of negotiation. Notable is the signed DTA with the United States of America, although this is not yet in force.

There are various guidelines on the application of DTAs. These include regulations relating to beneficial ownership and general anti-avoidance provisions. DTA entitlements will be denied where the main purpose of an arrangement is to obtain beneficial treatment under the terms of a DTA (treaty shopping) or where the recipient of the income is not the beneficial owner.

The guidance dictates that a substance over form analysis is required for the beneficial ownership and outlines the factors to be considered, which include:

• Where the recipient is obligated to distribute more than 50% of the income to an entity in a third country within 12 months

• Where the recipient has little or no substantive business activities

• Where the recipient has little or no control over or risk in relation to the income received

• Back to back arrangements

• Where the recipient is resident in a country with a low tax rate

• Where the recipient is an intermediary or agent

Value Added Tax (VAT)

The VAT system in Vietnam applies to goods and services used for production, business and consumption in Vietnam. Two methods can be used to calculate VAT payable.

Taxpayers meeting the requirements can apply the credit method. VAT payable under the credit method is calculated on the difference between output VAT (VAT collected for sales) and input VAT (VAT paid on purchases). Taxpayers that do not qualify for the credit method can apply the direct method.

Under the direct method, the taxpayer will pay VAT by applying a deemed rate on the added value of the transaction. A Corporate Tax-payer is required to file and pay VAT on a monthly basis, or on a quarterly basis if relevant conditions are met. The standard VAT rate is 10%, but the rates are classified into four groups: exempt, 0%, 5% and 10%.

Special Sales Tax (SST)

Special Sales Tax is imposed on a selected number of goods and services, either at the stage of production, provision of services or import. Export products are exempted from SST. The tax is calculated based on the selling price at the place of production excluding this tax and VAT.

Special sales tax is a form of excise tax levied on the production or import of certain goods and the provision of certain services:

• Goods generally subject to SST include: cigarettes, cigars and other products processed from tobacco; spirits and beer; certain passenger vehicles; two-wheel motor

vehicles with a cylinder capacity above 125cm3; aircraft and yachts; various types of petrol; air-conditioners with a capacity of 90,000 BTU or less and playing cards

• Businesses subject to SST include: dancehalls, massage lounges and karaoke parlors, casinos, slot machines and other similar types of machines, betting businesses, golf and lotteries

Taxpayers producing SST goods from SST inputs are entitled to claim a credit for the amount of SST paid on the materials imported or purchased from local suppliers.

Natural Resources Tax (NRT)

Natural Resources Tax (also known as royalty tax) is imposed on the exploitation of Vietnam’s natural resources including petroleum, mineral resources, forest products, seafood and natural water. Tax rates vary depending on the specific classification of natural resource and are applied to the production output at a specified taxable value per unit.

Property Tax

Foreign investors generally pay rental fees for land use rights. The range of rates is wide depending upon the location, infrastructure and the industrial sector in which the business is operating. In addition, owners of houses and apartments have to pay land tax under the law on non-agricultural land use tax which is charged on a square meter basis at progressive rates from 0.03% to 0.15%.

Environment Protection Tax

Effective from 1 January 2012, Vietnam introduced Environment Protection Tax (“EPT”) which is aimed to impose tax on goods that may cause damage to the environment.

EPT is in effect an indirect tax applicable to the production and importation of certain goods such as petroleum, coal, plastic bags and restricted chemicals.

Import and Export Duties

All goods entering Vietnam are generally subject to import duty. Import duty rates vary depending on the nature of goods involved and origin of the goods. There are three import duty rates applicable (ordinary, preferential and especially preferential), based on the trading relationship between Vietnam and the exporting country.

A partial or full exemption from import duty may be granted on application. Raw materials and components imported into Vietnam for the manufacture of goods for export are usually exempt from import duty provided that the goods are actually exported within 275 days. Enterprises with foreign-invested capital and parties to a Business Cooperation Contract in especially encouraged projects are exempt from import duty in respect of certain imported goods which form part of their fixed assets.

Most exports are duty-free, except for a certain natural resources such as sand, chalk, marble, granite, ore, crude oil, forest products and scrap metal.

Personal Income Tax (PIT)

Both foreigners working in Vietnam and Vietnamese citizens are subject to PIT. For tax residents, a progressive taxing system, where the marginal rate ranges from 5% to 35%, is applied to worldwide employment income.

For tax non-residents, a flat rate of 20% is applied to the employment income derived from Vietnam. In general, a tax resident is a person:

• Present in Vietnam for at least 183 days in a tax year; or

• Having a regular place of abode in Vietnam, i.e. an individual rents a house in Vietnam according to legislation on housing under a contract that lasts 183 days or longer in the tax year; or

• Not a tax resident of another country (subject to applicable double tax agreement)

If an individual has a regular place of abode in Vietnam, but is actually only present in Vietnam for less than 183 days in the tax year and fails to prove their residence in any other country, that individual will be considered to be a tax resident of Vietnam.

Social, Health and Unemployment Insurance Contributions

Social insurance (“SI”), Health insurance (“HI”) and Unemployment insurance (“UI”) contributions are applicable to Vietnamese and foreign individuals that are employed

under Vietnam labor contracts.

Tax Audits and Penalties

Tax returns are filed on a self-assessment basis and are subject to tax audit at later years.

Tax audits are carried out regularly and often cover a number of tax years. Prior to an audit, the tax authorities send the taxpayer a written notice specifying the timing and scope of the audit inspection.

There are detailed regulations setting out penalties for various tax offences. These range from relatively minor administrative penalties through to tax penalties amounting to various multiples of the additional tax assessed. For discrepancies identified by the tax authorities (e.g. upon audit), a 20% penalty will be imposed on the amount of tax under-declared. Late payment of tax is subject to interest of 0.03% (it was 0.05% prior to 1 July 2016) of the tax liability for each day late.

The general statute of limitations for imposing tax and late payment interest is 10 years (effective 1 July 2013) and for penalties is up to 5 years. Where the taxpayer did not register for tax, there is no statute of limitation for imposing tax and late payment interest.

Source RSM Vietnam

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