CHAPTER 1

AN OVERVIEW OF TAXATION AND THE VIETNAMESE TAX

SYSTEM AND ITS ADMINISTRATION

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define terms related to taxes and tax policy.

- Distinguish tax revenues from other revenues of the government.
- Give reasons why we have taxes.
- Explain the principles of taxation.
- Identify the types of taxes.
- Describe the standards of a modern tax system.
- Describe the basic elements of a tax law.
- Describe the overall structure of Vietnamese tax system.
- Explain the difference between tax avoidance and tax evasion.
- Describe the procedures by which individuals and organisations register
with the tax authorities.
- Describe the procedures by which registered taxpayers submit returns,
declare, amend their tax liabilities, pay and finalise their liabilities.
- Explain the obligation of businesses to keep proper books of account and
the consequences of failing to do so.
- Explain and apply the transfer pricing rules.
- Explain the rights and obligations of taxpayers with respect to tax
complaints.
- State and compute the penalties for non-compliance, under-declaration and
late tax payment.

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1.1. THE OVERALL FUNTIONS AND PURPOSES OF TAXATION

1.1.1. CONCEPTS AND CHARACTERISTICS OF TAXES

To many people, taxes are considered to be something they have to pay to the
government but for which they receive nothing directly in return. So taxes are just
understood as whatever (money or assets) a person or an entity has to pay
compulsorily to the government in order to finance the government’s activities.
This perception derives from the fact that people only see the act of tax payment
from the citizens to the government both in cash and by other assets such as rice
or wheat etc.

According to the Mc Milan Dictionary of Accounting, “Taxes are compulsory

levies made by public authorities for which nothing is received directly in return.
They are used in part to provide public goods”.1

The Longman Dictionary of Business English defines taxes as “Payments of

money legally demanded by a government authority to meet public expenses”.2

In our opinion, taxes are parts of income which are legally stipulated and
compulsorily paid by citizens to the government in order to finance the public
expenditures.

From the concepts of taxes mentioned above, the following characteristics can be
seen:

Firstly, taxes are compulsory payments. This compulsory nature is attached to the
power of the government. The way to tax is very different from the way to get
many other revenues of the government which can be got voluntarily such as the
sale of government’s properties, loans, grants or donations, etc. If taxes were paid
voluntarily, very few people would pay because they would get no direct benefits
in exchange for paying taxes.

1
R.H. Parker (2002): Mc Milan Dictionary of Accounting, second edition, page 279.
2
J. H. Adam: Longman Dictionary of Business English, page 433
2
But unlike fines, taxes are not paid as punishment for breaking a law or rule. The
payment of taxes is not accompanied with the law violations but the apparent
responsibility of the citizens to the state.

Secondly, taxes are indirect compensation payments. Taxpayers get nothing

directly in exchange for paying taxes. Although taxpayers can eventually benefit
from the public goods and services provided by the government such as security,
national defense and roads. They get no immediate benefits in return for their tax
payment. They cannot demand the government to provide public services before
they pay taxes or right after they pay taxes. Also, the public services and the
amount of taxes are not positively related.

1.1.2. THE OBJECTIVES OF TAXATION

1.1.2.1. To generate the government’s revenues
This is the primary objective of taxes. In order to get the money for public
expenditures as well as to finance for the governments’ activities, the governments
look for many revenue sources such as the sale of the state’s property (natural
resources, for example), fees, voluntary donations, loans, etc., among which taxes
are the most important source. Tax revenue is the core part of the government’s
budget because tax is compulsory and made by a wide range of payers whose
incomes are produced by their economic activities. Human beings cannot exist
without economic activities which people do to earn a living such as farming,
fishing, mining, tourism and manufacturing. Thus, as long as men exist, the sources
of taxes are available.

Taxes have an important advantage concerning to their compulsoriness. With

voluntary donation, governments cannot be sure of how much they can get. Loans
are not only dependent on the willingness of the lender but also must be repaid at
maturity date. With its compulsoriness, tax revenue will be firmly paid to the
government’s budget.

The wide range of payers makes tax superior to some other budget’s sources.
While natural resources and some other budget’s sources are limited, taxes are
endless. Even though in some Gulf countries where crude oil, but not taxes, are
3
the main parts of the budget of the governments, these governments cannot rely
forever on crude oil since it may be abundant but not unlimited. Crude oil one day
will become exhausted. Fees can only apply to non-pure public goods and services
such as roads and bridges.

In order to bring into full play of this taxes’ role, the government has to
deliberately consider the elements of each tax among which tax base and rate
count most. If the base is not clear and sufficient, it can be eroded, and of course,
the tax amount paid to the budget reduces. Some may think that the higher the tax
rate is, the higher the tax revenue will flow into the state budget. Unfortunately,
this is not always true. To some extent, as the tax rate increases (up to a certain
level), the tax revenue brought in goes up. When the tax rate continues to rise, the
tax amount brought in falls. This law is known as Laffer curve which was named
after an American economist who drew the curve to illustrate his concept while
he argued against President Gerald Ford’s tax increase in 1974 although Laffer
has never claimed to have invented the concept, explaining that he has learned it
from Ibn Khaldun and John Maynard Keynes. Laffer curve can be seen as follows:

Tax revenue

0 100%
Tax rate

The importance of tax to the state budget can be seen in the following example:

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 Example 1.1: State budget revenue structures of EU and OECD (1998)

Group of Tax Revenues from compulsory

Others Total
countries revenue social contributions

OECD 70.6% 28.2% 1.2% 100%

EU 65.2% 32.7% 2.1% 100%
[Source: Herve Dutel, The socio-economic context of public finance, Lecture
of FSP, Hanoi 2003]

The above example shows that in 1998 tax revenue percentage is the largest part
of the total budget revenue of OECD and EU countries, reaching nearly three
quarter of the total state budget.
1.1.2.2. Macroeconomic activities adjustment
As taxes affect the income of enterprises and citizens, they can impact the motive
of labor and investment; therefore, taxes can be used to adjust some major factors
of the economy such as the supply of labor, the demand of labor and capital, and
the aggregate demand and supply of the economy as a whole.

We will discuss how taxes can be used to adjust the economic activities in the
following section.

Firstly, taxes help to regulate the economic cycle. As many economists have
proven, the global economy as well as each economy all over the world goes up
and down cyclically through four stages including recession, crisis, recovery, and
prosperity. Crisis, of course, does harm to the development of the economy but
too fast economic growth is also harmful to the development of the economy. Too
fast economic growth may cause some unbalances to the normal trend. For
example, too fast economic growth may cause lack of the labor supply or the
exhaust of the natural resources and so on. Therefore, to maintain an appropriate
economic growth is of great significance to every economy.

One of the functions of the government is to make the economy develop stably.
In order to fulfill this function, the government uses some tools such as public
expenditure policy, monetary policy, and tax policy.
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How can taxes help to regulate economic cycle? This is a very complicated issue
but here in this basic chapter of a textbook on taxation, we introduce two of the
simplest ways as below:

(i) If the economy shows a sign of too fast growing, the government can
increase the corporate income tax. An increase in the corporate income
tax can force firms to charge a higher price in order to shift tax burden to
consumers if possible or bear the tax themselves. Thus the rise in the
income tax may cause the rise in commodities’ price, which may
discourage consumer spending and firm’s production. As a result,
businesses will see their profit shrink and investment reduce.

(ii) If there are signs of economic recession, tax cuts would be the
government’s choice. The effect of this choice may be to create a reversal
of the economic situation. This means tax reduction may stimulate firms
to invest more or encourage consumers to spend as firms have more
disposal income to invest and to raise their workers’ income. Another way
to spur the economy is to refund taxes, may have similar impact as tax
reduction on the development of the economy.

Example 1.2: In 2007, when the US economy had some signs of recession,
President Bush decided to apply an income tax refund program to all income
taxpayers. The aim of this program is to leave the people with more income to
spend which is believed to stimulate the growth of the economy. This program
helped Bush’s Administration refunded over USD370 billion. In accompany with
other solutions such as the rediscount rate reduction made by the Federal Reserve;
this measure to some extent did spur the US economy to recover in the following
years.

Secondly, taxes help to balance the labor market and control inflation. Similar to
the way they regulate the economic cycle, an increase or decrease in taxes can
help to control inflation and to lower the unemployment. However, the use of
taxes to achieve this target is similar to the use of a two edge sword. Misusage of
taxes could even make inflation and unemployment worse.
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Example 1.3:
In the 1960s, the US economy was in recession with high inflation. In 1963 and
1964, all consultants of President Kennedy advised him to take many solutions
including income tax and corporate tax cut. But regrettably, no reduction in taxes
was done. Some years later, this advice was applied but it was too late and
inflation continued to rise3.
Thirdly, taxes help to stimulate the economy to develop in accordance with
government’s directions. By the use of tax rates and tax incentives, the
government stimulates businesses to invest in certain areas of the country or in
some fields of the industry or to constrain investment in certain fields. All of these
help to efficiently use the limited resources of a country and achieve the
government’s set aims.

Example 1.4:
In the 1950’s in order to spur the development of the industries, Japanese
government applied an accelerated depreciation rate to companies whose
machinery was newly invested or using new technology. The accelerated rate was
up to 50 percent in the first year of usage of the machines. This solution strongly
affected the investment in new machine and technology of many firms in Japan
and it was one of the reasons explaining why the industry of Japan could sharply
develop in the following two decades after that.
Fourthly, taxes protect the domestic production. The protection is done by
imposing high import duty. High import duty pushes the price of imported goods
higher. Because of the high price, the imported goods are in difficulty in
competition with the similar domestic goods.

However, in the context of the global integration where the import duty rate is
reduced considerably even to zero, the domestic production protection role of tax
is apparently lessened.

Fifthly, taxes correct problems caused by negative externalities. Market system

does not always work as well as we might hope. One of the weaknesses of the
3
Paul A. Samuelson and William D. Nordhaus: Economics
7
market economy is that it causes negative externalities such as water and air
pollution. This is called market failure. By applying environmental tax on the
pollutants a firms puts into the air and water, the government can correct this
market failure.

“Pollution problem arise because producers have to pay only part of the real costs
of making their products. Producers must pay for their raw materials. They must
also pay for labor, the machines they use in production and energy. However,
producers may put tons of waste into the air, or into rivers, lakes, or oceans at little
cost to themselves. In doing so, they pollute our water and air, making both less
valuable to society.

In these cases, taxes can correct this market failure. The government can collect
taxes on the pollutants a business puts into the air and water. The money from that
tax can be used to clean up the pollution. The tax may also make production more
expensive; thus, the firm’s cost will more closely represent the true cost of making
the goods. This is just one way that a tax helps to correct a market failure.” 4
1.1.2.3. To reduce the unfairness in income distribution
Inequity in income distribution is regarded as an inevitable consequence of market
economy and it is a great challenge of every nation nowadays. This is also a
market failure. To cope with this challenge and to make the benefits of economic
development come to every man in society is an important responsibility of the
government.

Taxes can be used to achieve this aim. By imposing high excise duty on luxurious
goods, the government can take much income of the rich as only the rich people
are able to buy these goods. By applying a progressive income tax, the
government can partly reduce the gap between the rich and the poor. Some tax
incentives applicable to the poor such as VAT exemption of necessities may help
to achieve this goal.

4
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 423
8
1.1.3. TAX CLASSIFICATION
Based on ways to levy, taxes include direct tax and indirect tax.

Direct tax is a tax that is directly imposed on income and property and therefore
it is paid by the taxpayer direct to the government. Corporate income tax, capital
gains tax, land tax are examples of direct taxes.

“A direct tax is a tax paid by the person against whom the tax is levied. The tax is
levied against the individual taxpayer, and that taxpayer must pay the tax. A
personal income tax is levied against the individual taxpayer who, in turn, pays the
tax. Thus, the personal income tax is a direct tax. The individual who earns the
income must pay tax on that income. Shifting the incidence of a personal income
tax to another individual is difficult, if not impossible.”5

Indirect tax is a tax that is not directly imposed on income and property and it is
not paid by the taxpayer direct to the government but is collected by suppliers,
shopkeepers, stores, etc. Value added tax, excise duty, export duty are examples
of indirect taxes.

“Taxes on business can often be shifted to the person who uses the company’s
products. For example, businesses must pay taxes on the sale of certain items, such
as cigarettes, liquor, and gasoline. Excise taxes function this way. These taxes are
indirect taxes because although they are levied on the business, the consumer
actually pays part of the tax. Other taxes on business, including property taxes, can
be shifted in part to consumers. Many times companies raise prices in order to
cover the cost of new taxes”6

Based on bases of taxes, taxes include income tax, property tax and consumption
tax

Income tax is a tax the base of which is income. Corporate income tax and
personal income tax are apparently income taxes.

55
‘ J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 430

9
Property tax is a tax the base of which is property’s value. Land tax, house tax,
register tax, inheritance tax are property taxes.

Consumption tax is a tax the base of which is the value of the commodities sold
from sellers, shopkeepers to the consumer. This kind of tax is also called sales tax
for it is charged as a percentage of the price of goods or services. Examples of this
tax are value added tax, turnover tax, and excise tax.

Based on the proportion of tax to income, taxes include progressive tax,

regressive tax and proportional tax.

Progressive tax is a tax that takes a larger percentage from the income of high-
income earners than it does from low-income individuals. Individuals who earn
more pay higher taxes. Progressive tax means that the burden of tax is put more
on the rich than the poor. Personal income tax is often a progressive tax.

“Closely connected to the ability-to-pay principle is the concept of how the tax
burden is distributed among people in relation to their level of income. A
progressive tax is a tax that takes a larger percentage of higher incomes and a
smaller percentage of lower incomes. For example, if a person earning $100,000 a
year paid $25,000 for a particular tax, the tax is 25 percent of the person’s income.
If a person earning $1,000 a year paid $100 for that same tax, the tax is 10 percent
of that person’s income. This tax is a progressive tax because it takes a larger
percentage of the richer person’s income and a smaller percentage of the poorer
person’s income”.7

Regressive tax is a tax that takes a larger percentage from low-income people than
from high-income people. A regressive tax is generally a tax that is applied
uniformly. This means that it hits lower-income individuals harder. Regressive
tax means that the burden of taxes is put more on the poor than the rich. Examples
include sales taxes such as value added tax, excise duty, etc.

“A regressive tax is a tax that takes a larger percentage of lower incomes and a
smaller percentage of higher incomes. Assume that a tax took $10,000 from a

7
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
10
 person earning $100,000 per year and $2,500 from a person earning $10,000 a year.
The tax rate is 10 percent for the richer person and 25 percent for the poorer person.
This tax is regressive since the richer person pays a smaller percentage of income
than the poorer person. Regressive taxes go against the ability-to-pay principle of
taxation. They take greater percentages of the incomes of those who can least
afford to pay”.8

Proportional tax (also called a flat tax) is a tax system that requires the same
percentage of income from all taxpayers, regardless of their earnings. A
proportional tax applies the same tax rate across low-, middle- and high-income
taxpayers. Corporate income tax is often a proportional tax

“Taxes can also be proportional. A proportional tax is a tax that takes the same
percentage of income from all taxpayers. For example, consider a tax that takes
$10,000 from a person earning $100,000 a year and $100 from a person earning
1,000 a year. Both taxpayers must give up 10 percent of their incomes for that tax.
The tax is proportional because it taxes all taxpayers at the same percentage rate.

Proportional taxes are based less on the ability-to-pay principle than the
progressive taxes. They take proportional amounts of income at all levels. The
proportional amounts taken at lower income levels may have much more value to
the individual than the proportional amounts taken from those with higher incomes.
So, a proportional tax may take more dollars necessary for survival from lower
income families than it takes from higher income families”.9

Based on the power to levy, taxes include federal taxes and local taxes.

Federal Taxes

A federal tax is a tax that is levied by the federal government and is paid to the
budget of the federal government. In some countries, federal tax is called state tax
or central tax but the meaning doesn’t change much.

Local Taxes

8
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
9
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 430
11
A local tax is a tax that is paid to the budget of the local authority. The list of local
taxes and the ceiling tax rates are stipulated by the federal government. The local
authority has the right to choose a range of taxes among the list of the local taxes
and to define the rate provided it is not higher than the ceiling rate. Property taxes
such as land tax, house tax, severance tax, etc., are often local taxes.

Federal taxes and local taxes only exist in a country where tax autonomy is given
to the local authority.

1.1.4. BASIC ELEMENTS OF A TAX LAW

1.1.4.1. Name of a tax
Each tax has its own name to distinguish one tax from the others. Names of taxes
often show their contents, purposes or characteristics. For example, value added
tax implies that this tax is charged only on the value added of goods; excise duty
implies that this tax is only levied on certain special commodities.
1.1.4.2. Taxpayer
This element states in a certain circumstance stipulated in a tax law who has to
pay that tax. Taxpayer is the one who legally has to declare and pay taxes. In other
words, a taxpayer is any person or organization liable by law to pay a tax or taxes.
Taxpayer can also mean the person on whom tax burden falls.
1.1.4.3. Tax base
Tax base is the amount of income or property or goods, or the amount of value of
property or goods on which a tax is imposed. Thus, this element shows on what a
taxpayer is liable to pay tax.
1.1.4.4. Tax rate
Tax rate shows how much a tax is paid on a certain amount of tax base.

In terms of the form, tax rates include specific rate and ad valorem rate.

Specific rate is the one shown in the form of a specific amount (normally of
money) liable to be paid on a physical unit of a tax base. For example, the
agricultural land use tax in Vietnam is charged based on the amount of rice per

12
hectare of land; the excise duty in Malaysia is charged as RMB per liter of alcohol
(However, Malaysia also uses ad valorem rate to charge excise duty on alcohol).

Ad valorem rate is the rate shown in the form of a percentage on a monetary unit
of a tax base. For instance, the value added tax in Vietnam is charged at three rates
(0 percent, 5 percent and 10 percent) on the added value of goods and services.

Considering the ways of taxation, tax rates include single specific rate,
proportional rate and progressive rate.

Single specific rate is a rate that remains unchanged regardless of the amount of
tax base. For example, the poll tax in Vietnam in the 1930s which was charged as
Dongduong dong per capital.

Proportional rate is the one that is charged at a fixed percentage on any variable
amount of a tax base. In the other words, proportional rate is an ad valorem rate
that remains unchanged as the amount of income or value of property or goods
increases. For instance, the corporate income tax in Thailand (2007) is charged at
a standard rate of 30 percent. This rate applies to any amount of the taxable income
of a company.

Progressive rate is the one that is charged at an increasing percentage as the

amount of tax base increases. In order to show this kind of tax rate, a table
including brackets of taxable amount and their respective tax rates is used. It is
called progressive tax table. Example 1.5 below will illustrate clearly this type of
tax rate.

Example 1.5: The personal income tax in Vietnam which applies to income
derived from business and employment (Effective from 1 Jan 2009) is charged as
in the following table:
Taxable income per year (million Vietnam Tax rates
dongs) (%)
Up to 60 5
Above 60 to 120 10
Above 120 to 216 15
Above 216 to 384 20
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 Above 384 to 624 25
Above 624 to 960 30
Above 960 35
Applying the above progressive table, given a resident taxpayer without any
dependent s whose taxable income in a tax year is VND332 million, his/her
income tax is calculated as follows:
The first VND132 million is free from tax because it is his/her self deduction.
Therefore, his/her assessable income is VND200 million.
So the income tax he/she has to pay is: 60 x 5% + (120 – 60) x 10% + (200 – 120)
x 15% = VND21 million.
1.1.4.5. Incentives

This is an extra element of a tax. Some taxes may not have this element. Incentives
are used to achieve government’s social or economic targets. Normally, in order
to enjoy an incentive, a taxpayer has to meet one or some conditions stated by the
law. There are some types of incentives as follows:

(1) Exemption: This is one of the common examples of tax incentives. If the
taxpayer is exempt from a tax, he/she is free from having to pay that tax. There is
no time limit to this incentive.

(2) Tax holiday: This type of incentive is similar to the 1 st type above but there
are two differences: (i) in some cases, the tax amounts are only reduced partly,
normally 50 percent; and/or (ii) the reductions or exemptions are applicable only
for a period of time.

(3) Preferential rates: With this type of incentive, the taxpayer enjoys a lower
rate than the common rate applied to others. The low rate can be applied in a
period of years or in the lifetime of the project.

(4) Tax credit: This incentive is so-called because, in terms of economics, it is

similar to a credit from the government to the taxpayer. In some ways stipulated
by law, the taxpayer does not have to pay a tax amount for the current year but
that amount of tax will be paid in the following years. Accelerated depreciation

14
and tax refund for reinvested income are two typical examples of this kind of
incentive.

(5) Double deduction: With this type of incentive, the taxpayer enjoys a double
deduction for an expense, for example, in some countries research expense is
accepted to deduct twice. As a result, the taxpayer enjoys a reduction in income
tax.
1.1.4.6. Procedures
This element includes some issues such as forms of tax returns, procedures and
due time for declaration and payment, taxpayer’s obligations and rights, and the
obligations and rights of tax office and other relevant persons and organizations.

There are two ways to present this element. In some countries it is stated
separately in each tax law. In other countries, all procedures and tax punishments
are included in a law called act of tax administration or law on tax administration.
1.1.4.7. Punishment
In a tax law or in a tax administration law, fines – a sum of money paid as a
punishment – are applied to those who are found guilty of breaking the tax laws
including the following actions: late payments, late declaration, under declaration,
tax evasion, etc.

Where the tax evasion is regarded as criminal, the evader is not punished by the
tax law but by the criminal code.

1.2. CHARACTERISTICS OF A GOOD TAX SYSTEM

1.2.1. EQUITY
Equity is the utmost desire of human being. One of the functions of the state is to
help the society to achieve equity. Therefore, the state itself when imposing taxes
has to make tax equitable. The equity in tax is known as horizontal equity and
vertical equity.

The horizontal equity holds that tax treatment between those who are on every
aspect the same must be the same.

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The problem with the horizontal equity is that in reality how we can find two
persons who are the same in every aspect. To solve this problem, in practice,
persons in a similar circumstance or basically the same are treated the same in
terms of taxation.

The vertical equity insists that those who have more ability have to pay more
taxes.

The following difficulties immediately appear:

(i) How much more tax should a person with better ability to pay be taxed than
the less ability person?

(ii) How to measure the ability to pay?

The answer to the first question depends on the political tax views of the
government in power. The ability-to-pay often shown through income earned,
property value and value of goods and services consumed is the answer to the
second question.

1.2.2. EFFICIENCY
The efficiency of a tax system has two aspects which are efficiency in tax
administration and efficiency in socio-economic impact.

The efficiency in tax administration is shown by two indicators: (i) the low
expense of the tax office in carrying out the responsibility; and (ii) the efficiency
in preventing tax evasion and tax shelter.

The socio-economic efficiency includes three aspects: (i) the impact of tax system
on the economy means that tax system can help best to regulate the economic
cycle, control inflation, lower unemployment, and regulate the development of
the economy to the government’s directions; (ii) the deadweight loss caused by
tax is the least; and (iii) the tax compliance cost is minimized by simple and
transparent tax procedures, by reducing time of and money for declaration and by
reducing corruption in tax officials.

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The efficiency doesn’t normally go with the equity standard. A tax cannot often
meet these two criteria at the same time. Sometimes, in order to achieve the
standard of efficiency, the equity must be sacrificed and vice versa. Thus, the
efficiency and equity standards should not be considered as a mutually-exclusive
of requirement to a tax system.

1.2.3. STABILITY
As tax policy is closely related to the business environment, it is required to be
stable. The stability of a tax system is a base to make long-term investments. If
the tax system is frequently and unexpectedly changed, it will put investors at risk
because tax is one of the factors influencing their expenses and turnover which,
in turn, affect their profit.

This standard requires the tax system to be relatively stable for a period of time.
In order to meet this requirement, tax policy must be carefully prepared on the
basis of full and truthful statistics on socio-economic situation of the country.
Besides, the government has to inform the public in advance of any changes in
the tax policy. The government has to make sure that firms have enough time to
prepare themselves for the amendments and supplements of the tax policy.

1.2.4. ADAPTABILITY
The adaptability requires that a tax system has to be constructed so as to be
automatically adaptable to the changes in socio-economic situation of a country.
This means that there is no need to revise tax laws in case there are considerable
changes in the socio-economic situation due to the good automatic adaptability of
the tax system.

1.2.5. TRANSPARENCY
Transparency is an essential requirement of a modern tax system since this
standard has a strong impact on the business climate and the efficiency of tax
system. A transparent tax system prevents tax avoidance and reduces tax evasion.
Transparency also helps to create a good investment environment because it
reduces corruption in tax officials.

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Transparency is shown through three aspects: (i) clarity – meaning only one way
to understand a regulation, (ii) every rule is made publicly, and (iii) no exception
exists.

1.3. PRINCIPLES OF TAXATION

1.3.1. BENEFIT-RECEIVED PRINCIPLE

The root of this principle is the benefit received by the taxpayer as a result of the
investment of the government. Each citizen benefits differently from the
investment by the government, so in order to achieve equity, the weight of taxes
should be related to the benefit enjoyed by each taxpayer. For instance, the value
of a land near a newly-built road by the government may increase sharply as
compared to that of the time before the investment was made. This principle
requires that the more the taxpayer benefits from the government-supplied goods
or services, the more the tax is paid to finance for them.

However, difficulties in applying this principle at once arise. Those are:

(i) How does the government determine the benefits individual households and
businesses receive from national defense, education, and police and fire
protection? Even in the seemingly tangible case of highway finance we find it
difficult to measure the benefits;

(ii) Government efforts to redistribute income would be self-defeating if financed

on the basis of benefit principle; it would be absurd and self-defeating to ask
the poor to pay taxes needed to finance their welfare payments!

“The benefit principle of taxation is the concept that those whose benefit from the
spending of tax dollars should pay the taxes to provide the benefits. This means
that the people who benefit should pay. The gasoline taxes in America follow the
benefit principle. The amount of gasoline bought is a good measure of the amount
of highway service used. So, a tax on gasoline makes users of the highways pay
for their use. The money collected from gasoline taxes is used to repair and improve
highways.

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 But often the benefit principle of taxation does not apply. Most public goods such
as national defense and social welfare programs cannot use this principle. All
people benefit from national defense spending, but all people cannot be charged
directly for the benefit. People who benefit from social welfare payments cannot
afford to pay for those benefits. If they could afford to pay for them, they would
not need them.

The very nature of public goods often makes it hard to apply the benefit principle
of taxation. It is often impossible to separate those who benefit from those who
don’t. Even when this is possible, it is difficult to find ways of charging only those
who benefit. So, two conditions are necessary to use the benefit principle of
taxation: (1) Those that benefit from a particular good must be easily identified;
(2) ways to charge only those who benefit must be found. However, when these
conditions exist, it is usually more efficient to have the private sector produce that
particular good”.10

1.3.2. ABILITY-TO-PAY PRICIPLE

The ability-to-pay principle contrasts sharply with the benefit principle. The
ability-to-pay taxation rests on the idea that the tax burden should be geared
directly to a taxpayer’s income and wealth. This principle requires that the weight
of taxes should be related to the ability-to-pay of the taxpayer in order to bring
about equity of sacrifice. The ability-to-pay is often regarded as the taxpayer’s
income and property or the value of goods consumed. According to this view
point, the more the income the taxpayer earns, the more the tax is paid; the larger
the value of the taxpayer’s property is, the more the tax is charged; the higher the
value of the goods the taxpayer consumes, the more the tax is levied.

According to Campbell R. Mc Connell and Stanley L. Brue in the book named

Economics Principles, Problems, and Policies, the root of the ability-to-pay is
explained as follows:

10
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, 428
19
 “What is the rationale of ability-to-pay taxation? Proponents argue that each
additional dollar of income received by a household will yield smaller and smaller
increments of satisfaction or marginal utility. Because consumers act rationally,
the first dollars of income received in any period of time will be spent on high-
urgency goods which yield the greatest marginal utility. Successive dollars of
income will go for less urgently needed goods and finally for trivial goods and
services. This means a dollar taken through taxes from a poor person who has few
dollars is a greater utility sacrifice than is a dollar taken by taxes from the rich who
has much money. To balance the sacrifice which taxes levy on income receivers,
taxes should be apportioned according to the amount of income a taxpayer
receives.

This argument sounds reasonable, but problems of application exist here too.
Although we might agree that the household earning $100,000 per year has a
greater ability to pay taxes than a household receiving $10,000, exactly how much
more ability to pay does the first family have compared with the second? Should
the rich person pay the same percentage of his or her larger income – and hence a
larger absolute amount – as taxes? Or should the rich be made to pay a larger
fraction of this income as taxes? And how much larger should that fraction should
be?

The problem is there is no scientific way of measuring someone’s ability to pay

taxes. In practice, the answer hinges on guesswork, the tax views of the political
party in power; expediency, and how urgently the government needs revenue”.11

Similar to the above explanation but with better illustration is the viewpoint of J.
Holton Wilson and J. R. Clark in the book named Economics.

“The ability-to-pay principle of taxation is the concept that those who can best
afford to pay taxes should pay most of the taxes. Generally the rich or the
economically better off can best afford to pay. Most economists believe that every
extra dollar earned has value. For a person earning only $1,000 a year, extra dollars

11
Campbell R. Mc Connell and Stanley L. Brue (1996): Economics Principles, Problems, and Policies,
McGraw-Hill, page 626
20
 of income mean more food, or badly needed clothing, or medical care. On the other
hand, a person earning $1,000,000 a year does not need the extra dollars to meet
basic needs. This person would hardly notice an extra dollar of income. Therefore,
the extra dollars may not have nearly the value to that person as to the person
earning $1,000 a year. The ability-to-pay principle of taxation would tax the person
earning $100,000 a year more heavily than the person earning $1,000 a year”.12

Thus, regarding the question of how the economy’s tax burden should be
apportioned, there are two basic philosophies mentioned above. The following
parts will discuss some other principles concerning certain types of taxes.

1.3.3. ORIGIN PRICIPLE

This principle only applies to consumption taxation and implies the power of a
country’s authority to impose consumption taxes. According to this principle, a
government has power to levy on goods and services produced in its country
despite where they are sold and consumed. The reason for this principle is that the
goods and services are produced by using the country’s resources and the
producer/taxpayer benefits from the government’s supply of public services.

1.3.4. DESTINATION PRICIPLE

Similar to the origin principle, the destination principle concerns the power of a
government to levy taxes on goods and services. Contrary to the origin principle,
this principle states that a government has power to levy on goods and services
sold and consumed in its country despite where they are produced. The rationale
of this principle is that in a market economy, where to produce and by what to
produce is not as important as where to consume. Moreover, the aim of
consumption taxes is to take away part of the consumer’s income and therefore
the consumers who benefits from the public services provided by their
governments have to pay taxes to their governments. In order to practice this
principle, the government where the goods and services are produced has to
“concede” the power to tax to the government where the goods and services are

12
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
21
consumed. This process is often done by law to refund taxes to exported goods
and services or to stipulate that exported goods are free from a certain sales tax.

Both origin and destination principles deal with the power over consumption
taxation but destination principle is often the choice because it is reasonable in the
context of market economy. However, the origin principle, sometimes is chosen,
especially where the government wants to impose export duty.

1.3.5. SOURCE PRICIPLE

The source principle and residence principle deal with the power of a government
over income and property taxes. According to the source principle, an income or
a property earned by a person or company is taxed by the government of the
country where it is earned despite the residence state or the nationality of a
taxpayer.

1.3.6. RESIDENT PRINCIPLE

This principle requires that any person or company who is regarded by law to be
a resident of a country is taxed on worldwide incomes including both incomes
earned in the country where the taxpayer is liable to pay and incomes earned
overseas. Non-resident is only charged on incomes earned in the country where
the tax payer works and receives these incomes.

Of course when applying source and residence principles, disputes appear and the
double taxation emerges as an inevitable incident. That is why double taxation
avoidance and tax treaties need to be discussed. This issue will be dealt later in
chapter 9.

1.4. TAX AVOIDANCE AND EVASION

Tax avoidance is the legal utilization of the grey areas in the tax law to reduce or
postpone the amount of tax payable. Tax avoiders attempt to prepare their income
and wealth statement in such ways that do not violate tax law either to enjoy a
lower rate of taxes and/or to narrow the tax base.

22
Tax evasion is the general term for efforts by individuals, enterprises and other
entities to evade taxes by illegal means. Tax evasion usually entails taxpayers
deliberately misrepresenting or concealing the true state of their affairs to the tax
authorities to reduce their tax liability, in particular, dishonest tax reporting (such
as declaring less income, profits or gains than actually earned; or overstating
deductions). In other words, tax evasion is an unlawful attempt to minimize tax
liability through fraudulent techniques to circumvent or frustrate tax laws, such as
deliberate under-statement of taxable income or willful non-payment of due taxes.
Whereas tax evasion is an offense (punishable by both civil and criminal
penalties), tax avoidance is not.

Some tax evaders believe that they have discovered new interpretations of the law
showing that they are not subject to being taxed. These individuals and groups are
sometimes called resister is the refusal to pay a tax for conscientious reasons
(because the resister does not want to support the government or some of its
activities). They are more concerned with not paying for what they oppose than
they are motivated by the desire to keep more of their money (as tax evaders
typically are).

Level of evasion depends on a number of factors one of them being fiscal

equation. People’s tendency to evade income tax declines when the return for due
payment of taxes is obvious. Evasion also depends on the efficiency of the tax
administration. Corruption by the tax officials often renders control of evasion
difficult. Tax administrations resort to various means for plugging in scope of
evasion and increasing the level of enforcement.

1.5. THE OVERALL STRUCTURE OF VIETNAMESE TAX SYSTEM

The tax system in Vietnam has formed and developed along with the country's
development. It has undergone some phases of reform in the last three decades.
The independent Vietnamese tax system was formally established in 1990 with
the renovation and opening up of the economy, including the tax policy system
and tax administration system.

23
The National Assembly is responsible for promulgating the Tax Laws. General
Department of Taxation (GDT) and General Department of Customs (GDC) who
belong to Ministry of Finance are the government departments that controls and
administers all areas of tax law.

Tax law system

The Vietnamese tax system includes:

- The National Assembly issues the Laws on different kind of taxes.
- The Government issues Decrees detailing the implementation of the Tax
Laws.
- The Ministry of Finance issues Circulars guiding the implementation of
Tax Decrees.
- General Departments of Taxation/General Departments of Customs issues
Official Letter providing detail implementation for particular cases.
Tax administration system

General Departments of Taxation and General Departments of Customs are

responsible for: (i) supporting Ministry of Finance in formulation of tax policies;
(ii) organizing the management of tax collection; and (iii) compliance
enforcement.

The administrative function for the collection of tax is undertaken by the General
Department of Taxation and scaled down to Provincial Tax Department; District
Tax Department (tax authority) and since 2019, it includes Zone Tax Department.
It is similar to General Department of Customs. However, General Department of
Customs is in charge of controlling and administering of import tax, export tax,
excise duty, environment tax and value added tax at the stage of customs.

Staff who work for GDT/GDC are known as Tax/Custom Officers. They are
responsible for providing guidance for taxpayers, supervising the self-assessment
system and tax filling, auditing tax liabilities, collecting taxes and following up
amounts of unpaid tax, conducting tax inquiries and inspection.

24
Taxpayers are the persons who have responsibility to submit the tax return and
pay the tax liabilities to the Government on time.

Central government raises revenue through a wide range of taxes. The Vietnam’s
tax system now includes:

- Value added tax;

- Excise duty;
- Customs duty;
- Environmental protection tax;
- Corporate income tax;
- Personal income tax;
- Agricultural land use tax;
- Non-agricultural land use tax;
- Severance tax.

1.6. THE SYSTEMS OF REGISTRATION, THE MAKING OF RETURNS

AND THE PAYMENT OF TAX LIABILITIES
1.6.1. TAX REGISTRATION
1.6.1.1. Tax registration obligation
The following individuals and entities have to do tax registration:

- Organizations, households and individuals engaged in production, business

and provision of services or goods;

- Individuals liable to pay personal income tax;

- Organizations responsible for withholding and paying taxes on behalf of

taxpayers;

- Organization authorized to collect fees;

25
 - Foreign organizations without the Vietnamese legal entity status, foreign
independent practitioners conducting business activities in Vietnam in
accordance with Vietnamese law who earn incomes in Vietnam;

- Other organizations and individuals involved in tax-related activities, such

as: project management units, non-business units, organizations and
individuals that have no tax liability but are eligible for tax refund or receipt
of aid goods from abroad;

- Other Organizations and individuals who have incurred amounts payable

to the State Budget.
1.6.1.2. Tax registration procedure
All taxpayers have to do tax registration under the Law on Tax Administration.

Established enterprises operating under the Enterprise Law perform tax

registration under the Government’s Decree No. 78/2015/ND-CP dated 14
September 2015 on business registration and the Decree No. 108/2018/ND-CP
dated 23 August 2018 to modify some articles of the Decree No. 78/2015/ND-CP.
These decrees regulate that when enterprises apply for a business license or a
business certificate, they are given an EIN (enterprise identified number) or a TIN
(tax identified number), which are one and the same.

Enterprises that are not established under the Law on Enterprises and other
organizations, households and individuals subject to pay taxes shall apply for tax
registration in accordance with the regulations on the Decree No 126/2020/NĐ-
CP by the Government of Vietnam dated 19 October 2020. They should perform
tax registration by filling in a set of forms within 10 working days from the date
when:

- They are granted business registration certificates or establishment and

operation licenses or investment certificates;

- They commence their business operation, if they have no business

certificate, or their tax liabilities arise, if they are non-business
organizations or individuals;
26
 - They have responsibility of withholding and pay taxes on behalf taxpayers;

- They have responsibility of collecting charges and fees as prescribed by

law;

- Their personal income tax liabilities arise (the date they receive their
incomes);

- Their refundable value-added tax amounts arise under the Act of Value
added tax, for project owners and/or foreign contractors.

- Their non-agricultural land use tax arises.

Taxpayers may receive tax registration forms at the nearest tax office or get tax
registration forms from the website of the General Department of Taxation of
Vietnam (at website: http://www.gdt.gov.vn). Taxpayers may go to any tax office
to get help with the completion of tax registration dossiers.
1.6.1.3. Notification of changes in tax registration
For enterprises established under the provisions of the Law on Enterprises shall
notify the business registration office of the changes to the tax registration
information under the Government’s Decree No. 78/2015/ND-CP dated 14
September 2015 on business registration and the Decree No. 108/2018/ND-CP
dated 23 August 2018 to modify some articles of the Decree No. 78/2015/ND-CP.

Organizations, households and individuals: When there are any changes in

information declared in their tax registrations, taxpayers are responsible to notify
the tax office of the changes in the tax registration information within 10 days
from the date of the occurrence of changes. A dossier of tax registration
supplementation depends on the information changes, but the following two
documents are compulsory: a tax registration adjustment form; a tax registration
certificate (original); Taxpayers have to file dossiers of notification of changes in
tax registration information to tax offices in charge of them.

27
1.6.2. THE SUBMISSION OF INFORMATION AND CLAIMS
1.6.2.1. Principles
Taxpayers must fully and accurately provide information on the tax return
provided by the Minister of Finance and submit adequate documents to the tax
authority.

Taxpayers must calculate the tax payable themselves, except some special cases
in which tax has to be calculated by the tax authority.

Taxpayers must declare tax at the local tax authority where their headquarters are
based except for those taxpayers that does accounting mainly at the headquarters
and has dependent units in other provinces.

Overseas entities who do not have the permanent establishments in Vietnam but
have electronic commerce, digital business and other services in Vietnam must
directly or authorize representatives to apply for taxpayer registration, declare and
pay tax in Vietnam in accordance with regulations of the Minister of Finance.
1.6.2.2. The submission of tax declaration dossiers
The deadline for submission of a monthly tax declaration dossier is the 20th day
of the month following the month in which the tax obligation arises.

The deadline for submission of a quarterly tax declaration dossier is the last
day of the first month of the quarter following the quarter in which the tax
obligation arises.

The deadline for submission of an annual tax declaration dossier is the last day
of the first month of the calendar year or fiscal year.

The deadline for submission of a tax declaration dossier for each time of arising
of a tax obligation is 10 days since the date the tax obligation arises.

The deadline for submission of an annual tax finalization dossier is the last day
of the 3th month since the end of the calendar year or fiscal year.

28
For annual personal income tax returns prepared by income earners: the
deadline for submission of an annual tax finalization doss is the last day of the
4th month since the end of the calendar year.

The time limit for submission of a tax finalization dossier in case of termination
of operation, expiration of contract, enterprise ownership transformation or
reorganization is 45 days since the date of termination, expiration, transformation
or reorganization.

Taxpayers must calculate tax amounts payable and submit tax return by
themselves on time (self-assessment).

For taxes to be declared on a monthly, quarterly or yearly basis, if no tax

obligation arises in a tax period or taxpayers are currently eligible for tax
incentives, exemption or reduction, taxpayers shall still submit tax declaration
dossiers to tax agencies on time, except for cases where the tax obligation arisen
have terminated and cases in which business operations are suspended in certain
circumstances

For taxes to be declared on a monthly or quarterly basis, the first tax period is
counted from the date of commencement of activities that give rise to the tax
obligation to the last day of the month or quarter, and the last tax period is counted
from the first day of a month or quarter to the date of termination of activities that
give rise to the tax obligation. The annual tax period for corporate income tax or
royalty is counted according to the calendar year or the fiscal year applied by
taxpayers. The annual tax period for other taxes is the calendar year.

Taxpayers are not required to submit tax declaration dossiers for the period in
which business operations are suspended and no tax obligation arises.

1.6.3. THE MAKING OF RETURNS AND THE PAYMENT OF TAX

LIABILITIEES
1.6.3.1. The deadlines of tax payment
In the case the taxpayers calculate tax by themselves under self- assessment: the
tax payment deadline is the deadline for submission of the tax declaration dossier.
29
In case of submission of supplementary tax documents, the tax payment deadline
is the deadline for submission of the erroneous tax declaration dossier.

The deadline for paying corporate income tax, which is paid quarterly, is the
30th of the first month of the next quarter.

In the case the tax authority calculate tax and send notices to taxpayers: the tax
payment deadline is specified in the tax authority’s notice.

The deadlines for paying other amounts payable to state budget from land, grant
of the right to water resource extraction or mineral extraction, registration fees
and licensing fees shall be specified by the Government.

For tax liabilities related to export and import, the deadline for tax payment is
before customs clearance except for 2 cases: (1) Taxpayers with tax payment
guaranteed by credit institutions; (2) Priority enterprises. For taxpayers with tax
payment guaranteed by credit institutions, the deadline for tax payment is the
guarantee time but no more than 30 days since the date of customs clearance. For
priority enterprises, the deadline for tax payment is the 10th of the month following
the month of tax liabilities arisen.
1.6.3.2. The authorities receiving the tax payment
The Taxpayers shall pay tax: (i) At State Treasuries; (ii) At the tax authorities that
receive the tax declaration dossiers; (iii) Via an organization authorized by the tax
authority to collect tax; or (iv)Via a commercial bank or credit institution or
service provider as prescribed by law.

1.7. THE PROCEDURE RELATING TO ENQUIRIES, APPEALS AND

DISPUTES
Taxpayers, other organizations and individuals are entitled to file complaints to
authorities against an administrative decision or action of a tax authority or tax
official if they think such decision or action violates their lawful legal rights and
interests.

Individuals are entitled to appeal against tax law violations committed by

taxpayers, tax officials, other organizations and individuals.
30
Complaints and denunciations shall be settled in accordance with regulations of
law on complaints and denunciations.

Taxpayers could sue the tax authorities and tax officials of their administrative
decisions and actions in accordance with regulations of law on administrative
proceedings.

1.8. TRANSFER PRICING

1.8.1. LEGISLATION
Transfer pricing (TP) can be done both by domestic enterprises and foreign direct-
invested enterprises. In a market economy, the seller and the buyer decide the
transaction price of goods or services by themselves Related parties may decide
internal transfer price in a way that they most benefit on taxation aspect. Of
course, this actions lead to a loss in tax revenue. Therefore, all most countries in
the world have enacted legal documents to ensure that these transactions must
comply with the arm’s length price principles.

In Vietnam, on 20 October 1997, the MOF issued Circular 74-TC/TCT, which

was the earliest legal document to define related parties in a Vietnamese context.
However, the applicability of this circular was limited to foreign invested
enterprises. Circular 89/1999/TT-BTC, which was issued on 16 July 1999, also
provided guidelines on the definition of related parties. However, neither of these
circulars specifically stipulated the TP methods to be used or any documentation
requirements.

The MOF issued Circular 13/2001/TT-BTC (Circular 13) on 8 March 2001 to

provide guidelines on implementation of the Corporate Income Tax Act
applicable to FIEs. It specifies three traditional TP methods applicable to
determining the arm’s length nature of related-party transactions. However,
Circular 13 did not provide any detailed guidelines on application of the methods
or guidance on documentation requirements. The Business Income Tax Act (“BIT
Act”) issued in 2003, which came into force on 1 January 2004, requires all

31
transactions between related parties to be conducted at market prices (the arm’s
length principle).

Pursuant to the BIT Act, the Ministry of Finance issued Circular 117/2005/TT-
BTC (Circular 117) in 2006 to provide guidelines on related-party transactions
and the disclosure of documents and information. Besides laying down the
requirement for companies to comply with the arm’s length standard, it also
requires them to submit an annual TP declaration form and maintain
contemporaneous TP documentation from 2006 on. Non-compliance carries a fine
of up to VND 5 million.

In 2010, the Ministry of Finance enacted Circular 66/2010/TT-BTC (Circular 66)

to replace Circular 117. Circular 66 is considered the most comprehensive transfer
pricing regulation in Vietnam to date. From a technical viewpoint, the Vietnamese
TP regulations under Circular 66 are modelled on the OECD transfer pricing
guidelines for multinational enterprises and tax administrations (TP Guidelines).
Circular 66 adopts the arm’s length principle and the transfer pricing methods set
out in the OECD TP Guidelines.

Circular 66 then was replaced by the Government’s Decree No. 20/2017/ND-CP

in 2017. TP rules was then stipulated in the Law on Tax Administration No.
38/2019/QH14 and specifically guided in Decree No. 68/2020/ND-CP and Decree
No. 132/2020/ND-CP. These legal documents are introduced below.

Law on Tax Administration No. 38/2019/QH14

New principles of tax administration related to TP have been introduced in the

Law on Tax Administration No. 38/2019/QH14, including independent
transactions rules, operation substance rules, principles for determination of
taxable prices in related party transactions and provisions related to advance
pricing agreements. These rules indicate an increasingly “substance over form”
approach.

The Law on Tax Administration No. 38/2019/QH14 also provides the

“independent transactions” principle for determining a taxable price in related

32
party transactions. Accordingly, the transfer price of related party transactions
must be comparable to the price of similar transactions between independent
parties. Taxpayers will be required to make necessary adjustments to their related
party transactions for tax declaration purposes, on the basis that the adjustments
should not result in decreases of taxable income. The tax authorities can impose
deem tax if the taxpayer fails to comply with regulations on the declaration of
related party transactions.
Decree No. 20/2017/ND-CP

Vietnam’s Government has released a Transfer Pricing Decree No. 20/2017/ND-

CP (Decree 20), providing tax administration applicable to enterprises having
related party transactions. The Decree shall take effect from 1 May 2017 and has
some details of:

- Introducing “substance over form” principle;

- Related party definition;
- Comparability analysis and Transfer Pricing adjustments;
- Transfer Pricing methodology;
- Tax deductibility for related party expenses;
- Three-tiered Transfer Pricing Documentation;
- Timeline for Transfer Pricing Documentation preparation and
submission;
- Transfer Pricing documentation compliance exemption.
Circular No. 41/2017/TT-BTC

On 28 April 2017, the Ministry of Finance released Circular No. 41/2017/TT-

BTC (Circular 41) providing further guidance on the implementation of certain
articles of Decree 20 on tax administration of enterprises engaging in related party
transactions.
Decree No. 68/2020/ND-CP

The Decree No. 68/2020/ND-CP (Decree 68) was enacted on 6 June 2020 to
modify Clause 3 Article 8 of the Decree No. 20/2017/ND-CP. This decree took
effect from the date of issuance and retrospective application for the tax period
33
2017 and 2018. According to this decree, the cap of interest expense for CIT
purpose is 30% of EBITDA instead of 20% of EBITDA as stipulated in Decree
No. 20/2017/ND-CP.

Decree No. 132/2020/ND-CP

After more than three years of implementing Decree 20 and other guiding
documents such as Decree 68 and Circular 41, on 5 November 2020, the
Government has officially issued Decree No.132/2020/ND-CP (Decree 132) to
replace Decree 20 and Decree 68 prescribing tax administration for enterprises
engaged in related party transactions. This Decree is inclusive of a number of
changes that have material effects on taxpayers’ compliance status with Transfer
Pricing regulations in Vietnam. Some notable changes are as follows:

Narrowing the arm’s length range for prices of related party transactions:
During the effective period of Decree 20 and its related guiding documents as well
as other previous regulations, the statistical probability method applying the
interquartile range function, which ranges from the 25 th percentile to
75th percentile, was used to determine the arm’s length range for related party
transactions. Under Decree 132, the arm’s length range is now defined as to be
from the 35th percentile to the 75th percentile. Specifically, the lower threshold has
increased from the 25th percentile to 35th percentile.

Adding more subjects to be regarded as related parties: (1) In comparison with

the provisions of Decree 20, Decree 132 has supplemented the following subjects
to be identified as related parties for the case that both enterprises are managed or
controlled in terms of their personnel, financial and business activities by
individuals, each of whom is in one of the following relationships with the others
such as “stepfather, stepmother, parents-in-law”; “stepchild of wife or husband,
daughter-in-law, son-in-law”; “brothers, sisters of the same father but different
mother, brothers, sisters of the same mother but different father, brothers-in-law,
brother-in-law, sister-in-law, sister-in-law of a person of the same parent or of the
same father, different mother or of the same mother, different father”; (2) The
enterprise enters in transactions of transferring or receiving at least 25% of the
34
contributed capital of the enterprise in the tax period; borrowing, lending at least
10% of contributed capital of the owner at the time of transactions in the tax period
with the individuals who are managing or controlling the enterprise or with the
individuals fall into the regulations as prescribed in point “g” of clause 5 of Decree
132.

Expanding the concept of Commercial Database: Decree 132 has expanded its
information source for collecting financial and economic data used in
benchmarking analysis to commercial databases provided by information
business organizations with data that is retained, standardized and updated.
Previously, the data sources were limited to databases provided by information
business organizations extracted from publicly available sources.

Provisions relating to Country-by-Country reports: Clause 5, Article 18, Decree

132 has included new provisions relating to the preparation and retaining of
Country-by-Country reports, specifically as follows:

- As for the deadline for submission of Country-by-Country reports in case the

taxpayer is the Ultimate Parent Company in Vietnam (with consolidated revenue
being over VND18,000 billion): 12 months after the end of the fiscal year of
ultimate parent company (Clause 5a).

- Additional provisions on Country-by-Country reports requirement in case the

Ultimate Parent Company is required to submit this Report in its country of
residence (Clauses 5b and 5c) and the cases of tax authorities carrying out
automatic information exchange as committed in International Agreements.

- For taxpayers whose Ultimate Parent Company is not required to submit

Country-by-Country reports according to the regulations of its country of
residence, provisions under international tax treaties shall be followed.

- However, at the present time, the provisions relating to taxpayers' obligations

regarding the Country-by-Country reports still need further clarification. There
will be more update on this content in case the tax authority issues more detailed
guidance.

35
Deadline for provision of Transfer Pricing Documentation as required by the
tax authority during tax audits and inspections: According to Decree 132, the
deadline for provision of Transfer Pricing Documentation as required by the tax
authority during tax audits and inspections shall be determined in accordance with
the provision under the Law on Inspection.

Regulations on deductible interest expenses: Inheriting the provisions of Decree

68, Decree 132 regulates the cap for deductible interest expenses for businesses
engaged in related party transactions to be at 30% of net EBITDA as well as other
specific provisions on carrying forward non-deductible interest expenses or the
retroactive application for the period of 2017-2018.

1.8.2. SCOPE OF APPLICATION

1.8.2.1. Subject of application
Organizations who: (i) engage in production and business of goods and services;
(ii) have business transactions with related parties; (iii) are obliged to declare their
CIT liability in Vietnam.
1.8.2.2. Scope of application
Commodity or service production and business entities (hereinafter referred to as
taxpayers) that are entities paying corporate income tax according to the
declaration method and performing transactions with related parties. Transactions
for purchasing, selling, renting, leasing, delivering, transferring of goods of
services.
1.8.2.3. Exempt transactions
The following exemptions are provided to a taxpayer who:
- has sales revenue of less than VND50 billion and the value of its related
party transactions is less than VND30 billion.
- engages in simple functions, has revenue of less than VND200 billion and
achieves a ratio of earnings before interest and taxes to revenue of at least
5% for distribution function; 10% for manufacturing function; and 15% for
processing function).

36
 - has signed an Advance Pricing Agreement (APA) and submitted annual
APA report(s).
In addition, a partial exemption is available if:
- the taxpayer only has transactions with related parties who are subject to
CIT in Vietnam.
- the taxpayer and its related parties apply the same CIT rate and enjoy no
CIT incentives.
1.8.2.4. Objectives
To ensure that: (i) transactions between the taxpayers and their related parties are
at arm’s length price; (ii) appropriate documentation is kept to support the
methods and the determination of the transfer prices.

1.8.3. DEFINITION OF RELATED PARTIES

Related parties are parties with the following relationship: (a) a party participates
directly or indirectly in the management, control or equity of the other, or puts
investment in the other; (b) parties participate directly or indirectly in the common
management, control, or owning equity in other parties.

To be specific, related parties are parties having relationships if they are in the
following cases:

- An enterprise owns directly or indirectly at least 25% of equity in other

enterprise;
- Both enterprises own at least 25% of equity in which a third party
participates directly or indirectly;
- An enterprise is the shareholder who has the greatest ownership of equity
of the other enterprise, or participates directly or indirectly in at least 10%
of total share capital of the other enterprise;
- An enterprise guarantees or offers another enterprise a loan under any form
(even including third-party loans guaranteed by financing sources of related
parties and financial transactions of same or similar nature) to the extent
that the loan amount equals at least 25% of equity of the borrowing

37
 enterprise and makes up for more than 50% of total medium and long term
debts of the borrowing enterprise;
- An enterprise appoints a member of the executive board responsible for the
leadership or control of another enterprise provided the number of members
appointed by the former accounts for more than 50% of total number of
members of the executive board responsible for the leadership or control of
the latter; or a member appointed by the former has the right to decide
financial policies or business activities of the latter;
- Both enterprises appoint more than 50% of membership of the executive
board or have one member of the executive board authorized to decide
financial policies or business activities who is appointed by a third party;
- Both enterprises are managed or controlled in terms of their personnel,
financial and business activities by individuals, with each being in one of
the following relationships with the others such as a wife, husband,
natural/foster father, stepfather, stepmother, parents-in-law; natural/foster
child, natural/foster older/younger sibling, brother/sister-in-law, stepchild
of wife or husband, daughter-in-law, son-in-law; brothers, sisters of the
same father but different mother, brothers, sisters of the same mother but
different father, brothers-in-law, brother-in-law, sister-in-law, sister-in-law
of a person of the same parent or of the same father, different mother or of
the same mother, different father.
- Both business entities have transactions, either between their head offices
and permanent establishments or between permanent establishments of
overseas entities or individuals.
- One or more enterprises is/are put under control of one individual through
either his/her capital participation into that enterprise or his direct
involvement in administration of that enterprise;
- The enterprise enters into transactions of transfering or receiving at least
25% of the contributed capital of the enterprise in the tax period; borrowing,
lending at least 10% of contributed capital of the owner at the time of
transactions in the tax period with the individuals who are managaing or

38
 controlling the enterprise or with the individuals fall into the regulations as
prescribed in point “g” of clause 5 of Decree 132;
- In other cases where an enterprise is in reality under management of, or
control of decision on, business activities of the other enterprise.

1.8.4. TRANSFER PRICING METHODS

1.8.4.1. Comparable Uncontrolled Price Method (CUP)
The CUP method is applied in either cases where taxpayers perform transfer
pricing of specifically classified products, tangible assets or specified services
subject to trading conditions, commonly sold on the market or assigned prices
quoted on the domestic and international exchanges of commodities or services;
make payment of royalties on use of intangible assets; pay loan interest when
performing lending and borrowing activities; or perform independent and related-
party transactions in products that are of similar product specifications and subject
to contractual terms and conditions;

The CUP method is implemented according to the principle that there is none of
differences in product specifications and contractual conditions upon comparison
between prices of independent transactions and these of related-party transactions
which materially influence product prices. Where there are material differences
in product prices, these material differences must be eliminated.

Such factors as product specifications and contractual terms and conditions, which
have material effects on product prices, encompass the followings: characteristics,
quality, brands and trademarks of products, and transaction scale and volume;
terms and conditions of agreements on supply and transfer of products, including
amount, duration of transfer of products, payment deadline and others; rights to
distribute or consume commodities, services or assets that affect the economic
value and the market where such transaction occurs and other factors affecting
product prices such as economic conditions and operational functions of
taxpayers.

39
Example 1.6: Company A manufactures cars and has following transactions in
2015: Sales of 300 cars to headquarter in Japan at the unit price of VND500
million. Sales of 300 cars to a car dealer at the price of VND 600 million.

Solution: The price of VND500 million is considered as not truly reflecting the
market price. Company A is required to impose the price of VND600 million to
calculate its tax liabilities
1.8.4.2. Comparable Uncontrolled Price Method CUP
(i) Resale Price Method – RP
Purchase price = Resale price – Gross profit margin – Other expenses

Gross profit = Net x Gross profit margin ratio

margin revenue of the comparable party

Gross profit margin ratio Net revenue – Cost of goods sold (COGS)
=
of the comparable party Net revenue
The gross profit relative to the selling price (net sales) of independent comparable
shall be calculated as the value falling within the standard arm’s length range of
the gross profit to the selling price (net sales) of independent comparable which
are selected for adaptation to principles herein stipulated.

The purchase price (cost) of such commodity, service or asset sold by a related
party, which is adjusted for independent comparable shall be the price for taxation
or declaration of costs and determination of corporate income tax obligations
which must be paid by taxpayers.

This method is usually applied to transactions in respect of products in the phase

of provision of simple services and commercial distribution which have a short
cycle from purchase to sale. There are no considerable value-added to the products
by way of processing, assembling, etc.

Example 1.7: Company V (VN) and company C (overseas) are related parties.
Company V receives 100 watches from company C with total payment of
USD330,000. By end of 2015, revenue of Company V from sales of all watches
40
is USD400,000. Company D in VN (independent) operates in same watches
trading. The gross profit margin of Company D in 2015 is 20%.

Required: Determine purchase price of company V.

(ii) Cost plus profit
The selling price or net sales of a commodity, service or asset sold to a related
party shall be calculated as the arm’s length cost thereof plus (+) the gross profit
relative to the cost of a taxpayer.

Sale price = COGS + Gross profit margin of an unrelated parties

Gross profit Revenue - COGS

margin on cost =
COGS (excluding financial cost such as interest,
royalties)

The gross profit relative to the cost paid by selected independent comparable shall
be calculated as the value falling within the standard arm’s length range of the
ratio of the gross profit to the cost paid by independent comparable which are
selected for adaptation to principles herein stipulated.

The transfer selling price (or net sales) which is adjusted for independent
comparable shall be the price for taxation, declaration of costs and determination
of corporate income tax obligations which must be paid by a taxpayer.
This method is usually applied to: (i) Transactions in the phase of assembly and
processing of products for sale to related parties; (ii) Transactions between related
parties in order to perform a joint venture contract or business co-operation
contract for production, assembly, manufacturing or processing of products or to
implement agreements for supply of production input and off-take of output
product; (iii) Transactions of provision of services to related parties.

Example 1.8: Company V (VN) is a subsidiary of Company J (Japan), responsible

for processing of Company J’s shoes. Company V’s data in 2015 is as below:

- Revenue (processing fee): VND15 billion

- COGS: VND13 million

41
- Selling and administration expenses: VND1.8 billion

- Company Y having similar operation to Company V with data as below:

- Processing fee = (COGS+Selling & admin expenses) * 1.07%

Required: Determine revenue of Company V

(iii) Comparing net profit ratios
The margin ratio of net profit before interest and corporate income tax to sales
revenue, costs or assets of a taxpayer engaged in the transfer pricing shall be
adjusted for the margin ratio of net profit before interest to sales revenue, costs or
assets of selected independent comparable, based on which tax obligations of the
taxpayer is adjusted or determined.

Net profit excludes difference in sales revenue and costs of financial operations.

The net profit margin to be selected shall be the value falling within the standard
arm’s length range of the net profit margin of independent comparable which are
selected for adjustment to or identification of taxable income and tax obligations
of a taxpayer in conformity with the principles herein stipulated.

Margin indicators of the net profit before interest and corporate income tax shall
be computed in accordance with provisions laid down in legislation on
accounting, tax administration and corporate income tax.

This method is considered as extension method of Resale price and Cost plus
profit method, therefore usually applied to cases similar to those of these two
methods.
1.8.4.3. Profit split
Application principles: This method is defined as the method for allocating total
profit generated from related-party transactions in order to determine profit of a
taxpayer. This method shall be applied to total actual and potential profit of
related-party transactions which are calculated by using financial data obtained
on the basis of proper and valid evidencing documents; value and profit in the

42
transfer pricing must be determined by using the same accounting method in the
full time length of application of this method.

Calculation method: Profit to allocated = Total actual profit + potential profit

Total actual profit: Determine by using the methods to compare the profit ratios

Potential profit: Allocated using specific factors such as revenue, expenses, assets
or manpower of the related parties and in line with arms' length principle

Through lack of information or data for apportionment of the adjusted profit

stipulated above, such apportionment can be based on one or certain factors such
as sales, costs, assets or employees of related parties engaged in the transfer
pricing and conform to the arm's length principle.

The method for allocation of profits between related parties shall be applied to
either cases where a taxpayer engages in the transfer pricing which is of general,
specific, sole or closed nature in a corporation, or develops new products, uses
proprietary technologies, takes part in the value chain exclusively transacted
within a corporation or the process of developing, increasing, maintaining,
protecting and utilizing proprietary intangible assets in the absence of bases for
determination of prices of transactions between related parties or transactions
closely connected or simultaneously performed, or complicated financial
transactions that relate to multiple financial markets across the globe; or a
taxpayer engages in the digital transfer pricing in the absence of bases for
determination of prices of transactions between related parties or participates in
creation of added value from synergies within a corporation, or performs its
functions to exercise autonomy over the entire production and business process
1.8.4.4. Data for comparison
 Publicly available sources:
- Database of enterprises publicly disclosed on the stock market;
- Data from accredited independent professionals (auditor, company
registration, etc).
 Government sources:
- Database owned by tax authorities;
43
 - Information made available to tax authorities by ministries or sectoral
departments;
- Information or data exchanged with counterparty tax authorities.
 Data/documents of unauthenticated sources may only be used as reference.

1.8.5. TAX ADMINNISTRATION

1.8.5.1. Compliance requirement
Decree 132’s contemporaneous documentation requirement follows OECD
guidelines, with taxpayers required to prepare and arrange (i) a Master File
containing standardized information for all members of a multinational group; (ii)
Local File for the local taxpayer, and (iii) Country by Country Reporting (“CbC
Reporting”) for TP lodgment. The CbC reporting is required where consolidated
global revenue of VND18,000 billion and more in a tax year.

TP Documentation is required to be prepared in Vietnamese prior to lodgment of

annual Corporate Income Tax returns. In addition, documentation may be
required to be presented within 15 days upon a specific TP audit.

Timeline for preparation and submission of TP documentation package:

TP documentation package to be prepared before the annual CIT finalization

deadline and maintained and submitted in accordance with the tax authorities’
request to provide information. In the event of a tax audit, the TP documentation
package is required to be submitted within 15 working days from receiving the
request to provide information.

Deadline for submission of TP documentation package is no longer than 30

working days from receiving the written request during the Consolation Procedure
prior to the audit. If an acceptable reason is provided, the submission deadline
may be extended only once with an additional 15 working days upon the expiry
date.
1.8.5.2. Rights of tax authority in TP management
Tax authorities shall have authority to set the level of price, profit margin or profit
allocation rate which is used for tax assessment or setting thresholds for taxable

44
revenue or corporate income tax amount payable with respect to taxpayers
engaged in the transfer pricing within a specified tax period, based on information,
data and analysis of assessment of the tax authority in the cases where taxpayers
commit violation against transfer pricing legislation as follows:
- Taxpayers do not provide or insufficiently provide information or do not
submit the Form No.01 given in the Appendix of Decree 132.
- Taxpayers provide insufficient information required in the transfer pricing
documentation package referred to in the Form No. 02, 03 given in the
Appendix to Decree 132 or do not present the transfer pricing
documentation package and data, evidencing documents and materials used
as the basis for comparability analysis and redetermination of prices in the
transfer pricing documentation package at the tax authority’s request within
the permitted deadline as stipulated by law.
- Taxpayers use inaccurate or unreliable information about independent
information to carry out comparability analysis, declare and determine the
transfer price, or rely on materials, data and evidencing documents which
are illegitimate, invalid or are of unclear origin to determine the level of
price, profit margin or profit allocation rate applicable to related-party
transactions;
- Taxpayers commits any violation against transfer pricing regulations.
1.9. TAX PENALTIES AND FINES

1.9.1. PRIORITY ORDER FOR PAYMENT OF TAXES AND FINES

When a payment of taxes, fines and late payment interest is made by a tax payer
in the case that the tax payer has a number of unpaid taxes, fines and late payment
interest, the priority order is as follows:

First, tax debts, fines and late payment interest which are in the cases of applying
tax debt enforcement measures under the Law on Tax Administration (i.e.: Over
the due date of more than 90 days and other specific cases under Article 124 of
the Law on Tax Administration).

45
Second, tax debts, fines, late payment interest which are not in the cases of
applying tax debt enforcement measures under the Law on Tax Administration.

Third, tax debts, fines, late payment interest arising in the current tax period.

1.9.2. TAX PENALTIES AND FINES

1.9.2.1. Conduct constituting a breach of the tax law
- Breach of tax procedures (registration, incorrect/missing tax declaration items,
late declarations, late provisions of requested documents, etc.).

- Late payment of tax.

- False declaration resulting in a reduction of the amount of tax payable or an

increase in refundable amount of tax.

- Tax evasion or tax frauds.

1.9.2.2. Principles of and procedures for dealing with breaches of the law on
tax
All detected breaches of the law on tax shall be dealt with justly, thoroughly and
promptly. All consequences caused by a breach of the law on tax shall be rectified
in accordance with law.

Any organization or individual shall only be subject to an administrative penalty

in relation to tax when it, he or she commits a breach of the law on tax.

A breach of the law on tax shall be dealt with by the competent person.

A breach of the law on tax shall only be penalized once.

Where a number of persons jointly commit a breach of the law on tax, each
offender shall be penalized.

A person who commits several breaches of the law on tax shall be penalized for
each breach.

Penalties for breaches of the law on tax shall be based on the nature and
seriousness of the offence, and any attenuating or aggravating circumstances, in
order to issue an appropriate decision on the form of penalty.
46
The order and procedures for penalties for breaches of the law on tax shall be
carried out in accordance with regulations of the Government.

Where a breach of the law on tax is serious enough to warrant prosecution for
criminal liability, the criminal law and the law on criminal proceedings shall
apply.
1.9.2.3. Penalties applicable to late payment of tax
Any taxpayer making a late payment of tax in comparison with the stipulated
period or extended period for tax payment, or the deadline stated in a notice or
decision of the tax management body on penalty, shall be liable to pay in full the
amount of tax payable plus a fine of 0.05% of the amount of tax for each day of
late payment.

- If tax debt is incurred from 01 January 2015, late payment interest is charged at
0.05% per day from the deadline for paying tax.

- If tax debt is owned before 01 January 2015 but is not paid after 01 January
2015, late payment interest shall be charged in accordance with the prevailing
Law on Tax administration for the days before 01 January 2015 (i.e. 0.05% to the
90th day and 0.07% from 91th day onwards), and in accordance with the 2014
Amended Law on Tax Administration for the days after 01 January 2015 (i.e.
0.05% for each day of late tax payment).

- In case tax payer under-declared taxes for tax periods before 1 January 2015 but
self-identified and paid additionally (or such under-declaration is identified by the
tax authority in their tax audit), the applicable rate is 0.05% for each day of late
tax payment.

- Since 1 July 2016, under the Law No 106/2016/QH13 on amending and

supplementing some articles of the Law on VAT, the Law on Excise duty and the
Law on Tax Administration, late payment interest is charged at 0.03% per day
from the deadline for paying tax.

Any taxpayer conducting a false declaration resulting in a reduction of the amount

of tax payable, or failing to conduct a tax declaration but voluntarily rectifying
47
consequences by way of paying in full the amount of tax payable before the
competent body detects the breach, shall be subject to a penalty for late payment
of tax in accordance with this article but shall not be subject to a penalty for a
breach of tax procedures, shortfall of tax or tax evasion.

In the case of import or export goods, a taxpayer detecting errors which affect the
amount of duty payable and paying on its own initiative the shortfall of duty to
the State budget within 60 days from the date of registration of a customs
declaration but before the customs office carries out a check or inspection, shall
be subject to a penalty for late payment of tax in accordance with this regulation
but shall not be subject to a penalty for a breach of tax procedures, shortfall of tax
or tax evasion.

A taxpayer shall personally determine the fine for late payment on the basis of the
amount of tax paid late, the number of days of late payment and the rate of 0.05%
of the amount of tax for each day of late payment. Where a taxpayer fails to
personally determine or determines falsely an amount of fine for late payment, the
tax management body shall determine an amount of fine for late payment and
notify it to the taxpayer.

Where a taxpayer fails to pay the amount of tax and a fine for late payment within
thirty days after expiry of the time-limit for tax payment, the tax management
body shall notify the taxpayer of the outstanding amount of tax and the fine for
late payment.
1.9.2.4. Penalties applicable to false declarations leading to a deficit in amount
of tax payable or an excess in amount of tax refunded
Any taxpayer who has reflected fully and truthfully economic activities giving
rise to tax obligations in the accounting books, invoices and source documents but
has made a false declaration resulting in a reduction of the amount of tax payable
or an increase in the amount of tax refundable, or has made a false declaration
resulting in a reduction of the amount of tax payable or an increase in the amount
of tax refundable, must pay in full the shortfall or return the excess amount of tax
and shall be subject to a fine of 20% on the shortfall of tax or excess amount of

48
tax refunded plus a fine for late payment on the shortfall of tax or excess amount
of tax refunded.
1.9.2.5. Penalties applicable to acts of tax evasion or tax fraud
Any taxpayer committing any of the following acts of tax evasion or tax fraud
shall pay in full the amount of tax payable pursuant to the regulations and shall be
fined an amount of up to three times the amount of the tax evaded. The tax evasion
and fraud are:

- Failing to submit a tax registration; failing to submit a tax declaration; failing to

submit a tax declaration within ninety days after the deadline for submission or
from the expiry date of the extended time-limit for submission.

- Failing to record revenue relating to determination of an amount of tax payable

in accounting books.

- Failing to issue an invoice upon selling goods or services, or recording a value

lower than the actual value of goods or services sold.

- Using unlawful invoices or source documents for accounting of input raw

materials or goods in activities giving rise tax obligations, resulting in a reduction
of the amount of tax payable or an increase in the amount of tax creditable or
refundable.

- Using unlawful source documents or other documents to determine falsely an

amount of tax payable or refundable.

- Conducting an incorrect declaration of actual import or export goods but failing

to make an additional declaration to the tax declaration file within sixty (60) days
from the date of registration of the customs declaration.

- Intentionally failing to conduct a declaration or conducting a false declaration of

duty payable on import or export goods.

- Colluding with a goods consigner to evade duty payable on import goods.

- Using duty-free goods for an improper purpose without declaration of duty.

49
50
CHAPTER REVIEW

SUMMARY
Concept and Revenue
characteristics
1. Overall Income distribution
functions & Objectives
purpose of
Tax classification
taxations Macro economic adjusment
Basic elements of a
tax law

Equity

Efficiency

2. Characteristics
of a good tax Transparency
system
Stability

Adaptibility

Benefit-received

3. Principles Ability-to-pay
of taxation
Origin vs Destination

Source vs Residence

51
 4. Tax avoidance and evasion
5. The overall structure of Vietnamese tax systyem
6. The system of regsistration, making returns,
payment of tax liabilities
7. Procedures relating to
enquiries, appeals and
disputes
8. Transfer pricing
9. Penalties and fines
Tax registration
Submission of information and claims
Making of returns and payment
Legislation
Scope of application
Definition of related parties
TP methods
TP Administration
Penalties for late payment
Penalties related to procedure
Penalties for lack of declaration
Penalties for fraud/evasion
52
1) Tax is a part of income which is legally stipulated and compulsorily paid by
citizens to the government in order to finance the public expenditures. Its
prominent characteristics are compulsory and indirectly compensational.

2) There are 3 objectives of imposing taxes: (i) State budget revenue; (ii) To
regulate the economic activities, the economic cycle, control inflation, and
protect domestic production, etc., and (iii) To reduce inequity in economic
distribution.

3) There are many ways to classify taxes. Depending on each criterion, taxes can
be classified differently. The most frequently used taxes are: direct and
indirect taxes, income, property and consumption taxes, progressive,
regressive and proportional taxes, and federal and local taxes.

4) There are five main characteristics of a good tax system. They are equity,
efficiency, stability, adaptability and transparency. It is ideal for a tax system
to have all these characteristics but normally in order to meet a certain
requirement; one of the rest has to be sacrificed.

5) Normally, there are seven elements to constitute a tax law including name,
taxpayer, tax base, tax rate, incentives, procedures and punishment of which
tax rate is the most important one. To decide on the tax rate is a difficult issue
of any government because high rate are not always accompanied with high
revenue from taxes and tax rate is also a key tool to redistribute income as
well as to regulate economic activities. In tax laws of countries all over the
world, we can see many kinds of tax rates such as specific rate, ad valorem
rate, proportional rate and progressive rate.

6) Some principles are used to impose taxes among which two principles (the
ability-to-pay and benefit principles) are used to construct almost all taxes and
the others are used to levy certain types of taxes (e.g. the origin and destination
principles are used for consumption taxes while the source and residence
principles are used for property and income taxes).

53
7) By the end of the 2019, Vietnam’s tax system has had the presence of 9 taxes,
among which some taxes are considered as necessary for the performance of
a market-oriented economy, such as CIT, PIT, CIT and excise duty.

8) Tax payers are responsible for regsistration, making returns, payment of tax
liabilities. After having registered, tax payers are given a TIN (Tax Identified
Number). For enterprises, TIN is also their EIN (Enterprise Identified
Number). Tax payer must file the tax return by the due dates which are
different depending on the tax period basis of declaration: Monthly, quarterly,
annually or each time of payment.

9) When enquiries, appeals and disputes appear, tax payers can send their
enquiries or requirements to tax office in written papers, through emails or
other electronic devices. The tax office in charge is responsible for solving
their requirements according to the procedures stipulated in the Law on Tax
Administration.

10) In case of having transactions with related parties, the tax payers have to
declare and apply transfer pricing methods as stipulated by law in order to
compute their tax liabilities under arm’s length price principle.

11) In case of breaking the tax law, tax payers will be fined. Depending on the
types of violation, penalties will be imposed differently.

KEY TERMS

Supply definitions for the following terms:

Ability-to-pay Fee Specific rate

Accelerated depreciation Levy Stability
Adaptability Local tax Tax base
Ad- valorem rate Indirect tax Tax credit
Agricultural land use tax Income tax Tax evasion
Benefit Personal income tax Tax fraud
Compliance cost Procedure Tax incentive
Consumption tax Property tax Taxpayer
54
 Corporate income tax Progressive rate/tax Tax exemption
Declare Proportional rate/tax Tax holiday
Destination Public goods Tax punishment
Direct tax Regressive rate/tax Tax reduction
Efficiency Residence Tax refund
Equity Sales tax Tax return
Excise duty Severance tax Transfer pricing
Federal tax Source Value added tax

ECONOMIC CONCEPTS

1. What is tax?

2. What is the protection role of tax?

3. List the 5 standards that a modern tax system should follow.

4. How can taxes be classified?

5. List the principles of taxation.

DISCUSSION QUESTIONS

1. Point out the similarities and differences between tax and fee.
2. Why do we have taxes?
3. In countries such as Gulf countries where natural resources are abundant, does
tax act as the most important source of the state budget?

4. Why, in the context of integration, the role of tax as a tool to protect domestic
production become lessened?
5. Give examples of tax types. Discuss the significance of tax classification.

6. What are the standards of a modern tax system? Why sometimes in order to
achieve the equity we have to sacrifice the efficiency?
7. What is the most important element of a tax law?

8. Give examples of each type of tax rate.

55
9. State the types of tax incentives and discuss the advantages and disadvantages
of each type.
10. Discuss the taxation principles and give examples.

CHAPTER 2
PERSONAL INCOME TAX

LEARNING OBJECTIVES

Upon completion of this chapter you should be able to:

♦ Understanding the the nature of personal income tax (PIT).

♦ Define the contents of Vietnamese PIT law including:

- Who are subject to PIT?

- What is taxable income, exempt income and assessable income?
- What is tax rate?
- How to calculate the tax liabilities for resident and non-resident
taxpayers?
- How to make the PIT declaration and payment?

♦ How to use the exemption and reliefs for deferring and minimizing PIT
liabilities?

2.1. OVERVIEW OF PERSONAL INCOME TAX

The personal income tax or individual income tax is, as its name implies, a direct
tax levied on income of a person, not on transactions or things. The charging
provision in the income tax law therefore should impose on person. The tax is not
imposed on all persons; rather, it is imposed only on those who have taxable
income for the relevant tax period. A person means an individual, a “physical
person” or “natural person”. In general, a person liable to PIT has to by himself

56
compute his tax liability, file tax return and pay tax, if any, accordingly on a year
basis.

The charging provision set out four central concepts in income tax. Therefore, it
is necessary to consider four central concepts of the personal income tax:
taxpayer, tax period, taxable income, and amount of tax payable13.

Taxpayer is the person liable for tax, namely, any person who has taxable income
for the tax period.

Tax period: The year/period during which one's taxable income is considered.
This means that the taxable income of any person must be calculated separately
for each tax period. Generally, the tax period for the income tax is a specific period
of 12 months, commonly the calendar year or financial year of the relevant
country. The periodic nature of the income tax means that it is necessary to
provide accounting rules for allocating income and expenses to particular tax
periods for the purpose of calculating a person's taxable income for the period.

Assessable income: Assessable income, also sometimes called "gross income”, is

the total of amounts derived by the person during the period that are subject to
tax. The assessable income of a person, therefore, will not include the amounts
that are exempt from tax. It is commonly divided into four broad categories:
employment, business, and investment income, and miscellaneous receipts.

Taxable income: The concept of taxable income defines the tax base. Taxable
income is a net concept determined by reference to the tax period. All income tax
systems, whether global or schedular, generally seek to impose taxation on a net
amount because this amount properly reflects a person’s increase in economic
capacity for the tax period. The taxable income of a person for a tax period is
therefore commonly defined as the assessable income of the person for the period
less the total deductions allowed to the person for the period (that are allowable
in that tax period).

13
Victor Thuronyi: Tax Law Design and Drafting, volume 2; IMF, 1998
57
Consequently, there are three key elements in the definition of the tax base: first,
the inclusion of amounts in assessable income (gross income); second, the
identification of amounts that are exempt income; and third, the allowance of
amounts as deductions.

Tax payable: The charging provision should provide for the calculation of the
amount of tax payable. In the ordinary case, this involves applying the relevant
tax rates to the taxable income of the taxpayer and then subtracting any tax offsets
that may be available to the taxpayer. Tax offsets are reductions in the amount of
tax otherwise payable. They are allowed primarily to reflect tax already paid
through a special collection regime or as a concession to achieve certain social or
economic objectives.

When we mention the characteristics of personal income tax, we usually picture

it in two angles: direct and progressive. These characteristics are described briefly
here under:

First, personal income tax is a direct tax. It is borne entirely by the entity that pays
it, and cannot be passed on to another entity. Taxable person who is subject to PIT
law must bear and pay tax by him-self and cannot pass to others. Unlike the
consumption taxes, personal income tax is based on “ability-to-pay” principle but
(being very obvious to the taxpayer) they sometimes work as a disincentive to
work harder and earn more because that would mean paying more tax.

Second, personal income tax is progressive. Personal income tax aims at ensuring
social-equity, both in horizontal and vertical equity. In addition, PIT bases on
“ability-to-pay” principle. Under this principle, tax burdens should be related not
to what taxpayers receive from government, but rather to their ability to bear the
tax burden - that is, to tolerate a sacrifice. Another plausible idea is that paying a
dollar is a lesser sacrifice for a well-to-do person than for a poor person; an equal
sacrifice requires higher tax payments from the well-to-do person. Moreover, the
idea of a progressive income tax has garnered support from economists and
political scientists of many different ideologies, from Adam Smith in The Wealth
of Nations to Karl Marx in The Communist Manifesto. In most western European
58
countries and the United States, advocates of progressive taxation tend to be found
among the majority of economists and social scientists who realize that
completely proportional taxation is not even a possibility. In the U.S., the vast
majority of economists (81%) support progressive taxation. Thus, designing the
PIT has high progressive.

“The key concept of progressive income taxation is that income is considered

in different steps, where income earned between certain points will be taxed
at a certain rate. This is done to avoid creating incentive traps, where earning
more might actually decrease your income (e.g., if income up to 10,000 is
untaxed and after 10,001 you pay 10%, you will receive 9,000.90 if you
make 10,001 and 10,000 if you make 10,000). The size and severity of the
different steps varies a great deal and the differences inside the term
‘progressive’ can be enormous. In this sense, it is not surprising that most
economists support progressive taxation to some degree - the primary
differences come when looking at the maximum income taxes that the
highest earners might have to pay”14.

2.2. THE SCOPE OF PERSONAL INCOME TAX

Personal income tax (PIT) or individual income tax was first imposed in Vietnam
in 1990 under the name of Income tax on high income earners. It has been revised
for several times from 1990 to 2008. The threshold increased from VND500.000
per month for Vietnamese people (1990) to VND5 million per month (2004) and
from VND2.4 million per month (1990) for foreigner to VND 8 million (2004).
In company with the changes in threshold, tax rate has been changed with
decreasing the highest margin tax rate from 60% to 40% and the cut of additional
tax rate (25%).

In the context of international integration and significant changes in Vietnamese

socio-economic conditions, a radical and comprehensive reform is needed in the
tax system in general and the personal income tax in particular, in order to meet
the requirements of budget revenues, the long term stability of the tax system and

14
http://en.wikipedia.org/wiki/Progressive tax
59
contribute to achievements of the strategic targets of socio-economic development
promulgated by the Party and State.

Law on Personal Income Tax or the Act of Personal Income Tax was passed by
the National Assembly of Vietnam in May 2007 and effective from 1 January
2009 (Law on PIT 2007). This law then was amended and supplemented in
December 2012 by the National Assembly of Vietnam under the name “Law No
26/2012/QH13 on the amendment and supplement of some articles of Law on
PIT” which takes effect from 1 July 2013 and Law No.71/2014/QH 13 dated
November 26, 2014 on amending, adding some articles of tax laws, with effect
from January 01, 2015. The Standing Committee of the Vietnam National
Assembly issued Resolution No. 954/2020/UBTVQH14 on 2 June 2020 which
officially approves the increase of allowable deductions for personal income tax.
The Resolution will be effective from 1 July 2020 and will be applicable for
personal income tax declarations for 2020.

Regulations of PIT are as follows:

2.2.1. TAXPAYERS
Taxpayers are residents or non-residents and earn taxable incomes according to
regulations of tax law.

A resident individual means a person that meets any of the following conditions:

(i) Being present in Vietnam for 183 days or more within a calendar year or
within 12 consecutive months from the first date of arrival in Vietnam;

(ii) Having a permanent residence in Vietnam, including the registered

permanent residence or rented house in Vietnam under the rent contract for
the definite period.

Persons who fail to meet these conditions are treated as a non- resident.

Example 2.1. Mr. A is a foreigner who first came to Vietnam on April 19, 2018.
In 2018 up to December 31, Mr. A has stayed in Vietnam for 130 days. In 2019
up to April 19, Mr. A has stayed in Vietnam for 65 days.

60
Required: Determine the residence status of Mr. A for each of the years of
assessment.

Solution: In the first calendar year of 2018, Mr.A is physically present in Viet
Nam for 130 days, thus, he doesn’t meet conditions of resident status. However,
in the 12 consecutive months from the first date of arrival in Vietnam (From April
19, 2008 to April 19, 2019), he has stayed in Vietnam for total 195 days (130 days
+ 65 days). Thus, he is resident in Viet Nam in the tax year.

If the person has no regular residence in Vietnam according to this regulations but
actually is present in Vietnam for fewer than 183 days in the tax year, and fails to
prove his or her residence in any country, that person shall be considered a
resident of Vietnam.

The residency in another country shall be proved by the Certificate of residence.

If the person belongs to a country or territory that has signed tax agreements with
Vietnam and does not issue the Certificate of residence, that person shall present
a photocopy of the passport to prove the period of residence.

Types of taxpayers

Taxpayers in some specific cases are identified as follows:

- For the person who earns incomes from business:

+ If the person has the Certificate of Business registration: the taxpayer is the
person whose name is registered in the Certificate of Business registration or the
persons whose names are registered in the Certificate of Business registration (If
multiple people are registered in the Certificate of Business registration and
participate in the business).

+ If the person or household does business without the Certificate of Business

registration (or practice certificate), the taxpayer is the person doing business.

+ When leasing a house, the right to use land, water surface, and other property
without business registration, the taxpayer is the person or all the owners who
own the house, the right to use land, water surface and other property
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- For the person who earns incomes from transfer the assets:

When transferring real estate under a co-ownership; transfers the ownership, the
right to use protected intelectual works according to the Law on Intellectual
property and the Law on Technology under co-author, taxpayers are the co-
owners or co-author that earn incomes from such transfer.

- A sole trader has an annual revenue of VND 100 million or less is non- taxable
person.

2.2.2. THE SCOPE OF TAX LIABILITIES TO RESIDENT AND NON-

RESIDENT TAXPAYERS
Individuals living in Vietnam (resident taxpayers) and individuals who do not live
in Vietnam but receive income from Vietnam (non-resident taxpayers) are liable
to pay income tax.

Determination of taxable incomes earned by taxpayers:

- Taxable incomes earned by residents are the incomes earned within or

outside Vietnam’s territory, regardless of locations or payment and receipt.
- Taxable incomes earned by non-residents are the incomes earned within
Vietnam’s territory, regardless of the location of payment and receipt.

2.2.3. BASIS OF ASSESSMENT

2.2.3.1. For residents individual
a) Annual declaration: applicable to incomes from wages, remunerations

The tax period is the calendar year if the person is present in Vietnam for 183 days
or more in the calendar year.

If the person has been present in Vietnam for fewer than 183 days in a calendar
year, but has been in Vietnam for 183 days for 12 consecutive months from the
date of arrival, the first tax period is the 12 consecutive months from the date of
arrival. In the second year, the tax period is the calendar year.

Example 2.2: Using the information given in the example 2.1. Determine the tax
period of Mr.A in the relevant years.
62
Solution: The first tax period of Mr. A begins on April 20, 2018 and ends on April
19, 2019 (12 consecutive months). The second tax period begins on January 01,
2019 and ends on December 31, 2019 ( calendar year).

b) Declaring tax when an income is earned (Transaction): applicable to incomes

from capital investment, incomes from capital transfer, incomes from real estate
transfer, incomes from winning prizes, incomes from royalties, incomes from
franchising, incomes from inheritance, and incomes from gifts.

c) Annual or Occasional declaration: Applicable to business income:

+ Annual declaration: Applicable to income from trading in goods/services in any

field and sector prescribed by law.

+ Occasional declaration: Applicable to income of persons who do casual

business and do not have permanent business premises; persons who engage in
business cooperation with other organizations in a way that their personal
revenues can be determined.
2.2.3.2. For non-residents individual
Non-residents shall declare tax whenever an income is earned (occasional
declaration).

2.3. INCOMES SUBJECT TO PERSONAL INCOME TAX

2.3.1. TYPES OF INCOMES SUBJECT TO PERSONAL INCOME TAX
The income is subject to PIT named assessable income. There are 10 types of
assessable income subject to personal income tax including the following
incomes, excluding those are exempt as stipulated by law:

(1) Business income

Incomes from business include:

+ Incomes from manufacturing, sale of goods or services;

+ Income from freelance works of individuals having licenses or practicing

certificates as prescribed by law.

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+ Income from manufacturing and business activities in agriculture, forestry, salt
mining …which don’t satisfy all condition for tax exemption.

(2) Employment Income

Employment income is incomes receivable by employees from employers in

monetary or non-monetary forms, comprising of:

- Monetary income is all remunerations an employee receives on the basis of his

employment for his work. The principal forms of wages are “wages in cash”,
allowance, overtime payment, commissions, annual bonus, and anything else an
employer pays in cash to an employee which is deemed to be remuneration for his
work.

- Non - monetary incomes are also other forms of wages as well, such as benefit-
in-kind, claims and (free) reimbursements and facilities. Benefit-in-kind is income
that is not paid in money, but in some other ways, for instance, a house, a holiday,
a car, meals or tickets for public transport.

- Incomes from wages and remunerations (wages) are incomes paid to workers
from employers, including:

+ Wages, remunerations, and the other amounts paid as wages or remunerations

in cash or not in cash.

+ Allowances and benefits.

+ Remunerations in the forms of agent commission, brokerage commission,

payments for participation in science and technology researches, payments for
participation in projects and schemes, royalties according to legislation on
royalties, payments for teaching, payments for participation in artistic
performance, sports, payments for advertising, payments for other services, and
other remunerations.

+ Payments for participation in business associations, Boards of Directors,

Control Boards, project management boards, management councils, professional
associations, and other organizations.
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+ Rewards in cash or not in cash in any shape or form, including rewards in the
form of securities.

+ Other benefits in cash or not in cash apart from wages paid to the taxpayer by
the employer in any shape or form.

♦ Special-treatment income of benefit- in-kind

(i) Housing allowances:

- Allowance in cash: fully taxable.

- Allowance in kind (paid by employer under employer name): taxable income is

capped at the lower of actual housing allowance and 15% total other taxable
incomes. Housing provided free of charge by the employer to the employee in
industrial zones, economic zones, difficult/especially difficult socio-economic
areas.

Example 2.3. Mrs. Hanah is resident in Vietnam and is working in Vilgo

Company. In 2019, she has a gross salary of VND1.200 million and is provided a
house with monthly rental of VDN20 million paid by her employer.

Required: Calculate Mrs. Hanah’s taxable income in the tax year 2019.

Solution:

VND million

Mrs. Hanah’s gross salary 1.200

15% of total other taxable income: 15% x 1.200 180

Housing allowances: VND20 million X 12 months = 240 restricted to 180

Total taxable income 1.380

(ii) Meal shift allowance: Exempt but subject to cap

 Allowance in kind (Employer pay directly to the vendor with proper

supporting): no cap.

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 Allowance in cash: capped at VND 730K/month (from 15/10/2016)

(iii) Per diem

 Allowance in cash: capped two times of policy for State civil (domestic:
VND200.000/day x 2 times = VND400.000/day)

(iv) Overtime/ Night-shift allowance:

 The first 100% payment as per the normal working hour is still taxable.

 Exempt for extra payment following overtime

Example 2.4. In the year assessment, Mr. Long has VND 300 million from his
employer for working overtime.

Required: Calculate the taxable income of Mr. Long in the year assessment, given
that his overtime was paid at 150% of his normal wage

Solution: Mr. Long’s taxable income is Mr. Long’s normal wage: 300/150% =
VND200 million. VND 100 million (300 million – 200 million) of excess amount
for overtime is exempt income.

The life insurance premiums, premiums of other optional insurance with accrual
of premiums, voluntary pension insurance premiums or contributions to the
voluntary pension fund paid on the worker’s behalf. If the employer buys optional
insurance without accrual of premiums for employees, such premiums shall not
be included in taxable income of employees

(v) The expenditure on shuttling employees is not included in taxable incomes

of employees according to rules and regulations of the employer.

(vi) Membership fees and other expenditure on services serving individuals

such as: healthcare, entertainments, sports, recreation, in particular: if the card
specifies the user or group of users, the fees are taxable income; if the card is
shared without specific users, the fees are not included in taxable incomes

(3) Income from capital investment: These incomes are derived from activities
of providing loans to business or manufacturing establishments, or buying
66
 shares or contributing capital for business or manufacture in the following
forms:

+ Interest receivable from loans provided to organizations, enterprises, business

households, groups of business individuals or individuals under a loan contract
(except for interest receivable from deposits with banks and credit institutions).

+ Income and dividends receivable from share capital contribution.

+ Income receivable from capital contribution to liability limited companies,

partnerships, co-operatives, joint ventures, business co-operation contracts and
other forms of business as stipulated in the Law on Enterprises and the Law on
Co-Operatives.

+ Increased portion of the value of the capital contribution share receivable upon
dissolution of an enterprise, conversion of operational model, merger or
consolidation of an enterprise or upon withdrawal of capital.

+ Income receivable from interest on bonds, debentures and other valuable papers
issued by domestic organizations (including foreign organizations permitted to
establish and operate in Vietnam) excluding income from interest on bonds issued
by the Government of Vietnam.

+ Income receivable from capital investments in other forms, including

investment capital contribution in kind, by reputation, by land use right, or by an
invention or discovery.

+ Income from shares paid in lieu of dividends.

(4) Income from capital transfer: Income from the transfer of capital that has
been contributed to economic organizations; transfer of securities; and others
includes:

+ Income from transfer of a capital contribution share in a limited liability

company, partnership, shareholding company, business co-operation contract, co-
operative or economic organization.

+ Income from transfer of securities comprising income from transfer of share

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certificates, bonds, fund certificates and other types of securities stipulated in the
Law on Securities.

+ Income from transfer of capital in other forms.

(5) Income from the transfer of immovable properties includes

+ Income from transfer of land use right and properties accompanied with land.
These properties include a residential house; infrastructure, buildings and
engineering works attached to the land and other assets attached to the land
comprising assets being agricultural, forestry and fishery products (such as
cultivated crops and reared animals).

+ Income from transfer of ownership or the right to use of resident houses;

+ Income from transfer of the right to lease the lands or water surfaces and other
immovable properties.

+ Other income from transfer of capital in other forms.

(6) Income from winning prizes, including: Lottery wins; prizes in all
promotional forms; betting; prizes in games, competitions and other prizes.

(7) Income from copyrights: Incomes from copyright are incomes from the
transfer of ownership, rights to use the subjects of intellectual property rights
according to the Law on Intellectual property, incomes from technology
transfers according to the Law on Technology transfers. In particular:

+ The subjects of intellectual property rights are specified in Article 3 of the Law
on Intellectual property and relevant guiding documents. For example: literary,
artistic, and scientific works; video recordings, sound recordings of broadcasted
programs, program-carrying satellite signals; inventions, industrial designs,
integrated circuit designs, business secrets, makes, trademarks, and geographical
indications and subjects of rights to plant varieties being propagating materials
and harvested materials.

+ Subjects of technology transfers according to Article 7 of the Law on

Technology transfers, including: transfer of technical know-hows; transfer of
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technological knowledge in the form of technological plans, technological
processes, technical solutions, formulae, specifications, drawings, technical
diagrams, computer programs, information; transfer of solutions for rationalizing
production and technological innovation and incomes from transfer of aforesaid
subjects of intellectual property rights and technology transfers include re-
transfer.

(8) Income from franchising

+ A commercial activity whereby a franchisor authorizes and requires a franchisee

to conduct on its own behalf the purchase and sale of goods or provision of
services in accordance with the conditions of the franchisor.

+ Income receivable by an individual from the franchise contracts mentioned

above, including sub-franchising in accordance with the law on franchising.

(9) Income from the inheritance of securities, capital in business organizations,

immovable properties and other properties of which their ownership or use
must be registered in accordance with laws, including:

- Inheritance of shares, call options on shares, bonds, treasury bills, fund

certificates, and other securities according to the Law on Securities; shares of the
person in the joint-stock company according to the Law on Enterprises.

- Inheritance of capital share in economic organizations and businesses

establishment such as: capital contribution to limited liability companies,
cooperatives, partnerships...

- Inheritance of real estate: such as rights to use land, rights to use land and
property thereon; ownership of houses... except for some exempt incomes from
the inherited real estate mentioned.

+ The ownership and use rights of other inherited assets must be registered with
state agencies.

(10) Income from gifts of securities, capital in business organizations,

immovable properties and other properties of which their ownership or use
69
 must be registered in accordance with laws. The regulations of taxable income
from gift and inheritance are similarly.

2.3.2. ALLOANCES, BENEFITS AND RECEIPTS NOT SUBJECT TO PIT

There are some allowances, subsidies and rewards which are not subject to PIT.
They are excluded when calculating assessable incomes from salaries or wages.
These include:

(a) Allowances and benefits

+ Monthly benefits, lump-sum benefits and allowances according to legislation

on incentives for contributors.
+ Monthly allowances and one-off allowances for the persons that participate in
the resistance movements, national defense, fulfillment of international tasks, and
discharged volunteers.
+ Allowances for national defense and security; subsidies for the armed forces.
+ Danger allowance.
+ Toxicity allowance.
+ Allowances for workers in disadvantaged areas.
+ Irregular allowances for difficulties, occupational accident benefits,
occupational illness benefits, one-off allowances for childbirth or adoption,
maternity leave benefits, post-maternity recovery benefits, benefits for reduction
in work ability, one-off allowance of retirement, monthly widow’s pension,
severance pay, redundancy pay, unemployment benefits, and other benefits
according to the Labor Code and the Law on Social insurance.
+ Benefits for beneficiaries of social security.
+ One-off allowance for the persons reassigned to the areas facing extreme
economic and social difficulties, lump-sum supports for officers working for
sovereignty over sea and islands as prescribed by law. One-off allowance for
moving allowances for foreigners that move and reside in Vietnam and
Vietnamese people that go to work abroad.
+ Benefits for medical workers in villages.
+ Occupational allowances.

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 (b) Rewards including:

+ Prize money associated with the titles awarded by the State, including the prize
money associated with honorary titles as prescribed by law.
+ Prize money associated with national prizes and international prizes recognized
by Vietnam.
+ Rewards for technical innovations and inventions recognized by competent
authorities.
+ Rewards for reporting violations of law to competent authorities.

2.3.3. EXEMPT INCOMES

Exemptions are prescribed under the Act of personal income tax for various
reasons, e.g., for economic development, for promotion of social policy, for
promotion of agriculture, education and culture, under the requirement of equity,
or as a consequence of tax convenience etc. There are 16 categories of income
that are not subject to income tax. Some remarkable exempt incomes are as
follows:

+ Income from the transfer or the inheritances or gifts of immovable properties

between spouses; parents and children; adopted parents and children; parents-in-
law and daughters or sons; paternal grandparents and grandchildren; maternal
grandparents and grandchildren; and between siblings;

+ Income from the transfer of residential houses, residential land use right and
properties accompanied with the residential land where the individuals have a
unique house or residential land use right;

+ Income being the value of land use right allocated by the State to the individuals;

+ Income of households or individuals directly engaged in production of

agriculture, forestry, and salt, aquaculture which have not been processed to other
products or just undergone the ordinary preliminary treatment;

+ Income from the conversion of agricultural land allocated by the State to

households and individuals for production purposes.

71
In addition, some other incomes (Including income in the form of interest on
savings in credit institutions and interest of life insurance policy; income from
overseas remittances; excess amount of salary for night-shift or overtime; pension,
scholarships, insurance indemnities of life insurance policies, non-life insurance
policies, compensations; income earned from charity funds and foreign aids for
charity, humanitarian) are also treated as a exempt income when defining one’s
chargeable income

2.4. THE COMPUTATION OF PERSONAL INCOME TAX LIABILITIES

The basis for calculating tax on incomes is the assessable income and tax rate.

Formula:

Personal income tax payable = Assessable income x Tax rate

There are ten categories of assessable income for income tax, each type of
assessable having its own rate. Moreover, tax rate varies between resident and
non-resident person.

2.4.1. FOR RESIDENT PERSONS

Resident taxpayers may receive income from different sources which are
classified into ten categories. The income from each of the categories is taxed at
a different rate. As a result, ten categories could be divided in to some groups as
follows:

(1) Income from business source

a. Assessable income

Assessable income of business is classified into four groups as follows:

(i) The sole trader who paying flat tax: The taxable business income is tax-
inclusive revenue (if taxable) from the sale of goods, payment for
processing, commission, provision of services earned in the tax period from
the business.

72
(ii) The individual paying tax for each time it is incurred, such as residents who
earn revenue outside Vietnam’s territory; persons who do casual business
and do not have permanent business premises: Assessable income is the tax-
inclusive revenue (if taxable) from the sale of goods, payment for
processing, commission, provision of services according to the contract,
including subsidies, surcharges, damages, fines for breach of contract (with
regard to revenue subject to PIT) earned by the business person, whether
such amounts have been collected or not.
(iii) The persons leasing property who earn revenue from the lease of their
property, including: housing, premises, stores, workshops, warehouses,
depots exclusive of accommodation services; lease of means of transport,
machinery and equipment without operators; lease of other property without
associated services: Assessable income is the tax-inclusive revenue (if
taxable) from rents periodically paid by the lessee under the lease contract
and other revenues including fines and damages received by the lessor under
the lease contract.
(iv) The person who directly signs the lottery, insurance, or multi-level
marketing agent contract is the person who directly signs an agent contract
with the lottery company, insurer, or multi-level marketing company to sell
goods/services at prices fixed by the company and receive commission
(hereinafter referred to as agent): Assessable income is determined as the
tax-inclusive revenue (if taxable) from the commission, bonuses in any
shape or form, subsidies, and other revenues received by the person from
the lottery company, insurer, or multi-level marketing company.

b. Tax rate

 Tax rate applicable to business income:

Taxable income Tax rate (%)

Distribution, supply of goods 0.5%

Service provision, construction exclusive of building materials 2%

73
 Asset lease, insurance brokerage, lottery brokerage, multi-level 5%
marketing brokerage

Manufacturing, transport, services associated with goods, 1.5%

construction inclusive of building materials

Other business activities 1%

c. Timing for tax liability

The time for determining the taxable income for the business income is the date
on which the individuals receive the income or when the invoices are issued for
provision of goods and services.

(2) Employment income

a. Assessable income

Assessable income of salary and wages is a part of taxable income of taxpayers

after being reduced by the amount of the family deduction; contributions of
compulsory or voluntary insurance and charity and humanitarian deduction. This
is illustrated by the following formula:

Compulsory Contributions
Assessable Taxable Family or voluntary to charity and
= - - -
Income income deduction insurance humanitarian
premiums purposes

 Taxable income:

Taxable income is total income receivable by employees from employers in

monetary or non-monetary forms, determined by regulations of scope of income
tax mentioned above. It is considered of allowance, subsidies not subject to
income tax as well as exempt income.

 Family deduction

The family deduction means the allowable sum to be deducted from the assessable
income prior to assessment of tax in respect of the resident taxpayer’s business

74
incomes or incomes from salary or wage. Family deduction includes two portions:
self deduction and dependent deduction.

 Self deduction: VND11million per month (VND132 million per annum).

 Dependent deduction: Each dependent is deducted VND4,4 million per

month (VND52,8 million per annum).

There are two principles for dependent deduction:

(i) Only taxpayer who has registered and has been given a tax identified number
(TIN) are qualified for dependent deduction.

(ii) Each dependent is assessed once for one taxpayer. If there are two or more
taxpayers having right to deduction of a dependent, taxpayers have to discuss
and come to an agreement on who is entitled to deduction. Family deduction
is merely applicable to tax registered persons.

Dependents are persons that taxpayers have obligations to feed or support,

including:

(i) Children under 18 years old; children being handicapped or incapable of

working;

(ii) Children of 18 years old or more studying in universities, colleges, high

schools or technical and vocational schools and having no income or an
average monthly income of VND1.000.000or less from all income sources;

(iii) Other persons treated as taxpayers’ dependent s are specified as follows:

- Other dependents include: spouses, parents, parents-in-law, blood

brothers, blood sisters, grandparents; blood uncles and aunts; blood
siblings; blood nephews and nieces.

- Persons of the working age must fully satisfy the following conditions to
be treated as dependents:

+ Being disabled and incapable of working;

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 + Earning no income or an average monthly income of VND1.000.000
or less from all income sources.

- Persons beyond the working age and earning no income or an average

monthly income of VND1.000.000 or less from all income sources will be
treated as dependents.

Dependents must also satisfy the condition that they are helpless and directly
nurtured by taxpayers.

Example 2.5: Mrs. Nam Dao is employed by Tuber Company as a director of

marketing. Nam Dao is married with 2 children. Her daughter is 23 years old
studying master at British University Vietnam, her son is 12 years old. She also
lives with her mother who reached 55 three years ago and now looks after her
children and has no income.

Required: Calculate the family deduction of Mrs. Nam Dao for the tax year
assessment.

Solution:

In the tax year, Nam Dao could claim the family deduction as follows:

VND million

- Self deduction 132

- Dependent deduction:

+ First daughter: no deduction

+ Son: 4,4 x 12 52,8

+ Mother: 4,4 x 12 52,8

Total family deduction 237,6

 Compulsory or voluntary insurance premiums

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Compulsory insurance includes: Social insurance, health care insurance,
unemployment insurance, insurance of occupational responsibility under the Law
on Social insurance and the Law on Health care insurance of Vietnam.

Deductible voluntary insurance is an amount contributed to voluntary retirement

fund premium or bought voluntary retirement insurance. It is restricted to
VND1.000.000 per month.

 Deduction for contributions for charity and humanitarian purposes

The contributions for charity and humanitarian purposes are deducted from the
income prior to assessment of tax for the resident taxpayer’s business income and
income from salary and wage, including:

- Contributions made to organizations and foundations which provide money for

children with special difficult situations, handicapped persons, and helpless
elders; the organisation established and operated in accordance with the
relevant Government's regulation.

- The contributions to charitable, humanitarian and study encouragement funds

established and operated in accordance with the relevant Government's
regulation.

- Contributions to charitable funds arising in any one year shall be deductible

from taxable income of that same year, and if not fully deducted within such
year then they may not be carried forward to taxable income of the next tax
assessment year.

- The maximum amount of deductions shall not exceed tax assessable income
from business income and income being salary of the year in which such
contributions were made.

b. Tax rate

Personal income tax rates applicable to incomes from salary and wages are
progressive rates, as follows:

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Level Annual assesssable income Monthly assessable income Tax rate
(%)
(million dongs) (million dongs)

1 Up to 60 Up to 5 5

2 Over 60 to 120 Over 5 to 10 10

3 Over 120 to 216 Over 10 to 18 15

4 Over 216 to 384 Over 18 to 32 20

5 Over 384 to 624 Over 32 to 52 25

6 Over 624 to 960 Over 52 to 80 30

7 Over 960 Over 80 35

c. Timing for tax liability

The time for determining the assessable employment income is the date on which
the organizations and individuals pay income to the taxpayer or when the taxpayer
receive the income.

Example 2.7: Mr. Quang is a resident taxpayer. He has two sons who are studying
at a secondary school and has the following incomes in tax year 20xx:

- Salary after paying compulsory insurance: VND278.200.000

- Bonus and prizes: VND40.000.000 of which VND25.000.000 is from a prize

awarded by the Government of Vietnam for a patent.

- Income from membership of boards of management of HPA company:

VND6.000.000

Required: Calculate PIT amount payable by Mr. Q. Given that:

- Dependent deductions: two sons

- In the tax year, he contributed to a charitable fund: VND5.000.000

Solution:
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 1. PIT of salary and wages: Income

(VND Million)

Salary exclusive compulsory insurance 278,2

Bonus and prizes: ( 40 -25) 15

Because a prize awarded by the Government of Vietnam for a

patent is exempt from PIT

Income from membership of boards 60

Total taxable income 353,2

Less : Family deduction

- Self-deduction (132)

- Children ( 4,4 x 12 x 2) (105,6)

Charitable deduction (5)

Assessable income 115,6

PIT payable 8,56

{60 x 5% + (115,6 – 60) x 10% }

Total PIT payable 8,56

(3) Income from capital investment

Formula: Personal income tax payable = Assessable income x Tax rate

a. Assessable income

The assessable income from capital investment is the total of incomes from capital
investments which the taxpayer receives in the tax period. In this case the taxable
income is equal to the assessable income i.e. there is no threshold for this kind of
income. It includes: interest receivable from loans, dividend, income from
contribution to Ltd, joint ventures; increased portion of the value of the capital

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contribution; interest on bond, debentures; income from investment capital
contribution in kind, reputation…and shares paid in lieu of dividends. Note that
interest from bank deposit and interest on bonds issued by the Government of
Vietnam are exempt from taxable income.

b. Tax rate

Tax rate: flat rate of 5%.

c. Timing for tax liability: when the income-paying entity pays the income to
the taxpayer, except for the followings:

 Increased portion of the value of the capital contribution share receivable

upon dissolution of an enterprise, conversion of operational model, merger
or consolidation of an enterprise or upon withdrawal of capital: when the
individual actually receives the income being the increased portion of the
value of the capital contribution share

 Income from shares paid in lieu of dividends: the time of transfer of the
securities.

(4) Income from capital transfer

The way to compute the tax liability of capital transfer varies from capital
contribution portion to security. It can be discussed in more detail.

(i) Income from transfer of a capital contribution portion

Formula: PIT amount payable = Assessable income x Tax rate

a. Assessable income

The assessable income from capital transfer is determined by the following

formula:

The
Assessable The selling/ Reasonable
= - purchasing -
income transfer price expenses
price

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Transfer price is the amount of money the individual receives under the capital
transfer contract or imposed by tax authority in the case the transfer contract does
not specify the price or the price stated in the contract is not conformable with the
market price.

Purchase price is the value of contributed capital when the transfer is made
including the value of the capital contributed to the establishment of the Decree,
value of additional contributions, value of purchased capital, and value of capital
from reinvested profit.

Related deductible expenses which must be supported by receipts and invoices in

accordance with the laws, including fees and charges related to the land use right
in accordance with the laws; costs for improvement of land and house, site
removal and clearance; investment costs for construction of houses, infrastructure
and architectural works on land; other expenses directly related to the transfer of
immovable properties.

b. Tax rate: flat rate of 20%

c. Timing for tax liability: The time for determining the assessable income of
capital transfer is the date on which the capital transfer is completed in accordance
with laws.

(ii) Income from securities transfer:

Formula:

Personal income tax payable = Assessable income x Tax rate

a. Assessable income

Assessable income is determined by price of each transfer as follows: (1)

Listed securities: selling price on the securities market; (2) Unlisted securities:
selling price on the Securities Trading Centre; (3) Others: contract or accounting
book; (4) Imposed by tax authorities in the case the transfer contract does not
specify the sale price or the sale price stated in the contract is not conformable
with the market price.
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b. Tax rate: flat rate of 0.1%

c. Timing for tax liability

The assessable income from transferring securities is calculated as follows:

- For securities of a public company that are traded at the Stock Exchange, it
is the time the taxpayer receives the income from securities transfer.
- For securities of a public company that are not traded at the Stock Exchange
but only transferred via the system of the Vietnam Securities Depository, it
is the time the ownership is transferred at the Vietnam Securities Depository.
- For the securities that do not fall into the cases above, it is the time the
securities transfer contract takes effect.
- When making capital contribution by securities without paying tax when
making capital contribution, the time to calculate income from transferring
securities to make capital contribution is the time the person transfers,
withdraws capital.

(5) Income from immovable properties transfer

a. Assessable income

The assessable income from immovable properties is determined by the following

formula:

Personal income tax payable = Assessable income x Tax rate

Transfer price

The transfer price of rights to use land ( with or without constructions) is the price
stated in the transfer contract when the transfer is made.

If the transfer price is not identifiable or the price stated in the transfer contract is
lower than the land price imposed by the People’s Committee of the province when
the transfer is made, the transfer price is based on the land price list made by the
People’s Committee of the province.

b. Tax rate: tax rate of 2%

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c. Timing for tax liability

The assessable income from real estate transfer shall be calculated when the person
initiates the procedure for real estate transfer as prescribed by law.

(6) Income from prizes, royalties’ income, franchising, inheritances and gifts

a. Assessable income

There is a threshold of VND10 million applicable to these types of income. The

assessable income from this group is the portion of taxable income exceeding 10
million dongs, which the taxpayer receives each time or per contract.

Assessable income = Table income – VND10 million

b. Tax rate

The table of scheduler rates is stipulated as follows:

- Royalties income and franchising income: tax rate of 5%

- Income from prizes, inheritances and gifts: tax rate of 10%

c. Timing for tax liability

The time for determination of the assessable income from prizes, royalties’
income, franchising, inheritances and gifts is the date on which these incomes are
paid.

Example 2.8: On August 20, 20XX, Mr. X received a lottery prize of VND150
million.

Required: Define the tax payable of Mr. X in this case.

Solution: Assessable income = (150 – 10) = VND140 million.

PIT amount payable: VND140 million x 10% = VND14 million

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2.4.2. FOR NON-RESIDENT TAXPAYERS
A non-resident is, however, subject to tax only on income from sources in
Vietnam. Thus, stipulation of bases for tax calculation varies according to ten
categories.

(1) Business income

Tax payable = Business turnover x Tax rate

The turnover means the total proceeds derived from the provision of goods and
services, including non-refundable expenses for goods and services paid by the
buyer on behalf of the non-resident individual.

Tax rates applicable to the business income derived from each business line and
sector are as same as tax rates applied to resident taxpayers.

(2) Employment income

Tax payable = Taxable income x 20%

Taxable income from salary and wage is the total amount of salary and wage that
the non-tax resident receives from the Vietnamese organizations and individuals,
irrespective of the location of income payment.

(3) Income from capital investment

Tax payable = Taxable income x 5%

Taxable income from capital investment is the amount received by non-resident

individual for capital investment in Vietnamese organizations and individuals.

(4) Income from capital transfer

Tax payable = Taxable income x 0.1%

The taxable income from capital transfer is the amount received by non-resident
individuals for transferring the capital in Vietnamese organizations and
individuals.

(5) Income from the transfer of immovable properties

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 Tax payable = taxable income x 2%

The taxable income from the transfer of immovable properties by a non-resident

individual in Vietnam is determined by the price of the transfer of immovable
properties.

(6) Royalties’ income and franchising income, prizes, inheritances and gifts

Tax payable = taxable income x tax rate

The taxable income from these categories is determined by the portion of income
exceeding 10 million dong per each time, contract of assignment or transfer; or
per each prize in Vietnam. Tax rate applying for royalties’ income and franchising
income is 5%, for income from prizes, inheritances and gift is 10%.

Time for determining the taxable income

The time for determining the taxable income for the business income is the date
on which the non-resident individuals receive the income or when the invoices
are issued for provision of goods and services.

The time for determining the taxable income for salary and wage; capital
investment; royalties income and franchising income; prizes, inheritances and
gifts is the date on which the organizations and individuals in Vietnam pay the
amounts to non-resident individuals, or the date on which non-resident individuals
receive the amounts from overseas organizations and individuals.

The time for determining the taxable income for capital transfer; immovable
properties transfer is the date on which the transfer contract is effective.

2.5. TAX REDUCTION AND TAX EXEMPTION

Taxpayers who suffer from difficulties due to natural disasters, fires, accidents,
fatal diseases which affect the ability of to pay are subject to the consideration of
tax reduction in corresponding to the value of loss, but not exceeding the amount
of tax payable.

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Tax reduction shall be considered in the tax year. The taxpayer shall receive tax
reduction for the tax year in which the taxpayer suffers from natural disaster, fire,
accident, or fatal disease.

The amount of personal income tax payable is total PIT payable less (-) PIT
payable reduced.

The total PIT payable includes:

 The personal income tax payable on incomes from business and incomes
from wages, remunerations.
 The paid or withheld personal income tax on incomes from capital
investment, incomes from capital transfer, incomes from real estate transfer,
incomes from winning prizes, incomes from royalties, incomes from
franchising, incomes from inheritance, and incomes from gift.

The PIT payable reduced is the total expenditure for repairing damage minus the
indemnities provided by insurers (if any) or compensations provided by the
organization or individual that caused the accident (if any). restricted to total PIT
payable

2.6. TAX DECLARATION AND PAYMENT

2.6.1. REGISTRATION
Individuals who have incomes liable to personal income tax are responsible for
filing for tax registration at tax agencies of localities where their taxable incomes
are generated or where their permanent or temporary residence is registered.
Similarly, organizations and individuals responsible for withholding and paying
taxes on taxpayers’ behalf have to file for tax registration at tax agencies of
localities where those organizations’ or individuals’ head offices are located.

2.6.2. DECLARATION AND FINALIZATION

Under the Tax Administration and the Act of PIT, tax period for resident taxpayers
is based on annual basis for the business income and income in the form of salaries
and wages. Thus, taxpayers must file monthly tax declarations by the 20 th of the

86
month following the tax month. Where the tax amount payable is VND50,000,000
or less, the taxpayers do not have to file a monthly declaration but a quarterly one.
For final annual tax declaration, the filing deadline is the ninetieth day from the
end of the calendar year or the fiscal year.

In principle, PIT applies concurrently to two collection regimes: Deduction at

source and self-payment by taxpayers.

The entities paying incomes to taxpayers are responsible to deduct PIT before
paying salaries, wages and other incomes to the beneficiaries. Besides, taxpayers
in Vietnam now must comply with self-assessment procedure under the Tax
Administration Law; hence, they must comply with regulation that stipulates the
deadline for tax payment is the due date for filing of tax declaration dossiers.

Income-paying entities

- Quarterly or monthly tax declaration: Income paying entities are

responsible for withholding tax and preparing tax declaration for income
being salaries, income from capital investments, transfers of securities,
copyright, franchising or winnings, also for non-resident individuals with
income being salary, business income.
- Quarterly declaration is applicable to taxpayers whose annual revenues are
VND50 billion or less. Monthly declaration is applicable to taxpayers
whose annual revenues are more than VND50 billion.
- Deadline for monthly tax filing: The 20th day of the following month. For
quarterly filling: The last days of the first month of the next quarter.

Tax finalization

- All income-paying entities subject to withholding must provide a

declaration of personal income tax finalization using the templates
provided by the tax authorities on behalf of authorising employees.
- Deadline for tax finalization filling: The last day of the third month since
the end of the calendar year or fiscal year.

Resident individuals with employment income

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 - Declaration of tax finalization: Individuals have to make a declaration of
tax finalization in the following cases:

 The amount of tax payable in the year is greater than the amount already
deducted or provisionally paid in the year, or tax obligations arise
throughout the year for which deductions or provisional payments have not
yet been made.
 The taxpayer requests a tax refund or an offset of tax into the following
period.
 A resident individual being a foreigner must conduct tax finalization on
termination of his or her contract to work in Vietnam and before departing
from Vietnam
 Other cases, tax finalization is not required.
- Deadline for filing: The last day of the fourth month since the end of the
calendar year.
- Place for filing: tax office directly managing the income-paying entity.

Other cases

- Individual having salary income (labor contract for more than 3 months) if
having visited income of not more than 10 million in a year and already be
withhold of 10% then no need tax finalization for visited income if the
individual choose to do so.
- Individual having salary income (labor contract for more than 3 months) if
having house rental income of not more than 20 million/month (on average)
and already paid tax on this income then there is no need for tax finalization
if the individual choose to do so.
- Individuals being insurance, lottery, and multi-level marketing agents
having income already withheld for tax by the income-paying agents are
not subject tax finalization requirements.

For other categories and non-resident taxpayers, the deadline for filing tax
declaration dossiers is the tenth day from the date on which the tax liability arises.

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Where incomes of VND2,000,000 or more are paid to a taxpayer with a TIN, who
does not work full time for an income-payer (such as incomes from brokerage
commissions, royalties and the like), a deduction of 10% at source for PIT must
be done by the income-payers before the payment of incomes is made.

2.7. TAX PLANNING OF PERSONAL INCOME TAX

Most people think that minimizing taxes should be the goal of tax planning and
tax planning means arranging your affair to legally minimize your tax liability.
This is quite shortsighted, because taxes are only one factor, albeit a major one,
in the mix of costs and other factors that generate the amounts most often taxed:
profits and wealth. Furthermore, strategies for reducing tax liabilities are rarely
cost free and tax strategies are also risky: Changing operations to save on tax bills
often results in an increase in long-term administrative costs and generates
uncertain returns because tax laws can change. However, even though total
elimination of taxes is not a goal, people and organizations often invest significant
amounts of time and resources in implementing tax-reducing strategies. Overall,
tax planning should ever be done with a view to increasing your total wealth. It
means that tax planning should focuss on tax optimisation rather than just tax
minimization.

Tax saving strategies usually fall into one of four types: (1) creation, (2)
conversion, (3) timing, and (4) splitting.

 Creation involves plans that take advantage of tax subsidies, such as moving
an operation to a jurisdiction that imposes lower taxes.
 Conversion entails changing operations so that more tax-favored categories
of income or assets are produced.
 Timing involves techniques that move amounts being taxed (also called the
tax base) to more favorable tax-accounting periods. A good example is
accelerated depreciation, which allows more of an asset’s cost to be a tax-
deductible expense in early years, thus deferring the payment of taxes until
later.

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  Splitting techniques entail spreading the tax base among two or more
taxpayers to take advantage of different tax rates.

Regarding personal income tax, there are some tactic that could be used in order
to differing and minimizing the PIT liability:

Income splitting: is based on the simple of reducing your own assessable income
by diverting the income to someone else, usually a family member or associate.

Maximizing rebates/relief: make use of regulations of relief (family deduction,

dependent deduction) and tax exemption in order to have maximum relief.

Salary sacrifices: A “salary sacrifice” arrangement is a deal agreed on between

an employee and an employer to swap some cash salary for another type of non-
cash benefit which exempt from income tax and the employee could reduce the
amount of his/her tax payable

Timing: this involves techniques that move amounts being taxed (also called the
tax base) to more favorable tax-accounting periods

With regulations of Personal Income Tax Law in Vietnam, taxpayer could make
use of exemption and relief in deferring and minimizing PIT liabilities as follows:

Income splitting: in the case of groups of business or household, it is better to

divide the tax base among individuals based on their marginal tax rate instead of
dividing equally by the percentage of their capital contribution. This will reduce
the amount of tax payable by individuals who are subject to high marginal tax
rates when calculating PIT and total PIT payable in the group of business or
household will reduce.

Maximizing rebates/relief: Taxpayer can choose to claim the dependent child to

the person (husband or wife) who has a higher marginal tax rate than the other.
This could make use of dependents reduction regulation and minimize the tax
liability of a family.

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Salary sacrifices: An employee could agree with your employer to receive non-
taxable benefits in lieu of salaries: such as transportation costs, life insurance,
housing, electricity, water bills. This could reduce his/her tax liabilities.

Timing: Choosing the time for receiving salary or bonus (may be into the next
period) in order to differ the tax liabilities could be the one of tax planning
strategies of the taxpayer.

CHAPTER REVIEW

SUMMARY

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 Personal income tax (PIT)

Overview of PIT Basic content of custom

 Definition duty in Vietnam
 Characteristics

The scope of PIT

 Resident & Non-
Taxable Income
Resident taxpayer  Taxable income
 Tax liabilities of  Non- taxable
Tax rate
Residence and non income
– residence  Exempt income
Taxpayer.  Timing for PIT
 Basic of assessment

Tax Liabilities Calculation

 For Residence taxpayer
 For non- residence taxpayer

Tax Exemption, Reduction and

Refund
 Tax Exemption
 Tax Reduction
 Tax Refund
Tax Declaration and payment
 Tax Declaration
 Payment Deadline

Minimizing PIT liabilities

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1) The personal income tax is a direct tax levied on income of a person who has
taxable income for a relevant tax period.

2) There are five central concepts relating to the personal income tax. They are
taxpayer, tax period, assessable income, taxable income and tax payable.

3) Personal income tax is a direct tax. It is borne entirely by the person who
pays it, and cannot be passed on to another person or entity.

4) Personal income tax is highly progressive i.e. the more you earn the higher
tax amount you have to pay.

5) Individuals living in Vietnam (resident taxpayers) and individuals who do

not live in Vietnam but receive income from Vietnam (non-resident
taxpayers) are liable for income tax. Residents are taxed on their entire
income, regardless of the place of origin (worldwide). Nonresidents are taxed
only on income directly connected with the territory of Vietnam.

6) Assessable income includes income from business; employment; capital

investment; capital transfer; immovable properties transfer; winning prizes;
copyrights; franchising; inheritance and gifts.

7) There are 16 categories of income that are not subject to income tax in
Vietnam which is called exempt income.

8) There are ten categories of assessable income for income tax; each type of
taxable income has its own rate which varies from resident to non- resident
person.

9) Taxable income of resident taxpayers who have income from salary and
wage is determined by subtracting compulsory and voluntary insurance
premium, family deduction, charity and humanitarian contributions from
assessable income.

10) Taxable income of resident taxpayers who have income from salary and
wage is taxed according to the table of progressive tax rates. Other categories
are taxed under the table of flat tax rates.
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11) A non-resident is, subject to tax only on income generated in Vietnam. Thus,
their tax liabilities are defined by the following formula: Tax payable =
taxable income x tax rate. Tax rate applicable to these incomes varies
according to income categories.

12) For resident taxpayers is based on annual basis for the business income and
income in the form of salaries and wages. Thus, taxpayers must file monthly
tax declaration dossiers by the 20th of the following month. Where the tax
amount payable is VND50,000,000 or less, the taxpayers do not have to file
a monthly declaration but a quarterly one. For final annual tax declaration,
the filing deadline is the ninetieth day from the end of the calendar year or
the fiscal year.

13) A taxpayer can take advantages of the tax allowances and tax reliefs to
minimizing his/her PIT liability by some ways such as: income splitting,
maximizing reliefs, salary sacrifices, and timing.

ECONOMIC TERMS

Dependent deduction

Family deduction

Individual income tax

Non- resident person

Personal income tax

Resident person

Self deduction

Withholding

ECONOMIC CONCEPTS

1) State the characteristics of PIT.

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2) List the determinants of status of resident person under the Law on PIT of
Vietnam.

3) Outline four types of income that are subject to PIT.

4) State five types of income that is exempt from PIT.

5) State the contents of family deduction. Who is considered as dependent ?

6) How to calculate PIT of resident taxpayers who have income from salary and
wage?

7) How to calculate the tax payable on the business income by a non- resident
individual?

DISCUSSION QUESTIONSS

1) What is the most eminent characteristic that shows clearly distinguishes PIT
from other taxes?

2) Discuss the rationale behind family deduction.

3) What are the advantages and disadvantages of the application of family

deduction in Vietnam?

4) What types of contributions for charity and humanitarian purposes are subject
to deduction for PIT? Discuss the rationale.

5) Discuss the difference between tax liabilities of resident and non- resident
person in the case of running business?

6) Why should deduction both at source and self-assessment regime be

applicable at the same time in PIT administration?

7) State the different between tax avoidance, tax evasion and tax planning? What
are the goals of tax planning? What are strategies to minimize the PIT liability
of taxpayer? Which strategies could apply to differ and minimize the PIT
liability in Viet Nam?

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 CHAPTER 3
CORPORATE INCOME TAX

-
LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define corporate income tax and its characteristics.

- Identify who is liable to pay corporate income tax in Vietnam.

- Define kinds of incomes subject to corporate income tax in Vietnam.

- Define what kinds of incomes are exempt from corporate income tax in
Vietnam.

- Recognize and compute assessable income, base income, base turnover and
deductible expenses.

- Explain and compute the ‘other income’ that should be included in taxable
income.

- Know the standard rate and other rates of corporate income tax in Vietnam.

- Calculate the amount of corporate income tax payable of a taxpayer in

Vietnam.

- Prepare a CIT computation, including the standard CIT declaration forms,

taking into account the tax regulations.

- Know the due date when to file a return and pay tax.

- Define who and in what case is exempt from corporate income tax in Vietnam,
and determine the exempt amount.

- Identify, compute and apply the right reduction/relief and tax saving/deferral
arrangement in given circumstances.

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3.1. OVERVIEW OF CORPORATE INCOME TAX
Income tax includes corporate income tax (CIT) and personal income tax. While
personal income tax is levied on income of individuals, including salaries, wages,
business income and other incomes received by each individual, corporate income
tax is imposed on incomes received by legal entities such as limited companies,
join-stock corporations, and other economic entities.

Corporate income tax is a tax the base for which is incomes of corporations and
other economic entities. The core part of the base is the profit from business
activities by a company. The others are the incomes that an enterprise or an
economic entity receives related to their business such as incomes from asset
liquidation, gifts, or donations, etc.

We can distinguish corporate income tax from other taxes by the following
characteristics:

Firstly, income tax is a direct tax. Legally, income taxpayers are those who really
pay tax. The base is the income of the taxpayers, not the price of goods or services.
It is difficult, if not impossible, to shift the tax burden onto the consumers of goods
or services. Being a direct tax, corporate income tax is in general proportional or
progressive and this is a strength of corporate income tax. However, the payers of
corporate income tax as a direct tax are inclined towards fraud and evasion. Of
course, this is a weakness of corporate income tax.

Secondly, despite being a direct tax, corporate income tax is less sensitive than
personal income tax. Corporate income tax is rather vague to many people. This
is because in many cases, those who really pay tax are stockholders and most of
them do not manage the business. They seem to neither know nor care about any
tax issues. Their mere concern is dividend. However, their dividend is influenced
by income tax, which they are unaware of. They attribute the rise or fall in their
dividend to the management of the corporation. In some cases, a shareholder can
be a manager of the company. He or she knows that the income tax reduces his or
her dividend as well as affects the income of all other owners of the company.

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Thus, the desire to evade payment of tax is but not as strong as that of personal
income tax payers.

Thirdly, corporate income tax is dependent on the profitability of the taxpayers’

business. In fact, the core of the base of corporate income tax is the profit of the
corporation. Therefore, the more profit the corporation earns, the bigger tax
revenue will flow into the state budget. Thus, corporate income tax is not neutral.
It depends on the efficiency of the business.

Fourthly, in certain cases, income tax is regarded as a withholding of personal

income tax. In some countries, dividend and capital gains are subject to personal
income tax. In this case, both corporate income tax and personal income tax are
imposed on the income of a taxpayer. The proponents of this kind of taxation hold
that income is taxed at two different stages – one as a corporate income and one
as personal income – so there is no double taxation here. However, according to
some economists there is a double taxation in this case as they argue that although
the income paid by the company, it really belongs to the shareholders of the
company. If no corporate income tax were paid, the income received by the
shareholders would be greater. This explains why in many countries, personal
income tax is not imposed on dividend. In this case, corporate income tax is
regarded as a withholding of personal income tax.

3.2. THE SCOPE OF CORPORATE INCOME TAX

3.2.1. TAXPAYERS
Corporate income tax payers are those enterprises and economic organizations
that have assessable income as prescribed by the Law on Corporate Income Tax
of Vietnam. For corporate income tax purposes, the term “enterprises and
economic organizations” means:

(i) An enterprise organized under Vietnam law including limited liability

company, a joint venture, a join stock corporation or a partnership (a limited
partnership or a registered ordinary partnership);

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(ii) A company established overseas under other countries’ law having or not
having permanent resident establishments in Vietnam;

(iii) A business or profit-seeking organization owned by any social or professional

organization or non-government organization;

(iv) An organization founded under the Act of Co-operative;

(v) Other organizations that do business and get income from the business.

Enterprises organized under Vietnam law are subject to CIT on their worldwide
incomes. Foreign companies having resident establishments in Vietnam are also
subject to CIT on their worldwide incomes while foreign companies not having
resident establishments in Vietnam are only subject to CIT on incomes generated
in Vietnam.

Resident establishment of a foreign enterprise means a production and/or business

establishment via which a foreign enterprise conducts part or all of its production
and/or business activities in Vietnam which earn income, comprising:

- Branches, executive offices, factories, workshops, goods-forwarding

warehouses, means of transport, mines, oil or gas fields or natural resource
exploring and exploiting sites or equipment and facilities at the service of
natural resource exploration;
- Construction sites, construction supervision as well as construction,
installation or assembly projects;
- Establishments providing services, including consultancy services provided
via people working for such establishment or via other organizations or
individuals;
- Agents of foreign companies;
- Vietnam-based representatives who are authorized or not authorized to sign
contracts on behalf of the foreign companies; but regularly perform the
delivery of goods or the provision of services in Vietnam.

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3.2.2. TAX PERIOD
Tax period is the calendar year or the fiscal year of the enterprises if it is different
from calendar year.

If the first tax period or last tax period is less than 3 months, business
establishments are allowed to combine two consecutive tax periods into one.

Example 3.1: Company A established and registered its business on 10 July year
N. Its applicable fiscal year is 1 January to 31 December. The first tax period of
Company A shall be the period from 10 July 2012 to 31 December year N.

Example 3.2: If Company A registered its business on 1 November year N. Its

applicable fiscal year is 1 January to 31 December. For the year N it is only 2
months. So it can choose to have the first tax period from 1 November year N to
31 December year N+1.

Where enterprises carry out the change of tax period of corporate income
(including the change of tax period from calendar year to fiscal year or vice versa),
the tax period of corporate income must not exceed 12 months.

Example 3.3: For enterprise A, the tax period of corporate income in 2017 under
the applicable calendar year, at the beginning of 2018 choosing to change to the
fiscal year from April 01 this year to March 31 of the following year. The tax
period of CIT of the changed year ( 2018) from the January 01, 2018 by the end
of March 31, 2018 (3 months), the tax period of corporate income of the following
year shall be calculate from April 01, 2018 by the end of March 31, 2019.

Enterprises during the time enjoying the preferential CIT with the change of tax
period shall have the right to choose: preference in the year of change of tax period
or payment of tax at the ordinary rate of tax of the year of change of tax period
and enjoying the tax preference to the following year

Example 3.4: The same enterprise A enjoys enterprise income tax incentives (2
years’ tax exemption and 50% tax reduction in the subsequent 4 years), with tax
exemption starting in 2016. Then it may enjoy the tax incentives as follows: tax

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exemption in 2016 and 2017; and 50% tax reduction in 2018, 2019, 2020 and
2021. If the enterprise chooses to enjoy 50% tax reduction in the tax period of the
year of conversion 2018, it may enjoy such 50% tax reduction for three
subsequent tax years, from the fiscal year 2018 (from April 1, 2018 to March 31,
2019) to the end of the fiscal year 2020. If it does not choose to enjoy 50%
reduction of enterprise income tax in the tax period of the year of conversion 2018
(it declares and pays the tax at the common rate in the year of conversion 2018),
it may enjoy 50% reduction of enterprise income tax from the fiscal year 2018
(from April 1, 2018, to March 31, 2020) to the end of the fiscal year 2021.

3.2.3. INCOMES SUBJECT TO CIT

Under the Law on CIT of Vietnam, incomes subject to CIT include incomes
derived in Vietnam and overseas incomes.

Incomes derived in Vietnam are those generated in Vietnam by enterprises

established under Vietnamese laws and income earned in Vietnam by foreign
enterprises.

Vietnamese enterprises that are engaged in offshore investment activities and

remit their incomes to Vietnam after paying CIT in foreign countries shall comply
with the double taxation avoidance agreements concluded between Vietnam and
such countries, for foreign countries with which Vietnam has concluded double
taxation avoidance agreements.

For foreign countries with which Vietnam has not yet concluded any double
taxation avoidance agreement if the CIT rate applicable in a country from which
incomes are remitted to Vietnam is lower than that prescribed by the Vietnamese
law on CIT, only difference must be collected.

3.3. THE COMPUTATION OF CORPORATE INCOME TAX

3.3.1. THE COMPREHENSIVE COMPUTATION OF CORPORATE

INCOME TAX
Under the Law on CIT of Vietnam, the amount of CIT payable is determined by
the following formula:
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 CIT amount Base Deduction of Science and CIT
= - x
payable income Technology Fund rate

Tax base is the key factor to determine CIT amount payable. As can be seen in
the above formula, under the Law on CIT of Vietnam, the base of corporate
income tax is called base income or assessable income. The base
income/assessable income is defined as follows:

Base income/Assessable Taxable Exempt Losses carried

= - -
income income incomes forward

The taxable income is determined by the following formula:

Taxable Base Deductible Other taxable

= - +
income turnover expenses incomes

3.3.2. THE TEMPLATE FOR COMPUTATION OF CORPORATE INCOME

TAX
Because CIT liabilities is determined based on the financial statement prepared
by tax payers and their accounting books and documents, there are 2 templates to
compute CIT liabilities as follows:
3.3.2.1. Template 1
Turnover x
Less: Deductible expenses (x)
Add: Other taxable income x
--------------------
Taxable income x
Less: Exempt income (x)
Less: Losses carried forward (x)
----------------------
Assessable income x
Less: Science & Technology Fund (x)
Net assessable income x
CIT payable @ CIT rate % x

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3.3.2. Template 2
Accounting Profit before tax x
Add:
Adjustments that increase turnover x
Expenses of the reduced turnover x
Income tax paid on the overseas income x
Non-deductible expenses x
Other adjustments that increase profit before tax x
Less:
Turnover that was taxed previous years (x)
Expenses of the increased turnover (x)
Other adjustments that reduce accounting profit before tax (x)
Taxable income (adjusted profit) x
Less:
Exempt income (x)
Losses carried forward (x)
Deduction of Science and Technology Fund (x)
Income from transfer of real estate x
Assessable income from trading and production x
Tax payable @ 20%
Less:
Tax reduction due to tax rate lower than 20% (x)
Tax liability that is exempted/reduced (x)
Tax paid on overseas incomes (to be restricted to the amount of (x)
tax payable in accordance with Vietnam laws)
Tax liability for production and trading in goods and services x
Add: tax on income from transfer of real estate (if any) x
Total tax liability x
Paid amount for the first 3 quarters x
Tax payable x
75% of tax liability x
Difference between 75% of tax liability and paid amount x

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3.3.3. THE COMPUTATION OF CORPORATE INCOME TAX FOR
OVERSEAS INCOMES
Incomes from goods production and trading or service provision activities
overseas is treated as follows:

(i) If incomes are generated in countries which have signed double taxation
avoidance agreement with Vietnam, the way we record these incomes must be
compliant with the terms and conditions stated in the agreement.

(ii) If incomes are generated in countries which have not signed double
taxation avoidance agreement with Vietnam, the amount of before-CIT income
overseas are taxed in Vietnam. When determining income tax payable in Vietnam,
the income tax amount already paid overseas by the business establishment will
be deducted, provided such deducted amount does not exceed the income tax on
the received income calculated under the Act of Corporate Income Tax of
Vietnam. If the overseas incomes are reduced or exempt by the foreign countries
where the establishment invests, the amount of CIT overseas is still deducted.

Example 3.5:
We have data from AGV Co. in 20XX as follows:
+ Base turnover: VND30 billion;
+ Total deductible expenses: VND26 billion;
+ Income received from an investment project in country A after payment of CIT
for country A at the rate of 15%: VND1,700 million. Country A has not signed
the double taxation avoidance agreement with Vietnam.
Required: Determine CIT amount payable for the tax year 20XX by AGV.
Solution:
- For domestic business:
+ Assessable income = Base income: VND30 billion – VND26 billion = VND4
billion.
+ CIT payable for domestic business: VND4 billion x 20% = VND800 million
- For overseas income:

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+ Before-CIT income from overseas: VND1,700 million/(1 – 0,15) = VND2
billion.
+ CIT payable for overseas income: VND2 billion x 20% – VND 2 billion x 15%
= VND100 million.
- Total CIT payable: VND800 million + VND100 million = VND900 million
Example 3.6:
We have data from AAC Co. in 20XX as follows: Income received from an
investment project in country A after payment of CIT for country A at the rate of
18% and being reduced by 50% of the CIT amount payable: VND5,460 million.
Country A has not signed double taxation avoidance agreement with Vietnam.
Required: Determine CIT amount payable for overseas income for the tax year
20XX by AAC.
Solution:
+ Before-CIT income from overseas: VND5,460 million/(1 – 0,18 x 0,5) = VND6
billion.
+ CIT amount payable: VND6 billion x 20% – VND 6 billion x 18% = VND120
million.

3.4. TAXABLE INCOME AND ASSESSABLE INCOME

3.4.1. BASE TURNOVER
The base turnover is the total revenue from the sales of commodities and services,
surcharges, and price subsidies earned by business establishments. The base
turnover is in Vietnam dongs. Where the turnover is in foreign currencies, it will
be converted into Vietnam dong based on the inter-bank transaction exchange rate
announced by the State bank of Vietnam at the time of earning.

Quantity discount, goods returns and price reduction due to poor quality are
excluded from the base turnover. However, cash discount and discount for early
payment are not subtracted from the base turnover.

The time of determining turnover for tax purpose is the time of sale, regardless
the time of the payment made by the buyer. For tax purpose, the time of
determining turnover for goods is the time of transfer of ownership or use right of
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goods. The time of determining turnover for services is the time of service
completion or partial service provision done.

Example 3.7:

The financial report of the Huy Hoang Co. Ltd for the tax year N shows that the
gross turnover of the company is 2,000 million dongs, of which:

+ 1,300 million dongs come from exported goods;

+ The quantity discount is 100 million dongs;

+ Discount for early payment is 200 million dongs.

Besides, in the tax year this company received a subsidy of 50 million dongs from
the government for the goods sold to the poor.

Required: Define the base turnover for corporate income tax for the tax year N.

Solution:

The subsidy is added to the base turnover. The quantity discount is excluded while the
discount for early payment is not. Therefore, the base turnover for the tax year is:

2,000 million + 50 million – 100 million = 1,950 million dongs

For business establishments that pay value added tax (VAT) under credit method,
their base turnover is the turnover exclusive of VAT. For business establishments
that pay VAT under direct method, their base turnover is the turnover inclusive of
VAT.

The base turnover in some specific cases is specified as follows:

- For goods sold on installment payment: The base turnover is lump-sum price,
excluding interest on deferred payment.
- For goods or services used for barter or internal consumption (except for those
used for the production or doing business of the enterprise): The base turnover
is determined based on the selling price of goods or services of the same or
similar categories at the time of barter or internal consumption.

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- For goods processing activities: The base turnover is the proceeds from the
processing, including remuneration, costs of fuels, power, ancillary materials
and other costs for goods processing.
- For property leasing activities: The base turnover is the rent paid by the lessee
for each term under the leasing contract. If the lessee pays rent in advance for
several years, the tax payer can choose one of the following two ways to
record base turnover for CIT purpose: (i) The base turnover is the advance-
paid rent divided by the number of years for which the rent has been paid in
advance; (ii) The base turnover is advance payment meaning all the advance
payment recorded for the year of payment. The matching principle requires
that when you book a turnover, you have to book the corresponding expenses
that generate the turnover.

Other specific cases of booking turnover for tax purpose are stipulated by the
Ministry of Finance of Vietnam. The general principles for these cases are: (i)
Matching principle is followed; (ii) Ensure the consistent implementation for
cases with many different interpretations; (iii) True reflection of the nature of
corporate income tax is imposed on the profit of an enterprise in a tax period.

3.4.2. DEDUCTIBLE EXPENSES

Expenses are deductible if they are not in the list of non-deductible expenses
stipulated by legislation and meet the following three conditions at the same time:
(i) they are actual expenses used for generating income or for the purpose of
business; (ii) they are proved by legitimate invoices, vouchers and documents
stipulated by legislation; (iii) non-cash payment are made to those expenses with
total payment of VND20 million or more.

The three conditions for a deductible expense and major non-deductible expenses
will be discussed below.
3.4.2.1. Conditions for deductible expenses
a) Actual expenses used for the production and business of the enterprise

107
The Act of corporate income tax in Vietnam provides no definition for “actual
expenses” but in practice, actual expenses simply are not artificial or fictitious
expenses.

No explanation for what an expense “used for the production and business of the
enterprise” means, but in practice, expenses that are necessary for business
operations are accepted as ‘actual expenses’. Expenses for capital construction
investment; financial supports for localities, mass organizations and social
organizations outside business establishments; expenses for charity purposes
except for some donations mentioned below are regarded as “Not used for the
production and business of the enterprise”.

b) Legitimate invoices and vouchers

In principle, there are two types of legitimate invoices. They are: (i) invoices
published by the tax offices; and (ii) invoices made and issued by business
establishments which are registered with the tax offices in charge. The use of the
invoices must be compliant with the Act of accounting and other regulations on
invoices stipulated by the Ministry of Finance.

Vouchers are legitimate if they are in compliance with the regulations stipulated
by the Ministry of Finance.

c) Non-cash payment

Non-cash payment is required to expenses with total payment of VND20 million

or more. Non-cash payment is bank payment (such as cheque, credit card, debit
card, visa card, bank transfer etc.) and other non-cash payment under the
regulations stipulated by the State Bank of Vietnam such as offsetting payment,
clearing payment etc.

In case of deferred payment which is specified in the contract on the deferred

payment period, the deferred payment expenses is deducted at the tax period for
which such expenses are incurred. If that expense then is paid not through bank,
that expense must be excluded out of the total deductible expense of the tax year
in which the expense is paid.
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3.4.2.2. Non-deductible expenses
The list of non-deductible expenses is stipulated in the Law on Corporate Income
Tax and is specifically guided by the Government and by the Ministry of Finance.
This list may be changed over time under specific circumstances and there are
many reasons for these expense to be not deductible but they can be classified into
the following groups:

(1) Expenses that do not match with base turnover under matching principle

The rationale of this group of non-deductible expenses is closely related to a basic

accounting principle – the matching principle according to which a company
should report an expense on its income statement in the period in which the
related revenue are earned. This is to truly reflect the profit of a company.
Examples of these expenses are: (i) Asset rental expenses that exceed the
allocation by the number of years prepaid by the lessee; (ii) Accrued expenses but
not having been paid by the end of the tax year; (iii) Expenses for construction to
form fixed assets.

Example 3.8: An amount of a prepaid rent for 5 years renting of a house is

VND50,000,000. If the prepaid expense is allocated to each tax year is
VND10,000,000 (the prepaid rent of VND50,000,000 is allocated for 5 years),
this prepaid expense is deductible because it is compliant with the legislation on
rent expense. However, if the prepaid expense had been allocated for only two
years, with VND25,000,000 each year; the excess amount allocated (25,000,000
– 10,000 = 15,000,000) would have not been deductible.

(2) Capped expenses

As a best common practice, in many countries, a ceiling are imposed to certain

expenses under tax purpose. It means for some expenses, the excessive amount as
stipulated by law is not deductible. The rationale is that for some expenses, the
owners of the company benefit if they actually pay more than the market price.
For example, salaries or remuneration paid to directors or managers who at the
same time are owners of the company.

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In the current Vietnam’s Law on CIT, the following expenses are capped:

- Amortization and depreciation: Applicable to certain type of fixed asset (under-

ten-seat cars, passenger boats) in certain fields; certain depreciation methods;
accelerated depreciation;

- Money paid for employees to buy uniforms;

- Interest expenses paid to lenders who are not credit institutions or economic
organizations;

- Welfare benefit which is directly spent on employees;

- Life insurance and voluntary retirement insurance;

- Expenses for hiring management in the fields of prize-winning electronic game

business, casino business.

The ceiling of the above expenses may be changed over times depending on
specific socio-economic circumstances.

(3) Expenses which are not in compliance with specific regulations stipulated
by competent state agencies

This group of expenses accounts for the majority of the total non-deductible
expenses. As for the specific characteristics of the some expenses related to the
production and business activities of the enterprise, in many cases, the lack of
specific regulation may lead to different understandings in application. Therefore,
there should be specific provisions to ensure that a uniform way in the
determination of these expenses will be done for tax purposes. Expenses in this
group include: Fixed asset depreciation, material costs, provision expenses, some
charity expenses etc. Following are the most typical expenses in this group.

♦ Depreciation and amortization

In order to be deductible as depreciation expense, a fixed asset of a business

establishment has to meet the following criteria: (i) it must have legitimate

110
vouchers; (ii) it is used for generating incomes; and (iii) the depreciation has to
comply with the stipulations by law.

There are three depreciation methods accepted including straight-line, adjusted

declining-balance and units of production.

- Straight-line depreciation

By this method, an equal portion of the cost of the asset is allocated to each period
of use. The periodic charge is calculated as follows:

Cost of asset (Total purchase price)

Annual depreciation charge =
Useful life

The useful life is determined by the business establishment based on the asset’s
technical features but should neither be shorter than the minimum service life nor
longer than the maximum service life specified by the Ministry of Finance of
Vietnam. The service life is currently specified for eight groups of assets. and each
group has its minimum service life and maximum service life.

Where the business establishment’s efficiency is high and the assets are quickly
out of date, it can apply an accelerated rate of depreciation. The maximum
accelerated rate is twice as much as the straight-line rate. The accelerated rate is
applicable only to some types of assets provided they are not second-hand ones.

Example 3.9: The cost of a machine (the total purchase price) is

VND100,000,000. Estimated service life is 5 years. The maximum service life of
this machine stipulated by the Ministry of Finance is 6 years.

Required: Define the annual depreciation charge of this machine, using straight-
line method.

Solution:
The annual depreciation charge is:
100,000,000
= VND20,000,000 per year
5

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- Adjusted declining-balance method

This is an accelerated method of depreciation because a greater amount of

depreciation expense is taken in the early years of an asset’s life and less is taken
in the later years.

The depreciation charge is determined by multiplying the book value at the

beginning of the year by the accelerated rate. At the end of the depreciation period
when the depreciation charge calculated in that way becomes smaller than the
average of the book value towards the remaining depreciation years, the
depreciation charge is calculated by dividing the book value by the remaining
depreciation years. As can be seen in example 5.4 below, the 4 th year of
depreciation has the book value of 21,600,000. If you continue to multiply the
book value by the accelerated rate of 40 percent, the depreciation charge would
be 8,640,000 which is smaller than the average amount of depreciation for the last
two years (The average is 21,600,000/2 = 10,800,000). Therefore, the
depreciation is adjusted by dividing the book value by 2. That is why this method
is called “Adjusted declining-balance” instead of “Declining-balance”.

The book value of the asset at the end of the preceding year becomes the book
value at the beginning of the following year. The book value at the beginning of
the year minus the depreciation charge of that year gives you the book value of
the asset at the end of that year.

The accelerated rate can be 1.5 times or twice as much as the straight-line rate. If
the service life of an asset is 4 years or less, the accelerated rate is 1.5 times. If the
service life of an asset is more than 4 years, the accelerated rate will be doubled.

Thus, the procedure of the method is to apply a fixed rate to the declining book
value of the asset each year. As the book value declines, the depreciation becomes
smaller.

Example 3.10: With the data provided in example 3.9 above, use the adjusted
declining-balance depreciation method.

Solution:
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As the service life of the asset is 6 years, the accelerated rate is doubled. Thus,
over a period of 5 years of estimated service life, the depreciation rate is 20
percent.
The accelerated rate is 20 percent x 2 = 40 percent.

Book value at
Accelerated Depreciation Book value at
Year Beginning of
rate charge for Year End of Year
Year

1 100,000,000 40% 40,000,000 60,000,000

2 60,000,000 40% 24,000,000 36,000,000

3 36,000,000 40% 14,400,000 21,600,000

4 21,600,000 Adjusted 10,800,000 10,800,000

5 10,800,000 Adjusted 10,800,000 0

Adjusted declining-balance method is applicable to some types of assets such as

machines, equipments, and experimental tools in the field of business where the
technology quickly becomes out of date, provided they are not second-hand ones.

- Units of production method

This method is based on an asset’s usage. According to this method, a fixed

amount of depreciation is allocated to each unit of output produced by the
machine. The result of depreciation per-unit multiplied by the number of items
produced in each tax year is the annual depreciation expense. Depreciation
expense is computed in two steps:

Step 1:

Cost of asset (Total purchase price)

Depreciation per unit =
Total estimated units of output

Step 2:

Units produced x Depreciation per unit = Annual depreciation expense

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Example 3.11: The cost of a machine (total purchase price) is VND100,000,000.
The estimated number of units produced during the machine’s lifetime are
500,000. First year production is 20,000 units. Second year production is 30,000
units.
Required: Define the depreciation charge of this machine for the first and second
year, using units of production method.
Solution:
The depreciation per unit is:
VND 100,000,000 VND200 depreciation per
=
500,000 unit
The depreciation expense for the first and second year would be calculated as
follows:
Year 1: 20,000 units x VND 200 = VND4,000,000
Year 2: 30,000 units x VND 200 = VND6,000,000
In order to apply this method, a machine must meet the following three criteria:
(i) it is directly used for production; (ii) estimated number of units produced by
the machine can be determined; and (iii) the monthly average use of the machine
is not less than 50 percent of the design capacity.

♦ Provisions

Provisions include provisions for the decrease in value of inventories, provisions

for doubtful or bad debts, provision for unemployment allowances, provision for
financial investment, and provision for construction guarantee. The level of
provision is stipulated by the Ministry of Finance of Vietnam and can be adjusted
from time to time, depending on the socio-economic situation.

In general, regulations on these provisions are as follows:

- Provision for the decrease in value of inventories: The provision is applicable to

only inventories (or stock) with legitimate vouchers and the net realizable value
of which is lower than the original price. The net realizable value is the estimated
selling price less the estimated cost for completing the products and the estimated
selling cost. The provision is made at the end of the financial year. Thus, first the
difference must be determined between the net realizable value and the original
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price, which can be considered as the provision demand. Then, all the provision
demands are totaled up and compared against the balance of the inventories
provision account. If the total provision demand is greater than the balance of the
inventories provision account, a provision for the tax year is deductible. If they
are equal, no provisions are allowed. If the total provision demand is smaller than
the balance of the inventories provision account, the expenses have to be written
down as the difference.

Example 3.12:
We have the information on TNT Co. Ltd. on 31 December 200N as follows:
- The balance of the inventories provision account is VND40 million.
- The prices of three items in stock (all of which have legitimate vouchers)
are in the following table:

Items Quantity Estimated net book value Market price (VND)

(VND) per unit per unit
A 1,000 50,000 40,000
B 2,000 40,000 35,000
C 2,000 100,000 80,000
Required: Define the provision for the price decrease of inventories.
Solution:
Step 1: Define the provision demand by totaling all of the differences between the
estimated net book value and the market price of all items: 1,000 x (50,000 – 40,000)
+ 2,000 x (40,000 – 35,000) + 2,000 x (100,000 – 80,000) = VND60 million.
Step 2: Compare the provision demand against the balance of the inventories
provision account: VND60 million > VND40 million. This means the provision
demand is greater than the balance of the inventories provision account and the
difference is VND60 million – VND40 million = VND20 million.
Conclusion: The provision for the price decrease of inventories of TNT Co. Ltd.
for the tax year 200N is VND20 million.
- Provision for bad debts: is determined in the similar manner as the provision for
the decrease in value of inventories. First, the expected bad debt amount for all
debts have to be determined. According to the current legislation, debts can be
115
regarded as doubtful or bad debts which require provisions only if they are not
paid by the due date stipulated in the lending contract. The amount of expected
bad debts ranges from 30 percent to 100 percent of the value of the debt,
depending on how late the payment is. After totaling all of the amount of expected
bad debts, the next step is to compare the result against the balance of the bad debt
provision account in order to make the provision for the bad debts just like you
make provision for the price decrease of inventories.

- Provision for financial investment risks: This provision is related to long-term

investments in other companies and securities investments. The way you
determine this provision is similar to the way you calculate the above provisions.
The difference in the method here is the criteria. Provisions are applicable only to
listed securities with legitimate vouchers.

- Provision for construction guarantee: The business establishment can make a

provision of up to 5 percent of the building contract price.

♦ Materials

Under regulations stipulated by the Ministry of Finance, the following material

expenses are not deductible for tax purpose:

- Materials and commodities expenses that exceed the consumed norms that
have been determined and noticed to the tax office by the business
establishment, and the actual ex-warehousing cost of the materials;
- The cost of damaged or ruined materials caused by natural disasters and fires
which have been compensated by insurance companies or/and by individuals
or entities;
- The cost of damaged or ruined materials caused by natural disasters and fires
which have not been supported by proper documents as prescribed by
legislation;
- The cost of materials which are ruined by natural bio-chemical process or
being out of date;

116
- The cost of materials being handicrafts, agricultural products, second-hand
furniture and the likes directly purchased from non-business households or
individuals without a list of those goods as prescribed by legislation.

♦ Salaries or salary in nature

Under regulations stipulated by the Ministry of Finance, the following salaries

expenses are not deductible:

- Salaries and/or wages of the owner of the private enterprises;

- Salaries and/or wages of the owner of one-member limited company owned
by an individual;
- Remuneration paid to the founding members of companies who do not
directly take part in the administration of goods production and trading or
service provision;
- Remuneration paid to members of administrative board of a corporation who
do not directly take part in the administration of goods production and trading
or service provision;
- Bonuses or life insurance fees for which the conditions and the levels are not
specified in one of the following documents: labor contracts or labor
collective agreements or financial regulations, bonus regulations;
- Salaries and remuneration payable written in book but not actually paid or
actually paid to employees but having illegitimate vouchers;
- The excess amount of salaries and/or wages actually payable but have not
been paid by the due time of annual declaration of CIT as compared to the
maximum rate of provision for salaries/wages of 17% of paid salaries/wages
(if any). In any case the total salaries/wages expenses including paid
salaries/wages and the amount of provision for salaries/wages cannot exceed
the amount of salaries/wages payable written in accounting books and other
documents such as labor contracts and/or collective labor agreements etc.

♦ Donation

In general, donations are not deductible except for the following donations: (i)
Donation for education; (ii) Donation for health care; (iii) Donation for natural
117
disaster recovery; (iv) Donation for building houses for the poor; (v) Donation for
science research; (vi) Grants to localities with exceptionally difficult socio-
economic conditions under the Government’s Program.

The above donations is only deductible if they are in compliance with the specific
regulations stipulated by the Ministry of Finance.

♦ Transportation tickets and accommodation expenses not in compliance with the

specific regulations by the Ministry of Finance are not deductible.

♦ Taxes

From an enterprise perspective, every tax payable is considered a cost when

determining profits. For tax purposes, not all taxes are considered deductible
expenses. Under the current Law on CIT of Vietnam, the following taxes are not
deductible for tax purpose:

- Credited or refunded inputs of value added tax;

- Value added tax paid under credit method;
- Corporate income tax;
- Personal income tax on gross salary;
- Foreign contractor taxes on gross price.

(4) Tax penalties and legal fines

These fines include fines for violations of traffic Law, violations of the Law on
business registration, violations of the Law on accounting, violations of tax laws,
and other fines for administrative violations.

(5) Expenses covered by other sources

These expenses include payment made by social insurance fund for health
expenses of employees, expenses covered by the government for public services
etc.

(6) Some other non-deductible expenses

- Expenses of golf fees or golf member card.

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- Where the charter capital is not fully contributed as committed, the interest
paid for the loan that is equivalent to the lack of the charter capital is not
deductible.
- Payments of interest on loans that is equivalent to the lack of the charter
capital as contribution timetable stipulated in the enterprise’s charter.
- Any expenses without invoices or vouchers or with invalid vouchers.
- Losses for the revaluation of items in foreign currencies in cash, bank
deposits, money in transfer and receivables at the end of financial year.
- Innovation prizes without a regulation for Innovation prizes and/or a board
of innovative examination.
- Overhead expenses allocated by an overseas parent company to a Vietnamese
establishment which exceed the permitted amount by the law of Vietnam. The
criterion for allocation of these expenses is the turnover. This means the
overhead expense allocated to Vietnamese establishment depends on the ratio
between the turnover of the Vietnamese establishment and the turnover of the
parent company.

Example 3.13: John Group, a Malaysian company, has a resident establishment

in Vietnam called Vietnam John Co. Ltd. In the tax year, N the overhead expense
of the Group is 50 million dollars. The turnover of all companies and branches
belonging to John Group is 10 billion dollars of which the turnover of Vietnam
John Co. Ltd is 1 billion dollars.
Required: Define the allocated overhead expense to Vietnam John Co. Ltd.

Solution:

1billion dollars
50 million x = 5 million dollars
10 billion dollars

3.4.3. OTHER TAXABLE INCOMES

In general, other taxable incomes are those incomes received or receivable by a
CTI payer that are not generated by the business fields stipulated in the business
license or business registration certificate of that CIT payer. Thus, almost every

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income received or receivable by a CIT payer other than incomes from goods
production and trading or service provision activities listed in business license or
business registration certificate of that CIT payer is treated as other taxable
incomes. These include:

- Sales margin of securities dealing.

- Income from activities related to industrial property rights and copyright.
- Other incomes from property ownership.
- Income from land use right or land rent or transfer rights: Income of these
kinds is calculated separately and losses from this activity can only be carried
forward to the following tax year of income from land use right or land rent
right transfer. It cannot be carried forward to the following tax year of incomes
from other sources.
- Gains from property transfer or liquidation: In case of property liquidation,
the taxable income is determined by the following formula:

Taxable income Liquidation Liquidation Book value at the time

= - -
from liquidation turnover expenses of liquidation

- Interest on deposits, loans and goods sold on deferred payment. These

incomes are recorded as follows:

+ We first offset interest receivables on bank deposits and lending loans

against interest expenses for borrowings.

+ If the interest receivables are greater than the interest expenses for
borrowings, the difference is recorded as other income.

+ If the interest payable for borrowings are greater than the interest
receivables, the main income is written down by the amount of the
difference.

Example 3.14: We have data from Inc Co. Ltd. in 20XX as follows:
+ Total interest receivables for bank deposits: VND1,400 million;
+ Total deductible interest expenses for borrowings: VND1,200 million.

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Required: Determine other taxable income in 20XX from interest of Inc.
Solution:
+ Interest receivables are greater than deductible interest expenses. The difference
is: VND1,400 million – VND 1,200 million = VND300 million.
+ Other taxable income from interest: VND300 million.
Example 3.15: We have data from VAA Co in 20XX as follows:
+ Base turnover: VND40,000 million;
+ Total deductible expenses apart from interest expenses for borrowings:
VND36,000 million;
+ Total deductible interest expenses for borrowings: VND2,200 million;
+ Total interest receivables for bank deposits: VND600 million;
Required: Determine base income in 20XX of VAA.
Solution:
+ Main income: VND40,000 million – VND 36,000 million = VND4,000 million.
+ Deductible interest expenses are greater than interest receivables. The difference
is: VND2,200 million – VND600 million = VND1,600 million.
+ Base income: VND4,000 – VND1,600 million = VND2,400 million.
- Income from fines for contractual breaches is treated as follows:

+ We first offset fine receivables against fine payables.

+ If the fine receivables are greater than the fine payables, the difference is
recorded as other income.

+ If the fine payables are greater than the fine receivables, the amount of the
rest of other incomes are written down by the amount of the difference. In
the case when the amount of the rest of other incomes are not enough for the
subtraction, the main income is written down.

The following examples will illustrate clearly the above regulation.

Example 3.16: We have data from ANV Co. in 20XX as follows:

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+ Fine receivables for suppliers’ breaches of contracts: VND240 million;

+ Fine payables to buyers due to ANV’s breaches of contracts: VND160 million;

+ Net income from an asset liquidation: VND210 million.
Required: Determine other taxable income of ANV in 20XX.

Soluiton:
+ Fine receivables are greater than fine payables. The difference is: VND240
million – VND160 million = VND80 million.
+ Net income from an asset liquidation: VND210 million.
+ Total other taxable incomes: VND80 million + VND210 million = VND 290
million.
Example 3.17: We have data from ABC Co. in 20XX as follows:
+ Fine receivables for suppliers’ breaches of contracts: VND210 million;
+ Fine payables to buyers due to ANV’s breaches of contracts: VND260 million;
+ Net income from an asset liquidation: VND210 million.
Required: Determine other taxable income of ABC in 20XX.

Solution:
+ Fine payables are greater than fine receivables. The difference is: VND260
million – VND210 million = VND50 million.
+ Net income from an asset liquidation: VND210 million.

+ Total other taxable incomes: VND210 million – VND 50 million = VND 160
million.
- Sales margin from foreign currencies or foreign exchange rate difference.
- Year-end balance of provisions according to regulations by law except for bad
debt provision, provision for decrease in value of inventories, provision for
risks in financial investments, provision for the guarantee of construction and
installment, and salaries/wages provision.
- Recovered bad debts that were written off from accounting books.
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- Debts payable to unidentifiable creditors.
- Incomes from goods production and trading or service provision activities in
previous years, which had been missed for booking but later discovered.
- Incomes from the sale of goods or provision of services, which are not yet
included into the turnover, after deducting expenses for the generation of these
income amounts under the Finance Ministry’s regulations.
- Other incomes such as income from project transfer, gain from capital transfer,
real estate transfer etc.

3.5. EXEMPT INCOMES

The following incomes are exempt from corporate income tax:

- Income from farming, animal husbandry and aquaculture products of

cooperatives and entities, which are established under the Act of Cooperatives;
- Income from farming, animal husbandry and aquaculture products of
enterprises earned in geographical localities with exceptionally difficult socio-
economic conditions;
- Income from the provision of technical service directly related to agriculture
production;
- Income from contracts on scientific research and/or technological development
for maximum period of time of 1 year counting from the commencement of
production under the scientific research and/or technological development
contract;
- Income from the sale of products during the period of trial production in
accordance with the production process, but for no more than 6 months since
the commencement of the trial production;
- Income from the sale of products made by new technologies applied for the
first time in Vietnam, but for no more than 1 year since the application of these
new technologies to the production;
- Income from goods production and trading or service provision activities
carried out by disabled people, HIV acquired people and recovered drug
addicted people (the percentage of disabled people and/or HIV acquired people

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 and/or recovered drug addicted people must be at least 30% of the total number
of employees);
- Income from job training exclusively for ethnic minority people, disabled
people, children in exceptionally difficult circumstances, and social evil
victims;
- Income received from a joint venture (which is established in Vietnam) which
has paid the corporate income tax;
- Donations received for education, scientific research, cultural and art activities,
charities and other social activities in Vietnam.

3.6. LOSSES CARRIED FORWARD

Losses can be carried forward for 5 subsequent years since the year of loss. Losses
are subtracted from the assessable income of the following tax years.

The principle for carrying losses forward: Losses must be carried forward all and
continuously to the subsequent years if the enterprise earns a profit in those
subsequent years.

Example 3.18: The following table shows some possible cases related to losses
and gains of Company ABC from 2020 to 2026 (In billion Vietnam dong).

Year Profit

Case 1 Case 2 Case 3

2020 (800) (900) (700)

2021 600 (700) (740)

2022 700 (500) (720)

2023 750 400 (400)

2024 780 700 (200)

2025 830 900 (50)

2026 880 800 340

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The way we determine losses carried forward for each case above is as follows:

Case 1: The amount of VND800 billion loss of the tax year 2020 is carried
forward to the tax year 2021 VND600 billion which makes the assessable income
of the tax year 2021 equal to 0 (600 – 600 = 0). The rest VND200 billion loss of
the tax year 2020 is carried forward to the tax year 2022 which makes the
assessable income of the tax year 2022 equal to VND500 billion (700 – 200 =
500).

Case 2: Loss of the tax year 2020 is carried forward VND400 billion to the tax
year 2023 and VND500 to the tax year 2024. Loss of the tax year 2021 is carried
forward VND200 billion to the tax year 2024 and VND500 billion to the tax year
2025. Loss of the tax year 2022 is carried forward VND400 billion to the tax year
2025 and the rest VND100 billion to the tax year 2026. Similarly to the way we
determine the assessable income in case 1, the assessable income of the tax year
2023 to 2025 is 0. The assessable income of the tax year 2026 is VND700 billion
(800 – 100 = 700).

Case 3: The last year for carrying loss of the tax year 2020 is 2025. The loss of
the tax year 2020 cannot be carried forward to the tax year 2026. The amount of
loss of the tax year 2021 VND340 can be carried forward to the tax year 2026.
The rest of the loss of the tax year 2021 worth of VND400 cannot be carried
forward to the tax year 2027.

3.7. DEDUCTION OF SCIENCE AND TECHONOLOGY FUND

A maximum amount of 10 percent is deducted from base income to form the
Science and Technology Fund (STF). The business establishments have to use
this fund to cover all expenses related to scientific research and technology
innovation.

Within 5 years since the year of the deduction for the fund, if only less than 70
percent of the STF have been used, the establishments have to pay income tax on
the non-used fund. Besides, the establishments have to pay interest on the non-

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used of STF. The interest applicable is the interest for a-year-treasury government
bond. The interest payment period is two years.

If the STF is used for other purposes than scientific research and technology
innovation, the establishments it would not be accepted as a deductible expense.

3.8. TAX RATES

The standard rate is 20 percent (effective since 1 January 2016).

The rate between 32 percent and 50 percent is applicable to each project by

business establishments conducting exploration and exploitation of oil and gas or
other precious and rare natural resources.

3.9. TAX INCENTIVES

Beside exempt incomes as mentioned above, there are some other incentives in
the Law on CIT of Vietnam including preferential rates, tax holiday and other
forms of tax incentives. These include the followings:

3.9.1. PREFERETIAL RATES

The rate of 10 percent for the lifetime of a tax payer is applicable to establishments
engaged in education, training, health care, culture, sport and environment
provided that provided that these business establishments fully satisfy all of the
criteria for socialization stipulated by the Government of Vietnam.

The rate of 10 percent for 15 years since the commencement of business operation
is applicable to business establishments newly founded under investment projects
engaged in: (i) localities with exceptionally difficult socio-economic conditions;
(ii) economic or high technological zones; (iii) fields of high technology,
scientific research and technology development; (iv) investment in specially
important infrastructure of the government; and (v) software production.

The rate of 20 percent is applicable to cooperatives and people’s credit funds.

The rate of 20 percent for 10 years since the commencement of business operation
is applicable to business establishments newly founded under investment projects
engaged in localities with difficult socio-economic conditions. The period for this
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reduced rate applicable to projects with mass investment capital and very high
technology can be longer than 10 years but no more than 15 years.

The starting time for applying the preferential rates is at the first year of turnover
generating.

3.9.2. TAX HOLIDAY

Tax exemption up to 4 years after the taxpayer’s taxable incomes are generated
and a 50% reduction of the taxpayer’s payable tax amounts up to 9 subsequent
years is applicable to business establishments newly founded under investment
projects engaged in: (i) localities with exceptionally difficult socio-economic
conditions; (ii) economic or high technological zones; (iii) fields of high
technology, scientific research and technology development; (iv) investment in
specially important infrastructure of the government; and (v) software production,
education, training, health care, culture, sport and environment.

Tax exemption up to 2 years after the taxpayer’s taxable incomes are generated
and a 50% reduction of their payable tax amounts up to four subsequent years is
applicable to business establishments newly founded under investment projects
engaged in localities with difficult socio-economic conditions.

Where the establishment generates no taxable incomes within 3 years since the
first year that turnover arises, the starting time for tax holiday is counted from the
4th year since the first year that turnover arises.

3.9.3. OTHER EXEMPTS

Business establishments that engaged in production, construction or transport
activities and recruit female laborers can enjoy corporate income tax reduction
corresponding to the amount of extra expenses for the female laborers. The extra
expenses are salaries paid to the female laborers for their work done during the
maternity leave, maternity allowance for the first and second parturition, and extra
training expenses.

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Corporate income tax reduction is applicable to business establishments
employing a large ratio of minority corresponding to the amount of extra expenses
for minority employees.

Example 3.19:
We have data from Viet Co. Ltd. in tax year 20XX as follows:
1. Financial statement of Viet Co. Ltd:
 Gross turnover exclusive of VAT: VND92,000,000,000
 Quantity discount: VND2,000,000,000
 Total expenses which are all supported with legitimate invoices and
vouchers and bank payment receipts exept for those stated otherwise:
VND80,000,000,000.
 Other incomes:
- Overseas income: Net income received from Singapore equivalent to VND:
8,300,000,000. The amount of CIT paid in Singapore equivalent to VND is
1,700,000,000. Under the Tax Treaty between Vietnam and Singapore, tax
credit is applicable to avoid double taxation.
- Income from a technical service for agriculture: VND60,000,000
- Revenue from an asset’s liquidation: VND110,000,000. Liquidation
expense: VND10,000,000. The residual value of this asset is 0.
 Last year’s loss: VND200,000,000.
2. Related information to prepare CIT return for the tax year 20XX:
 There was a sale of goods worth VND 4,000,000,000 which was not
qualified to record as turnover under the Vietnamese accounting standards
for the risks related to the sale has not been transferred to the buyer.
Therefore, the accountants of the company has not recorded to the turnover
in the turnover account. The use right of this goods has been transferred to
the buyer. The cost of this sale is VND3,800,000,000.
 Some information related to the declared expenses above:
- Salaries expenses with illegitimate vouchers: VND80,000,000
- Donation with legitimate vouchers for scholarship to a university:
VND200,000,000
- Donation with legitimate vouchers to a church: VND20,000,000

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Required: Compute the CIT payable by the company for the tax year 20XX and
present the CIT liabilities of the company in the CIT return.
Solution:
1. Accounting profit before tax (In million Vietnam dong)

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 No Criteria Amount
1 Gross turnover 92,000
2 Quantity discount (2,000)
3 Net turnover: 1 – 2 90,000
4 Financial revenue: Overseas income 8,300
5 Total expenses (80,000)
6 Net income from businesses: 3 + 4 – 5 18,300
8 Other revenue (1) 170
9 Other expenses (10)
10 Other profit: 8 – 9 160
11 Accounting profit: 6 + 10 18,460
2. Compute and present CIT payable in CIT return (In million Vietnam dong)
No Criteria Amount
1 Accounting profit before CIT 18,460
2 Adjustment to increase taxable income: 3+4+5 5,800
3 Adjustment to increase turnover 4,000
4 Non-deductible expenses (2) 100
5 CIT paid for overseas income 1,700
6 Adjustment to reduce taxable income (3,800)
8 Expenses related to the adjustment to increase turnover (3,800)
9 Taxable income: 1 + 2 – 6 20,460
10 Exempt income (3) (60)
11 Losses carried forward (200)
12 Assessable income: 9 – 10 – 11 20,200
13 CIT under standard rate: 12 * 20% 4,040
14 Less: CIT paid for overseas income (1,700)
15 CIT payable: 13 – 14 2,340
Explanation:
(1): Other revenue includes income from a technical service for agriculture and
revenue from an asset’s liquidation: 110 + 60 = 170
(2): Non-deductible expenses include:
Salaries expenses with illegitimate vouchers: VND80,000,000
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Donation with legitimate vouchers to a church: VND20,000,000
Total non-deductible expenses: 80,000,000 + 20,000,000 = VND100,000,000
(3): Income from a technical service for agriculture is exempt from CIT.

3.10. TAX DECLARATION AND PAYMENT

3.10.1. TAX DECLARATION

In general, a self-assessment system is applicable to income tax declaration in
Vietnam. The taxpayers themselves calculate the tax amount payable, files the tax
return, and pays tax at the due time stated by law.

Corporate income tax declaration includes annual declaration, monthly

declaration, declaration for each time of generation of income, and final
declaration at the termination of business operation or contracts, tranfer of
corporate ownership or corporation reorganization. Now we examine these types
of declaration in turn.

(1) Annual declaration

This type of declaration is applicable to all business establishments except for

those who cannot declare expenses related to the business or cannot declare both
turnover and expenses related to the business.

In this case, the taxpayer has to pay a provisional CIT amount quarterly based on
their financial statement or their accounting books. The deadline for the
provisional CIT amount is on the thirtieth day of the quarter following the quarter
in which the tax liability arises.

The annual tax return must be filed by the last day of the third month since the
end of the calendar year or the fiscal year.

Based on the annual tax return, if the total amount of quarterly provisional
payments is more than the CIT amount for the tax year, the taxpayers can claim a
tax refund or choose to offset against the tax payable of the following tax year. If
the taxpayers claim a refund, they have to file a notice letter to the tax office about

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their choice. If offset against is their choice, no letter is required; the software of
the tax office does the offset against automatically.

Based on the annual tax return, if the total quarterly provisional payments of the
first three quarter is less than 75% of the CIT amount for the tax year, a late
payment is imposed on the difference between 75% of the CIT amount and the
total quarterly provisional amount of the first three quarter. The time for the late
payment is a duration from the date after the deadline of the provisional payment
of the 3rd quarter to the date that the company pays. For example, the provisional
CIT amount from 1st quarter to 3rd quarter of company A are: VND 1 billion,
VND1.4 billion and VND2.6 billion. This means the total provisional CIT amount
of company A during the tax year is: 1 + 1.4 + 2.6 = VND 5 billion. The CIT
payable amount shown in the annual tax return of company A is VND 10 billion.
Because VND 5 billion is less than 75% of VND 10 billion (which is VND 7.5
billion), company A must pay a late payment with the rate of 0.03 percent on VND
2.5 billion (VND 7.5 billion – VND 5 billion = VND 2.5 billion).

(2) Monthly declaration

The tax amount payable of monthly declaration of corporate income tax is

calculated according to the ratio of income to monthly turnover. This type of
declaration is applicable to business establishments that properly comply with
regulations on goods or service sale invoices or vouchers and can determine base
turnover but cannot determine expenses.

The monthly tax return must be filed by the twentieth day of the month following
the month in which the tax liability arises.

(3) Declaration for each time of generation of income

This type of declaration is applicable to business organizations engaging in

ireregular business.

The taxpayer has to file the tax return by the 10 th day as from the date of income
arising.

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(4) Final declaration at the termination of business operation or contracts,
transformation of corporate ownership or corporation reorganization

The deadline for filing tax declaration dossiers in this case is on the 45 th day from
the date of termination of operation or contracts, transfer of corporate ownership
or corporate reorganization.

Beside the four cases of declaration above, taxpayers who sign agency contracts
with households or individuals acting as service agents to sell their goods at set
prices for commissions have to withhold corporate income tax, which is equal to
5 percent of commission amounts paid to agents (including supports for agents
under contracts signed with taxpayers).

3.10.2. TAX PAYMENT

In principle, the due date for tax payment is the filing deadline of tax declaration.
This means that for tax paid on each time of generation of income, the deadline
for payment is on the 10th day since the date of generating; for monthly payment,
the deadline is the 20th of the month following the tax month; for annual payment,
the deadline to pay any balance of tax is the last day of the third month since the
end of the calendar year or the fiscal year.

3.11. THE USE OF EXEMPTIONS AND RELIEFS IN DEFFERING AND

MINIMISING CIT LIABILIES
In order to get an economic or a social purpose, the National Assembly stipulates
exemptions and reliefs in tax laws. Taxpayers may take advantages of these
stipulations to defer or minimize their CIT liabilities. There are some typical ways
to use exemptions and reliefs in differing and minimizing CIT liabilities
including: The Establishment, Profit Shifting, the Tax Arbitrage, The
Postponement.

3.11.1. THE ESTABLISHMENT

A company may minims its CIT liability by choosing to invest in to a certain fields
of businesses or to a location that preferential rates or tax holiday are applicable.
In order to use this way for minimizing CIT liability, a company should consider
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all other conditions related to the ultimate purpose of doing business –
maximizing the profit, not only minimizing CIT liability. This means that, all
disadvantages related to the choice of investment and related expenses should be
considered and computation. In short, you must find the answer to three questions:
(1) How much more would you get by investing this project in comparison to
other choices? (2) How much more expenses would you have pay for this project
in comparison to other choices? (3) How much would you get after netting off
your benefits and your expenses by choosing this project?

3.11.2. PROFIT SHIFTING

Because of the difference in tax rates and in exemption between types of incomes
and between companies investing in different fields of businesses or localities, a
company may minimize its CIT liabilities by shifting its profit from a certain
fields of business to others or shifting profit among related parties (For example,
from parent company to its subsidiaries, from a subsidiary to other subsidiary).
The way to reduce CIT liabilities is: Profit from the fields with higher CIT rate
would be shifted to the fields with lower CIT rate by accounting techniques; profit
from companies subject to higher CIT rate would be shifted to companies subject
to preferential rates by internal transactions of goods and services (Known as
transfer pricing as mentioned in chapter 1).

Example 3.20: Company ABC (ABC) founded in 2016 in Laichau where a tax
holiday is applicable. ABC started its production and made a profit of VND40
billion in 2017. Under the law on CIT, all of ABC’s profit earned in Laichau is
exempt from CIT for 4 years, since 2017 to 2020; a reduction of 50% of CIT is
applicable to its profit earned from 2021 to 2019. Suppose that, in 2020, ABC
bought 300 equipment worth VDN25 million each. Under the law on CIT, this
expense is allocated to the deductible expenses in maximum 3 years. This means
that ABC can choose to allocate this expense only for a tax year 2020 or to allocate
this expense for 3 tax year: 2020, 2021 and 2022. By choosing to allocate this
expense for 3 years instead of one year, the total deductible expenses of the tax
year 2020 reduces: [(300 x 25) x 2]/3 = VND5,000 million. With CIT rate 10%

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and 50% reduction applicable to 2021 and 2022, ABC reduces its CIT liabilities:
VND250 million (5,000 x 10% x 50%).

3.11.3. THE TAX ARBITRAGE

Tax arbitrage refers to transactions that are entered into profit off the spread
between tax systems, tax treatments, or tax rates.

A company can take advantage of tax systems, for example, by recognizing

revenues in a low tax region while recognizing expenses in a high tax region. Such
a practice would minimize the tax liability by maximizing deductions while
minimizing taxes paid on earnings. A company may also resort to profit on price
differences on the same security resulting from different tax systems in the
countries or jurisdictions in which the security is traded.

A company that uses tax-exempt bonds as a short-term corporate cash

management strategy engages in tax arbitrage. The interest paid on these bonds
(e.g. municipal bonds) is not taxed by the federal government and, in many cases,
state governments. Thus, a company can buy these bonds, earns more interest on
them than savings accounts offer, and then sell them after a short period of time
without the government taxing its interest income.

3.11.4. THE POSTPONEMENT

A company may postpone its CIT liability in a certain tax year by some ways:
Accounting techniques or deduction of scientific and technology fund.

By using accounting techniques in the allocation of some prepaid expenses or to

determine the depreciation expenses in compliance with the tax law, a company
can make the total deductible expenses of a tax year increase while reducing the
total deductible expenses of the following tax years. Thus, in this case, that
company would pay less CIT in the current tax year and pay more CIT in the
following tax years.

By the choice of deduction of scientific and technology fund when computing CIT
payable, a company can reduce 10% of CIT payable for that year. Of course, in
the next tax years, instead of recognizing the scientific expenses as deductible
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expenses for CIT purpose, they must use the scientific and technology fund to
cover these expenses, leading to the decrease of the deductible expenses as
compared to the case without deduction of scientific and technology fund.
Therefore, the CIT payable of the next tax years increase accordingly.

CHAPTER REVIEW

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SUMMARY

1) Corporate income tax is a tax the base for which is incomes of corporations
and other economic entities. Despite being a direct tax, corporate income tax
is less sensitive than personal income tax. Corporate income tax is dependent
on the efficiency of taxpayers’ business.

2) Under Vietnam law, corporate income tax is levied on enterprises and

economic organizations that do businesses and have income generated in
Vietnam.

3) The base for corporate income tax of Vietnam is the assessable income or base
income. In order to determine base income, you first have to calculate taxable
income. The base income is equal to taxable income minus exempt incomes
and losses carried forward. Taxable income equal to base turnover minus
deductible expenses plus other taxable incomes.

4) The base turnover is the total of sales of commodities and services,

surcharges, and price subsidies earned by business establishments. Quantity
discount, goods returns and price reduction due to poor quality are excluded
from the base turnover. Cash discount and discount for early payment are not
subtracted from the base turnover. The time for the turnover to be booked is
the time of sale, regardless the time of the payment by the buyer.

5) Expenses are deductible if they are not in the list of non-deductible expenses
stipulated by legislation. They also have to meet the three criteria:

- They are actual expenses and used for generating income or for the purpose
of business.
- They are proved by legitimate vouchers and documents stipulated by law.
- Non-cash payment is required to expenses with total payment of VND20
million or more.

6) Almost every income from the business of the establishment other than
incomes from goods production and trading or service provision activities is
regarded as other taxable incomes.
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7) Losses can be carried forward for 5 years since the subsequent year of loss.

8) The standard tax rate is 20 percent. The rate of between 32 percent and 50
percent is applicable to each project performed by business establishments
conducting exploration and exploitation of oil and gas or other precious and
rare natural resources.

9) There are many incentives available to payers of corporate income tax in

Vietnam. These include preferential rates (10%, 15% and 17%), exempt
incomes, tax holiday and other exempts.

10) In principle, income tax declaration in Vietnam is a self-assessment system.

The taxpayers themselves calculate the tax amount payable, file the tax return
and pay tax at the due date stated by law. The most common case of
declaration is based on year basis, which is done by quarterly provisional
payments and an official final annual tax return at the end of the tax year.

11) Taxpayers may take advantages of these stipulations to defer or minimize their
CIT liabilities. There are some typical ways to use exemptions and reliefs in
differing and minimizing CIT liabilities including: The Establishment, Profit
Shifting, the Tax Arbitrage, The Postponement.

KEY TERMS

Supply definitions for the following terms

Accelerated rate Discount for early Straight-line

payment method

Adjusted declining balance Doubtful debt Provisions

method
Amortization Exempt income Self-assessment

Annual tax return Ex-warehousing cost Taxable income

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Bad debt Final declaration Tax notice

Base income Liquidation Tax return

Base turnover Margin To book
Book value One-stop-shop To file
mechanism
Cash discount Overhead expense To generate
Consuming norm Prepaid expense To withhold
Deductible expense Preferential rate Unit of production
Deduction Provisions Useful life
Depreciation Quantity discount Year-end balance
Depreciation charge Quarterly tax return

ECONOMIC CONCEPTS

1) Point out four characteristics of corporate income tax.

2) Who is liable to pay corporate income tax in Vietnam?

3) Point out how to determine income tax base.

4) How to determine assessable income?

5) What is the base turnover?

6) When is an expense deductible?

7) List non-deductible expenses stipulated by law.

8) Clarify three depreciation methods acceptable for calculating corporate

income tax in Vietnam.

9) Explain types of provisions deductible for calculating corporate income tax

in Vietnam.

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10) List taxable incomes stipulated by the Act of Corporate Income Tax in
Vietnam.

11) List exempt incomes stipulated by the Act of Corporate Income Tax in
Vietnam.

12) Explain types of incentives enjoyed by corporate income tax payers in

Vietnam.

13) Explain procedures for income tax declaration.

DISCUSSION QUESTIONS

1) Discuss the similarities and differences between corporate income tax and
individual/personal income tax.

2) Why are quantity discount, but not cash discount and discount for early
payment, excluded from the base turnover?

3) Which depreciation methods should you choose to benefit the business? State
the reasons.

4) What does “an expense generating income” mean? Give some examples of
expenses that do not generate income.

5) What is a legitimate invoice? Give some examples of invalid invoices.

6) Explain why some expenses need to be capped for tax purpose.

7) Why donations, in principle, except for donation for education, for health care,
for natural disaster recovery, for building houses for the poor; for science
research and grants to localities with exceptionally difficult socio-economic
conditions under the Government’s Program, are not deductible?

8) Point out the significance of income tax incentives. Explain possibilities

where a taxpayer can take advantage of tax incentives to avoid or to evade tax.
Give examples for each.

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9) Why a system of quarterly provisional payment of income tax is applicable in
parallel with an annual tax declaration and payment?

CHAPTER 4
VALUE ADDED TAX

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define value added tax (VAT) its characteristics.

- Define who is liable to pay VAT in Vietnam.
- Define characteristics of non-taxable goods and services
- Distinguish taxable, non-taxable and exemption from declaring and paying
VAT
- Determine base price in Vietnam.
- Know VAT rates in Vietnam.
- Calculate the amount of VAT payable by a taxpayer.
- Complete a VAT return.
- Identify when to file VAT returns and to pay VAT.
- Define who and in what case is entitled to tax refund as well as the
responsibilities of parties involved in VAT refund performance.

4.1. OVERVIEW OF VALUE ADDED TAX

Value Added Tax (VAT) is derived from turnover tax. The concept was proposed
in 1917 by Carl Friedrich von Siemens, a German business man. France was the
first country to launch VAT pilot program in 1954 and VAT has been officially
applied since 1968. Since its application, VAT has helped to achieved two
objectives: timely increase in revenue and prevention of double taxation by
turnover tax. Up to now, more than 130 countries have introduced the VAT,
which accounts for a quarter of the total government’s revenues on average.

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VAT is a form of sales tax, charged as a percentage of the added value of a
commodity as it changes hands from manufacturer to wholesaler, from wholesaler
to retailer and from retailer to consumer.

We can distinguish VAT from other taxes by the following characteristics:

Firstly, VAT is a multi-phased consumption tax. VAT is imposed on all phases

of production, distribution, but it is only charged on added value of each phase.
It is a consumption tax because it is borne ultimately by the end consumer. It is
not a charge on the supplier. The supplier must add the VAT to the price of
commodities and the buyer pays the total.

Added value is the new value generated in the process production and business
activities. It may be calculated by addition or deduction method. Under the
addition method, added value is determined by summing the profit and wages.
According to the deduction method, added value can be defined as the difference
between the selling price and the purchase price of goods and services.

Total added value of all phases is equal to the final price at the last phase.
Therefore, the total amount of VAT collected from all phases is equal to the
amount of VAT which is computed on the selling price to the end consumer.

Secondly, VAT is a neutral tax. VAT is not a cost to a seller. It is only a charge
counted on the price of commodity and is paid by the buyer. VAT is charged as a
percentage of the selling price, which means that the actual tax burden visible at
each stage of production and distribution chain is born by the buyer and of course
falls on the end consumer. It is collected via a deduction system where a taxable
person (i.e. VAT-registered business) must calculate the output tax at each stage
of production and distribution but he is allowed to offset against the input tax, i.e.
tax charged to him by his supplier. This mechanism ensures that the tax is neutral
regardless of how many transactions are involved.

Thirdly, VAT is an indirect tax. Legally, VAT payers are those who supply
products or provide services, but tax burden is born by consumers, because VAT
is shifted onto buyers via the price of goods and services.

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Fourthly, VAT is regressive in relation to income. VAT is charged on the selling
price of goods and services. At each price of goods and services, the same VAT
amount is paid but the buyers’ income level is not the same. Therefore, VAT has
less effect on the rich/high income group than on the poor/low income group.

In 1997, the Assembly of Vietnam enacted the Act of VAT (also called Law on
VAT) that was effective from 1 January 1999. VAT is rather new in Vietnam, so
since its introduction many changes and amendments have been made. This law
was then revised in 2003, 2005, 2008, 2013, 2014 and in 2016.

4.2. SCOPE OF VAT

4.2.1. TAX PAYER

Taxpayers of VAT are organizations and individuals who are engaged in
producing and/or trading goods and rendering services subject to VAT in
Vietnam, regardless of their business forms. Other organizations and individuals
that import goods (it is referred as importers) or purchase services oversea subject
to VAT are also taxpayers of VAT.

4.2.2. TAXABLE GOODS AND SERVICES

Subject to VAT are goods and services used for production, business and
consumption in Vietnam (including imported goods and services), except for
those listed as non-taxable items (mentioned below).

4.2.3. NON-TAXABLE GOODS AND SERVICES

Under the Act of VAT of Vietnam, 25 groups of items are exempt from tax. In
other words, these items are called non-taxable goods and services. These include
the following:

- Necessities such as education and health service.

- Goods and services for social and charity objectives, such as goods imported
in the following cases: humanitarian aid or non-refundable aid goods; gifts
for state agencies, political organizations, socio-political organizations,
social organizations, socio-professional organizations and/or people’s armed

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 forces units; presents and gifts for individuals in Vietnam; personal effects
of foreign organizations and individuals within diplomatic immunity limits;
and personal effects in duty-free luggage limits; personal effects brought
along by overseas Vietnamese upon their return to the country; goods and
services sold to other organizations and individuals as humanitarian aid or
non-refundable aid for Vietnam.

- Products of preferential fields such as unprocessed or preliminarily

processed agricultural products at the stage of producing and importation,
crop seeds, animal breeds etc.

- Imported goods, but not really used for production, distribution and
consumption in Vietnam, such as goods transferred from border gate to
border gate, goods in transit or transported by land through the Vietnamese
territory; goods temporarily imported for re-export, goods temporarily
exported for re-import, raw materials and materials imported for the
production or processing of goods for export under export production or
processing contracts signed with foreign parties.

- Products and services considered to be used for non-profit aim such as public
transportation by bus, some cultural services etc.

- Goods and services paid for by the government such as imported weapons,
state broadcast and telecast.

4.2.4. CASES EXEMPT FROM DECLARING AND PAYING VAT

In some cases, taxpayers do not have to declare and pay VAT. These include the
following:
- An organization or individual receives a monetary compensation, bonus,
allowance, or payment for transfer of emission permit, or other revenues; The
delegated payments that are not related to the sale of goods/services of the
taxpayer.

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Example 4.1: In a tax period, Dragon Company receives a compensation of
VND 20 million for contract violation from HP company. Dragon Company shall
make a receipt and is not required to declare and pay VAT on such amount.
- Goods internally circulated as supplies or semi-finished products serving the
operation of a manufacturing or business establishment.
- Transfer of depreciated in-use assets between a business establishment and its
wholly-owned subsidiaries or among these subsidiaries to serve the
manufacturing or trade of goods/services subject to VAT.
- A business organization or businessperson in Vietnam purchases services from a
foreign organization that does not have a permanent establishment in Vietnam, or
from am overseas individual that is not a resident in Vietnam. These services
include: repair of vehicles, machinery, equipment (including supplies and parts);
advertising, marketing; trade promotion; brokering sale of goods and services to
abroad; training, international postal and telecommunications services that are
provided outside Vietnam, lease on foreign satellite transmission lines and
frequency bands.
Example 4.2: Vinataba purchases service repair of vehicles.from outside Vietnam,
this service provided in Japan. In this case Vinataba does not to have to declare and
pay VAT
- The non-business organizations and individuals shall not pay VAT on the sale
of their assets.
- Company or cooperative that pays VAT using credit method and sells
unprocessed or preprocessed farming, breeding, aquaculture products to another
company or cooperative.
- The entities that transfer project of investment in manufacturing or trade of
goods/services subject to VAT to other companies or cooperatives;
Example 4.3: Viet Thang Garment Company executes a project of investment in
a garment factory in Ha Nam province. In June 2020, 60% of the project is

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completed according to the design, and the investment is VND 25 billion. Due to a
financial difficulty, Viet Thang Garment Company transfers the incomplete project
to Thai Tuan Company for VND 27 billion. Thai Tuan Company receives and
keeps executing this project. Viet Thang Garment Company is not required to
declare and pay VAT on the value of the transferred project.
- The revenue from goods/services sold by agents, commissions paid to agents,
including: postal and telecommunications services, lottery, air tickets, bus tickets,
train tickets, ship tickets, international transport agents; air and maritime service
agents entitled to 0% VAT; insurance agents; revenue and commissions on
selling goods/services that are not subject to VAT.

4.3. TAX BASE

VAT base is the base price. The base price for sale of goods or provision of
services is the total revenue (turnover) received or receivable by a supplier from
the sale of goods or the provision of service exclusive of VAT.

In some cases the base price is specifically determined as follows:

For imported goods, the base price is the base price for import duty plus import
duty (if any) plus excise duty (if any) and plus environmental protection tax (if
any). The base price for import duty is determined under the Act of customs duty.
Where imported goods eligible for import duty exemption or reduction, the base
price is the base price for import duty plus (+) the import tax payable after the
exemption or reduction.

Example 4.4: Company A import a machine form Japan. The base price for import
duty is VND 100 million, import duy is VND 5 million. The VAT base price is
VND 100 million + VND 5 million = VND 105 million.

- For services supplied by foreign parties to consumers in Vietnam, the base price
is the service price payable by Vietnamese parties to foreign parties.

- For goods and services subject to excise duty, the base price is the price inclusive
of excise duty but exclusive of VAT.
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- For goods and services subject to environmental protection tax, the base price is
the price inclusive of environmental protection tax but exclusive of VAT.

- For goods and services subject to environmental protection tax and excise duty,
the base price is the price inclusive of environmental protection tax and excise
duty but exclusive of VAT.

- For goods and services used for barter or as presents, gifts or salary payments,
the base price is determined as equal to the base price of goods or services of the
same or equivalent types at the time such activities are carried out.

- For goods and services used for sales promotion in accordance with trade laws,
the base price is zero (0). In case they are not conformable with trade laws, tax
shall be declared and paid as if they are used as presents, gifts or donated.
Example 4.5: Company A is a manufacturer of carbonated drinks. In a tax period,
company P does a sales promotion in the form of “buy 5 get 1 free". The sales
promotion is conformable with trade laws, thus taxable price of every product given
free of charge in tax period is zero. In the case the sales promotion in a tax period
is not conformable with trade laws, thus company A must declare and pay VAT on
the products given free of charge.

- For goods or services delivered by businesses for internal consumption rather

than for production, the base price is the selling price of the goods or services of
the same or equivalent types at the time of consumption.
Example 4.6: Lavie Company manufactures bottled water. The VAT-exclusive
price of a bottle on the market is VND 4,000. In the tax period company uses 100
bottles for company’s conference and uses 200 bottles in a holiday trip of the labour
of the company.Thus, for 100 bottles for company’s conference comapany does
not have to declare and pay VAT and VAT base price of 300 bottles used in a
holiday trip of the labour of the company, which do not serve the manufacture or
trading, shall be levied: 200 x VND 4,000 = VND 800,000.

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- For leasing services such as leasing of houses, offices, workshops, warehouses,
wharves, yards, means of transport, machinery, equipment, etc., the base price is
the rent exclusive of VAT. If rent is paid in installments or prepaid for a leasing
term, the base price is determined on the basis of each installment or the prepaid
rent, including the amounts collected for renovation, repair and upgrading of
leased houses at the lessees’ requests. The rent agreed upon by the involved parties
is shown in the contract. If the rent bracket is prescribed by the law, the rent is
determined to be within the prescribed bracket.

- For goods sold in installments or deferred payment, the base price is the lump-
sum price exclusive of VAT (excluding interests on installment or deferred
payments), regardless of the amount of each installment or deferred payment.

- For goods for processing, the base price is the total expenses for processing those
goods including employees’ expense, costs of fuel, power, materials and other
processing expenses incurred by the processing parties exclusive of VAT.

- For ocean shipping agency services, brokerage services, export and import
entrustment as well as other services entitled to remuneration or commissions, the
base price is the earned remuneration or commission exclusive of VAT.

- For transportation, loading and unloading services, the base price is the freight
or loading and unloading charges exclusive of VAT, regardless of whether the
establishment directly undertakes the transportation, loading and unloading or
hires such services.

- For goods and services of specific nature for which documents such as freight
tickets, lottery tickets etc. are used and recorded with the payment price inclusive
of output tax, the base price is determined as follows:

The payment price (Proceeds from the sale of tickets, stamps…)

The base price =
1 + the tax rate (%) applicable to such goods or service

The base price of goods or services covers additional fees and surcharges
collected in addition to the goods or service prices which are paid to businesses,

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excluding those which businesses remit into the state budget. When businesses
apply discounted sale prices, the base price are discounted sale prices indicated
on the invoices.

The base price is determined at the time when a business completely transfers the
ownership of or the right to use the goods or services (for cases of construction
and installation, it is at the time of testing and takeover of completed works, work
items, construction or installation volumes), regardless of the time of payment.

4.2.6. TAX RATES

The VAT rates are applicable uniformly to each type of goods or services at the
importation, production, processing or trading stage. There are 3 rates of VAT
including 0%, 5% and 10%.

The 0% rate is applicable to exported goods and services; construction and

installation overseas and in free trade zones; international transport; exported
goods and services that are not subject to VAT, except for the cases, in which 0%
rate is not applied.

Exported goods include goods exported overseas, including those exported under
entrustment, goods sold to non-tariff zones, goods that are delivered to the
recipients outside Vietnam, parts and supplies for repairing, maintaining vehicles,
machinery, and equipment of foreign entities, and those that are used outside
Vietnam and goods regarded as exports prescribed by the Government, such as
transitionally processed goods as prescribed in the Commercial Law regarding
activities of international goods purchase and sale and activities of goods
purchase, sale and processing agency with foreign countries; processed goods for
on-spot export as prescribed in the Commercial Law regarding activities of
international goods purchase and sale and activities of goods purchase, sale and
processing agency with foreign countries; goods exported for sale at overseas fairs
and exhibitions. Some conditions must be met for exported goods to apply 0%.
These are: (i) Bank receipts for payment for exported goods and other documents
prescribed by law; (ii) exported goods must be supported with legitimate
economic contract as prescribed by laws; and (iii) there is an export declaration
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form certified by a customs office that customs procedure has been made for those
goods.

Exported services are services provided directly to organizations or individuals

overseas and are consumed overseas; the services provided for the entities in non-
tariff zones and consumed within, which have to fully meet the following
conditions: service -providing businesses have contracts signed with overseas
purchasers in accordance with the Commercial Law; and bank receipts for
payment for exported services and other documents prescribed by law.

There are some exceptions where 0% of VAT is not applicable to an exported

item or an item sold to non-tariff zone. These include:

- Exported credit and derivatives, financial investment and securities investment

services;

- Overseas reinsurance;

- Royalty and copyright transfer overseas;

- Sale of out coming telecommunication and post service overseas;

- Exploited mineral resources not yet processed into other products;

- Goods and services sold to non-business households in non-tariff zones;

- Tobacco and alcoholic beverages imported then re-export shall not incur VAT
output upon re - exportation though on which VAT input must not be deducted.

- Automobile sold to entities or individuals in non-tariff zones;

- Gasoline sold in domestic market to automobile of entities in non-tariff zones;

- Services provided for the entities in non-tariff zones include: leases on houses,
meeting halls, offices, hotels, warehouses; employee transport; food and drink
services (except for catering, food and drink services provided in non-tariff
zones).

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The rate of 5% is applicable to goods and services basically used for production
and consumption; for example, clean water for production and daily life; curative
and preventive medicines for human and animal use (including vaccines, distilled
water for preparation of injections); teaching and learning aids etc.

The 10% rate applies to goods and services not listed in 5% and 0% rate
category.

4.4. VAT METHODS

VAT payable by businesses is calculated by either of the two methods: the credit
method and the direct method. If a business liable to pay VAT under the tax credit
method also trades in gold, silver or gems, it must separately report these business
activities for calculation of tax under the direct method.

4.4.1. THE CREDIT METHOD

4.4.1.1. Who apply this method?
The credit method of VAT payment is applied to business establishments which
fully observe regulations on accounting, invoices and documents as prescribed by
the law on accounting, invoices and documents including:

- Business establishments who have at least 1 billion VND in annual revenue from
selling goods and services, except for business households and business people
pay VAT under the direct method;

- Business establishments that voluntarily apply credit method, except for the
business households and individuals pay VAT under the direct method;

- Foreign entity and individual that provides goods and services serving petroleum
exploration and extraction pay VAT under credit method and authorizes a
Vietnamese party to deduct tax and pay VAT.
4.4.1.2. Determination of VAT amount payable
The VAT amount The output The deductible input
= -
payable VAT VAT

Of which:

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The output VAT (output tax) amount is equal to the base price of the taxable goods
sold or service provided multiplied by the rate applicable to these goods or service.

Under this method, when selling goods and providing services, the supplier
includes the output tax on the before-VAT price (price exclusive of VAT) and this
is shown on the invoice. When making invoices for goods sold or services
provided, the business must enter the before-VAT price, the output VAT and the
total payment. If on an invoice only the payment is stated but not the before-VAT
price and the output VAT, the output VAT on the goods sold or the services
provided shall be calculated based on the total payment inclusive of the before-
VAT price and the VAT, not the before-VAT price.

Example 4.7: The data on the sales during the month of an enterprise who sells
product A are as follows:
- Sale of 100 units at the before-VAT price of VND 4,600,000/unit.
- Sale of 200 units at the total sale price of VND 960,000,000. On added value
invoice, the VAT amount is not written.
- VAT rate 5%
Required: Define the output tax amount
Solution:
The output tax amount is
- Sale of 100 units: 100 x VND 4,600,000 x 5% = VND 23,000,000
- Sale of 200 units VND 960,000,000 x 5% = VND 48,000,000
- Total VAT output VND 71,000,000
Businesses have to comply with the concerning accounting rules as prescribed by
law. Wrong VAT rates stated on invoices which are not adjusted yet by businesses
themselves but are detected through auditing by tax offices can put the violators
at a disadvantage. If the VAT rate stated on the invoice is higher than that
prescribed in the Law on VAT, VAT must be declared and paid at the VAT rate
stated on the invoice. If the VAT rate stated on the invoice is lower than that
prescribed in legal documents on VAT, VAT must be declared and paid at the
VAT rate prescribed in legal documents on VAT.
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The deductible input VAT (input tax) amount is equal to the total VAT amount
stated on the value added invoice for purchased goods or services used for
production and trading in goods and services subject to VAT or the VAT amount
stated on vouchers on import tax payment for imported goods or VAT payment
made on behalf of foreign parties under the guidance of the Ministry of Finance
applied to foreign organizations and individuals doing business in Vietnam
without establishing legal entities in Vietnam.

If purchased goods and services are of the kinds for which special-type invoices
written with VAT-inclusive payment prices are used, businesses may base
themselves on these VAT-inclusive prices to determine the before-VAT prices
and the deductible input tax amount.

Example 4.8: In a tax period, JP Co. Ltd. made payment for input services of
special type invoice eligible for tax credit.

The total payment price is VND 110 million (inclusive of VAT). This service is
subject to the 10% tax rate.

Required: Define the deductible input tax amount for the tax month.

Solution:

The deductible input tax amount is

VND 110 million

x 10% = VND 10 million
1 + 10%

Wrong VAT rates indicated on the invoice which are not adjusted yet by
businesses themselves but are detected through auditing by tax offices, can put
the purchasers at a disadvantage. If the VAT rate stated on the invoice is higher
than that prescribed in legal documents on VAT, input tax shall be deducted at the
VAT rate prescribed in legal documents on VAT. If the VAT rate stated on the
invoice is lower than that prescribed in legal documents on VAT, input tax shall
be deducted at the VAT rate indicated on the invoice. The purchasers can avoid
the above disadvantages if they have a letter of certification issued by tax offices
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who are in charge of the sellers to prove that the sellers have declared VAT at the
rates as prescribed by laws.

When determining input tax, businesses have to comply with the following
principles:

Principle 1: Only input VAT of goods and services used for the production of
and trading in goods and services subject to VAT is deductible. Input VAT of
goods or services used for the production of and trading in goods and services not
subject to VAT (exempt items) is not deductible.Businesses have to book
separately the input tax amount of the goods or services used for the production
of taxable items and exempt items.

If input tax amount of purchased goods and services cannot be separated from
being used for taxable items, for not to declare and pay VAT items or exempt
items, deductible input tax is determined by allocating the input VAT based on
the ratio between turnover of taxable items plus turnover of transactions exempt
from declaring and paying VAT and total turnover of goods and services.

Some special cases relating deductible input tax:

- For purchased goods or fixed assets which are lost, damaged due to natural
disasters, fires or unexpected incidents, or stolen, and if organizations and
individuals responsible for paying compensations therefore are identified and/or
the loss value has been compensated by insurance companies, the input tax of
these goods is not deductible.

- The input VAT of fixed assets, machinery, equipment, including the input VAT
of operation of hiring these assets, machinery, equipment, in the following cases,
shall be not credited but included in historical cost of fixed assets or the deducted
costs as prescribed by Law on enterprise income tax and other guidelines: special-
purpose fixed assets used for the manufacture of weapons and military equipment
for security and defense purposes, fixed assets, machinery, equipment of credit
institutions, re-insurance businesses, life insurance enterprises, securities trading

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enterprises, hospitals or training institutions; civil aircraft and yachts not for
commercial transportation of cargo or passengers, or for tourist or hotel business.

- For fixed assets being passenger of 9 seater car or less (Except cars for
commercial transportation of cargo or passengers, or for tourist or hotel business;
cars used for trial driving for business) which are valued at over VND 1.6 billion,
the input VAT amount corresponding to the amount in excess of VND 1.6 billion
will not be credited.

- Input VAT on goods and services forming fixed assets such as canteen,
recreation room, locker room, parking lot, restroom, water tank serving workers
at the workplace, housing and medical facility for workers in industrial parks shall
be fully deducted.

- VAT on purchased goods and services serving the provision of goods and
services for the foreign entities that use them as humanitarian aid or non-
refundable aid shall be deducted in full.

- Input VAT of goods and services serving provision of goods and services that
are exempt from declaring and paying VAT shall be fully deducted.

For corporation offices that are not directly engaged in business operations and
subsidiary administrative and non-business units such as hospitals, clinics,
sanatoriums, institutes, training schools, etc., not liable to pay VAT, they are not
entitled to credit input tax or to refund for goods and services purchased in service
of their activities.

Example 4.9: In the tax period, BD Co. ltd. purchased goods and services for
production product X, which is taxable and product B, which is an exempt item.
Total VAT input written on added value invoices legible VND15,000,000. The
company cannot separate the input tax for each item. Turnover of selling product
X in the period is VND 100,000,000, product B is VND 50,000,000.
Required: Define the deductible input tax amount
Solution:
The deductible input VAT amount is
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 15,000,000 x 100,000,000/(100,000,000 + 50,000,000) = VND 10,000,000
+ Principle 2: The deductible input VAT arising in the period is declared for credit
immediately when the VAT amount payable in that period is determined,
regardless of whether these goods or services have been delivered for use or still
remain in stock.

When value added invoices of purchased goods and services are made but not yet
declared in the tax period, they are accepted for deduction in the following period
except for the case where the tax authority or a competent authority has announced
their decisions on tax audit at taxpayers’ premises.

In order to be deductible, 3 conditions below must be met at the same time:

+ Condition 1: The establishment must have registered to pay VAT under credit
method.

+ Condition 2: The purchase must be supported with legitimate invoices and/or

vouchers.

Input VAT is not deductible if the invoice is considered to be illegal including the
following cases:

- Value added invoices are used at variance with law provisions, i.e., they are
written with the total payment prices without VAT amount stated (except for
special cases permitted by the Ministry of Finance);

- The seller’s name, address or tax identification number is not written or

written incorrectly so that the seller is unidentifiable;

- VAT payment invoices and vouchers are fake;

- Invoices are erased or improperly modified, false invoices (invoiced goods

or services are not actually sold);

- Invoices are written with a value not true to the real value of goods or
services purchased, sold or exchanged.

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+ Condition 3: Non-cash payment must be done to the purchase with total
payment of VND 20, 000,000 and more.

Where businesses having customs office’s certification for exported goods but
lack of proof of bank payment, they are not required to calculate the output tax
but are not entitled to claim for deduction of input VAT.

For businesses providing export services, if they do not satisfy the condition of
bank payment or the condition for being regarded as bank payment, they are not
required to calculate output tax but are not entitled to claim for deduction of input
VAT.

For the cases of transitionally processed goods and on-spot exported goods, if the
businesses lack one of the documents as prescribed, they shall have to calculate
and pay VAT as if these goods were sold in domestic market.

Example 4.10: The data during the month of an enterprise, who pays VAT under
credit method, are as follows:
1. Value of goods left at the beginning of the month:100 units, before-VAT
price of VND 20,000,000
2. Purchase during the month
- Purchase 3,000 units, before-VAT price of VND 200,000 per unit.
- Purchase 2,000 units with before-VAT price VND 200,000 per unit. The
VAT invoice is not written the seller’s TIN.
- Purchase 100 units with price written on sale invoice of VND 22,000,000.
3. Value of goods left at the end of the month: before-VAT price of VND
30,000,000
Required: Define the deductible input tax amount. Given that:
- VAT rate 10%.
- All items are taxable and
- All purchases are with receipt of bank payment.
Solution:
The deductible input VAT amount is for purchasing 3,000 unit
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 3,000 x VND 200,000 x 10% = VND 60,000,000
Example 4.11: The data during the month of an enterprise who sells product M
are as follows:
1. Sale of 5,000 units at the before -VAT price of VND 100,000/unit in the
domestic market.
2. Export 400 units at FOB price of VND 110,000/ unit
3. Purchase 3,000 units with before-VAT price of VND 90,000 per unit.
4. Purchase 300 units with price of VND 92,000 per unit stated on the sale invoice.
Required: Required: Define the tax amount payable. Given that:
- VAT rate 10%.
- All items are taxable and
- Exported goods are supported with sufficient documents as prescribed by law
- All purchases are with receipt of bank payment.
Solution:

1. VAT output
- Sale of 5,000 units: 5,000 x VND 100,000 x 10% = VND 50,000,000
- Export 400 units 400 x VND 110,000 x 0% = 0
- Total VAT output VND 50,000,00
2. The deductible input VAT amount is for puchasing 3,000 unit
3,000 x VND 90,000 x 10% = VND 27,000,000
3. VAT amount payable VND
50,000,000 – VND 27,000,000 = VND 23,000,000

4.4.2. DIRECT METHOD

4.4.2.1. For trading of gold, silver, and gemstones:

VAT payable = Added value x 10%

Added value of gold, silver, and gemstones = Selling price - Cost of the gold,
silver, and gemstones sold.
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Selling prices of gold, silver, or gemstones are the actual selling prices written on
the sale invoices, inclusive of VAT, and other surcharges to which the seller is
entitled.

Cost of gold, silver, or gemstones sold are their VAT-inclusive values when they
are purchased or imported.
4.4.2.2. Cases in which VAT is calculated by directly multiplying a rate (%) by
the revenue
VAT payable = Taxable revenue x Deem VAT rates
- This method may be applied by the following entities: companies and
cooperatives that earn less than 1 billion VND in annual revenues, except for those
that voluntarily apply credit method; Business households and businesspeople;
foreign entities doing business in Vietnam without following the Law on
Investment; the organizations that fail to adhere to accounting and invoicing
practice, except for those that provide goods and services serving petroleum
exploration and extraction.

-The taxable revenue is the total revenue from selling goods and services, which
is written on the sale invoice for taxable goods and services, inclusive of the
surcharges to which the seller is entitled.

- Deem VAT rates applied to various business lines:

+ From goods distribution or goods supply: 1%;

+ From services or construction exclusive of building materials: 5%;

+ Manufacturing, transport, services associated with goods, construction inclusive

of building materials: 3%;

+ Other lines of business: 2%.

If the taxpayer engages in various lines of business to which different rates are
applied, they must be sorted by VAT rate. Otherwise, the highest rate among
which shall apply.

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The direct VAT payable by a business household or businessperson that pays
VAT at a flat rate depends on the declaration made by the taxpayer, the data of
the tax authority, the result of the investigation into the taxpayer’s actual revenue,
and opinions of the local Tax Advisory Council.

If the taxpayer that pays tax at a flat rate engages in multiple lines of business, the
rate on the primary business line shall be applied.

Example 4.12: We have data in the month of a company, who declares and pays
VAT using direct method in the tax month as follows:
- Revenue from selling computer software: VND 300,000,000
- Revenue from consultancy on company establishment: VND 200,000,000
- Direct VAT rates from service is 5%.
Required: Define the VAT amount payable by this company
Solution:
- Revenue from selling computer software: non- taxable
- Revenue from consultancy on company establishment: taxable with Direct VAT
rates: 5%
The VAT amount payable: VND 200,000,000 x 5% = VND 10,000,000

4.5. INVOICING
Businesses, when purchasing or selling goods and services, have to comply with
the regime on invoices and vouchers as prescribed by law.

Businesses applying credit method, when selling goods or providing services

subject to VAT have to use value added invoices (except where they are permitted
to use special-type invoices and vouchers written with total payment prices).
Businesses applying direct method, when selling goods or services, have to use
normal invoices. Businesses have to use export invoice when they export goods
or render services overseas.

When making invoices, businesses have to fully and correctly fill in all items on
the invoices. For value added invoices, they have to clearly write the before-VAT

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price, surcharge and charge collected in addition to the payment price (if any), the
VAT, and the total payment price.

In some special cases, the use and writing of invoices and vouchers are as follows:

 Production and businesses applying credit method, when selling exempt items
or selling taxable items to VAT-exempt entities or selling gold, silver, and gems
shall use value added invoices. On these values added invoices only the line for
writing the sale price is written with the before -VAT price while the lines for
writing the tax rate and VAT amount are left blank and crossed out. In case of
selling exempt items or selling taxable items to VAT- exempt entities, the
invoices must clearly state that the goods are exempt or are sold to a VAT-
exempt entity.

 For export and import businesses applying credit method which undertake to
import goods under entrustment for other establishments, when delivering the
goods, they shall make invoices as follows:

- If the import entrustee has paid VAT at the importation stage when
delivering goods imported under entrustment, it shall make an value added
invoice for use by the import consignor as a basis for declaration and credit
of input tax on goods imported under entrustment.

- If the import entrustee has not yet paid VAT at the importation stage when
delivering the imported goods, it shall fill in the ex-warehousing-cum-
internal transport bill and make the internal transfer order for use as a
voucher for circulation of the goods on the market. Only after paying VAT
at the importation stage for goods imported under entrustment can the
establishment makes the invoice according to the above regulations.

- An value added invoice on the delivery of goods imported under entrustment

is written as follows:

(i) The before-VAT price covering the value of goods actually imported at
CIF price, the import tax, the excise duty and other amounts payable
according to regulations at the importation stage (if any).
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 (ii) The VAT rate and VAT amount as indicated in the tax payment notice
of the customs office.

(iii) The total payment amount is equal to (i) plus (ii).

 The import entrustee has to make a separate value added invoice for the
commission paid for the entrusted import.

 For production and businesses which deliver and transfer goods to their
dependent cost-accounting establishments such as branches, shops… in other
localities (provinces or centrally run cities) for sale or transfer among branches
and dependent units; which receive goods back from dependent cost-
accounting units; or which deliver goods to commission agents for sale at fixed
prices, basing themselves on the mode of business organization and cost-
accounting, they may opt for either of the two following ways of using invoices
and vouchers:

(i) Using value added invoices as a basis for VAT declaration and payment in
each unit and at each independent stage;

(ii) Using ex-warehousing-cum-internal transport bills issued by the Finance

Ministry (the General Department of Taxation), together with the internal
transfer orders for goods internally transferred; using the delivery bills for
goods for agency sale, issued by the Finance Ministry (the General
Department of Taxation) for goods delivered to agents, together with the
internal transfer orders.

 Dependent cost-accounting units and units acting as agents in various forms,

when selling goods, have to make invoices as prescribed by law, and at the
same time, to make lists of sold goods, and send them to the establishments
which have delivered the goods to them or delivered goods for agency sale so
that these establishments can make value added invoices for goods actually
consumed. Businesses which directly retail goods or provide services of a value
below the prescribed level are not required making invoices. However, if a
purchaser requests an invoice, they have to make an invoice as prescribed by

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 law. In case they do not make any invoices, they have to make retail lists for
tax purpose.

 For organizations, individuals and administrative non-business units producing

or trading in goods or services subject to VAT on an irregular basis and without
invoices, they shall be given separate invoices by the tax office for use in each
specific case.

4.6. TAX DECLARATION AND PAYMENT

4.6.1. DECLARATION
4.6.1.1. Tax declaration for production and business activities
Taxpayers have to file VAT declarations and submit to tax offices in charge of
them. Businesses have to make and file declarations and submit to tax offices even
when no goods or service sale turnover or input tax and output tax arises.

For taxpayers that have dependent units conducting business in the province or
city where taxpayers’ head offices is located: If these dependent units conduct
independent accounting, they have to file VAT declarations and submit to tax
offices in charge of them. If these dependent units conduct dependent accounting,
taxpayers have to make a VAT declaration for both themselves and their
dependent units.

For taxpayers that have dependent units conducting business outside province or
city where taxpayers’ head offices are located, these dependent units have to file
VAT declarations and submit to tax offices in charge of them. If these dependent
units do not directly sell goods and have no sale turnover, they shall all make tax
declaration at taxpayers’ head offices.

If taxpayers conduct business activities of construction, installation or itinerary

goods sale without establishing dependent units outside the province or city where
their head offices are located (below referred to as extra-provincial mobile
construction, installation or goods sale business), they have to file tax declarations
and submit to district-level tax departments of the localities where such
construction, installation or goods sale activities are conducted.

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If a taxpayer applying credit method have an input tax amount left after deduction
against the output tax of the tax month, he is entitled to deduct this input tax
amount in the following tax period regardless of the calendar year or the fiscal
year.

Tax period:

- Value-added tax declaration is made on a monthly basis, except cases of

declaration on quarterly or upon incurrence of tax.

- Case of declaration on quarterly basis: The taxpayer earns a total revenue of

50 billion VND or less from the sale of goods and/or services in the preceding.

- Case of declaration upon incurrence of tax: VAT on revenues from extra

provincial business; VAT on revenues of casual businesspeople.

The deadlines for submitting of tax return are as follows:

The deadline for submitting a monthly tax declaration is the 20 th of the month
following the month in which tax is incurred.

The deadline for submitting a quarterly tax declaration is the last day of the firs
month of the quarter following the quarter in which tax is incurred.

For tax declaration upon incurrence of tax must be submitted within 10 days since
the day on which tax is incurred.

If taxpayers detect errors in their tax declarations already filed to tax offices which
affect their tax amounts payable, they can make additional declaration in these tax
declarations. Tax declaration with additional declarations may be filed and submit
to tax offices on any working day.

The declaration of tax payable in some specific cases is as follows:

 Those taxpayers engages in an extraprovincial construction, installation with a

value of VND 1 billion or higher inclusive of VAT, or extraprovincial real estate
transfer have to declare temporarily and pay VAT at the rate of 2% (for goods
and services subject to the VAT rate of 10%) or at the rate of 1% (for goods

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 and services subject to the VAT rate of 5%) of before-VAT turnover to district-
level tax departments of localities where the construction is done, the goods are
sold.

 Dossiers of VAT declaration for this case shall be filed for each time of arising
of turnover. If tax declarations need to be filed many times in a month,
taxpayers may register monthly filing of VAT declarations to district-level tax
departments where tax declarations are filed. When declaring tax to tax offices
in charge of them, taxpayers reflect all turnover amounts arising from extra-
provincial mobile construction, installation or mobile selling of goods and VAT
amounts paid for these turnover amounts in tax declarations of their head
offices. Tax amounts (according to tax receipts) paid for turnover from extra-
provincial mobile construction, installation or mobile selling of goods will be
subtracted from VAT amounts payable stated in taxpayers’ VAT returns of
their head offices.

 Tax payers that have production units located in provinces other than the
province where the head office of the tax payers locate have to declare VAT as
follows:

- If the production unit conducts accounting, the production unit has to declare
and pay VAT to tax office where it locates.

- If the production unit doesn’t conduct accounting, the production unit

doesn’t have to declare VAT. The tax payer has declare VAT for the sale of
the tax payer and its production unit. The tax payer has to pay VAT to tax
office where the production unit locates at the rate of 2% (for goods and
services subject to the VAT rate of 10%) or at the rate of 1% (for goods and
services subject to the VAT rate of 5%) of before-VAT turnover. The VAT
paid to tax office where the production unit locates shall be subtracted from
the VAT amount payable at head office. Where the VAT amount paid as
percentage of 2% or 1% as mentioned above is greater than the amount of
VAT payable by the tax payer in the tax month, the VAT amount payable to
each locality is allocated based on turnover.
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 - Declaration of value-added tax for agency activities:Taxpayers that are sale
agents for goods or services liable to VAT have to declare tax on turnover
from entrusted goods sale and their agent commissions. If establishments
acting as agents selling goods at prices fixed by the goods owners for
commission (except transactions which are exempt from declaring and
paying VAT), they have to declare and pay tax only on their agent
commissions.

 Tax declaration by import or export businesses undertaking entrusted import of

goods subject to VAT: When delivering the goods, establishments that
undertake entrusted import of goods subject to VAT are not required to declare
VAT on goods they have imported under entrustment but have to separately
declare invoices made for these goods which have been delivered to import-
entrusting parties in the list of value added invoices for goods sold and file them
to tax offices in charge of them.

 Where businesses that produce or trade in both taxable items and exempt items
but fail to separately account the creditable input VAT, the creditable input
VAT shall be calculated according to the proportion (%) of the turnover from
the taxable items to total turnover from the sale of goods and services in the
period. This proportion is defined temporarily every month and officially
defined at the end of the tax year.

 For businesses that sell taxable items at prices prescribed by the government
and enjoy price and freight subsidies provided by the government, when selling
such goods, they have to calculate the output tax so as to declare and pay VAT
on goods at the government-prescribed prices. Price and freight subsidies
provided from the state budget are not subject to VAT and are included in their
incomes for corporate income tax liability.

 Businesses dealing in assorted goods and services liable to different VAT rates
have to declare separately each tax rate prescribed for each kind of goods or
service. If they fail to determine tax separately for each tax rate, they have to

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 calculate and pay tax at the highest tax rate applicable to the goods or services
which they deal in.

 Where businesses trading in gold, silver and gems and businesses applying
direct method and the added value is negative, the negative added value shall
be carried forward and cleared against the arising added value of the following
month for calculating VAT amounts payable but the negative added value of
the tax finalization year must not be carried forward to the subsequent year.
4.6.1.2. Declaration for imported goods
Businesses and importers that import goods subject to VAT have to make and file
VAT declarations upon each importation at the time of import tax declaration to
the customs offices.

4.6.2. TAX PAYMENT

4.6.2.1. For production and trade establishments
- Tax payment deadlines

Taxpayers are obliged to pay taxes fully and on time into the state budget. If
taxpayers conduct tax calculation, the tax must be paid by the last day of the
deadline for submitting of tax returns. If tax offices conduct tax calculation or
tax assessment, the tax payment deadline is stated in notices of tax offices.

- Tax payment places and procedures

Taxpayers pay taxes into the state budget by the following ways: directly at the
State Treasury office or at tax offices that receive tax declarations or through
organizations authorized by tax administration agencies to collect taxes or through
commercial banks or other credit institutions and service organizations defined by
law.

Taxpayers may pay taxes in cash or by account transfer. If taxpayers directly come
to the State Treasury office to pay taxes in cash, the State Treasury shall give
certification of paid tax amounts in tax receipts. If taxpayers pay taxes in cash at
tax offices, banks, credit institutions or to organizations or individuals authorized
by tax offices to collect taxes, upon receiving tax amounts, organizations or
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individuals shall issue to taxpayers tax receipts. For taxpayers paying taxes by
account transfer, banks or credit institutions that deduct and transfer money from
taxpayers' accounts into the State Treasury's account shall give certification in
taxpayers' tax receipts. Banks or credit institutions shall reflect all contents of tax
receipts on recourse receipts to be sent to the State Treasury that collects state
budget revenues.

Within eight working hours after receiving tax amounts from taxpayers, tax-
receiving agencies or organizations have to remit those tax amounts into the state
budget. If tax amounts are collected in cash in mountainous, deep-lying or remote
areas, islands or areas difficult to access, the time deadline for remittance of
collected tax amounts into the state budget is five working days from the date of
tax collection.

- Handling of overpaid tax amounts

In a tax period, if businesses have the overpaid tax amounts of the previous period,
these tax amounts may be cleared against the tax amounts payable of the
subsequent period.

Taxpayers may deal with overpaid tax amounts by one of the following ways:

(i) Offsetting overpaid tax amounts against tax or fine arrears, or clearing
overpaid amounts of a tax against amounts payable of another tax.

(ii) Offsetting overpaid tax amounts against tax amounts payable of the
subsequent payment time.

(iii) Getting overpaid tax amounts refunded if they have no tax or fine arrears.

- Currency for tax payment

Currency for tax payment is Vietnam dong, except cases in which they are
permitted by law to pay tax in foreign currencies.

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4.6.2.2. For imported goods
Businesses and persons that import goods have to pay VAT on imported goods
upon each importation. The deadline for payment of VAT on imported goods
coincides with the deadline for import tax payment.

4.7. TAX REFUND

4.7.1. CASES OF VAT REFUND
(1) The monthly or quarterly amount of input VAT which has not been fully
deducted from the VAT paid by a business taxpayer adopting the credit method
in the period shall be deducted from the VAT incurred in the subsequent period.

(2) The refunding of VAT on annual goods and services used for investment
activities (except circumstances not be eligible for a refund), shall be applicable
to a registered business which has recently been incorporated under an investment
project and registered to pay VAT by credit method, or an oil well exploration
and development project undergoing the investment phase in at least 1 year and
has yet progressed to operation. If the accumulated value added tax (VAT) on
services and goods purchased for investment activities is VND 300 million or
higher, the VAT shall be refundable.

(3) Refund of VAT for investment projects

(a) An active business taxpayer which pays VAT by the credit method shall
separately declare input VAT on its investment projects currently under the
investment phase in the same province where it is based (except for the
circumstances not be eligible for a refund and except investment projects that
construct houses for sale or rent but without constituting any fixed assets) from
the VAT on its ongoing business activities. The maximum deductible VAT from
the investment projects is equal to the VAT payable on business activities in the
period.

If the remaining deductible VAT is VND 300 million or higher, it shall be

refunded.

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If the remaining deductible VAT is smaller than VND 300 million, it shall be
carried forward to the next tax period of the project.

(b) An active business taxpayer which pays VAT by the credit method shall
declare, by separate documentation, and offset input VAT on its new investment
projects which are under investment and have not applied for neither business nor
tax registration in a province different from the location of its head office (except
for the circumstances not be eligible for a refund and except investment projects
that construct houses for sale or rent without constitution of fixed assets) against
the declared VAT on its ongoing business activities. The maximum VAT
deductible from the investment projects is equal to the VAT payable on business
activities in the period.

VAT on a new investment project shall be refunded if the remaining deductible

input VAT on such project is VND 300 million or higher.

If the remaining deductible input VAT is less than VND 300 million, it shall be
carried forward to the next period.

If the business taxpayer decides to establish project management boards or

branches in provinces other than the province where its headquarter bases in to
manage one or more projects on its behalf, such project management boards or
branches shall submit their own tax declarations and refund claims to local tax
authorities with which tax registration is applied provided they have their own
legitimate official seals, maintain their own records according to accounting
regulations, have bank accounts, have registered for tax and have obtained their
own taxpayer identification numbers. When an investment project for the
incorporation of an enterprise completes the formalities of registration for
business and tax, the business that is the main investor of such project shall inform
the new enterprise of the amounts of the project’s VAT incurred, VAT refunded
and pending VAT refund. The new enterprise shall declare and pay tax
accordingly.

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(c) In the following cases, a business shall not be eligible for a refund but can
carry forward remaining deductible VAT on its investment project to the
subsequent period:

- The charter capital of the investment project of the business has not been fully
contributed as registered as per the laws.

- An investment project is carried out by a business that undertakes conditional

trade(s) though not satisfying business conditions as per the Investment Law; in
other words, such investment project is run by a business that engages in though
not licensed to perform conditional trade(s); by a business that engages in though
not certified qualified to perform conditional trade(s); by a business that engages
in though not permitted by a competent authority to perform conditional trade(s);
or by a business that engages in but does not meet conditions to perform
conditional trade(s) though not required by the laws on investment to be permitted
or certified thereof in writing.

- An investment project is carried out by a business that undertake conditional

trade(s) but fails to sustain business conditions during its operations; in other
words, such investment projects are run by a business that engages in conditional
trade(s) but has its relevant license(s) revoked during its operations; by a business
whose certificate(s) of eligibility for conditional trade(s) is (are) revoked; by a
business that has the written permission revoked by a competent authority for
conditional trade(s); or by a business that fails conditions to undertake conditional
trade(s) as per the laws on investment. In this case, the business shall be ineligible
for the refund of VAT upon the revocation of one of the said documents or upon
being exposed by competent government authorities as having failed conditions
for conditional trades.

- The value of natural resources and/or minerals plus the energy cost of an
investment project for extraction of natural resources and minerals which has been
licensed since July 01, 2016 or an investment project for production of goods
makes up 51% of its prime cost or above.

(4) Refund of tax on exported goods and services

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A business that has an amount of remaining deductible input VAT of at least
VND 300 million on its exported goods and services in a month (if declaring the
tax every month) or in a quarter (if declaring the tax every quarter) shall be given
a refund of monthly or quarterly VAT; however, the remaining deductible input
VAT of less than VND 300 million in a month or quarter shall be carried forward
to the subsequent month or quarter.

(5) A business that pays the value added tax by the credit method shall receive a
refund of overpaid VAT or of remaining deductible input VAT upon its transfer,
conversion, merger, consolidation, division, dissolution, bankruptcy or shutdown.

(6) Projects and programs financed by grant ODA, grant aids or humanitarian aids
shall be eligible for VAT refund.

(a) For the projects financed by grant ODA: Project owners or main contractors
or organizations that foreign sponsors designate to manage the projects shall
receive a refund of VAT paid on goods and services acquired in Vietnam to serve
the projects.

(b) VAT paid on goods and services shall be refunded to Vietnam-based

organizations spending foreign entities’ humanitarian aids on such goods and
services for projects and programs that utilize grant aids and humanitarian aids.

(7) Entities granted diplomatic immunities and privileges as per relevant laws
shall receive a refund of VAT paid, according to the VAT invoice or the receipt
stating the VAT- included price, on the goods and services that they purchase in
Vietnam for consumption.

(8) Foreigners and Vietnamese expatriates holding passports or immigration

papers issued by competent foreign authorities shall be receive refunds of tax on
the goods that they purchase in Vietnam and carry upon departure.

(9) Tax refund for the businesses shall be at the discretion of competent authorities
as per the laws and according to the cases of value added tax refund as defined in
international treaties that the Socialist Republic of Vietnam engages in.

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4.7.2. RESPONSIBILITIES OF PARTIES RELATING TO VAT REFUND
4.7.2.1. Responsibilities of VAT refund beneficiary
- To make tax refund dossiers and send them to tax offices. To make accurate
and truthful declaration in tax refund dossiers and to take responsibility under
law for the declared figures.

- Where their dossiers are unclear or incomplete, to supply supplementary

documents or give explanations as requested by tax offices.

- To fully keep at the establishments other documents related to tax refund and
tax credit; to fully supply invoices, vouchers and related documents used as a
basis for the determination of the refunded VAT amounts when tax offices
carry out tax refund inspections at the establishments.
4.7.2.2. Tax offices’ responsibilities in tax refund
- To collect tax refund dossiers from taxpayers.

- To examine tax refund dossiers at the tax offices, classify the subjects eligible
for tax refund so as to apply appropriate tax refund procedures and ensure strict
management of tax refund.

- To notify in writing and return the dossiers to the businesses not eligible for
tax refund.

- To check the figures and determine the refundable tax amounts of taxpayers
eligible for tax refund.

- To issue decisions to refund tax to taxpayers eligible for tax refund.

- To examine and audit the tax refund at the establishments when detecting
doubtful signs in the dossiers or taxpayers’ violations of the tax law.
4.7.2.3. Responsibilities of State Treasuries
State treasuries of provinces and centrally run cities have to refund VAT to
various taxpayers within three days after receiving according the tax refund
decisions.

CHAPTER REVIEW
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 SUMMARY

Taxpayers

Taxable items

Scope of application Exempt items

Cases exempt
from declaring
and paying VAT

Base price
Tax base
VAT rate

Credit method
Method of
calculation Direct method
VAT

VAT invoice

Invoice Sale invoice

Other

VAT declaration and VAT declaration

payment VAT payment

Cases VAT refund

VAT refund
Procedures

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KEY TERMS

Agency activities Internal transfer orders

Annual finalization declaration Non- taxable goods and services
Before-VAT price Output tax
Credit method Outstanding tax amounts
Creditable input tax Overpaid tax amounts
Deductible input tax State-prescribed prices
Dependent cost-accounting establishments Direct method
Discounted sale prices Taxable goods and services
Dossier Underpaid tax amounts
Ex-warehousing-cum-internal transport bills Value added invoice
Normal invoice VAT refund

ECONOMIC CONCEPTS

1) Point out the characteristics of VAT.

2) What goods and services are subject to VAT in Vietnam.

3) Who is liable to pay VAT in Vietnam?

4) What is the base of VAT in Vietnam?
5) How is the base price defined in principle?
6) How is the base price of imported goods determined?
7) List the tax rates of VAT currently in Vietnam.
8) What is the main content of credit method? Is all input tax amounts
creditable?
9) What is the main content of direct method?
10) Describe the procedures for VAT declaration and payment in Vietnam.
11) What is the deadline for VAT declaration and payment in Vietnam?

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12) Define the cases of VAT refund in Vietnam.

DISCUSSION QUESTIONS

1) Discuss the reasons for VAT-exempt goods and services.

2) Why do we impose VAT on imported goods?

3) What are the similarities and differences between 0% rate and non-taxable
goods and services (exemption)? Point out the significance of 0% rate?

4) What are the similarities and differences between taxable, non-taxable

goods and services (exemption) and exemption from declaring and paying
VAT transaction?

5) What are the strong points of credit method?

6) What are strong points and weaknesses of direct method?

7) Point out the significance of VAT refund.

CHAPTER 5
FOREIGN CONTRACTOR TAXES

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define foreign contractor taxes (FCT).

- Define who is liable to pay FCT in Vietnam.
- Define cases which are not subject to file and pay FCT
- Determine VAT taxable objects and CIT taxable income in calculating
FCT.
- Determine FCT tax bases in Vietnam .
- Calculate the amount of FCT payable by a taxpayer.
- Understand the interaction between176
FCT and double taxation agreements.
5.1. OVERVIEW OF FOREIGN CONTRACTOR TAXES
Foreign contractor taxes (FCT), as its name implies, are not separate types of taxes
but some taxes that a foreign contractor has to pay when doing business or having
income arising in Vietnam. These taxes are CIT, VAT and PIT and some other
taxes which have been mentioned in previous chapter of this book. Among these
taxes, VAT and CIT counts the largest amount that a foreign contractor has to
pay.

5.2. THE SCOPE OF APPLICATION

5.2.1. TAXPAYERS
The Vietnam’s FCT imposes on foreign business organizations with or without
permanent establishment in Vietnam and foreign business individuals whether
they are residents or non-residents of Vietnam (foreign contractors) doing
business in Vietnam or having income arising in Vietnam on the basis of a contract
or agreement between such foreign contractor and a Vietnamese organization or
individual.

Foreign sub-contractors are also subject to FCT in Vietnam. Foreign sub-

contractors are foreign business organizations with or without permanent
establishment in Vietnam and foreign business individuals whether they are
residents or non-residents of Vietnam (foreign sub-contractors) doing business in
Vietnam or having income arising in Vietnam on the basis of a contract or
agreement between such foreign sub-contractor and a foreign contractor to
perform part of the work of the latter contractor’s contract.

The FCT also imposes on the following entities or individuals:

(i) A foreign contractor which sells goods into Vietnam under an Incoterms
delivery clause [with a few exceptions described in Item (b) (goods delivered at
a foreign border gate) and in Item (c) (goods delivered at Vietnam’s border

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gates) below] and which bears the risk in relation to the goods until (the goods are
delivered) in the territory of Vietnam.

(ii) A foreign contractors who carry out a part or all of goods distribution
and service provision in Vietnam, in which foreign organizations and individuals
are owners of goods delivered to Vietnamese parties or being responsible for the
costs of distribution, advertising, marketing, service quality and quality of goods
delivered to Vietnamese entities or being the person who decide selling prices;
including cases of authorizing or hiring a number of Vietnamese entities to
perform a part of other distribution and service services related to the sale of goods
in Vietnam.

(iii) Foreign contractors who negotiate and sign contracts with Vietnamese
parties through Vietnamese organizations and individuals in the name of foreign
contractors.

(iv) Foreign contractors who carry out the right to export or the right to
import or the right to distribute goods in the Vietnamese market; or purchase
goods for export; or sell goods to Vietnamese traders under the Law on
commercial.

Cases where foreign contractors or sub-contractors are not obliged to file and
pay FCT:

The FCT does not apply to foreign organizations and individuals doing business
in Vietnam in accordance with the Law on Investment, Petroleum Law, and Credit
Institutions Law.

The FCT does not apply to a Foreign Contractor that sells its goods to or provides
services in Vietnam in the following circumstances:

a) Goods delivered at a foreign border gate: The seller is responsible for all
liabilities, cost and risks in relation to goods exported to Vietnam and delivered
at the foreign border gate; the buyer is responsible for all liabilities, costs and risks
in relation to the receipt of goods and transportation of goods from the foreign
border gate to Vietnam (even when the seller is responsible for the warranty);
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 b) Goods delivered at Vietnam’s border gates: The seller is responsible for
all liabilities, cost and risks in relation to the goods until the goods are delivered
at Vietnam’s border gate; the buyer is responsible for all liabilities, costs and risks
in relation to the receipt of goods and transportation of goods from Vietnam’s
border gate (even when the seller is responsible for the warranty);

c) Services provided and consumed outside of Vietnam: Income derived from

services that are provided and consumed outside of Vietnam are not taxed in
Vietnam;

d) Provision of services abroad: A foreign service provider is not subject to

the FCT if its services are provided abroad and if it provides the following
services: (i) repair of transportation means (aircraft, aircraft engine, aircraft and
ship parts), machinery and equipment (including undersea cables and
transmission devices), with or without spare parts; (ii) marketing and
advertisement services (other than marketing and advertisement through the
Internet); (iii) investment and trade promotion; (iv) brokerage for offshore sale of
goods or provision of services; (v) training (other than online training); and (iv)
international post and telecommunication that are provided abroad;

e) Use of bonded warehouses and inland clearance deports (ICD): A

Foreign Contractor , which uses a bonded warehouse or ICD as a storage place of
goods for the purpose of supporting international transportation, transship,
border-transship, or goods storage for other enterprises to process, is not subject
to the FCT.

Example 5.1:
(1) Foreign enterprise Maxxi signs a processing contract or buys fabric with
Vietnamese enterprise Thanh Long (Enterprise Maxxi provides materials for
Enterprise Thanh Long for processing) and appoints Enterprise Thanh Long to
deliver goods to Vietnamese enterprise Duc Phat for further processing (in the
form of on-spot import and export processing according to the provisions of law).
After processing, enterprise Duc Phat returns the goods to enterprise Maxxi and

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enterprise Maxxi must pay the processing fee to enterprise Duc Phat under the
processing contract.
(2) Enterprise A, in a foreign country, signs a contract to buy cloth from
Vietnamese company B, and appoints enterprise B to deliver goods to Vietnamese
company C (in the form of on-spot import and export as prescribed by law).
Enterprise A earns income in Vietnam on the basis of a contract signed between
enterprise A and enterprise C (enterprise A sells cloth to enterprise C).
(3) Overseas company X signs a fabrication contract with Vietnamese
company Y and appoints company Y to deliver goods to Vietnamese company Z
for further production (in the form of on-spot import and export as prescribed by
law). Enterprise X earns income in Vietnam on the basis of a contract signed
between enterprise X and enterprise Z (company X sells goods to enterprise Z).
(4) Company H of Hong Kong provides cargo handling services at a port in
Hong Kong to Company A's international transport fleet in Vietnam. Company A
must pay Company H the service charge for arranging the goods at the port in
Hong Kong.
Required: In which cases are foreign enterprises imposed FCT?
Solution: (1) No; (2) Yes; (3) Yes; (4) No

5.2.2. TAXABLE OBJECTS

5.2.2.1. VAT taxable objects
VAT taxable objects are those taxable services or taxable services under the Law
on VAT associated with goods supplied by a foreign contractor or sub-contractor
which are consumed in Vietnam including:

+ Taxable services or taxable services under the Law on VAT associated with
goods supplied in Vietnam by a foreign contractor or sub-contractor and which
are consumed in Vietnam;

+ Taxable services or taxable services under the Law on VAT associated with
goods supplied outside Vietnam by a foreign contractor or sub-contractor and
which are consumed in Vietnam.

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5.2.2.2. CIT taxable income
Taxable incomes are those incomes arising from the provision of services
including services associated with goods supplied by a foreign contractor or sub-
contractor in Vietnam.

Incomes arising in Vietnam of a foreign contractor or sub-contractor are all items

of income receivable in any form on the basis of a foreign contractor’s or sub-
contractor’s contract irrespective of the location of business operation of the
foreign contractor or sub-foreign contractor comprising:

- Income from the transfer of ownership of or right to use of assets.

- Income from royalties in any form.

- Income from the rights of an author and rights of the owner of a work,
industrial rights and technology transfer.

- Income from the assignment and/or liquidation of assets.

- Interest earned form loans in any form; income from interest on deposits
(except for interest on deposits of foreign individuals and interest on deposits in
deposit bank accounts which are to maintain operations in Vietnam of diplomatic
representative offices, representative offices of international organizations or
NGOs in Vietnam) including any bonuses accompanying the deposits; and
income from interest on late payments under economic contract.

- Income from investment and securities.

- Fines and penalties receivable from another party for contractual breach.

- Other items of income as stipulated by law.

5.3. COMPUTATION OF FCT

There are 3 ways of FCT calculation:

(1) The Declaration method;

(2) The Direct method;

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 (3) The Hybrid method.

5.3.1. THE DECLARATION METHOD

Under this method, the amount of VAT payable is determined under credit method
and the amount of CIT payable is determined based on net income.

In order to apply this method, the foreign contractors or foreign sub-contractors

must at the same time satisfy the 3 conditions below:
Having permanent establishments in Vietnam or being Vietnamese residents;
(i) The duration of the work in Vietnam under the contract is at least 183
days counting from the date that the contract taking effective;

(ii) Applying Vietnamese accounting standards; having registered and have

been granted a Tax Identified Number.

The ways to calculate these taxes and the tax base of these taxes have been
discussed in chapter 3 and chapter 5.

5.3.2. THE DIRECT METHOD

Under this method, the amount of VAT payable is determined under direct
withholding method and the amount of CIT payable is determined based on
percentage of revenue. These are as follows:
5.3.2.1. VAT amount payable
VAT amount payable = Base turnover x Deemed VAT rate

a) Base turnover

In principle, the VAT base turnover (taxable turnover) is the turnover inclusive of
VAT and all other taxes payable in Vietnam.

If the turnover receivable by the foreign contractor or sub-contractor is net of

VAT, the turnover must be converted into turnover including VAT according to
the following formula:

= Turnover exclusive of VAT

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 The base
1 - Percentage of VAT on turnover
turnover

For services associated with goods supplied by a foreign contractor or sub-

contractor, the VAT base is the turnover of services receivable by the foreign
contractor or sub-contractor for services supplies in Vietnam or outside Vietnam
and which are consumed in Vietnam.

When goods are supplied under the Incoterms DDP, DAT or DAP, the value of
the goods is only subject to VAT at import stage, while the value of services
subject to FCT. The VAT base is the actual turnover receivable by the foreign
contractor or sub-contractor. If the contract does not separate out the value of the
goods and the value of the associated services, the VAT base is the turnover of
the whole contract including of the turnover of the goods and the associated
services.

If a foreign contractor signs a contract with either a Vietnamese or foreign sub-

contractor in order to allocate part of the work of the former contractor’s contract
signed with Vietnamese party, the VAT taxable turnover of such foreign
contractor does not include the value of the work or the value of the machinery
and equipment to be implemented by such Vietnamese or foreign sub-contractor.
If a foreign contractor signing contracts with suppliers in Vietnam for the
purchase of goods and services serving performance of the foreign contractor’s
contract, the VAT taxable turnover still include such value of goods and services.
If the costs of goods and services purchased for internal consumption, for items
which are out of foreign contractor’s scope of work under the contract signed with
the Vietnamese party, the VAT taxable turnover include also such value of goods
and services.

For international forwarding and warehousing services, the VAT base is the
turnover receivable by the foreign contractor excluding of international freight
charges payable to the carriers.

For international forwarding and warehousing services from Vietnam to overseas,

the VAT base is the total turnover receivable by the foreign contractor.
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 b) Deemed VAT rate

Business lines Deemed VAT rate

Services; machinery and equipment leasing

business; insurance; construction; assembly and
5
installation without supply of materials, machinery
and equipment.

Manufacturing; transportation; services together

with supply of goods; construction, assembly and
3
installation with supply of materials, machinery and
equipment.

Other businesses. 2

If a foreign contractor’s or sub-contractor’s contract comprises different activities,

the deemed VAT rate shall apply for each business activity. If the contract fails to
separate the value of each activities, the highest deemed VAT rate shall apply.

In the case of a contract for the supply of machinery and equipment accompanied
by such services as installation, training, operation and commissioning where the
value of machinery and equipment is separable from the value of such services,
the deemed VAT rate shall apply to each part of the contract value. If the contract
fails to separate the value of the activities referred to above, the deemed VAT rate
of 3% shall apply.

Example 5.2: Foreign contractor A provides the Vietnamese party with the
service of supervising the construction volume of cement plant Z, the contract
price excluding VAT (but including corporate income tax) is USD 612,000. In
addition, the Vietnamese party arranges accommodation and office for
management staff of foreign contractor A with a value excluding USD 100,500.
Under the contract, the Vietnamese party is responsible for paying VAT on behalf
of the foreign contractor.

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Required: Calculate the amount of VAT the Vietnamese party has to pay on
behalf of foreign contractor A. Given that:
- Foreign contractor A does not have any permanent establishments in Vietnam;

- Exchange rate for tax purpose: 1USD = VND23,000;

Solution:

612,000 + 100,500
The base turnover = = USD750,000
1 – 5%

= VND17,250 million

=> VAT amount payable = 17,250 x 5% = VND862.5 million

5.3.2.2. CIT amount payable
CIT amount payable = CIT-taxable turnover x Deemed CIT rate
a) CIT-taxable turnover
In principle, the CIT-taxable turnover for FCT (The CIT base for FCT) is the
turnover receivable by the foreign contractors or sub-contractors exclusive of
VAT and without of any taxes payable.

If pursuant to the contractor’s or sub-contractor’s contract, the turnover receivable

by the foreign contractor or sub-contractor is net of CIT, the turnover must be
converted into turnover including CIT according to the following formula:

The CIT-taxable Turnover exclusive of CIT

=
turnover 1 – CIT rate as percentage of taxable turnover

If a foreign contractor signs a contract with either a Vietnamese or foreign sub-

contractor in order to allocate part of the work of the former contractor’s contract
signed with Vietnamese party, the CIT-taxable turnover of such foreign contractor
does not include the value of the work or the value of the machinery and
equipment to be implemented by such Vietnamese or foreign sub-contractor. If a
foreign contractor signing contracts with suppliers in Vietnam for the purchase of
goods and services serving performance of the foreign contractor’s contract, the
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CIT-taxable turnover still includes such value of goods and services. If the costs
of goods and services purchased for internal consumption, for items which are out
of foreign contractor’s scope of work under the contract signed with the
Vietnamese party, the CIT-taxable turnover include also such value of goods and
services.

In the case of lease of machinery, equipment and means of transportation, CIT

base is the total rent. If the turnover from the lease includes costs directly paid by
the lessor such as international insurance and freight, the CIT base is the turnover
excluding such costs if there are documents proving actual costs.

For international forwarding and warehousing services, the CIT base is the
turnover receivable by the foreign contractor excluding of international freight
charges payable to the carriers.

For international forwarding and warehousing services from Vietnam to overseas,

regardless of whether payment is made by consignors or consignees, the CIT base
is the total turnover receivable by the foreign contractor excluding of international
freight charges payable to the carriers.

b) Deemed CIT rate

Business lines Deemed CIT rate

Supply of goods in Vietnam or associated with services

rendered in Vietnam (including in-country import-export and
imports, distribution of goods in Vietnam or delivery of goods 1
under Incoterms where the seller bears risk relating to goods in
Vietnam)

Services (except for restaurant, hotel, casino management

services and financial derivatives) 5
Leasing of machinery, equipment, and drilling rigs

Restaurant, hotel, and casino management services 10

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 Financial derivatives 2

Construction, assembly and installation with or without supply

2
of materials, machinery and equipment

Leasing of aircraft and vessels 2

Transportation
2
Other businesses

Interest 5

Re-insurance, commission for re-insurance; transfer of

0.1
securities

Income from royalties 10

If a foreign contractor’s or sub-contractor’s contract comprises of different

activities, deemed CIT rate shall be applicable to each CIT-taxable turnover from
each activity. If the contract fails to separate the value of each activities, the
highest deemed CIT rate shall apply to the total turnover of the contract.

In the case of a contract for the supply of machinery and equipment accompanied
by such services as installation, training, operation and commissioning where the
value of machinery and equipment is separable from the value of such services,
the CIT rate shall apply to each part of the contract value. If the contract fails to
separate the value of the activities referred to above, the deemed CIT rate of 2%
shall apply to the total turnover of the contract.

Example 5.3: In June 20XX, ABC Co., Imported a machine from a Japan
company named Sumitomo Mitsui Co. The total turnover paid to Sumitomo
Mitsui Co. is USD400,000 of which the value of the machine is USD380,000 and
the value of installation service is USD20,000.

Required: Calculate the amount of FCT the ABC Co. has to deduct and pay on
behalf of Sumitomo Mitsui Co. Given that:
- Sumitomo Mitsui Co. does not have any permanent establishments in Vietnam;

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- Exchange rate for tax purpose: 1USD = VND23,000;

- VAT rate applicable to the above goods and services: 10%.

Solution:
- Because the value of the machine is separable, the machine is only subject to
VAT at importation, not subject to VAT as an FCT.
- VAT of installation service: 20,000 x 23,000 x 5% = VND23 million
- CIT of installation service: (20,000 x 23,000 – VND23 million) x 2% =
VND8.74 million
- CIT for the machine: 380,000 x 23,000 x 1% = VND87.4 million

5.3.3. THE HYBRID METHOD

In order to apply this method, the foreign contractors or foreign sub-contractors
must at the same time satisfy the 2 conditions below:

(i) Having permanent establishments in Vietnam or being Vietnamese

residents;

(ii) The duration of the work in Vietnam under the contract is at least 183
days counting from the date that the contract taking effective.

This method is so called because it is a combination of the declaration method and

the direct method, i.e. the VAT amount payable is determined based on deduction
(credit) method and the amount of CIT payable is based on the direct method.

5.4. DECLARATION
For foreign contractors or sub-contractors to apply the declaration method the
filing and payment of FCT is the same as other Vietnamese enterprises which has
been mentioned in chapter 2 and chapter 5.

For foreign contractors or sub-contractors to apply the direct method, the

Vietnamese parties who sign contracts with the foreign contractors or sub-
contractors have to deduct and pay FCT on behalf of the foreign contractors or
sub-contractors. FCT have to be filed and paid no later than 10 days since the date

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of payment to foreign contractors or sub-contractors. If the payments under the
contracts are made several times in a month, the Vietnamese party may register
to file and pay FCT once a month. In this case, the due date for filing and payment
is the 20th of month following the tax month. An official declaration is required
for each contract upon its completion.

For foreign contractors or sub-contractors to apply the hybrid method, the filing
and payment of VAT is the same as other Vietnamese enterprises which has been
mentioned in chapter 4, the filing and payment of CIT is the same as that of the
direct method above.

5.5. INTERACTION WITH DOUBLE TAXATION AGREEMENTS

Double taxation agreement is an international treaty signed between two entities
of international law (mainly nation) to avoid double taxation and to prevent tax
evasion and fraud on income and property tax.

Double taxation agreements can have a significant impact on the FCT. Generally,
a foreign contractor may avoid income tax (but not the VAT portion) being a
component of the FCT, if it is from a country that has a double taxation agreement
with Vietnam and if it does not have a permanent establishment in Vietnam. This
is because a rule that is provided in most double taxation agreement is that a non-
resident company is taxed only in its country and it may be taxed on its business
income in Vietnam if it has a permanent establishment in Vietnam.

What constitutes a permanent establishment may vary in each double taxation

agreement. Most if not all of Vietnam's double taxation agreements follow the
OECD Model or UN Model double taxation agreement which defines a permanent
establishment as a fixed place of business through which the business of an
enterprise is wholly or partially carried out. A place of business must be "fixed".
That means, a particular building or a physical location that is used to conduct the
enterprise's business must be more than temporary.

Although Vietnam's double taxation agreements employ the same definition of

permanent establishment, the specific list of what constitutes a permanent

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establishment in each double taxation agreement may differ. For example, the
double taxation agreement between Vietnam and the Seychelles or the double
taxation agreement with Sweden extend the meaning of a permanent
establishment to furnishing a service. In this connection, even if the non-resident
enterprise that provides services does not have a "fixed" place in Vietnam, the
service supplied is deemed to create a permanent establishment and consequently
the income from that service is taxed in Vietnam. Of course, some other
conditions may apply, such as: the service was performed in the source country
for a period exceeding six months and by an employee or other personnel.

Some of Vietnam's other double taxation agreements do not enlarge the definition
of permanent establishment, for example, Malaysia and France. This means that
a foreign contractor from those countries that provides services in Vietnam is less
likely to have a permanent establishment in Vietnam when the service provider is
a resident of those other countries and consequently is not taxed in Vietnam.

There is a mechanism in most double taxation agreements that allow a foreign

contractor to claim a tax credit in its home country for the FCT (income tax
portion) it pays in Vietnam owing to the principle of elimination of double
taxation which principle is the underlying objective of the double taxation
agreements. Of course, a foreign contractor that seeks the benefits of a double
taxation agreement must prove that it is covered by the double taxation agreement
and must comply with other conditions and procedures in the double taxation
agreement and with the tax regulations of its home country.

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CHAPTER REVIEW
SUMMARY

Taxpayers

Taxable objects
Scope of application
Cases not to
file and pay
FCT

Declaration
method

Method of
Direct method
calculation

Hybrid method
FCT

FCT
FCT declaration and declaration
payment
FCT payment

Interaction with
DTAs

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KEY TERMS

Base turnover Foreign contractor

CIT taxable turnover Foreign sub-contractor
Declaration method Hybrid method
Deemed rate Non-resident
Direct method Permanent establishment
Discussion questions Resident
Double taxation agreement

ECONOMIC CONCEPTS
13) State definition of FCT.
14) Who is liable to pay FCT in Vietnam?
15) State taxable objects of FCT.

16) State methods of FCT calculation.

17) Identify VAT base turnover and CIT taxable turnover in calculating FCT.
18) State procedures for FCT declaration and payment in Vietnam.

DISCUSSION QUESTIONS

1. Determine the FCWT implications in the following cases:

(i) Company X in South Korea provides goods under on-spot import/export mode

(ii) Company B in South Korea provides training services to employees of

Company A in Vietnam including (i) online training; (ii) training in Vietnam by
foreign experts assigned by B; (ii) training overseas (A’s employees are assigned
to South Korea for training).

(iii) Company C in South Korea provides machines & equipment to a Vietnamese

company which are delivered at Vietnam’s border gate and accompanied with
installation services at the Vietnamese company’s site.

(iv) Company D in Japan provides machines to a Vietnamese company which are

delivered at Vietnam’s border gate under one-year warranty term.
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(v) Company E in the USA provides goods under DDP term to Company A in
Vietnam

(vi) Company F supplies a machine under CIF term to Company A in Vietnam.

Under the contract, Company shall pay company F (i) value of the machine and
(ii) software to run the machine.

2. A Co, a foreign company based in Singapore, hired space in a bonded

warehouse in Vietnam. The storage space was used for:

– The temporary storage of materials for B Co, a Vietnamese company, prior to

their further processing by B Co; and

– The storage of finished goods for other companies in Vietnam prior to their
distribution in Vietnam.

In the case of the finished goods, the costs of transportation from the bonded
warehouse to the distributors’ warehouse in Vietnam was paid for by the
distributors but reimbursed by A Co.

What are the Vietnamese foreign contractor tax (FCT) implications for A Co from
the above transactions?

3. Company A, who is located overseas, delivers goods to a Vietnamese Company

B (or authorizes Company B to perform some services, such as delivery,
distribution, marketing, advertising) while Company A is still the owner of goods
delivered to Company B (or still take responsibility for the cost, quality of
goods/services delivered to Company B; or A impose selling prices for
goods/services). What tax status of A?

4. Company C, who is located in Vietnam, signs a contract to import

excavators and bulldozers with Company D who is located overseas. Goods
are delivered at a Vietnam’s border gate. Company D bears all responsibility
and costs related to the goods until they arrive at the Vietnam’s border
gate; Company C bear responsibility and costs related to the receipt and
transport of goods from the Vietnam’s border gate. The contracts prescribes that

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the goods come with a one-year warranty by Company D. Other than that,
Company D does not provide any services related to such goods in Vietnam. What
tax status of C?

5. Vietnamese Company B provides postal services from abroad to Vietnam

(inbound) and vice versa (outbound). To provide these services, Company
B pays (shared fee) to the Overseas Company C an amount of X USD. What
are VAT treatments of money received by C?

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