By: Dezan Shira & Associates
Editor: Ellena Brunetti
Corporate Income Taxation (CIT) is a constant for companies of all sizes, regardless of their jurisdiction. Although difficult to avoid entirely, even the slightest changes in percentages due can have substantial impacts on the profitability of a company’s operations. With this in mind, the following article outlines the manner in which corporate taxation is currently applied within Vietnam. We take a look at the laws governing Corporate Income Tax (CIT), the enterprises liable for CIT, the determination of income within Vietnam, as well as the various corporate income rates applied within Vietnam.
Although this article provides a broad approach to understanding taxation within Vietnam, it is strongly recommended that government officials or professional services be consulted should any questions or confusion arise.
1. Legal Framework
Within Vietnam, a number of laws, governmental decrees, and circulars collectively dictate the treatment of corporate taxation within Vietnamese boarders. Current and prospective investors should, at minimum, ensure a clear understanding of the following:
- Law No. 14/2008/QH12 Law on Enterprise Income Tax (LEIT)
- Law No. 32/2013/QH13 Amending and Supplementing LEIT
- Law No. 71/2014/QH13
Pursuant to compliance with these laws, companies should also be sure to follow up to date guidance issued in Government’s Decree 12/2015/ND-CP of February 12, 2015, and Circular 96/2015/TT-BTC of the 22 of June 2015.
In addition, investors should be aware of relevant letters issued by the Ministry of Finance, which provide guidance on more detailed aspects of those regulations.
2. Liability for Corporate Income Tax
Taxpayers within Vientnam include business entities – domestic and foreign – in all economic sectors including all professional organizations with production, trading or servicing activities in within the country. Thus, the key criterion in determining whether a company is liable for corporate income taxation is not tax residency, but the source of income.
It should be noted that Vietnamese tax law currently does not allow for tax consolidation or implementation of grouping regimes, and thus, the offset of profits and losses between companies belonging to the same group isn’t allowed.
3. Taxable income
3.1 Determination of gross income
Under recent ammendments to Circular No. 78/2014/TT-BTC , taxable income within a tax period includes income from the production and trading of goods and provision of services and other incomes.
3.2 Service Invoicing
Up to date guidance recognizes serives upon full or progressive completion only. Accordingly, revenue recognition – based on invoice issuance – in which the date of the invoice is made before iniation of service will not be applied. Application will only take place from the start of service.
4. Determination of Net Income
To determine net income, which serves as the basis for calculating corporate income tax, some expenses incurred by the company may be deducted from gross income tax.
As a result, the net taxable income derived from activities of or related to the production and trade of goods or provision of services represents the turnover from these activities minus applicable deductible charges. It should be noted that the procress for claiming deductibles involves invoicing and the provision of supportunting documentation. Fortunately, circulars issued in 2015 have made great strides in the simplification of this process.
4.1 Deductible Expenses:
- Activities of employees
- Transfers of capital
- Expenses incurred during occupational training
- Interest expenses from loans pertaining investment into other companies
- Life insurance expenses for employees, uniforms and per-diems for business trips, and advertising and promotion expenses are fully deductible, and not subject to any deductibility cap as it used to.
4.2 Depreciation of Assets
In addition to the expenses listed above, depreciation of assets can be taken into account when making deducting from gross taxable income. It should be kept in mind that tax depreciation may differ from accounting depreciation as depreciation in excess of the rates specified in tax regulations is not deductible.
Before claiming depreciation deductions, enterprises must notify the direct managing tax agencies of the method by which they will calculate depreciation (for example: straight-line depreciation, or accelerated depreciation). The ability to use a specific method of calculation is subject to approval based upon the type and conditions of a given business.
Note: In the special case of land use rights, long-term land use rights may not be depreciated and amortized to deductible expenses for determining taxable income, unlike termed land use rights.
Finally, provisions, including to prevent losses that could result of bad debts, are deductible if the provision is made in accordance with the guidance by the Ministry of Finance.
Besides the expenses, depreciation and other provisions, losses incurred in previous years or resulting from previous tax years must be taken into account at the stage of determining the basis of taxation, as they can be carried over to the following years.
Note: Losses cannot be carried over for more than 5 years. Furthermore, carrying-back of losses are not permitted.
4.4 Exempted income
Certain incomes are temporary exempted from CIT, such as those earned from scientific research and technological development contracts until expiration of that contract, and the income derived from the sale of products that are results of new technologies and are applied in Vietnam for the first time
5. Tax rates
Within Vietnam, corporate income tax is based on a flat rate. An enterprise that conducts various business activities subject to different tax rates should calculate the income for each activity separately, multiplying income from each activity by the corresponding tax rate.
While the standard tax rate is, in theory, to be applied evenly to all parties within Vietnam, a number of rates are utilized within the country and may be available to investors. The following rates – most commonly utilized within Vietnam should be noted:
5.1 Standard Rate
Previously standing at 22%, Vietnam’s Standard rate of taxation has been reduced to 20% as of January 1st, 2016.
5.2 Preferential Rate
Prior to 2016 and pursuant to Decree 218/2013/ND-CP, Companies whose annual profits were under 20 billion VND (equivalent to approximately US$1 million) could benefit from a preferential rate of 20%. As of January 1st, 2016, this has been further reduced to 17%
In addition to reduced rates, Industry and geography based incentives are also available for investors in areas deemed of importance by Vietnamese authorities.
5.3 Special Rates
A higher rate is applied to some industries including many of the extractives industries such as mining and oil.
6. Compliance requirements
In order to ensure compliance with up to date CIT guidance, declaration and payments should be made every three months and at the end of the fiscal year.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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