Introduction to Corporate Income Tax in Vietnam
HANOI – Many first and second tier suppliers, including small to medium-size enterprises, are prioritizing their investments into Vietnam, acting on the business potential that it holds for companies involved in a larger supply chain providing goods and services to manufacturing hubs in Asia. It is thus increasingly important to understand the taxes which Vietnam imposes on business, such as corporate income tax (CIT).
In the final part of our recent coverage of taxation, this article will provide an introduction to corporate income tax in Vietnam.
The standard CIT rate is 25 percent for both domestic and foreign-invested enterprises (FIEs) in most industries. In an effort to attract more foreign direct investments, boost investment in Vietnamese businesses and to support struggling local enterprises, Vietnamese lawmakers have recently approved the government’s proposal to reduce the current CIT rate from 25 percent to 22 percent (the new rate is expected to take effect starting January 1, 2014).
The National Assembly will also cut CIT rates for small and medium-sized enterprises and developers of low-cost housing by 5 percent (to 20 percent) and 15 percent (to 10 percent), respectively.
This new tax rate would put Vietnam at an advantage over other neighboring countries such as China (25 percent), Indonesia (25 percent) and the new rising star Myanmar (30 percent). Having said that, however, other countries such as Thailand do offer a lower CIT rate at 20 percent and also more attractive incentives and tax breaks for newcomers.
CIT is a direct tax levied on the profits earned by companies or organizations. All income arising inside Vietnam is subject to CIT, no matter whether a foreign enterprise has a Vietnam-based subsidiary or whether that subsidiary is considered a permanent establishment.
Taxable income includes income from production and/or trading of goods and provision of services, as well as other incomes, including incomes from:
- Capital transfer and real estate transfer;
- Ownership of or rights to use assets;
- Assignment, leasing out and liquidation of assets;
- Business unreported in previous years;
- Interest on deposits, loans or income from the sale of foreign currency;
- Recoveries from contingency reserves and bad debts that were written-off; and
- Other sources, including activities of production and/or business outside Vietnam.
An enterprise that conducts multiple business activities that are subject to different tax rates should calculate the income for each activity separately, multiplying income from each activity by the corresponding tax rate. In particular, income from real estate transfer must be separately accounted for when declaring and paying CIT and cannot be deducted against incomes or losses from other production and business activities.
Certain incomes are exempt from CIT, such as those earned from scientific research and technological development contracts during the trial production period, and from technical service contracts directly serving agricultural production.
The CIT Law also allows enterprises to set aside a maximum of 10 percent of their annual taxable incomes for research and development if it is spent in the country within five years. If the research and development fund is not used within that time period, is used for incorrect purposes, or less than 70 percent of the fund is used, then the company will have to refund the CIT exemptions on the fund plus interest.
When calculating CIT, FIEs can deduct most expenses paid for production and business activities if supported by adequate lawful invoices and documents. This can be an area of concern for FIEs in Vietnam, as frequently many expenses are barred from being deducted given the fact that they are not supported by official invoices, or that they exceed some pre-determined caps (for example, on advertising, marketing and promotional expenses). This effectively means that in many cases the tax rate of a company will be higher than 25 percent.
However, exceptions apply to the below expenses, which are not deductible:
- Salaries and wages of owners of private enterprises or one-member limited liability companies (owned by a single individual); remunerations paid to founders and members of members’ councils or boards of directors who do not personally participate in administering goods production and trading or service provision activities;
- Expenses for advertisement and promotion exceeding 10 percent of total deductible expenses. For a new enterprise granted an investment license on or after January 1, 2009, such expenses are capped at 15 percent of deductible expenses for the first three years from the date of establishment. This cap does not apply for new FIEs established as a result of consolidation, separation, split, merger, and any type of ownership transformation;
- Fines for administrative violations, including violations of traffic law, tax law, business registration, accounting and statistics regulations and other administrative fines as prescribed by law; and
- Credited or refunded input value-added tax.
Enterprises shall pay tax in localities where they are headquartered. For an enterprise that has a dependent cost-accounting production establishment (including a processing and assembly establishment) operating in a province or city other than where it is headquartered, the tax amount shall be calculated and paid in both the locality where the enterprise is headquartered and the locality where its production establishment is based.
The CIT amounts payable to the province or city where a dependent cost-accounting production establishment is based is the payable CIT amount in a period multiplied by the ratio between expenses incurred by the production establishment and the total expenses incurred by the enterprise.
Tax must be paid by the taxpayer to the State Treasury in cash or by bank transfer. For the first option, the taxpayer must pay cash to the State Treasury and receive the voucher directly from the state official. The other option is to transfer the payment to the bank account of the State Treasury tax office accredited for such operations. The deadline for tax payment is the same as tax finalization: no later than 90 days from the end of the calendar year.
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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