Vietnam Issues Circular 78 on Corporate Income Tax Incentives and Deductions
HANOI – On June 18, 2014, Vietnam’s Ministry of Finance published Circular 78, which provides additional guidance regarding Decree 218 on corporate income tax (CIT). The Circular will come into effect on August 2, 2014 and will be effective for the whole 2014 tax year.
In the new Circular, the Vietnamese government has reintroduced tax incentives for investments in certain industrial zones. Industrial zones that do not qualify for CIT incentives are those in the inner districts of Ho Chi Minh City, Hanoi, and Hai Phong as well as those located in type 1 provincial cities.
The Circular includes a number of changes regarding CIT incentives and deductible expenses.
CIT incentives are available for a “new project” as well as a “business expansion.”
A “new project” is a project that has been issued an investment certificate for the first time and does not need to be a new company. It can also be an investment project that had been issued its investment certificate before 2014, but generated its first revenue after January 1, 2014. It is, however, necessary that an amended investment certificate be issued after January 2014.
“Business expansion” requires that there be a project in an encouraged sector or location and one of the following conditions are met:
- If the investment is located in an encouraged sector, the historical costs of the fixed assets must increase at least VND20 billion, or they must increase VND10 billion for investment into an encouraged location; or
- The historical costs of the fixed assets increase at least 20 percent compared with the total historical cost of fixed assets before the business expansion; or
- The design capacity has increased at least 20 percent compared to the design capacity before the business expansion.
If a project is provided CIT incentives because of its sector, then the profit from the sale of scraps and foreign exchange differences in relation to its main activities and other direct income (except interest from term deposits) are entitled to the CIT incentives.
If a project is provided CIT incentives because of its location, all profits are entitled to CIT incentives, except for profits from capital assignment, transfer of immovable property and from services subject to special sales tax.
For deductible expenses, the cap on the deductibility of Advertising and Promotion (A&P) expenses has been increased from 10 percent to 15 percent. For a trading entity, the purchase price of goods must be excluded from the expense base for A&P cap calculation purposes. The purchase price of goods includes import duty, special sales tax and environment tax.
Gifts to customers are CIT deductible but are still subject to the A&P cap. However, payment discounts are no longer subject to the A&P cap. For casino or gaming activities, deductible management expenses are capped at four percent of revenue.
In order to be CIT deductible, the most updated salary needs to be mentioned in the labor contract or its appendix. School fees for the children of expatriates are not CIT deductible commencing from pre-school. For the online purchases of air tickets, evidence of non-cash payment and the boarding pass are required for CIT deductibility purposes. These documents are not required if the air ticket is purchased from an airline or agent and supported by a VAT invoice.
Other changes that fall within Circular 78 include the reversal of provisions and net unrealized foreign exchange gains relating to the main business activities of a taxpayer are no longer treated as other income.
Furthermore, A&P expenses for a real estate company will be recognized in the first year of handover of real property instead of in the year incurred.
Capital assignments with a value of VND20 million or over must be supported by documents evidencing non-cash payment. If not, the tax authorities have the right to deem the transfer price for CIT purposes.
Lastly, for entities with an alternate tax year-end (i.e. not December 31), the applicable CIT rates will be applied on an apportionment basis, e.g. July 1 to December 31, 2013 has a CIT rate of 25 percent and January 1 to June 30, 2014 has a CIT rate of 22 percent.
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