Calculating Value-added Tax in Vietnam
HANOI – On June 3, 2008, the National Assembly passed the Law on Value-added Tax (VAT), which became effective from January 1, 2009. The VAT Law imposes tax on the value added to goods and services arising in the process of production, distribution and consumption in Vietnam, including goods and services purchased from abroad.
All organizations and individuals producing and trading VAT taxable goods and services in Vietnam have to pay VAT, regardless of whether they have Vietnam-based resident establishments or not.
For goods and services purchased from abroad, VAT applies to the duty paid value (the sum of the value and the duty paid) of imported goods and services. The importer must pay VAT at the same time that they pay import duties to customs. For some categories of goods and services which are subject to special consumption tax, VAT applies to the selling price plus the special consumption tax.
VAT is imposed on the supply of goods and services at three different rates: 0 percent, 5 percent and 10 percent (the standard rate).
Exempt Goods and Services
Goods and services which are encouraged by the government, such as agricultural products, healthcare services and scientific activities, are exempt from VAT. In addition, the following are exempt from VAT:
- Derivative financial and credit services, securities trading and capital transfers;
- Insurance services such as life insurance, student insurance, insurance on domestic animals, insurance on plants and reinsurance;
- Education and vocational training; and
- Printing and publishing newspapers and political books, textbooks and curricula.
Companies or individuals providing the goods and services enumerated above do not need to pay any VAT on such goods and services, but they are not allowed to claim refund of the input VAT.
The VAT law provides two different methods of calculating the tax amount: the credit method (also called the deduction method) and the direct method, which accordingly determines who has to do tax declaration and finalization and who is eligible for a tax refund. A taxpayer can choose the appropriate calculation method based on the criteria described below.
Most businesses are required to use the credit method, which applies to business organizations established under the Law on Enterprises, foreign invested enterprises and foreign parties to business cooperation contracts.
Business establishments must fully observe Vietnamese regulations on accounting, invoices and documents as prescribed by the relevant laws and register to pay tax according to the credit method. The VAT credit method is specified as follows:
Payable VAT amount = Output VAT amount – Creditable input VAT amount
The output VAT amount is the total amount of VAT on sold goods and services indicated in the VAT invoices. The creditable input VAT amount is the total VAT amount on goods or services purchased and on imported goods as indicated in VAT invoices and other relevant documents proving VAT payment.
In order to claim the input VAT, the taxpayers must obtain proper VAT invoices from suppliers. In addition, the following conditions must be met:
- The VAT invoices from the purchase of goods and services are legal;
- There is evidence of payment via a bank for the purchased goods and services, except where the total value of the purchase of goods and services is below VND20 million.
The invoices must be filled out fully and properly, displaying all surcharges and additional charges (if any). Where the VAT invoices do not indicate the VAT amounts, the output VAT will be determined to be the payment price indicated on the invoice multiplied by the VAT rate.
Under the credit method, payment and declaration of VAT is made on a monthly basis, where the taxpayer adds and subtracts the input and output VAT, and pays or claims the balance to the relevant bodies. As the situation is normalized every month, no annual VAT finalization is required at the end of the year.
Companies will also be given a grace period of six months to correct errors in the declaration and deduction of input VAT. Where the taxpayers’ input VAT is not credited for three or more consecutive months, it can claim refund from the tax authorities. In certain cases, exporters with excess input VAT credits exceeding VND200 million may be granted refund on a monthly basis.
The direct method applies to business establishments and foreign organizations or individuals without resident offices, but which generate income in Vietnam and have not implemented the Vietnamese Accounting System (VAS). The direct method also applies to gold, silver and gem trading activities. The direct method is specified as follows:
Payable VAT amount = Added value of sold goods or services * VAT rate
Added value of sold goods or services = Selling price – Purchasing price of goods or services.
The company sells medical equipment in Vietnam, which is subject to 5 percent VAT.
- Selling price of equipment = US$100
- Purchasing price of equipment = US$80
- Added value of medical equipment = US$100 – US$80 = US$20
- Payable VAT amount = US$20*5% = US$1
According to this method, VAT depends on total revenues, which is not known with certainty until the end of the accounting year. As such, the monthly payments are just provisional and the total amount of VAT may be different at the end of the year. Therefore, when using the direct method of calculation, tax finalization procedures must be done within three months following the end of the year.
Taxpayers adopting the VAT direct method should use sales invoices instead of VAT invoices.
Portions of this article was was taken from Vietnam Briefing’s Doing Business in Vietnam technical guide. This guide aims to assist foreign investors in understanding the business environment of Vietnam, including reasons to invest and the challenges for which to prepare for. This publication is available as a PDF download in the Asia Briefing Bookstore.
Dezan Shira & Associates 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 emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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A Guide to Understanding Vietnam’s VAT
In this issue of Vietnam Briefing, we clarify the entire VAT process by taking you through an introduction as to what VAT is, who and what is liable, and how to pay it properly. We first take you through the basics of VAT in Vietnam before taking you deeper into the topic. Additionally, we provide updates on the new changes to the VAT process and explain how they will impact your business. The magazine is out now and will be temporarily available as a complimentary PDF download on the Asia Briefing Bookstore until the end of April.