TAXATION

With effect from 1 January 2004, the new Law on CIT introduces a standard CIT rate of 28% (as opposed to 25% previously applicable to FICs and foreign parties to BCCs) for both local enterprises operating under the Law on Enterprises and FICs , including foreign parties to BCCs. FICs and foreign parties to BCCs which obtained investment licences before 1 January 2004 shall continue enjoying the preferential tax incentives as stipulated in the investment licence.


TAXATION

(April 2007 Update)

This Section discusses the following taxes that may affect foreign invested projects and foreigners working in Vietnam:

*

Corporate Income Tax;
*

Capital Transfer Tax;
*

Value Added Tax;
*

Special Consumption Tax;
*

Import - Export Duties;
*

Natural Resources Tax;
*

Withholding Tax; and
*

Personal Income Tax.

1. Corporate Income Tax

1.1 Scope of application

Corporate income tax ("CIT") is levied on the taxable income of FICs and foreign parties to BCCs licensed to operate in Vietnam. Taxable income for CIT calculated based on is revenues generated in their course of production less reasonable expenses in the relevant fiscal year.

Deductible expenses are strictly regulated by the tax authority and must be supported by valid invoices, vouchers and relevant documents. They comprise production costs, employment expenditure, insurance, financing and tax-related costs, management fees, and other expenses in relation to the sales and distribution of goods and services. Limitations are applied to certain deductible expenses. For example, expenses allowed for advertising, sales and marketing promotions cannot exceed 10% of total deductible expenses. Deductible depreciation costs also are capped.

1.2 CIT rates

With effect from 1 January 2004, the new Law on CIT introduces a standard CIT rate of 28% (as opposed to 25% previously applicable to FICs and foreign parties to BCCs) for both local enterprises operating under the Law on Enterprises and FICs, including foreign parties to BCCs. FICs and foreign parties to BCCs which obtained investment licences before 1 January 2004 will continue to enjoy the preferential tax incentives as stipulated in the investment licence.

Preferential rates

Other than the standard rate, preferential rates of 10%, 15% and 20% apply to a number of investment projects which satisfy certain conditions such as investment in certain fields of business and/or encouraged geographical locations. Specifically:

1.

CIT at 10% applies to FICs or foreign parties to BCCs which invest in a field of business that is encouraged ("Appendix I") that is implemented in a location suffering from especially difficult socio-economic conditions ("Appendix III"), both attached to Decree 108 dated 22 September 2006 of the Government implementing certain provisions of the Law on Investment ("Decree 108"). Fields of business under Appendix I include: (i) forestry projects, salt production and aquaculture development in “distant waters”; (ii) development of infrastructure, public transportation, and educational, training, health care and traditional culture projects; (iii) offshore fishing, agricultural, forestry and aquatic processing and technical services for directly assisting agricultural, forestry and aquatic production; (iv) scientific and technological research and services; legal, investment, business and enterprise management consultancy and consultancy for protection of intellectual property and technology transfers; and (v) some other fields of business. The rate of 10% applies for the first 15 years after an FIC is incorporated or a BCC is licensed.
2.

CIT at 15% applies to projects which are invested in a field of business set out in Appendix I and implemented in a location suffering from difficult socio-economic conditions ("Appendix II") attached to Decree 108 or projects which are invested in a location set out in Appendix III. The rate of 15% shall apply for the first 12 years after an FIC is incorporated or a BCC is licensed.
3.

CIT at 20% applies to projects which are invested in a field of business set out in Appendix I or implemented in a location set out in Appendix II. The rate of 20% shall apply for the first 10 years after an FIC is incorporated or a BCC is licensed.

After the stated preferential rate expires, normal CIT of 28% will be applicable for the remaining years of the relevant project.

With respect to oil and gas or rare and precious mineral exploitation projects, the CIT rate, subject to various conditions, ranges between 28% and 50%. A specific rate for these types of projects will be determined by the Prime Minister at the proposal of the MOF.

For ease of reference, the preferential CIT rates are summarised in a table below:

Criteria/

Rate


Type of Project (List A)


Location


Combination


Duration (year)

10%


*

forestry, salt production and aquaculture development in “distant waters”;
*

infrastructure development, public transportation, and educational, training, health care and traditional culture;
*

offshore fishing, agricultural, forestry and aquatic processing and related technical services;
*

scientific and technological research and services; legal, investment, business and enterprise management consultancy and consultancy for intellectual property protection and technology transfers; and
*

some other fields of business.



Appendix III of Decree 108


Appendix I + Appendix III


15

15%


Appendix I – see above


Appendix II and Appendix III


Appendix I + Appendix II or Appendix III only


12

20%


Appendix I – see above


Appendix II


Appendix I or Appendix II only


10




1.3 CIT exemptions and reductions

n addition to preferential CIT rates, FICs and foreign parties to BCCs may enjoy CIT exemption between 2 to 4 years after the first profit-making year and a 50% reduction in CIT between 2 to 9 years subsequently. Specifically:

1.

FICs and foreign parties to BCCs which are entitled to a preferential CIT rate of 10% may further enjoy the CIT exemption for 4 years and a 50% CIT reduction, subject to the number of employees used, from 7 to 9 years subsequently. BOT, BTO and BT projects and special projects decided by the Prime Minister are entitled to the maximum level of 4 year’s exemption from, and 9 year’s 50% reduction of, CIT;
2.

FICs and foreign parties which are entitled to a preferential CIT rate of 15% may further enjoy the CIT exemption from 2 to 3 years and a 50% CIT reduction, subject to the number of employees used, from 7 to 9 years subsequently; and
3.

FICs and foreign parties which are entitled to a preferential CIT rate of 20% may further enjoy the CIT exemption for 2 years and a 50% CIT reduction, subject to the number of employees used, from 2 to 6 years subsequently.

Existing foreign-invested projects which invest in new production facilities, increase their investments, invest in new technologies, improve the environment or upgrade their production capacity will, subject to certain conditions, enjoy CIT exemption up to 4 years and a 50% CIT reduction up to 7 years with respect to the additional investment portion.

The refund of CIT with respect to reinvested profits is no longer available to FICs and foreign parties to BCCs.

The CIT exemptions and reductions are summarised in a table below:

Project


Exemption (year)


50% reduction

(after exemption)

BOT, BTO or BT


4


9

Those entitled to 10% CIT


4


7-9

Those entitled to 15%


2-3


7-9

Those entitled to 20%


2


2-6

1.4 Carried-forward losses

During the operation, any losses incurred by FICs or foreign parties to BCCs in any tax year may be carried over to the following years. However, losses can not be carried over for more than 5 years. Carrying-back of losses is not permitted.

The registration of losses carried-forward is strictly monitored by the tax authority. In principle, the tax authority will not accept losses carried-forward if they are not registered on time.

1.5 Abolition of profit remittance tax

From 1 January 2004, profits derived from foreign investments in Vietnam have not been subject to profit remittance tax when remitted out of Vietnam. (The rate of this tax before was, depending on the prescribed capital scale and other criteria, 3%, 5% or 7%).

2. Capital Transfer Tax

2.1 Tax calculation

Capital transfer tax is by nature a form of CIT imposed on profits earned by foreign investors from the transfer of their interest in the charter capital of an FIC or in the capital of a BCC.

The taxable profit is determined as the sales price less (i) the initial value of contributed capital and (ii) any transfer expenses. With regard to subsequent transfers, the initial value of the contributed capital shall be the price of the preceding transfer plus the amount of any additional contributed capital.

2.2 Tax rates

The tax rate applied to capital transfer is 28% of the taxable profit.

Upon obtaining the amendment to the investment certificate, the transferor is required to register the transfer of capital with the tax authority.

3. Value Added Tax

3.1 Scope of application and tax rates

Value Added Tax ("VAT") applies to the supply of goods and services for use in production, business or consumption in Vietnam. VAT is calculated on the sale/purchase price of the relevant goods or service before the addition of VAT.

The applicable VAT rates are 0%, 5% and 10%, of which the normal rate of 10% is applicable to most goods and services; 5% for a number of encouraged goods and services; and 0% for exported ones. Certain goods and services are exempt from VAT. Examples are unprocessed agricultural products sold by the producer, certain insurance services and certain imported equipment. The difference between being subject to VAT at 0% and being exempt from VAT is that, in the former case, the input VAT can be claimed from the tax authority.

VAT payments to, or refunds from the tax authority are the difference between output VAT and input VAT.

3.2 VAT exemptions

Foreign invested projects shall be exempt from VAT in respect to the following imported items:

1.

machinery, equipment or specialised means of transportation which form part of a technological line, and construction materials which are not yet able to be produced domestically, and are required to be imported to form the fixed assets of enterprises;
2.

machinery, equipment, materials or means of transportation which are not yet able to be produced domestically and are imported for direct use in scientific research and technological development activities;
3.

aircraft, drilling platforms and watercraft leased from foreign parties which are not yet able to be produced domestically, and are used for production or business; and
4.

machinery, equipment, accessories, specialised means of transportation and materials required to carry out prospecting, exploration and development of petroleum fields; aircraft parts and accessories, and specialised equipment for aircraft (which are not able to be produced domestically).

4. Special Consumption Tax

4.1 Scope of application

Special consumption tax ("SCT") is applied to the production or import of certain goods and the provision of certain services, which are either luxury or discouraged for consumption. In particular, the following goods and services are subject to SCT:

1.

Goods: cigarettes, cigars, spirits, beers, automobiles of less than 24 seats, gasoline, air-conditioners up to 90,000 BTU, playing cards, and votive papers; and
2.

Services: discotheque, massage, karaoke, casino, jackpot, betting entertainment, golf course businesses (i.e. selling golf memberships), and lotteries businesses.
In addition to being subject to SCT, the above goods and services also are subject to VAT at 10%. If they are imported, import duty at various rates will apply in addition.

4.2 SCT rates

No


Good and Service


Tax rate (%)

I.


Good




1.


Cigarettes and cigars


55 - 65

2.


Spirits


20 - 75

3.


Beer


30 - 75

4.


Automobiles


15 - 50

5.


Gasoline and other components to be mixed in Gasoline


10

6.


Air-conditioner with the capacity of 90,000 BTU or less


15

7.


Playing cards


40

8.


Votive papers


70

II.


Service




1.


Discotheques, massage, karaoke


30

2.


Casinos, jackpot games


25

3.


Betting entertainment


25

4.


Gold businesses


10

5.


Lotteries businesses


15

5. Import and Export Duties

5.1 Tax rates

Export duties are charged on a few items, primarily agricultural products (e.g. rice, forest products and fish) and natural minerals. Rates vary between 0% and 50% of the FOB price of exported goods (in accordance with Resolution 977 passed on 13 December 2005 by the Standing Committee of the National Assembly). Petroleum oil is subject to an export duty rate between 0% and 8%.

Import duty rates are now classified into three categories as follows:

*

preferential rates vary between 0% and 150% of the CIF price of imported goods in accordance with Resolution 977. Preferential rates are applied to goods imported from one of some 60 countries which have MFN status with Vietnam;
*

ordinary rates apply to goods imported from other countries. These are up to 50% above the preferential rates applicable to MFN countries; and
*

special preferential rates apply to goods imported from countries which have a special preferential agreement with Vietnam, e.g. the ASEAN member countries under the CEPT and EU member countries under the Textile-Garment Treaty between Vietnam and EU.

To be eligible for the preferential rates or special preferential rates, the imported goods must be accompanied by an appropriate Certificate of Origin.

The dutiable value of imported goods is based on the invoice price (with penalties for fraudulent declarations). Where an invoice is not available or is 10% lower than the minimum price, the minimum price in the list set by the MOF under Circular 113 dated 15 December 2005 will apply.

5.2 Import duty exemptions

FICs and parties to BCCs shall be exempted from import duty with respect to the following goods, provided that: (a) they are implementing a project in an encouraged field of business set out in Appendix I, or in a geographical location set out in Appendix II, of Decree 108 of the Government dated 22 September 2006; and (b) such goods are imported to form the fixed assets of the enterprise:

1.

equipment and machinery;
2.

specialised means of transport that are used to carry materials between parts of a production line as certified by the MOST, and means of transport to be used for carrying workers (automobiles having 24 seats or more, and watercraft);
3.

components, details, detachable parts, spare parts, accessories, moulds and supplements pertaining to or accompanying the equipment and machinery, and specialised means of transport as specified above;
4.

raw materials and materials imported for the manufacturing of the equipment and machinery which are parts of the production line or the manufacturing of components, parts, detached devices, spare parts, installations, moulds and accessories which accompany the equipment and machinery;
5.

construction materials which cannot be manufactured domestically; and
6.

goods and materials imported by BOT companies and contractors for the performance of BOT, BTO and BT projects.

The above exemption of import duty is also applicable in the case of a project's expansion or replacement or renovation of technology.

Under Circular 113 of the MOF dated 13 December 2005, import duty is also exempt on one-off purchases of certain equipment for "encouraged investment projects" in hotels, offices, apartments for lease, residential properties, commercial centres, technical services, supermarkets, golf courses, tourist areas, sports areas, recreation and entertainment parks, health-care facilities, training centres, cultural, finance, banking, insurance, auditing and consulting services. This equipment is specified in Appendix III of Decree 149 of the Government dated 8 December 2005. It is however not entirely clear whether "encouraged investment projects" are those included in Appendix I of Decree 108.

Projects that fall under the list of projects in which investment is especially encouraged are entitled to exemption of import duty for the raw materials used for production for a period of 5 years from the commencement of production.

With regard to materials and raw materials imported for producing exported goods, the payment of the import duty can be postponed for a certain period of time. If the enterprise fails to export its products within such a period, the import duty will be imposed. However, the import duty will be refunded pro-rata when the products are eventually exported. This exemption may have to be abolished as part of Vietnam’s commitments to abolish export subsidies when joining the WTO.
In addition, goods and products imported in a number of circumstances also enjoy import duty exemption.

5.3 Approval for import duty exempted items

Based on the investment certificate, the feasibility study and the technical design of a project, the MOT or an agency authorised by it will approve the list of import duty exempted goods.

The imported goods mentioned above must not be assigned or sold in the Vietnamese market except as approved by the MOT. Otherwise the relevant taxes must be paid in accordance with laws.

6. Natural Resources Tax

Natural Resources Tax is imposed on the exploitation of Vietnam's natural resources such as minerals, petroleum, forests, fisheries and natural water. This tax is calculated based on the value of actual production output and tax rates.

Tax rates of some specific minerals are as follows:



Items


Tax rates (%)

Metallic minerals

Non-metallic minerals

Crude oil

Gas

Natural forest products

Natural aquatic products

Natural water

Others (except for swallow’s nests)


1 - 8

1 - 8

6 - 25

0 - 10

1 - 40

1 - 10

0 - 5

0 - 10



7. Withholding Tax

7.1 Interest from offshore loans

According to Circular 05 dated 11 January 2005 by the MOF ("Circular 05"), the amount of interest and fees payable under offshore loans is subject to withholding tax at a rate of 10%.

Loans obtained by a susidiary in Vietnam from its offshore parent company also are subject to withholding tax.

7.2 Foreign contractor tax (“FCT”)

FCT applies to foreign organisations and individuals that have business incomes sourced in Vietnam, even though they do not have a physical presence in Vietnam. Services which are performed wholly overseas but provided to a project in Vietnam will also be subject to FCT.

Under Part B of Circular 05, foreign contractors will have one of following options: (i) paying taxes by way of withholding by the relevant employer (the "Withholding Method"); (ii) registering with the Vietnamese accounting system ("VAS") for the direct payment of taxes (the "VAS Method"); and (iii) with respect to foreign contractors having a "permanent establishment" in Vietnam, paying taxes under the "hybrid" method (the "Hybrid Method"), which combines elements of both VAS Method and Withholding Method.

Withholding Method

Under the Withholding Method, foreign contractors are not required to register with VAS nor pay FCT directly to the tax office. Instead, the employer will have to take primary responsibility to ensure that the FCT, including VAT and CIT components, is withheld from payment(s) made to foreign contractors and paid to the tax office on behalf of the latter. In applying this method, the added value used for VAT calculations and the CIT rate will be determined on a "deemed" basis. Various "deemed" normal rates are specified according to the nature of the service as follows:

Type of supply


VAT rate


CIT rate


Total FCT

Trading


1


1


2

Services


5


5


10

Construction/installation services without supply of materials and/or equipment, machinery; Exploration, design, supervision


5


2




7

Construction/installation services with supply of materials and/or equipment, machinery


3


2


5

Other business or production activities and transportation


2.5


2


4.5

Interest from offshore loans (including loans obtained from parent company)


Exempt


10


10

Royalties


Exempt


10


10


Foreign contractors are in no position to issue VAT invoice(s) to the employer or maintain any accounts for reporting purposes in Vietnam. VAT charged by local sub-contractors and suppliers cannot be recovered by foreign contractors, and therefore constitutes an absolute cost to them.

The VAT component withheld will still be considered the "input VAT" of the employer and creditable for tax purposes. Nevertheless, the CIT component payable under this method is not refunded by the tax office nor reimbursed by the relevant contractor. The Withholding Method has been used by many foreign contractors operating in Vietnam due to its procedural simplicity.

Under Section II.1.1, Part B of Circular 05, if the contract price is net of FCT, all of the contract portions performed by foreign contractors or foreign subcontractors need to be grossed-up for CIT and VAT taxable amounts by applying respectively the following formulae:

Taxable amount for CIT = Net value ÷ (1 - deemed CIT rate)

Taxable amount for VAT = CIT taxable amount ÷ (1 - deemed VAT rate)

VAS Method

From a tax perspective, there is no difference between a foreign contractor applied VAS and a company incorporated under the laws of Vietnam. Under the VAS Method, foreign contractors are required to apply for a tax code with the relevant provincial tax department. They will pay VAT based on the "VAT deduction method," and CIT at 28% on the actual net profits resulting from their accounting records. They will issue VAT invoices to their customers and charge VAT (i.e."output VAT") on the purchase price. If they purchase materials or services from other suppliers or subcontract a portion of their work to a subcontractor, they can have the paid VAT (i.e."input VAT") deducted against their "output VAT." The "output VAT" of foreign contractors subject to the VAS Method will serve as a creditable "input VAT" claimed when the relevant employer pays the tax office the "output VAT" on their products.

The implementation of VAS by foreign contractors tends to increase the burden of paperwork and administrative procedures attributable to the registration and maintenance of accounting system and vouchers. Tax audits will also be required by the local tax office with respect to the contractor's operations. Due to these burdens, many foreign contractors in Vietnam have selected the application of the Withholding Method.

Hybrid Method

The Hybrid Method is officially provided for in Section I.3, Part B of Circular 05 as a result of the pre-Circular 05 practice. To apply this method, a foreign contractor must have a "permanent establishment" in Vietnam. The Hybrid Method combines the payment of VAT under the VAS Method and CIT under the Withholding Method. Specifically, the foreign contractor is required to register for a simplified VAS, rather than a full VAS to support the VAT returns filing and "input VAT" reclamation. Accounting records used for the simplified VAS consist of only certain key accounts, e.g. revenue, "output VAT", expenses, "input VAT", etc. CIT is however paid directly by the contractor to the tax office at a deemed rate as determined under the Withholding Method.

The Hybrid Method is quite useful to foreign contractors, as it comprises the advantages of both the VAS and Withholding Methods. However in practice, the Hybrid Method is subject to registration which is at the discretion of the tax authority.

Regardless of whether the VAS/Hybrid Method or Withholding Method is applied by foreign contractors, VAT that is charged on the contracted work (either presented in VAT invoices issued by foreign contractors subject to the VAS/Hybrid Method or withheld from payments made to them under the Withholding Method) will be considered "input VAT" and creditable against "output VAT" ultimately payable by the employer.

Turnkey contracts

While equipment and machinery imported under a normal sales contract are not subject to withholding tax, the supply of equipment under a turnkey contract shall be subject to withholding tax. To avoid the tax burden, many companies split a turnkey contract into two contracts: (i) equipment supply contracts and (ii) construction contracts.

Double Tax Agreements

To date, Vietnam has signed Double Tax Agreements ("DTA") with over 42 countries. All DTAs provide that, in case of a conflict between a DTA and the local tax regulations, the relevant provision of the DTA will prevail. Due to the complexity of DTA implementation, appropriate advice on any single DTA would need to be sought when a specific issue arises.

Article 7 of most DTAs provides that the profits of an enterprise (i.e. a foreign contractor) of a Contracting State is taxable "only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State." As far as the construction contractors are concerned, a "permanent establishment" is defined under most DTAs (usually in Article 5) to include, inter alia, "a building site or construction, installation or assembly project which exists for more than 183 days."

The tax exemptions under the DTAs will not apply automatically. Under Circular 133/2004/TT-BTC of the MOF dated 31 December 2004 implementing the DTAs, an application for the exemption (which contains certain requisite information) must be submitted to the MOF, together with other relevant documents. All documents in foreign languages must be translated into Vietnamese and certified by a Vietnamese Notary Public. It may take substantial time and effort to obtain the approval. Pending the MOF approval, FCT must be withheld and paid by the employer.

8. Personal Income Tax

8.1 Tax payers

*

Resident foreigners who stay in Vietnam for 183 days or more within a consecutive 12 month period are subject to PIT at progressive rates on worldwide-sourced regular income (regardless of where the income is paid) and Vietnam-sourced irregular income.
*

Non-resident foreigners who stay in Vietnam for less than 183 days in a consecutive 12 month period are subject to PIT on regular and irregular income sourced in Vietnam during their residence in Vietnam.
*

Vietnamese citizens working in Vietnam or outside Vietnam are subject to tax on worldwide-sourced regular income and irregular income.

8.2 PIT rates on regular income

Resident foreigners and Vietnamese citizens working overseas:

Exchange rate: US$1=approx. VND16,000

Monthly Incomes

Rate


Payable Tax Amount

(VND)

From

(VND)


To

(VND)

0

over 8,000,000

over 20,000,000

over 50,000,000

over 80,000,000


8,000,000

20,000,000

50,000,000

80,000,000



0%

10%

20%

30%

40%


0

Income x 10% - 800,000

Income x 20% - 2,800,000

Income x 30% - 7,800,000

Income x 40% - 15,800,000


Non-resident foreigners: subject to a tax rate of 25% of incomes sourced in Vietnam during the relevant period of time.

Vietnamese citizens residing permanently in Vietnam:

Exchange rate: US$1=approx. VND16,000

Monthly Incomes

Rate


Payable Tax Amount

(VND)

From

(VND)


To

(VND)

0

over 5,000,000

over 15,000,000

over 25,000,000

over 40,000,000


5,000,000

15,000,000

25,000,000

40,000,000



0%

10%

20%

30%

40%


0

Income x 10% - 500,000

Income x 20% - 2,000,000

Income x 30% - 4,500,000

Income x 40% - 8,500,000


8.2 PIT rates on irregular income

*

5% of income derived from technology transfer with a value of more than VND15,000,000 in accordance with the value of each contract, irrespective of the number of payments;
*

10% of income from lottery winnings in any form and promotional prizes, with a value of more than VND15,000,000 for each occasion a prize is won or received.

8.4 PIT exemption

Besides taxable income, the following income is not subject to PIT:

*

income in respect of interest received from bank deposits, bank savings and loans, profits from purchase of securities, bonds, treasury notes and shares, income from activities of investing in securities, and the difference on purchase and sale of securities; and
*

insurance compensation payments under personal and property insurance policies, retrenchment and allowances for loss of work, money contributed to the social insurance fund or health insurance deducted from workers’ salaries.