Vietnam Tax Update: Draft Decree on Tax Administration, Minimum Basic Wage and Personal Income Tax
Draft decree on tax administration of related-party transactions
The Ministry of Finance in December 2019, published the Draft Decree amending and supplementing Clause 3, Article 8 of Decree 20/2017/ND-CP. The Decree amends a regulated approach on determining the deductibility for interest expense for businesses engaging in related-party transactions. This new decree is expected to directly affect companies which incurs interest expenses from loan agreements with related parties.
The Draft Decree includes some notable changes as follows:
- Determination of total interest expenses: Total interest expenses are the net interest expenses incurred in the concerned period (interest expenses is offset with interest income from deposits and loans). The said interest expenses include loan interest expenses and any other items of the same nature, including the interest which is capitalized in the investment value as per accounting and tax regulations.
Net interest expenses = interest expenses – interest income
- Deductibility of net interest expenses: The deductible net interest expenses (if any) for the purpose of calculating Corporate Income Tax (“CIT”) shall be capped at 30 percent of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) (currently 20 percent as regulated by Decree 20/2017/ND-CP).
- Guidance on EBITDA formula: EBITDA is calculated as the sum of Operating profit, Net interest expenses and Depreciation of the concerned tax period.
- In the case where EBITDA is equal to or less than 0: Net interest expenses incurred in the concerned tax period can be carried forward continuously and fully against assessable income within the next 5-year period.
Annual increase in minimum basic wage
The 14th National Assembly of Vietnam finalized the minimum basic wage increase from 1,490,000 VND (US$64) to 1,600,000 (US$69) from July 2020 onwards. Such a change affects the maximum cap for calculating monthly social insurance and health insurance obligations.
This is also the last amendment of the minimum basic wage. The regulatory minimum basic wage and wage-multiply figures shall be eliminated in 2021 and replaced by a new official wage policy accordingly.
Impact of changes in the minimum basic wage are as follows:
Instructions on return of exported goods after VAT refund
The General Department of Taxation issued Official Letter 4593/TCT-KK in November 2019 providing instructions on the declaration of returned exports after a Value Added Tax (VAT) refund. The refund applies to the period the exported goods were returned but declared as exported.
Accordingly, the Company must make adjusted tax declarations for the period in which the returned goods was previously treated as exported. In addition, the refunded VAT related to the exported revenue must be remitted to the State Budget along with interest on late payments as per regulations.
Guidance of Personal Income Tax (PIT) on overtime
According to Official Letter 4641/TCT-DNNCN issued by General Department of Taxation on November 12 2019, employment income earned from night shifts and overtime that exceeds normal working hourly rates shall be exempted from PIT, provided that the number of overtime hours does not exceed the regulatory limit as set out in Article 106 of the Labour Code.