Taxation

Since the commencement of the “Doi Moi” policy in 1986, Vietnam’s economy has shifted from being centrally based to a market-based economy. The tax system of Vietnam has therefore undergone crucial reforms since that time. In particular, since Vietnam obtained memberships to a number of international organisations eg ASEAN (1995) and WTO (2007), tax policy and tax reform has become aligned with international rules and practices, and at the same time tax collection and administration processes have been improved. In 2007, the Law on Tax Administration was first implemented. The Law provides rules on tax administration, management of information, tax collection and enforcement, and has provided guidance in areas previously open to wide interpretation. Later in 2007, the National Assembly also passed the first Law on Personal Income Tax, covering taxation of all income of individuals in Vietnam for the first time. This Law introduced the concept of personal and family deductions in determining taxable income of individuals.

In 2008, three further major tax laws were amended: Corporate Income Tax, Value Added Tax and Special Sales Tax. All four of these laws were implemented since 2009 and were amended in 2013 with various changes for implementation in 2014.

Tax administration is controlled by the General Department of Taxation, which operates under the Ministry of Finance. Tax affairs may also be handled by local provincial Tax Departments.

Foreign investors are likely to be affected by the following taxes:

  • Corporate Income Tax
  • Value Added Tax
  • Personal Income Tax
  • Foreign Contractor Withholding Tax
  • Special Sales Tax
  • Environmental Tax
  • Import and Export Duties

Corporate Income Tax (CIT)

Scope

Organisations conducting business and earning taxable income in Vietnam are subject to CIT. These include:

  • Enterprises established pursuant to the law of Vietnam
  • Foreign enterprises earning income in Vietnam with or without a resident establishment in Vietnam
  • Enterprises established pursuant to the Law on Co-Operatives
  • Professional entities established pursuant to the law of Vietnam
  • Any other organisation conducting activities of production or business that earns income

A company is a tax resident if it is incorporated in Vietnam or has a permanent establishment in Vietnam. In these cases, the foreign enterprise must pay tax on its worldwide income. If the company is not a tax resident or it does not possess a permanent establishment in Vietnam, it is only required to pay tax on income arising in Vietnam.

Currently, the CIT rate is 22 per cent; this is set to decrease to 20 per cent from 1 January 2016. For corporations with total revenues of less than VND20 billion, the 20 per cent CIT rate was applied from 1 July 2013.

Certain industries are liable to a higher tax rate. Companies operating in the oil and gas industry are subject to rates ranging from 32 per cent to 50 per cent, 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 per cent or 50 per cent, again dependent on location. CIT may be reduced under investment incentive schemes.

Vietnam has an extensive number of income tax treaties available for the avoidance of Double Taxation.

Taxable income

Taxable income is defined as the difference between total revenue and deductible expenditures. Income will include all revenue from sales, provision of services and additional profits acquired from business activities.

Taxpayers are allowed to deduct from their taxable income such reasonable and deductible business expenses as provided under law. In general, a business expense will be deductible if it satisfies the following conditions:

  • The expenses actually arose and relate to the business of the enterprise
  • Not on the list of expenses prohibited for deduction
  • Accompanied by eligible invoices and vouchers. Invoices valued at VND20 million or more should be settled via bank payment, unless specifically stated otherwise by relevant law

Some examples of non-deductible expenses include:

  • Depreciation of fixed assets that are not in accordance with regulation
  • Employee remuneration expenses which are not stated in a labour contract
  • Reserves for research and development that are not in accordance with regulation
  • Provisions for severance allowances
  • Administrative penalties or fines

Administration

Taxpayers subject to CIT are obliged to file tax declarations on an annual basis. The tax payments shall be made on a quarterly and annually basis. The quarterly income tax is to be calculated and taxes paid no later than the 30th day of the following quarter. The annual CIT finalisation return is to be filed and the taxes paid no later than 90 days from the end of the fiscal or calendar year. A business may change the tax year period but the period chosen cannot exceed 12 months.

Firms 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 as between the production establishment and the main head office.

Capital gains

Vietnam does not operate a separate ‘capital gains tax’ regime. Capital gains will therefore form a part of a firm’s taxable income and will be taxed at the standard corporate income tax rate.

There are specific rules for corporate income tax imposed on the transfer of capital in an enterprise or the sale of securities by investors. The purchase price and transfer expenses are generally deducted from the transfer price in order to calculate the taxable capital gain. This tax is known as the Capital Assignment Profits Tax. Where the vendor is a foreign entity, the Vietnamese purchaser is required to withhold the tax due and account for this to the tax authorities. Where the purchaser is also a foreign entity, the Vietnamese enterprise in which the interest is transferred is responsible for the administration of the Capital Assignment Profits Tax.

For the transfer of shares in a Vietnamese JSC, gains derived by the resident entity are taxed at 22 per cent.

Groups

There are no provisions within corporate tax law addressing the concept of group consolidation. Nevertheless, current regulation stipulates that profits and losses cannot be offset between companies within a group.

Thin capitalisation rules

At present, there are no thin capitalisation rules. However, there are restrictions on loans from foreign affiliates in some sectors.

Losses

Businesses that incur losses after tax finalisation are entitled to carry forward those losses to be offset against the assessable income of future years. Tax losses are available to carry forward consecutively for a maximum of five years before they expire. Losses of incentivised activities can be offset against profits from non-incentivised activities, and vice versa.

Enterprises which incur a loss from real property transfers can carry forward the loss to be offset against assessable income of other activities.

The carry-back of losses is not permitted.

Dividend income

Dividends paid to corporate shareholders are generally exempt from CIT, if the paying firm has fulfilled its CIT obligations before payment. Dividends received from foreign companies are credited against CIT payable in Vietnam but not exceeding the income tax calculated under the CIT Law of Vietnam.

Withholding tax

Withholding tax is charged on the following types of income:

  • Royalties paid to a foreign party for the right to use or license patents, inventions, industrial property, designs, trademarks, copyright and technical knowhow – 10 per cent
  • Interest and any other amounts charged by the offshore lender in connection with a loan agreement – five per cent

Foreign Contractor Withholding tax

The foreign contractor withholding tax covers the taxation of outbound, cross-border remittance of contract payments by a resident corporation to an overseas goods or services provider. The foreign contractor withholding tax covers Value Added Tax and Corporate Income Tax.

The foreign contractor withholding tax covers interest, royalties, service fees, leases, insurance, transportation, transfers of securities and goods supplied in Vietnam or associated with services rendered in Vietnam. The tax rates vary depending on the type of goods, services or goods associated with services.

There are three methods of payment under which the foreign contractors may declare and pay the tax:

Deduction method: the Vietnamese party withholds the payment paid to the foreign contractor for the tax.

Direct method: the foreign contractor registers under the Vietnamese Accounting System (VAS) to pay taxes directly.

Hybrid method: the foreign contractor registers for only VAT, combining elements of both the deduction and direct method.

Foreign contractor withholding tax does not apply to pure trading transactions for certain purchases under Incoterms.

Transfer pricing

Related party transactions must be conducted at arm’s length and must comply with the transfer pricing rules and documentation requirements. Parties are related if they hold directly or indirectly at least 20 per cent of the equity or the total property of the other business establishment. The definition of related parties also extends to certain significant suppliers, customer and funding relationships between otherwise unrelated parties such as a business establishment, which directly or indirectly controls more than 50 per cent of the sales turnover (calculated on the basis of each type of product) of the other business establishment.

Vietnamese transfer pricing rules generally adopted the revised Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. This included the acceptable methods of determining the arm’s length principle, such as, comparable uncontrolled price, cost plus, resale price, comparable profits and profit split.

Contemporaneous documentation is required to be prepared and maintained. Such documentation is required to be presented to the tax authorities (translated into Vietnamese) within 30 days of receiving a written request. In addition, a declaration is required to be filed together with the CIT return providing details of related transactions and the methodologies adopted. By the time of the submission of the transfer pricing declaration, the company shall maintain the supporting documentation to prove that its related-party transactions are conducted in line with the arm’s length principle and to confirm the arm’s length price on this transfer pricing declaration.

Controlled foreign companies (CFC)

There is no anti-controlled foreign company legislation.

Tax incentives

Companies engaged in preferred areas of investment or located in special geographical areas are generally entitled to preferential tax rates, as follows:

  • 10 per cent CIT rate for 15 years for new investment projects in an area with especially difficult socioeconomic conditions, in economic zones and in high-tech zones; and to new investment projects in the sectors of high technology, scientific research and technological development, investment in development of especially important infrastructure facilities of the State, and production of software products
  • 10 per cent CIT rate for the entire operational period is applicable to enterprises operating in the sectors of education and training, occupational training, health care, culture, sport and the environment
  • 20 per cent (reduced to 17 per cent from 1 January 2016) CIT rate for the first 10 years applies to new investment projects in areas with difficult socioeconomic conditions
  • 20 per cent (reduced to 17 per cent from 1 January 2016) CIT rate for the entire operational period is applicable to agricultural service co-operatives and to people’s credit funds

Taxpayers may also be eligible for tax holidays and reductions. Tax holidays are available for two to four years, as well as a 50 per cent tax reduction for up to nine years from the first profit-making year of the forth revenue-making year, whichever comes first.

Additional incentives may be available for companies that employ a significant number of female employees or employ ethnic minorities.

Personal Income Tax (PIT)

The new Law on Personal Income Tax (as revised in 2012) took effect on 1 January 2009. This replaced the previous ordinance and regulations covering Income Tax of High Income Earners in Vietnam.

Individuals liable to Vietnamese tax

Vietnamese resident individuals are subject to personal income tax on their worldwide income, non-resident individuals are liable to personal income tax only on income arising within Vietnam.

An individual is considered a resident for tax purposes if he satisfies one of the following conditions:

  • Being present in Vietnam for a period of 183 days or more within one western calendar year or for 12 consecutive months
  • Having a regular residence in Vietnam in one of the following cases: Having permanent residence recorded in the residence card or temporary residence card or having a lease contract of ninety days or more.

A non-resident is any individual who does not satisfy the above conditions.

For individual stays in Vietnam of more than 90 days but less than 183 days in a tax year; or in 12 consecutive months from the date of arrival in Vietnam, the individual will be viewed as a Vietnam tax non-resident if the individual can prove that he/she is tax resident of another country.

Taxable income

Taxable income generally comprises 10 main types of income: business income, salaries and wages, income from capital investments, income from capital transfers, income from real property transfers, winnings or prizes, royalties, income from franchises, income from inheritances and receipts of gifts.

Income not subject to tax generally includes:

  • One-off regional transfer allowances for foreigners moving to reside in Vietnam
  • The cost of one return air ticket paid by the employer for a foreign employee to return home for holiday once per year
  • Employee training fees paid to training centres
  • School fees of expatriate employees’ children paid directly to schools in Vietnam
  • Income from real property transfers between certain related parties
  • Income from the transfer of a sole residential house or residential land use right in Vietnam
  • Receipt of an inheritance or gift of real property between certain related parties
  • Interest on money deposited at a bank or credit institutions
  • Income from life insurance policies
  • Foreign currency remitted by overseas Vietnamese
  • That part of night shift or overtime salary payable that is higher than the day shift or normal working hours salary stipulated by the Labour Code
  • Scholarships
  • Compensation payments from life and non-life insurance contracts
  • Compensation for labour accidents

The personal income tax law stipulates that the taxpayer may deduct VND3.6 million per dependent per month and VND9 million per month as a personal deduction. Deductions are also permitted for contributions to raise or care for children in especially difficult situations, for disabled people, elderly people; and to charitable, humanitarian, and study promotional funds.

Individual responsibilities in relation to Vietnamese personal income tax

Any individual present in Vietnam who has taxable income must obtain a tax code. Those who have taxable employment income must submit the tax registration file to their employer; the employer will subsequently submit this to the local tax office. For individuals with taxable non-employment income, they must submit their tax registration file directly to the district tax office.

Employers must deduct and withhold employees’ personal income tax and submit it to the tax authority, alongside the relevant social security contributions. They are required to do this no later than the 20th of every month. The total income withheld must be finalised no later than 90 days after the end of the western calendar year.

For tax residents who have overseas income, any personal income tax paid in a foreign country is creditable against tax paid in Vietnam subject to certain tax administration procedures.

Tax rates and bands – 2014

Residents – employment and business income
Annual taxable income (VND million) Tax rate ( per cent )
Income exceeding Not exceeding
0 60 5
60 120 10
120 216 15
216 384 20
384 624 25
624 960 30
960+ 35
Residents – other income
Type of income Tax rate ( per cent )
Interest/dividends 5
Sale of shares:
Net gain 20
Sales proceeds 0.1
Sale of real estate
Net gain 25
Sales proceeds 2
Other
Income from copyright 5
Income from franchising/royalties 5
Income from winning prizes 10
Income from inheritances/gifts 10
Non-residents
Type of taxable income Tax rate ( per cent )
Employment income 20
Business income 1 – 5, dependent on the type of income
Interest/dividends 5
Sales of shares 0.1
Sale of real estate 2
Income from royalties/franchising 5
Income from inheritance/ gifts/winning prizes 10

Tax returns

For employment income, tax has to be declared and paid provisionally on a monthly basis by the 20th day of the following month or on a quarterly basis by the 30th day following the reporting quarter. The amounts paid on a monthly basis are then reconciled to the total tax liability at year-end.

Individuals who receive income from overseas shall file tax returns on a quarterly basis.

An annual tax return must be submitted and any outstanding tax due paid within 90 days of the year end. For those who have only one source of employment income and some other prescribed cases, the income paying organisation is allowed to prepare the annual personal income tax finalisation for him/her. Otherwise, that individual is required to file his/her own annual personal income tax finalisation return to the local tax authority.

For non-employment income, the individual is required to declare and pay personal income tax on a regular basis.

Joint declarations are not permitted; each individual must file a separate tax return.

Other taxes

Value Added Tax

VAT is a transaction tax, the cost of which ultimately falls on the end customer. The majority of transactions involving the supply of goods, the provision of services and importations will be subject to this tax.

Broadly, VAT is levied on the value added at each stage of the production and distribution supply chain. Registered businesses act as collection points for the Value Added Tax department.

Not all transactions are subject to the tax, and those that are may be subject to different rates. In addition, not all of the VAT incurred by a business can be reclaimed.

Making taxable supplies

A taxable person for the purposes of VAT can be an individual (sole trader) in business, a partnership (including a limited liability partnership), a trust, an incorporated business or a branch of an overseas corporate entity.

Organisations and individuals producing and trading VAT taxable goods and services in Vietnam, or importing VAT taxable goods or services from foreign countries are liable to pay VAT.

VAT administration

All organisations and individuals producing VAT liable goods and supplies must register for VAT. Each branch must register separately and declare VAT on its own transactions. Transfers of goods between branches may also be liable to VAT. Registration for VAT is mandatory within 10 days of a corporation’s establishment date.

The monthly value-added tax declaration is to be submitted and tax paid no later than the 20th day of the following month or on a quarterly basis by the 30th day following the reporting quarter (provided revenue of the prior year was less than VND50billion). A newly established entity is allowed to file VAT on a quarterly basis for the first 12 months from incorporation.

Entities may use pre-printed invoices, self-printed invoices or electronic invoices to declare their VAT liability. There are stipulated items that must be included.

If a taxpayer’s input VAT for a given period exceeds its output VAT, it can carry the excess forward for a period of 12 months. Following this, it can claim a refund from the authorities.

Applicable rates

Rate (%) Applicable to
0 Exported goods and services; construction and installation operations of export processing enterprises; goods sold to duty-free shops; international transportation, and to goods and services that are not subject to VAT and that are exported, except for the following: technology transfers and intellectual property transfers to foreign countries; services being reinsurance offshore; credit services, assignment of capital and derivative financial services; post and telecommunications services; and export products being exploited natural resources and mined minerals that have not yet been processed.
5 Areas of the economy considered as essential goods and services, including clean water for manufacturing and for living purposes; fertilisers; ore used for production of fertilisers; pesticides and growth stimulants for animals and crops; feed for cattle, poultry and other animals; fresh food produce; sugar and its by-products; products made from jute, sedge, bamboo, rattan, thatch, coconut fibre, coconut shell, water hyacinth, and other handmade products produced by using agricultural raw materials; semi-processed cotton; newsprint; medical equipment and instruments; medical sanitary cotton and bandages; preventive and curative medicines; and pharmaceutical products and pharmaceutical materials which are the raw materials for producing preventive and curative medicines; scientific and technological services as stipulated in the Law on Science and Technology.
10 All other goods and services not subject to the zero per cent and five per cent rates.

Some supplies are exempt from VAT, these include: products of cultivation, aquaculture, animal breeding stock and plant varieties, genetic materials; salt products; transfers of land use rights; life insurance; credit services; securities business activities; assignments of capital; derivative financial services; medical health services and veterinary services; education and vocational training; publications, importation and distribution of newspapers, books and teaching materials.

Other items that are exempt from VAT when imported include: machinery, equipment and materials that cannot be produced domestically but are required for scientific research and technological development activities or prospecting, exploration and development of petroleum and natural gas fields.

Business establishments are not entitled to a credit and refund of input VAT in respect of the above goods and services which are not subject to VAT.

Methods of calculating VAT

VAT payable can be calculated using the tax credit method or by calculating tax directly on the basis of added value.

The tax credit method applies to business establishments that fully implement the regime on accounting, invoices and source vouchers as stipulated by law, and register to pay VAT by the tax credit method.

The method of tax calculation based directly on added value only applies to business establishments, foreign organisations and individuals conducting business without a resident establishment in Vietnam, which have income arising in Vietnam and do not implement the regime on accounting, invoices and source documents.

Import duty

Generally, all goods crossing Vietnamese borders are subject to import duties. In particular:

  • Goods imported through Vietnamese border gates or border by road, river, seaport, airport, international railway, international post and other locations for customs procedures clearance
  • Goods transferred from the local market to non-tax areas or vice versa
  • Other goods traded or exchanged that are considered as imports

The following goods are not subject to import duties:

  • Goods transited and transported by mode of border gate trans-shipment through Vietnam’s border gates or border under the customs law
  • Humanitarian aid goods
  • Goods imported from abroad into non-tariff zones and only used therein
  • Goods brought from one non-tariff zone to another

Import tax rates include preferential tax rates, particularly-preferential tax rates and ordinary tax rates.

Preferential tax rates are applicable to imports originating from countries or groups of countries or territories that grant most-favoured-nation treatment in trade relations with Vietnam. Taxpayers declare the origin of goods themselves and are held responsible for declarations regarding the origin of goods.

Particularly-preferential tax rates are individually specified for each item covered by decisions released by the Minister of Finance.

Ordinary tax rates are applicable to imports originating from countries, groups of countries or territories that do not grant most-favoured-nation treatment or special import tax preferences to Vietnam. The ordinary tax rate is equal to 150 per cent of the preferential tax rate.

Apart from being subject to import tax, in certain situations Vietnam also imposes an anti-dumping tax, anti-subsidy tax and anti-discrimination tax or safeguard tax, in accordance with existing rules.

Export duty

Export duties are charged on a limited number of items, generally natural resources such as sand, chalk, marble, granite. Rates range from 0 – 50 per cent.

Special Sales Tax (SST)

Special sales tax is a form of excise tax levied on goods deemed to be a luxury or indulgence.

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 parlours, slot machines and other similar types of machines, betting businesses, golf and lotteries.

The amount of SST payable is equal to the taxable price multiplied by the SST rate, which ranges from 10 per cent to 70 per cent depending on the taxable goods or services.

The SST taxable price must be calculated in Vietnamese Dong. A taxpayer whose turnover is in a foreign currency must convert it into Vietnamese Dong at the average trading rate on the inter-bank foreign currency market as announced by the State Bank of Vietnam on the date when such turnover arose. In the case of imported goods, the conversion of foreign currencies into Vietnamese Dong to fix the taxable price is to be conducted in accordance with the law on import and export duties.

Natural Resources Tax

All organisations and individuals engaged in exploiting or mining natural resources in compliance with the laws of Vietnam, irrespective of their industry, scope and operational form, are liable to register, declare and pay royalties.

Taxable resources means all natural resources existing in the land, islands, internal waters, sea territory, exclusive economic zones (including maritime areas common to both Vietnam and a neighbouring country) and the continental shelf under the sovereignty of the Socialist Republic of Vietnam, including: metallic mineral resources, non-metallic mineral resources including soil, stone, sand, gravel, coal, gemstones, mineral water and natural thermal water, oil; gas or natural gas, natural forest products, natural marine products, natural water including surface water, ground water and other natural resources under the law on natural resources.

The taxable value of a resource is the selling price of each item or unit of resource at the place of mining in accordance with the principle of market price. The royalty rates vary from 0 per cent to 40 per cent. Exemptions or reductions in royalty taxes include offshore fishing by high-capacity vessels, natural water used for generation of hydropower that is not fed into the national power grid, and soil or combined soil products for ground levelling or construction works.

Property Tax

Vietnam levies a number of taxes on those that own immoveable property. Any individuals who transfer real estate are subject to personal income tax at 25 per cent on net gains or two per cent on the proceeds; corporations are subject to corporate income tax at 22 per cent on net gain. In addition, the sale and rent of buildings is subject to VAT at 10 per cent.

The rental of land use rights by foreign investors is a form of property tax, known as land rental. The rates levied depend upon the location, infrastructure and industrial sector in which the business is operating.

Furthermore, owners of immoveable property have to pay land tax under the law on non-agricultural land use tax. The tax is charged on the specific land area in use, based on the price per square meter and progressive tax rates, ranging from 0.03 per cent to 0.15 per cent.

Environmental Tax

Environmental tax is an indirect tax, collected on products and goods that, when used, are deemed to cause negative environmental impacts. The tax is levied on the production or importation of certain goods, based on the Absolute tax rate. Export products are exempted from environmental tax.

Anti-avoidance measures

While Vietnam does not have any specific anti-avoidance rules, the tax authorities have the power to carry out tax audits of any taxpayers. Tax inspections can be conducted on a regular basis but no more than once a year. Tax inspection durations must not exceed thirty days from the date of notification of the tax inspection decision; however these may be extended for an additional period not exceeding thirty days.

A taxpayer who pays tax later than the deadline is to pay the full tax amount plus a late payment penalty equal to 0.05 per cent per day of the outstanding tax amount. Taxpayers that make incorrect declarations, thereby reducing taxes payable or increasing refundable tax amounts, are to pay the full amount of the undeclared tax or return the excess refund, and will also pay a fine equal to 10-20 per cent of the under-declared or excess refunded tax amounts, together with a fine for late payment of the tax.

A taxpayer that commits an act of tax evasion or tax fraud is liable to pay the full amount of tax according to regulations and a fine will be imposed of between one and three times the evaded tax amount. The general statute of limitations for imposing tax and late payment penalties is 10 years and for other penalties is five years.

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