While foreign investors do business in Vietnam, tax is an issue that needs the most attention. It greatly affects the business process if investors do not understand it well. Corporate income tax in Vietnam is an important legal institution that any business cannot ignore, but not everyone understands this tax well.
So, in this article, Warren B will introduce customers to what exactly is corporate income tax. How is corporate income tax calculated?
Companies are subject to the tax rates imposed under the CIT Law. The standard CIT rate is 20%. Companies doing business in the oil and gas sector in Vietnam are subject to CIT rates ranging from 32% to 50% depending on the location and specific conditions of the project. Companies engaging in prospecting, exploration, and exploitation of certain mineral resources are subject to CIT rates of 40% or 50%, depending on the project’s location.
Tax incentives are granted to new investment projects based on regulated encouraged activities, encouraged locations and the size of the projects, and to certain business expansion projects. New investment projects and business expansion projects do not include projects established as a result of certain acquisitions or reorganizations.
The activities which are encouraged by the Vietnamese Government include education, health care, sport/culture, high technology, environmental protection, scientific research, and technology development, infrastructural development, processing of agricultural and aquatic products, software production, and renewable energy.
New investment or expansion projects engaged in manufacturing industrial products prioritized for development are entitled to CIT incentives if they meet one of the following conditions:
- the products support the high technology sector; or
- the products support the garment, textile, footwear, electronic spare parts, automobile assembly, or mechanical sectors.
Locations that are encouraged include qualifying economic and high-tech zones, certain industrial zones, and designated difficult socio-economic areas.
Large manufacturing projects (excluding those related to the manufacture of products subject to special sales tax or those exploiting mineral resources) are entitled to CIT incentives as follows:
– Projects with total capital of VND6,000 billion or more, disbursed within 3 years of being licensed, meeting either of the following criteria:
- minimum revenue of VND10,000 billion/annum by the 4 th year of operation; or
- headcount of more than 3,000 by the 4th year of operation.
– Projects with total capital of VND12,000 billion or more, disbursed within 5 years of being licensed and using technologies appraised by relevant laws.
The two common preferential rates of 10% and 17% are available for 15 years and 10 years respectively, starting from the commencement of generating revenue from the incentivized activities. The duration of application of the preferential tax rates can be extended in certain cases. When preferential rates expire, the CIT rate reverts to standard. The preferential rate of 15% applies for the entire project life in certain cases. Certain social sectors (e.g. education, health) enjoy the 10% rate for the entire life of the project.
Taxpayers may also be eligible for tax holidays and reductions. The holidays take the form of an exemption from CIT for a certain period beginning immediately after the enterprise first makes profits from the incentivized activities, followed by a period where tax is charged at 50% of the applicable rate. However, where an enterprise has not derived taxable profits within 3 years of the commencement of generating revenue from the incentivized activities, the tax holiday/tax reduction will start from the fourth year of operation. Criteria for eligibility for these holidays and reductions are set out in the CIT regulations.
As noted above, R&D and investment projects which are entitled to special investment incentives would enjoy longer tax exemption and reduction periods.
Additional tax reductions may be available for companies engaging in manufacturing, construction, and transportation activities that employ many female staff or ethnic minorities.
Certain incentives, including a lower CIT rate, are granted to small and medium enterprises (“SMEs”) (various criteria apply to be considered an SME).
To support taxpayers during the Covid pandemic, a 30% CIT reduction applies for 2021 for companies with total revenue in 2021 not exceeding VND200b and less than what they earned in 2019. The latter requirement does not apply in certain cases, such as newly established companies and companies which underwent a merger or demerger in 2021.
Tax incentives that are available for investment in encouraged sectors do not apply to other income earned by a company (except for income that directly relates to the incentivized activities such as disposal of scrap), which is broadly defined.
Calculation of taxable profit
Taxable profit is the difference between total revenue, whether domestic or foreign sourced, and deductible expenses, plus other assessable income.
Taxpayers are required to prepare an annual CIT return which includes a section for making adjustments to accounting profit to arrive at a taxable profit.
Expenses are tax deductible if they relate to the generation of revenue, are supported by requisite documentation (including bank transfer vouchers where the invoice value is VND20 million or above), and are not specifically identified as being non-deductible. Examples of non-deductible expenses include:
- Depreciation of fixed assets which is not by the prevailing regulations;
- Employee remuneration expenses that are not paid, or are not stated in a labor contract, collective labor agreement, or company policies;
- Staff welfare (including certain benefits provided to family members of staff) exceeding a cap of one month’s average salary. Non- compulsory medical and accident insurance is considered a form of staff welfare;
- Contributions to voluntary pension funds and life insurance for employees exceeding VND 3 million per month per person;
- Reserves for research and development not made by the prevailing regulations;
- Provisions for severance allowance and payments of severance allowance over the prescribed amount per the Labour Code;
- Overhead expenses allocated to a permanent establishment (“PE”) in Vietnam by the foreign company’s head office exceeding the amount under a prescribed revenue-based allocation formula;
- Interest on loans corresponding to the portion of any charter capital not yet contributed;
- Interest on loans from individuals exceeding 1.5 times the interest rate set by the State Bank of Vietnam;
- Certain interest exceeding the cap of 30% of EBITDA;
- Provisions for stock devaluation, bad debts, financial investment losses, product warranties, or construction work that are not made by the prevailing regulations;
- Unrealised foreign exchange losses due to the year-end revaluation of foreign currency items other than accounts payable;
- Donations except certain donations for education, health care, natural disaster, building charitable homes for the poor, or scientific research. Of note, donations and sponsorships in cash and kind for Covid prevention activities, are deductible for CIT purposes in 2020 and 2021, subject to certain conditions.
- Administrative penalties, fines, late payment interest; and
- Service fees paid to related parties that do not meet certain conditions.
For certain businesses such as insurance companies, securities trading, and lotteries, the Ministry of Finance provides specific guidance on deductible expenses for CIT purposes.
Companies are allowed to set up a tax-deductible R&D fund to which they can appropriate up to 10% of annual profits before tax. Various conditions apply.
Taxpayers may carry forward tax losses fully and consecutively for a maximum of five years. Losses arising from incentivized activities can be offset against profits from non-incentivized activities, and vice versa. Losses from the transfer of real estate and the transfer of investment projects can be offset against profits from other business activities. Carry-back of losses is not permitted. There is no provision for any form of consolidated filing or group loss relief.
Companies doing business in Vietnam are required to make quarterly provisional CIT payments based on estimates. The provisional CIT payments in the first 3 quarters of a tax year must not account for less than 75% of the final CIT liability for the year. Any shortfall is subject to late payment interest (currently as high as 11% per annum), counting from the deadline for payment of the quarter 3 provisional CIT liability.
Final CIT returns are filed annually. The annual CIT return must be filed and submitted not later than the last day of the third month after the fiscal year-end. The outstanding tax payable must be paid at the same time.
Where a taxpayer has a dependent accounting unit (e.g. branch) in a different province, a single CIT return is required. However, manufacturing companies are required to allocate tax payments to the respective provincial tax authorities in the locations where they have dependent manufacturing establishments. The basis for allocation is the proportion of expenditure incurred by each manufacturing establishment over the total expenditure of the company. However, for dependent units or business locations that are entitled to CIT incentives, companies are required to separately determine (not allocate) the CIT payable.
The standard tax year is the calendar year. Companies are required to notify the tax authorities in cases where they use a tax year (i.e. fiscal year) other than the calendar year.
Foreign investors are permitted to remit their profits annually at the end of the financial year or upon the termination of the investment in Vietnam. Foreign investors are not permitted to remit profits if the investee company has accumulated losses.
The foreign investor or the investee company is required to notify the tax authorities of the plan to remit profits at least 7 working days before the scheduled remittance.
Warren B’s Tax & Accounting Services
Warren B provides Tax & Accounting Services for businesses throughout their business operations in Vietnam. Warren B will act on behalf of the business to do tax registration procedures, and work with tax authorities when any arise. Always ensure to put the customer’s work efficiency first as well as the legitimate interests of the business by the law.
Please contact Warren B if you need our Tax & Accounting Services. We look forward to working with you.
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