CHAPTER 5

CORPORATE INCOME TAX

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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.

- Determine assessable income, base income, base turnover, deductible

expenses and other base incomes of corporate income tax in Vietnam.

- 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.

- Fill in corporate income tax return.

- 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.
5.1. CONCEPTS AND CHARACTERISTICS

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.
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.

5.2. BASIC CONTENTS OF THE CORPORATE INCOME TAX IN

VIETNAM
The corporate income tax was first introduced in Vietnam in 1991 under the
Ordinance of Profit Tax. In 1997, the National Assembly of Vietnam enacted the
Act of Corporate Income Tax (or it may be called the Law on Business Income
Tax) that became effective as from 1 January 1999 to replace the above ordinance
as one step towards the second phase of the tax system reform.

The tax base under this law was much broader than the former, including not only
profit from business but also incomes from other sources related to the operation
of the taxpayer. There were two main rates - 25 percent applicable to foreign
corporations and 32 percent applicable to domestic taxpayers. A new law of
corporate income tax came into being in 2003. This law was to substitute the 1997
law and was put into effect since 1 January 2004. The most important change was
to end discrimination between domestic and foreign taxpayers by applying the
standard rate of 28 percent to all taxpayers. The law was then amended in 2005
with some minor changes to meet the requirements of the WTO.

In June 2008, the National Assembly of Vietnam passed a new law taking effect
as from 1 January 2009 to replace the Act of Corporate Income Tax 2003. The
main changes are as follows:

(i) The standard has been reduced from 28 percent to 25 percent;

(ii) Individuals and households have been excluded from the list of corporate
income tax payers, which means that they are no longer taxed by corporate
income tax, but rather by the Act of personal income tax which was enacted in
December 2007 and became effective as from 1 January 2009

(iii) The rules have been simplified by mainly abolishing considerable

exemptions and reductions.

The Act of Corporate Income Tax 2008 was then modified twice in 2013 and
2014 with some modifications and supplements on the deductible expenses,
standard rate (reduce from 25% to 22% since 1 January 2014 and to 20% since 1
January 2016), the preferential rates and some incentives.

The following sections will introduce the major contents of this law called the
Act of Corporate Income Tax 2008 or Law on Corporate Income Tax 2008 which
was modified in 2013 and 2014.

5.2.1. THE SCOPE OF CORPORATE INCOME TAX

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);

(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.

5.2.2. THE BASES AND COMPUTATION OF CIT LIABILITIES

The amount of CIT payable is determined by the following formula:

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
Taxable Exempt Losses carried
income/Assessable = - -
income incomes forward
income

The taxable income is determined by the following formula:

Taxable Base Deductible Other

= - +
income turnover expenses incomes

Thus, in order to define the base income/assessable income, five factors including
base turnover, deductible expenses (or sometimes called deductions), other
taxable incomes, exempt incomes, and losses carried forward need to be
determined. The following sections will introduce the main regulations related to
those factors.
5.2.2.1. 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 goods. The time of determining turnover for services is the time of service
completion or partial service provision done.

EXAMPLE 5.1:

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

+ 1.3 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 billion + 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.
- 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.
5.2.2.2. 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.
5.2.2.2.1. Conditions for deductible expenses

a) Actual expenses used for the production and business of the enterprise

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.
5.2.2.2.2. 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 5.2:

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.

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
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 5.3:

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.
- 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 4th 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, twice or 2.5 times as much as the straight-
line rate. If the service life of an asset is less than 4 years, the accelerated rate is
1.5 times. If the service life of an asset is from 4 to 6 years, the accelerated rate
will be doubled. If the service life of an asset is more than 6 years, the accelerated
rate will be 2.5 times.

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 5.4:

With the data provided in example 5.4, use the adjusted declining-balance
depreciation method.
3.... Units of production
SOLUTION

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 Year rate charge for Year End of 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

Adjusted declining-balance method is applicable to some types of assets such as
5 10,800,000 Adjusted 10,800,000 0
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

EXAMPLE 5.5:
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 unit
500,000
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
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 5.6:
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
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;
- 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
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.

- 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 5.7:

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 10 billion = 5 million dollars
dollars

5.2.2.3. 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
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
Liquidatio Liquidation Book value at the
from = - -
n turnover expenses time of liquidation
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 5.8:

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.

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 = VND 200 million.

+ Other taxable income from interest: VND200 million.

EXAMPLE 5.9:
- 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 5.10:

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

+ 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.

SOLUTION:

+ 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 5.11:

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.
- 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.
- 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.
5.2.2.4. 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 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
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.
5.2.2.5. Losses carried forward

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

5.2.3. 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-
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.

5.2.4. 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.

5.2.5. THE COMPUTATION OF CIT LIABILITIES FOR OVERSEAS

INCOME

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 5.12:
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:
+ 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 5.13:
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.
5.2.6. OTHER 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:
5.2.6.1. Preferential 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
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.
5.2.6.2. Tax holidays

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.
5.2.6.3. 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.

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 5.14:
We have data from Viet Co. Ltd. in a tax year as follows:
 Gross turnover exclusive of VAT: VND90,000,000,000
 Total declared expenses: VND80,000,000,000 of which:
- 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
 Income from a technical service for agriculture: VND60,000,000
 Net income from an asset’s liquidation: VND100,000,000.
 Last year’s loss: VND200,000,000.
Required: Define the corporate income tax payable by the company for the tax year.
SOLUTION
 The base turnover: VND90,000,000,000
 The non-deductible expenses:
- Salaries expenses of VND80,000,000 with illegitimate vouchers
- Donation of VND20,000,000 with legitimate vouchers to a church
- Donation with legitimate vouchers for scholarship to a university is deductible.
Therefore, the total amount of non-deductible expenses is:
VND80,000,000 + VND20,000,000 = VND100,000,000.
 Total deductible expenses:
VND80,000,000,000 – VND100,000,000 = VND79,900,000,000
 Other taxable incomes:
- Income from a technical service for agriculture: VND60,000,000
- Income from liquidation: VND100,000,000
Therefore, the total amount of other taxable incomes is VND160,000,000
 Taxable income:
90,000,000,000 –79,900,000,000 + 160,000,000 = VND10,260,000,000
 Exempt income: Income from a technical service for agriculture:
VND60,000,000
 Losses carried forward: VND200,000,000
 Assessable income:
10,260,000,000 - 60,000,000 – 200,000,000 = VND10,000,000,000
 CIT amount payable: 10,000,000,000 x 20% = VND2,000,000,000
5.2.7. TAX DECLARATION AND PAYMENT
5.2.7.1. 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 31 March of the next year following
the tax 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 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 is less
than 80% of the CIT amount for the tax year, a late payment is imposed on the
difference between 80% of the CIT amount and the total quarterly provisional
amount. The time for the late payment is a duration from the date after the
deadline of the provisional payment of the 4th quarter to the date that the company
pays. For example, the provisional CIT amount from 1st quarter to 4th quarter of
company A are: VND 1 billion, VND1.4 billion, VND1.6 billion and VND 1
billion. This means the total provisional CIT amount of company A during the
tax year is: 1 + 1.4 + 1.6 + 1 = 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 80% of VND 10 billion (which is VND 8 billion), company A must pay
a late payment with the rate of 0.03 percent on VND 3 billion (VND 8 billion –
VND 5 billion = VND 3 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 10th day as from the date of income
arising.

(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 45th 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).
5.2.6.2. 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 90th day of the subsequent year since
the end of the tax year.

CHAPTER REVIEW

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.

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% and 20%), 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.
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

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.

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.

9) Why a system of quarterly provisional payment of income tax is applicable

in parallel with an annual tax declaration and payment?

EXERCISES

Exercise 1

We have the data of the tax year N in Hanh Co. Ltd. as follows:

 The company’s gross sales exclusive of VAT are 10 billion dongs of which:

+ 7 million dongs come from exported goods.

+ 400 million dongs are the quantity discount.

+ 200 million dongs are the value of goods returns.

+ 300 million dongs are cash discount.

 In the tax year, this company received a subsidy of 250 million dongs from the
government for the goods sold to the poor.

 Surcharges receivable are 50 million dongs.

Required: Determine the base turnover for corporate income tax of this company
for the tax year N.

Exercise 2

We have the data of the tax year N in Moore Co. as follows:

 Turnover from exportation is 15 billion dongs.

 Sales of domestic goods exclusive of VAT is 10 billion dongs of which 7
billion dongs have been received; the remainder has been accepted to be paid.

 House rent received in advance for 5 years is 2 billion dongs. The company
chooses to book the expenses for the renting houses for each year.

 Surcharges receivable are 50 million dongs.

Required: Define the base turnover for CIT of this company for the tax year N.

Exercise 3

The cost of a machine (total purchase price) is VND500,000,000. Estimated

service life is 6 years. The maximum service life of this machine stipulated by the
Minister of Finance is 5 years.

Required: Determine the depreciation charge on this machine using straight-line

and adjusted declining balance methods.

Exercise 4

The cost of a machine (total purchase price) is VND400,000,000. Total estimated

units produced during its lifetime are 1,000,000. First year production is 80,000
units. Second year production is 100,000 units.

Required: Calculate the depreciation charge on this machine for the first and
second year using units of production method.

Exercise 5

We have the information on TNT Co. Ltd. on 31 December 200N as follows:

 The balance of the bad debt provision account: VND70 million.

 There have been 10 notes receivable of which:

- Six notes receivable are within the due date.

- A note receivable of VND30 million with no vouchers has been 6 months

over the due date.
 - A borrower of a debt of VND50 million has been on bankruptcy and cannot
afford to pay. This debt has a valid contract.

- Two notes receivable with valid vouchers have been 5 months over the due
date. The value of these notes is VND80 million.

Required: Calculate the provision for doubtful debt expense of this company.

Exercise 6

According to the financial report of Bamboo Co., operating in furniture

production, data on expenses for the tax year N are as follows:

 Total expenses: VND10,000,000,000 of which:

- Material expense with legitimate invoice: VND3,000,000,000. This expense

is compliant with the consumed norm defined by the company.

- The value of some invoices of material without the seller’s tax register
number: VND50,000,000.

- Donation for victims of a storm with valid vouchers: VND100,000,000.

- Remuneration with legitimate vouchers paid to the founding members of

companies who do not directly take part in the administration of goods
production: VND150,000,000

The rest expenses except for the above expenses are deductible.

Required: Determine the total deductible expenses of this company. Given that
bank payments are applicable to all purchase transactions of the company.

Exercise 7

We have data on business activities of Mist Group as follows:

 Gross turnover exclusive of VAT: VND20 billion of which, VND8 billion

comes from exported goods; VND 12 billion comes from the domestic sale of
an excise duty item with excise duty rate of 20 percent.

 Total declared expenses apart from excise duty: VND 16 billion of which:
 - Donation for construction of a hospital: VND200 million

- Donation to Youth union of Hanoi: VND100 million

- Expenses with invalid vouchers are VND150 million

- Provision for doubtful debt: VND140 million. Balance on bad debt

provision at the end of the tax year: VND100 million. There were no debts
with over due date during the tax year.

 Income received from a joint venture with a Vietnamese company on which

income tax has been paid is VND300 million.

Required: Calculate the VAT and CIT payable by this group. Given that:

- Input VAT qualified for deduction: VND80 million;

- VAT rate applicable to this item: 10 percent;

- All purchase transactions are supported with legitimate invoices except for those
stated otherwise;

- Bank payments are applicable to all purchase transactions of the company;

- CIT standard rate is applicable to this group.

Exercise 8

Data of business of Lion Co., operating in air-conditioner production, in the tax

year M, are as follows:

1. Turnover report

 Air-conditioner with capacity of 12,000 BTU: 10,000 units were sold at before-
VAT price of VND 11,000,000 per unit.

 Air-conditioner with capacity of 100,000 BTU: 1,000 units were sold at before-
VAT price of VND 44,000,000 per unit.

2. Expense report
 Depreciation which is compliant strictly with the stipulations by law:
VND10,000,000,000

 Material expense: VND80,000,000,000. This expense is compliant with the

consumed norm defined by the company.

 Salaries and remuneration expenses: VND20,000,000,000, of which

VND1,000,000,000 paid to the founding members of companies who do not
directly take part in the administration of goods production.

 Asset rent paid in advance for 5 years of renting: VND10,000,000,000.

 Interest expense: VND6,000,000,000 of which VND2,000,000,000 is

equivalent to the interest of the lack of charter capital.

 Input VAT qualified: VND9,000,000,000.

 Other deductible expenses apart from excise duty: VND8,000,000,000

3. Other relevant information

 VAT rate applicable to this item is 10 percent.

 Excise duty rate applicable to this item is 10 percent.

 Standard rate of corporate income tax is applicable to this company.

 All purchase transactions are supported with legitimate invoices.

 Bank payments are applicable to all purchase transactions of the company.

 Losses carried forward: VND2,000,000,000.

Required: Determine VAT, excise duty and corporate income tax payable by this
company for the tax year M.

Exercise 9

Company X, founded in year N-5 under an investment project engaged in Laichau

province, has the following data in tax year N:
1. Turnover report

Gross sales of goods exclusive of VAT: VND95,000,000,000, of which

VND5,000,000,000 is value of goods returns. These goods returns then were sold
at lower price and were paid VND4,000,000,000.

2. Expense report

Total declared expense: VND87,000,000,000 of which:

- Salaries and remuneration expense payable: VND15,000,000,000 of which

VND500,000,000 with list of laborers hired to do irregular work signed by the
director of the company but without labor contract; VND1,000,000,000 was
not actually paid to employees.

- Donation to the Student Union of Hanoi City: VND100,000,000.

- Donation for housing to the poor: VND200,000,000.

- Interest expense paid to a commercial bank: VND2,000,000,000.

- Interest expense paid to employees of the company at the rate of 15% per year:
VND1,500,000,000.

The rest expenses except for the above expenses are deductible.

3. Other incomes

- Income received after paying tax at source at the tax rate of 10 percent from an
overseas investment: VND900,000,000.

- Income received from a scientific contract: VND300,000,000.

4. Relevant information

- Laichau is a province in difficult socio-economic localities.

- This company started to sell product in year N-4 and earned income from
production in year N-3.
- The country from where the company received income for investment has not
yet signed double taxation agreement with Vietnam.

- The base interest rate announced by the State bank of Vietnam is 8% per
annum.

- All purchase transactions are supported with legitimate invoices except for those
stated otherwise.

- Bank payments are applicable to all purchase transactions of the company.

- This company was given a scientific research activities license.

Required: Calculate income tax payable by this company for the tax year N.

Exercise 10

A company engaging in furniture production has the following data in tax year
20XX:

1) CIT amount payable declared by the company: VND 7 billion.

2) Among total deductible expenses declared by the company, there are several
items as follows:

 Donation to Vietnam Women’s Union: VND 200 million;

 PIT deduction at source (Employees get net salary under labor contracts): VND
600 million;

 Depreciation of a 5-seat car corresponding to the excess of the historical cost

of VND 1.6 billion: VND 200 million;

 Donation to victims of a storm through Vietnam Frontiers: VND 160 million;

 Cost of damaged materials which has not been compensated: VND 400
million;

 Cost of damaged materials which has been compensated by an insurance

company: VND 300 million;
 Uniform expenses: VND 900 million;

 Deductible input VAT: VND 320 million;

 Non deductible input VAT for late declaration: 180 million;

 Employees’ training expense: VND 280 million;

 Bad debt provision: VND 1,200 million.

The rest expenses not mentioned above are deductible under the Law on CIT of
Vietnam.

Required: Calculate the amount of CIT payable by the company for the tax year
20XX. Given that:

 All expenses are supported with legitimate invoices and voucher;

 This company has 100 employees;

 All purchase transactions are supported with legitimate invoices;

 Bank payments are applicable to all purchase transactions of the company;

 No losses carried forward;

 The balance of bad debt provision account right before the time of making bad
debt provision is VND 800 million;

 By the end of 2011 the debt account is as follows:

- 2 debts over the due date of 10 months: VND 2.2 billion;

- 4 debts over the due date of 16 months: VND 1.4 billion.

- 1 debt over the due date of 26 months: VND 800 million.

- CIT rate: 25%.

Exercise 11

A corporation engaging in production has the following data for the tax year:

 Base turnover: 200 billion dongs

 Total expenses allocated for declared turnover: 170 billion dongs of which:

- House rent expenses paid in advance for 5 year: 1.5 billion dongs;

- Donation for scholarship to Haiphong University: 200 million dongs;

- Life insurance fees for employees (the labor contracts and all other
documents of the company are silent about this) paid to an insurance
company: 400 million dongs;

- PIT paid (Under labor contract, employees get net salary): 150 million
dongs;

- Uniform expense paid to employees in cash: 700 million dongs;

- The other expenses are deductible.

Required: Calculate the CIT amount payable by this corporation for the tax year,
given that:

- All of the expenses have sufficient legitimate invoices or vouchers;

- Bank payments are applicable to all purchase transactions of the company;

- This company has 100 employees;

- Standard CIT rate is applicable to this corporation;

- There are no losses carried forward and no exemption applicable to this

corporation;

- The company is in its 5th year of operation.

 CHAPTER 6

PERSONAL INCOME TAX

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

1. Define the personal income tax (PIT) and briefly outline the
characteristics of PIT.

2. Define the contents of the Law on PIT of Vietnam. You should find out
the answers to the following questions:

- Who is subject to PIT?

- What is assessable income, exempt income and taxable income?

- What is tax rate?

- How to calculate the tax payable for resident and non- resident
person?

- How to make the tax declaration and pay tax?

6.1. CONCEPTS AND CHARACTERISTICS

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 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 payable1.

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.

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

Assessable income: The concept of assessable income defines the tax base.
Assessable income is a net concept determined by reference to the tax period. All
income tax systems, whether global or schedular, generally seek to impose

1
Victor Thuronyi: Tax Law Design and Drafting, volume 2; IMF, 1998
taxation on a net amount because this amount properly reflects a person’s increase
in economic capacity for the tax period. The assessable income of a person for a
tax period is therefore commonly defined as the taxable 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).

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 high progressive. These characteristics are described
briefly hereunder:

First, personal income tax is direct tax. It is borne entirely by the taxpayer, 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 high progressive. Personal income tax aims at
ensuring of the 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. Other 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 the Communist Manifestos. In most western
European 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.

6.2. BASIC CONTENTS OF PERSONAL INCOME TAX IN VIETNAM

Personal income tax 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 changes in threshold, tax rate has been changed with decreasing
the highest margin tax rate from 60% to 40% and leave out the 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
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. Regulations of PIT are as follows:

6.2.1. TAXPAYERS

Income tax is a tax on the income of individuals. 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.
Residents are taxed on their entire income, regardless of the place of origin
(worldwide income). Nonresidents are only taxed on income directly connected
with the territory of Vietnam.

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 do not satisfy any of conditions above are treated as a non- resident.

A sole traders have revenue of VND 100 million per year or less is non- taxable
person.

6.2.2. TAXABLE INCOME

There are 10 types of taxable 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.
  Income from manufacturing and business activities in agriculture,
forestry, salt mining …which don’t satisfy all condition for tax exemption
(2) Income from salaries and wages.

Salaries and wages income receivable by employees from employers in monetary

or non-monetary forms, comprising:

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

employment for his work. Tax is also payable on various benefits, e.g. old age
pension and other benefits. 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 way, for instance, a holiday
or a car. A claim is an entitlement to receive a benefit or facilities after a set period
of time, or subject to conditions. An example of this is entitlement to pension.
Examples of facilities are tools, meals or tickets for public transport.

However, 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 including:
- Monthly benefits, lump-sum benefits and allowances according to legislation
on incentives for contributors.
- Monthly allowances and lump-sump allowances for the persons that
participate in the resistance movements, national defense, fulfillment of
international tasks, and discharged volunteers.
- Benefits for national defense and security; subsidies for the armed forces.
- Benefits for dangerous or harmful works.
- Benefits for workers in disadvantaged areas.
 - Irregular allowances for difficulties, occupational accident benefits,
occupational illness benefits, lump-sum allowances for childbirth or adoption,
maternity leave benefits, post-maternity recovery benefits, benefits for
reduction in work ability, lump-sum pension, 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.
- Benefits for senior officers.
- Lump-sum benefits 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. Lump-sum 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 allowance.
(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.
The time for determining the assessable income from salary or wage is the date
on which the organizations and individuals pay income to the taxpayer or when
the taxpayer receive the income.

(3) Income from capital investment, including: Interests on loans; dividends;

income from capital investments in other forms, excluding interest income of
Government bonds.
(4) Income from capital transfer, including income from the transfer of capital
that has been contributed to economic organizations; transfer of securities;
and others.

(5) Income from the transfer of immovable properties, including: land use right
and properties accompanied with land; ownership or the right to use of
resident houses; transfer of the right to lease the lands or water surfaces and
other immovable properties.

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

(7) Income from copyrights, including: Income from the transfer of the right to
use of subjects of intellectual properties and income from technology
transfers.

(8) Income from 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.

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

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

6.2.3. EXEMPT INCOME

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 14 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.

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.

6.2.4. TAX REDUCTION

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

6.2.5. ASSESSABLE INCOME AND TAX RATES

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

6.2.5.1. For resident person

a. Assessable income

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) Assessable income from business source

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

(a) The sole trader who paying flat tax: The assessable 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.

(b) The individual paying tax every 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 businessperson, whether such amounts have been collected or not.
(c) 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:
Taxable 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.
 (d) 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): Taxable 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.

(2) Assessable income derived from salary and wage

Assessable income of salary and wages is a part of taxable income of taxpayers
after being reduced by the amount of the family deduction, charity and
humanitarian deduction, contributions of compulsory or voluntary insurance.
This is illustrated by the following formula:

Assessable Compulsory Contributions

Income Taxable or voluntary Family to charity and
= - - -
(Base income insurance deduction humanitarian
income) premiums purposes

Now, we will discuss the factors of taxable income in more details.

 Deduction for compulsory or voluntary insurance premiums

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/month.

 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 incomes or incomes from salary or wage. Family deduction includes two
portions: self deduction and dependant deduction.

- Self deduction:VND 11 million per month (VND 132 million per annum).

- Dependant deduction:Each dependant is deducted VND 4.4 million per

month ( million per annum).

There are two principles for dependant deduction:

(i) Only taxpayer who has registered and has been given a tax identified number
(TIN) can apply dependant deduction.

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

Dependants 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 VND 1,000,000 or less from all income sources;

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

- Other dependants 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 dependants:

+ Being disabled and incapable of working;

+ 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 VND 1,000,000 or less from all income sources will
be treated as dependants.

- Dependants being grandparents; blood uncles and aunts; blood siblings;

blood nephews and nieces and other individuals must also satisfy the
condition that they are helpless and directly nurtured by taxpayers.

 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;

- Contributions made to charity, humanitarian funds and scholarship funds.

(3) Assessable income from capital investment

The assessable income from capital investment is the taxable income which is the
total of incomes from capital investments which the taxpayer receive 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.

(4) Assessable income from capital transfer and immovable properties transfer

Similarly to income from capital investment, there is no threshold applicable to

this kind of income.

The assessable income from capital is also taxable income and determined by the
following formula:

Assessable The Expenses directly

income/Taxable = The - purchasing - related to the
income selling/ price generation of income
 transfer from capital
price investment

If the purchasing price and expenses directly related to the transfer of securities
or immovable properties are unable to be determined, the taxable income is
determined as its selling price.

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.

The time for determining the taxable income is the date on which the capital
transfer is completed in accordance with laws.

 The assessable income from transferring securities: is the price of each

transfer.
Securities transfer price is determined by the transaction price at the Stock
Exchange (applied to securities of a public company traded at the Stock
Exchange) or the price written on the transfer contract or actual transfer price or
the price in the accounting book transferor ( applied to securities of a non- public
companies)

 The assessable incomes from real estate transfer: is the price written on the
transfer contract at the time of transfer.

(5) Assessable income from prizes, royalties’ income, franchising, inheritances

and gifts
The assessable income is also the taxable income for these incomes. There is a
threshold of VND10 million applicable to these types of incomes. The taxable
income from this group is the excessive amount 10 million dongs over the income
which the taxpayer receives each time or per contract.
The time for determination of the taxable income from prizes, royalties’ income,
franchising, inheritances and gifts is the date on which these incomes are paid.

EXAMPLE 6.1:

On August 20, 20XX, Mr. X received a lottery prize of 150 million dongs.
Required: Define the taxable income of Mr. X in this case.

SOLUTION: Taxable income = (150 – 10) = 140 million dongs.

b. Tax rates

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

Level Annual assessable 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
- Tax rate applicable to business income:

Taxable/Assessable income Tax rate

(%)
Distribution, supply of goods 0.5%

Service provision, construction exclusive of building materials 2%

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%
 - The table of scheduler rates is stipulated as follows:

Taxable/Assessable income Tax rate (%)

a) Income from capital investment 5
b) Royalties income and franchising income 5
c) Taxable income from prizes 10
d) Income from inheritances and gifts 10
e) Income from capital transfer 20
f)Income from securities transfer 0.1
g) Income from the transfer of immovable properties 2
c. Calculation of tax payable

The income tax payable is the aggregate amount of the tax counted on the taxable
income from each category.

Tax payable from each category is determined separately as formula follows:

Formula:

Personal income tax payable = Taxable income (x) Tax rate

Example 6.2 below will illustrate the way to determine the amount of PIT in
Vietnam.

EXAMPLE 6.2:
Mr. Q is a resident taxpayer. He has two sons who are studying at a secondary school
(qualified for deduction) and has the following incomes in tax year 20XX:
- Salary after paying compulsory contribution: VND240,000,000
- Bonus and prizes: VND40,000,000 of which VND25,000,000 is from a prize
6.2.5.2. 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.

a. 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.

b. Income from salary and wage

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.

c. 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.

d. 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.

e. Income from the transfer of immovable properties

 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.

f. 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.

6.2.6. TAX DECLARATION AND PAYMENT

Individuals who have incomes liable to personal income tax are responsible file
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.
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
20th of the 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 120th
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.

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

Where incomes of VND2,000,000 or more are paid to a taxpayer with a TIN, who
does not work full time for the income-payers (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.

CHAPTER REVIEW

SUMMARY

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) Taxable income includes income from business; salaries and wages; 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 taxable income for income tax; each type of
taxable income has its own rate which varies from resident to non- resident
person.

9) Assessable 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
taxable income.

10) Assessable 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.

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.

ECONOMIC TERMS

Dependant 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.

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 dependant?

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?

EXERCISES

Exercise 1

From the information provided you are required to define whether Mr. George is
resident or non- resident under the PIT Law:

Mr. George is an American’s engineer. He went to Vietnam under the contract of

the Intel Co. Vietnam from 15 March 200X to 1 May 200X+1. However, on 1
August, 200X, he came back home for 3 months in order to manage his working
in US. He came back Vietnam on 1 November and terminated his contract on
time.

Exercise 2

From the following information, you are required to calculate the taxable income
of taxpayer for the year 200X:
Mr. A, vice director of ASEAN company, is a resident individual. He is
unmarried and has the following incomes:

- Salary and wage from ASEAN Co.: $30,000

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

$6,000

- Dividend received: $10,500

- Interest received: $5,000 of which $3,000 from City Bank and $2,000 from
a household.

- Rental income: $24,000

- Exchange rate applicable for tax purpose: $1 = VND23,000

Exercise 3

Mrs. Le is a Vietnamese resident for the year of assessment 20XX. Her income
consists of employment income from Vietnam Prudential insurance company and
business income from a book shop.

Financial details related are as follows

- Salary (from Prudential Co.): VND 1.200 million

- Book sales: VND 3.200 million

Besides two sources of income above, in the tax year 20XX, Mrs. Le has VND
10 billion from transferring the house which she had as an inheritance from her
parent 5 years ago. This house is next to her residential house on the Cau Giay
district.

Required: Calculate income tax payable of Mrs. Le for the tax year 20XX, given
that:

- On 1 August, 200X, she has a prize from Prudential for high-turnover person
at the value of VND20 million. She has contributed VND10 million from
her prize to Hanoi Handicapped Person Association;

- She is married and has 2 children who are studying at a primary school.
 Exercise 4

Mr. Hai, an accountant, has formed an enterprise to provide accounting and tax
services to small and medium enterprises in Hanoi. His enterprise operates under
the name of C&A Co. His enterprise has staff of 10 persons and a client base of
50 enterprises.

Monthly report of his company has following information:

 For director:

- Salaries and wages: VND30 million

- Car and related expenses: VND8 million

- Telephone: VND5 million

 For vice director:

- Salaries and wages: VND25 million

- Telephone: VND3 million

- Travel expenses: VND5 million

 For each person of staff:

- Salary: 14 million

- Travel expenses: VND2 million

On the occasion of Tet holidays (February of the tax year), they had a bonus of
VND10 million for each. In addition, C & A gave a trip for all staff on Nation
Day in Nhatrang for 6 days. The trip cost VND8 million for each.

Required: Calculate the amount of PIT payable by each person that C&A Co.
must pay for the tax year in the role of withholding person, suppose that all
members of C&A Co. have no family deduction.

Exercise 5

Mr. Dennis, a financial expert working for IBFD - the International Tax Central
in the Netherlands, signed a contract with ministry of Finance Vietnam to assist
MOF making a Policy Draft of environment tax. His contract lasts from 1/3/20XX
to the end of this year. Below is his record of the period of stay in Vietnam:

Time period Place of work Total days Working days

1/3/200X to 20/3/200X In Vietnam 21 15

21/3/200X to 30/3/200X Survey in China 10 8

1/4/200X to 30/4/200X In Vietnam 30 22

1/5/200X to 30/8/200X In the Netherlands 120 102

1/9/200X to 20/9/200X In Vietnam 20 16

21/9/200X to In the Netherlands

101 87
31/12/200X

Here is some information in his financial report:

- Consultant fee: EURO500 per working day (received)

- Stationery and related (total): EURO1.000 (received)

- Travel cost (return ticket): EURO1.200 for each time (three times) paid by
MOF of Vietnam

- Hotel: EURO300 a day paid by MOF of Vietnam

In addition, he had income of VND 300 million from transfer securities in

Stock Market and interest of VND100 million from HSBC Vietnam.

Required: Calculate Dennis’s income tax payable for the tax year 20XX, given
that the exchange rate applicable for tax purpose: EURO1 = VND25.000

Exercise 6

Mr. Long, a resident under the Law on Personal income tax (PIT) of Vietnam has
the following data for the tax year 20XX:

1. Incomes received from ITM Corporation as an engineer:

 - Salary before a deduction of compulsory insurance premiums: VND 430
million. Compulsory insurance fee was deducted by ITM Corporation: VND
30 million.

- Performance bonus: VND 100 million

- Occupational allowance as stipulated by Law: VND 50 million

- Toxicity allowance: VND 40 million

- House allowance: VND 60 million

2. Other incomes:

- Won a prize on a TV show (Before income tax): VND 100 million

- Dividends after deduction at source of income tax: VND 57 million

3. Personal information: This man is married and has 2 children, a son and a
daughter. His son is 20 years old. His daughter is 15 years old.

Required:

1. What information do you need to calculate Mr. An’s PIT amount payable
under the Law on PIT of Vietnam?

2. With your supposition on the above information, calculate Mr. Long’s PIT
amount payable for the tax year 20XX under the Law on PIT of Vietnam.

7.5. 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.
7.5.1. 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 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 subject 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);

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.

7.5.2. Taxable objects

7.5.2.1. 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.
7.5.2.2. 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.

7.5.3. FCT BASE AND CALCULATION

There are 3 ways of FCT calculation: (1) The Declaration method; (2) The Direct
method; and (3) The Hybrid method.
7.5.3.1. 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:

(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;

(iii) 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 2 and chapter 5.
7.5.3.2. 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:

a) VAT amount payable

VAT amount payable = Base turnover x Deemed VAT rate

a1) 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

 The base
1 - Percentage of VAT on turnover
price

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.
a2) 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 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.

b) CIT amount payable

CIT amount CIT-taxable Deemed CIT

= x
payable turnover rate

b1) 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- Turnover exclusive of CIT

taxable =
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 CIT-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 CIT-taxable turnover include also such value of
goods and services.

In 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.

b2) Deemed CIT rate

Deemed CIT
Business lines
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 1
of goods 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

Financial derivatives 2

Construction, assembly and installation with or without

2
supply 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 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 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 7.4:

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;

- 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 a 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

7.5.3.3. 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.

7.5.4. TAX FILING AND PAYMENT

For foreign contractors or sub-contractors 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 apply the direct method, the

Vietnamese parties who sign contracts with foreign contractors or sub-contractors
have to deduct and pay FCT on behalf of foreign contractors or sub-contractors.
FCT have to be filed and paid no later than 10 days since the date 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 20 th of
month following the tax month. An official declaration is required for each
contract upon its completion.

For foreign contractors or sub-contractors apply the Hybrid method, the filing and
payment of VAT is the same as other Vietnamese enterprises which has been
mentioned in chapter 2, the filing and payment of CIT is the same as that of the
Direct method above.
7.1. AGRICULTURAL LAND USE TAX

7.1.1. CONCEPTS AND CHARACTERISTICS

Agricultural land use tax is a tax levied on persons or entities who own
agricultural land or agricultural land use right. In countries where land is merely
public property, this tax is called agricultural land use tax. In countries where land
owned by both the government and private sector, this tax is known as agricultural
land tax.

As its name suggests, this tax is a property tax because its base is the value of a
type of property – real estate.

Because of the fact that the taxpayer cannot shift the tax burden to other persons
or entities, agricultural land use tax is seen as a direct tax.

Besides, this tax often has numerous taxpayers but generates small budget
revenue. In many countries, it is regarded as one of the source of local government
tax revenue.

7.1.2. AGRICULTURAL LAND USE TAX IN VIETNAM

Agricultural land use tax was not presented in Vietnam until the late of 1980 when
the Ordinance on agricultural land use tax was introduced. In 1993, the Law on
agricultural land use tax was promulgated, which was at the same time with the
promulgation of the Law on Land 1993.

In the Law on agricultural land use tax, agricultural land was divided into
different categories. Tax rate was the number of kilograms of paddy per hectare
as determined in the tariff schedule, depending on land category. Category of land
is determined based on following factors: quality, location, region, weather,
irrigation supply and drainage situation.

Tax liabilities are converted to currency according the annually published price
of rice of the provincial’s people committee. As for land used to grow wood trees
and perennial trees that are harvested once only, the tax rate was set at 4% of the
value of the output. There was also a supplementary tax on the land in excess of
the thresholds.
In terms of revenue mobilization, agricultural land use tax had certain roles in the
1990s. In 1995, the total revenue collected from agricultural land use tax
accounted for 3.05 percent of total revenue of the government or 0.67 percent of
GDP, which was much higher than the personal income tax revenue at that time
of 0.23 percent of GDP (MOF, 2011). However, revenue from this tax has been
reduced considerably over the last decade as the agricultural land use tax has
either been exempted or reduced by the Resolution of the National Assembly to
support the farmers.

In particular, since 2003, farmers have been exempted from agricultural land use
tax on land within threshold2 as prescribed by the provincial’s people committees.
A reduction of 50% of agricultural land use tax has also been granted to entities
using agricultural land which are not eligible to agricultural land use tax
exemption or those having land area in excess of the prescribed thresholds. These
exemptions and reductions in agricultural land tax was originally proposed to
apply until 2010, but recently was extended to 2020. In 2010, the total revenue
collected from agricultural land tax was only VND56 billion, which is very small
in comparison with total State budget revenue collection of VND548.428 billion
(MOF, 2012).

7.2. NON-AGRICULTURAL LAND USE TAX

7.2.1. CONCEPTS AND CHARACTERISTICS

Non-agricultural land use tax is a tax that levied on persons or entities who own
non-agricultural land or non-agricultural land use right. Like agricultural land use
tax, it can be called non-agricultural land use tax or non-agricultural land use tax
depending on the land ownership regime of a country.

Similar to agricultural land use tax, non-agricultural land use tax is a property tax
and is also a direct tax.

In countries where land is merely public property, this tax is seen as a two-in-one
state revenue. It is a property tax because its base is the value of property. It is a

2
An agricultural land threshold is a standard agricultural land area that a household be granted by the Government.
With the area exceeding the threshold, a household must pay a higher tax rate.
property lease because land is the government’s property and the tax payable here
can be seen as a form of land lease.

7.2.2. NON-AGRICULTURAL LAND USE TAX IN VIETNAM

7.2.2.1. Taxable and non-taxable objects

Under the Law on Non-agricultural land use tax, the taxable objects include:
residential land, non-agricultural land used for production and business, including
land for the construction of industrial parks; land for business premises; land for
mineral exploitation and processing; and land for the production of construction
materials and pottery articles, lands leased by the government.

The following types of land fall into the non-taxable categories:

- Land used for public purposes;

- Land used by religious institutions;

- Land used for cemeteries and graveyards;

- Land under rivers, canals, ditches, streams and special-use water surface;

- Land with communal houses, temples, and clans’ worship houses;

- Land for the construction of government offices or non-business works or for

national defense and security purposes;

- Other non-agricultural land stipulated by law.

However, the land types mentioned above will be taxable if they are put to use
for commercial purposes. The objective of this regulation is to ensure that the use
of non-agricultural land aligns with its specified purposes.
7.2.2.2. Taxpayers

In principle, taxpayers are organizations, households and individuals that have

the right to use non-agricultural land.

In some cases the taxpayer is specifically determined as follows:

- If organizations, households or individuals have not yet been granted land use
right certificates or house and land-attached asset ownership certificates, the
current land users will be liable to pay tax.

- If land is leased by the State, lessees are liable to pay tax.

- If more than one person having the right to use a land plot, the lawful
representative of these users is the taxpayer.

- If a person having land use right leases his/her land under the terms of a
contract, the taxpayer is identified as agreed upon in the contract. If there is no
agreement made on who is liable to pay tax in the contract, the person with the
land use right is the taxpayer.

- If a land has been granted a certificate but is currently under dispute, pending
the dispute settlement, the current land user is the taxpayer. Tax payment does
not serve as a ground for the settlement of disputes over land use rights.

- If a person having land use right contributes his/her land use right as business
capital, thereby forming a new legal entity that has the right to use tax-liable
land, the new legal entity is the taxpayer.
7.2.2.3. Non-agricultural land use tax base

In terms of tax base, with the introduction of the Law on non-agricultural land
use tax, there has been a move to value based principles. Taxable value is defined
as taxable land area multiplied by the base price of one square meter of land.

If a person has the right to use more than one residential land plots, the taxable
land area is the total area of all taxable land plots. For residential land of a multi-
story building, a coefficient will be used.

The base price of a square meter of land is the price of land as set by the provincial
people's committee, which is kept stable for 5 years.
7.2.2.4. Tax rates

Tax rates for residential land follow the progressive rate structure, which consists
of three brackets including 0.03%, 0.07% and 0.15%. For land area within the
land threshold3, the rate is 0.03% and this rate for land area in excess of up to 3
times the land threshold is 0.07%. The 0.15% is applied to land area in excess of
over 3 times the land threshold.

The progressive tariff for residential land, including land used for commercial
purposes is shown in Table 7.1. Residential land of multi-story buildings,
condominiums or underground construction works is subject to the tax rate of
0.03%. Non-agricultural production land and business land is subject to the tax
rate of 0.03%.

Table 7.1: Tax rate for residential land

Taxable land area (m2) Tax rate (%)

1 Area within the land threshold 0.03

2 Area in excess of up to 3 times of land 0.07

threshold

3 Area in excess of over 3 times of land 0.15

threshold

Higher rates apply to land used improperly or land not yet used (e.g. a vacant lot)
or encroached land. The tax rate of 0.03% applies to non-agricultural land
specified as non-taxable land being used for commercial purposes. Land used for
improper purposes or land not yet used under the regulations is subject to the tax
rate of 0.15%. However, it is worth noting that land of a phased investment
project as registered by the investor and approved by a competent authority is
regarded as unused land and thus, this type of land is subject to the tax rate of
0.03%. Encroached land is subject to the flat tax rate of 0.2%. Tax payment does

3
Land threshold, land threshold is a standard area granted to a household. If a household without a land for
housing submit a petition for a land, this household is granted only a standard area. If a household has the land
use right of areas more than the threshold because this household buy these lands in the market or because they
inherited from their parents, the excess area will be taxed at higher rates. Land threshold also use to calculate the
amount of non-agricultural land use tax reduction or exemption. Land threshold is stipulated by the People’s
Committee of a province and the threshold is different from province to province, even it is difference from district
to district within a province. Normally, land threshold in urban area is less than it is in countryside.
not serve as a basis for recognizing taxpayers’ lawful land use right for the
encroached land area.

EXAMPLE 7.1:
In tax year 20XX, Mr. Long owns a land in Hanoi. The area is 500 square metres
in which:
♦ 150 square metres is the encroached area.
♦ The other 350 square metres is granted by the authority for housing as follows:
- 150m2 of land is used to build a house.
- 200m2 of land is used as a play ground and a small garden.
♦ Required: Calculate the amount of non-agriculture land use tax payable by
Mr. Long for tax year 20XX. Given that:
- The housing land threshold for each household is 100 m2
- The base price for tax purpose is: VND 20 million.
SOLUTION:
- Total taxable area: 500 m2
- Non-agriculture land use tax amount payable for encroached area: 150 x
VND20 million x 0.2% = VND6 million
- Non-agriculture land use tax amount payable for the rest of the land: 100 x
VND20 million x 0.03% + (350 – 100) x VND20 million x 0.07% = VND4.1
million
- Total non-agriculture land use tax amount payable by Mr. Long for the tax
year 20XX: 6 + 4.1 = VND10.1 million

7.2.2.5. Non-agricultural land use tax exemptions and reductions

In the Law on non-agricultural land use tax, there is an extensive list of land tax
exemptions. These exemptions include land for special investment projects;
business premises for educational, vocational training, healthcare, cultural, sports
or environmental activities; land for the construction of houses of gratitude;
residential land within the prescribed quota of households in areas with extreme
socio-economic difficulties or land of poor households.

In addition, certain categories of land and taxpayers are eligible to non-

agricultural land use tax reduction. For example, 50% reduction in the tax amount
payable applies to land for special investment projects; investment projects in
areas with socio-economic difficulties or land within the land use threshold in
areas with socio-economic difficulties. Taxpayers facing difficulties due to force
majeure circumstance may also be eligible to non-agricultural land use tax
reduction in certain cases.

The Law also provides that taxpayers who are eligible for both tax exemption and
reduction for the same land plot will be exempt from tax. Taxpayers who
concurrently fall into two or more categories eligible for tax reduction specified
in the Law will be exempt from tax. Residential land taxpayers will be eligible
for tax exemption or reduction only for one place as chosen by the taxpayer.
7.2.2.6. Tax declaration and payment

In principle, declaration of non-agricultural land use tax is made on annual basis.

The deadline for declaration is 30 January of the calendar year.

For households and individuals, if there is no change in taxable area of land, the
taxpayer only has to declare once. He/she does not have to declare for subsequent
years.

Non-agricultural land use tax is paid twice a year. The first payment must be
made by 31 May and the second payment must be made by 31 October of the tax
year.

7.3. SEVERANCE TAX

7.3.1. CONCEPTS AND CHARACTERISTICS

According to Sean O’Leary, severance tax is define as “A tax on the privilege of

severing or extracting natural resources, such as coal, natural gas, oil, timber, or
other minerals”4. In other words, severance tax is levied for removing the mineral
and other natural resources from land or water bottoms within territorial
bounderies of a state. Natural resources are all forms of timber, including pulp
wood and other forest products; minerals such as oil, gas, coaled methane,
consendate, coal, natural gas, lignite and ore, marble, stone, sand, and other
natural deposite.

As a rule, the purpose of the severance tax is to promote economically efficient

use of natural resources and to support sustainable development in the economy.

Severance tax is a three-in-one revenue: a property tax, a fee and a sale of

property. It is a property tax because its base is the value of a property – extracted
natural resources of a country. It can be seen as a fee because the taxpayer is the
exploiter who benefits from services provided by the government including
mapping of mineral mines, recovery of spoiled environment due to natural
resource exploitation, etc. It is also regarded as a sale of property because the
taxpayer is the exploiter who buys a property from the government – the natural
resources.

7.3.2. SEVERANCE TAX IN VIETNAM

7.3.2.1. Severance taxable objects

Under the Law on Severance tax 45/2009/QH12 modified by the Law No.
71/2014/QH13, severance tax is currently imposed on the exploitation of 9
categories of natural resources, including: (1) Metallic minerals; (2) non-metallic
minerals; (3) crude oil; (4) natural gas and coal gas; (5) forest products other than
animals; (6) natural aquatic products including marine animals and plants; (7)
natural water including surface water and groundwater except for those used for
agriculture forestry, fishery and salt industry; (8) natural swallow's nests; and (9)
other resources prescribed by the Standing Committee of the National Assembly
of Vietnam.

4
Sean O’Leary: Investing in the future, West Virginia center on Budget and Policy, USA
7.3.2.2. Taxpayers

The severance taxpayers are those organizations and individuals who exploit
natural resources which are taxable objects.

For a mining enterprise established on the basis of joint venture, the joint venture
enterprise has to pay severance tax. For Vietnamese and foreign parties who sign
a business cooperation contract to exploit natural resources, the parties' liability
to pay severance tax must be specified in such contract.
7.3.2.3. Severance tax base

The tax bases include base output of exploited natural resource and the base price
(taxable price).

a) Base output for natural resource

In principle, the base output for severance tax (base output) is the actual output
exploited in a tax period.

In some cases the base output for severance tax is specifically determined as
follows:

- For an exploited natural resource the tonnage or the volume of which can be
determined, the base output of severance tax is the tonnage or volume of
natural resource actually exploited in a tax period.

- For an extracted mineral of which the tonnage cannot be determined because

this mineral contains different elements and wastes, the base output is
determined based on the tonnage of each element obtained after mining and
processing.

- For minerals which are not sold but used for producing other products, if their
actually extracted tonnage cannot be directly determined, the base output is
determined based on the output of products made from the minerals and the
use norm of mineral per unit of product.

b) Base price
In principle, the base price is the selling price of a unit of natural resource product
exclusive of VAT.

In some special cases, the base price for severance tax is specifically determined
as follows:

 If the exploited natural resource selling price cannot be determined, the base
price is determined based on either of the following criteria:
- The regional market actual selling price of a unit of exploited natural
resource product of the same grade, which must not be lower than the base
price set by the provincial People Committee;
- In the case of exploited natural resource containing different elements, the
base price is determined based on the unit selling price and the grade of each
element, which must not be lower than the base price set by the provincial
People Committee.
 For natural water used for hydropower generation, the base price is the average
selling price of commodity electricity.
 For exploited natural resources which are not domestically sold but exported,
the base price is the FOB price minus export duty.
 For crude oil, natural gas and coal gas, the base price is the selling price at the
place of delivery.
 For natural resource products which are not sold at the exploitation places but
transported to other places for sale, if the transport costs are separately recorded
on the invoices, they are excluded out of the base prices.

7.3.2.4. Tax rate

The tax rates vary depending on the natural resource being exploited. The band
for tax rate for each resource is stipulated in the Law on severance tax, including
the minimum and maximum rate. Pursuant to this band, the Standing Committee
of the National Assembly stipulates specific rates for each category of natural
resource in each period based on the following principles:

 Ensuring conformity with the list of groups and categories of natural resource
and within the tax band prescribed by the National Assembly;
 Contributing to the management of the State on natural resources; protection,
exploitation and rational, economical and effective use of natural resources;
 Assuring state budget revenues and market stabilization.
However, for crude oil, natural gas and coal gas, a progressive rate table is applied
as based on their daily exploited average output.

7.3.2.4. Severance tax exemption and reduction

Under the Law on Natural resource, there are 7 cases in which the taxpayer may
be eligible to tax exemption and reduction, including:

 Taxpayer affected by natural disasters, fires or unexpected accidents, causing

losses of natural resources on which natural tax has been declared and paid,
may be considered for tax exemption or reduction in payable royalties for the
lost volume of natural resources.
 Exploitation of natural sea products.
 Exploitation of tree branches and tops, firewood and bamboo of all kinds which
individuals are permitted to exploit for their daily-life needs, but not for sale.
 Natural water used for hydropower generation by households and individuals
for their daily-life needs, but not for sale.
 Natural water used for agriculture, forestry, fishery and salt-making; natural
water exploited by households and individuals for their daily-life needs.
 Deposit or soil exploited and used right on granted and/or leased land areas;
and deposit or soil exploited for ground leveling and construction of security
and military works and dikes.
 Others cases eligible for royalty exemption or reduction as prescribed by the
National Assembly Standing Committee.
 CHAPTER 8

BASIC ISSUES IN TAX ADMINISTRATION

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define cases where taxpayers are obliged to register for a tax identified
number (TIN) and how to register.

- Understand the procedure of tax registration.

- Know what rights and obligations taxpayers have in tax audit.

- Recognise tax avoidance and know what the punishments are for tax
law violation.

- Distinguish between tax avoidance and tax evasion.

- Understand what transfer pricing is as well as explain the anti-transfer

pricing rules.
8.1. TAX REGISTRATION

8.1.1. CONCEPT

Tax registration means taxpayers giving their information in a set form and filing
these forms to tax administration agencies before starting to perform the tax
obligation towards the government according to the provisions of law.

8.1.2. TAXPAYERS’ 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;

- 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.

8.1.3. TAX REGISTRATION PROCEDURE

8.1.3.1. Deadline for tax registration

For enterprises established under the Law on enterprise, tax registration is done
at the same time with enterprise registration. The procedure for enterprise
registration is stipulated under the Law on Enterprise and Decree No.
78/2015/ND-CP dated 14 September 2015. 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.

For individuals and entities that are not enterprises under the Law on enterprise,
tax registration is done within 10 working day 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;

- The responsibility of organizations or individuals to withhold and pay taxes on

behalf taxpayers arises;

- They start performing the Required of collecting charges and fees 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 arise.

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.
8.1.3.2. What and where to file

a) Tax registration dossier

- Enterprises established and 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 other related legal documents.
- For those taxpayers not established under the Law on Enterprises:

For taxpayers being business organizations, a tax registration dossier comprises:

a tax registration form, and enclosed appendices (if any); a copy of the business
registration certificate or the license for foreign investment in Vietnam or the
decision on the establishment of the entity.

For taxpayers being individuals, groups of individuals or business households, a

tax registration dossier comprises: a tax registration form, a list of stores and
shops (if any) based outside the district, provincial town or province where the
headquarter is located; a copy of the business registration certificate (if any); and
a copy of the citizen’s identity card.

For taxpayers being individuals paying personal income tax, a tax registration
dossier comprises: a tax registration form; a copy of the tax registration’s identity
card or passport (for foreigners).

b) Filing of tax registration dossiers

For business units established under the Law on Enterprises, tax registration
dossiers are filed at the business registration agency under the Government’s
Decree No. 78/2015/ND-CP dated 14 September 2015 on business registration.

Businesses and other organizations have to file their tax registration dossiers at
provincial Tax Departments where they are headquartered.

Organizations and individuals responsible for withholding and paying taxes on

taxpayers’ behalf have to register with their local tax administration agencies.
Particularly, individuals paying income tax through their income-paying agencies
have to file their tax registration forms to the income-paying agencies, which have
to assemble and file tax registration forms of their staffs to tax offices in charge
of them.

Individuals who file personal income tax declaration directly at tax office (not
through income-paying organizations) have to register with tax offices in the
localities where they earn taxable incomes or where they register for their
permanent or temporary residence.
c) Receipt of tax registration dossiers

Tax officers are responsible to receive and examine tax registration. In case of
necessity to supplement dossiers, tax officers have to notify such to dossier
fileters on the date of dossier receipt, for directly filed dossiers, or within three
working days from the date of receipt of dossiers sent by post or electronically.
8.1.3.3. Grant of tax registration certificates

Tax registration certificate is granted to organizations and individuals, excluding

businesses established and operating under the Law on Enterprises where the
entities are given a certificate of EIN/TIN. Tax offices are responsible to grant
tax registration certificates within 3 working days, from the date of receipt of
complete tax registration dossiers (excluding the time for revision or
supplementation of dossiers containing information inaccurately or inadequately
declared by taxpayers).

A tax registration certificate has the following items:

- Name of the taxpayer;

- Tax file number;

- Serial number and date of the business registration certificate or operation

license or investment license, for business organizations or individuals;

- Serial number and date of the decision on the establishment, for non-business
organizations;

- Serial number and date and place of issue of the identity card or passport, for
non-business individuals;

- The tax office in charge;

- The issue date of the tax identification number.

 8.1.4. NOTIFICATION OF CHANGES IN ITEMS OF TAX REGISTRATION
FORMS

- 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.

- 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 (ogininal); Taxpayers have to file dossiers of
notification of changes in tax registration information to tax offices in charge
of them.

8.2. TAXPAYERS’ RIGHTS AND OBLIGATIONS IN TAX AUDIT

8.2.1. TAXPAYERS’ RIGHTS
thanh tra thuế
In tax audit, taxpayers have the following rights:

- To refuse the tax audit when there is no decision on tax audit;

- Not to provide information, document not related to the tax audit, or

information and documents belonging to the government secret, except for
where legislation states otherwise;

- To get written records of tax examination, to request explanations of the

contents of these records and to reserve their opinions on these records;

- To appeal against the decision of tax audit team, to complain about the
behaviors of the tax audit team in the conducting tax audit if the taxpayers have
evidence to prove that the decision is unlawful.
8.2.2. TAXPAYERS’ OBLIGATIONS
Taxpayers are responsible to:

- Comply tax audit decision;

- Supply full and accurate information and documentation at the request of tax
audit team and bear responsibility on the provided information;

- Explain about tax calculation, tax declaration and tax payment to the tax audit
team;

- Sign the tax audit report within 5 working days from the date that the tax audit
is finished.

- Comply the audit conclusion and decision of punishment of tax audit team.

8.3. TAX AVOIDANCE, EVASION AND PUNISHMENTS OF TAX

LAWS’ VIOLATIONS
8.3.1. 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.

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.

8.3.2. PUNISHMENTS OF TAX LAWS’ VIOLATIONS

8.3.2.1. Tax laws’ violations

According to the Vietnam legislation, tax-law violations by taxpayers include:

- Violation of regulations on tax procedures: Late filing of tax registration

dossiers and late notification of information changes;

- Incomplete and inaccurate declaration of contents in tax dossiers;

- Late filing of tax return;

- Violation of regulations on supply of information relating to tax liability

determination;

- Failure in compliance with tax audit decisions, and enforcement of tax-related

administrative decisions;

- Delay of tax payment;

- Incorrect and dishonest declaration to get lower payable tax amounts or higher
refundable tax amounts;
- Employment of other unlawful techniques for tax evasion or tax fraud.
8.3.2.2. Punishments for tax laws’ violations

There are some forms and levels of sanction against tax-law violations:

 Caution

A caution in writing applies to first-time violations, or second-time violations

involving extenuating circumstances, or less serious violations of tax procedures,
and violations of tax procedures committed by persons aged between full 14 and
under 16 years.

 Fines

A fine is charged for the following tax laws’ violations:

- A specific fine not exceeding VND100 million for acts of violating tax
procedures. The specific fine level for an act of violating tax procedures is the
average in the bracket set for such act; if there are extenuating circumstances,
the fine may be reduced, but not lower than the minimum level in the fine
bracket; if in aggravating circumstances, the fine may be raised but not higher
than the maximum level in the fine bracket;

- For late payment: A fine of 0.03% of the late payment amount a day;

- A fine of 20% of the under-declared amount is charged for false declarations

of domestic taxes which lead to lower tax amounts payable or a higher tax
refund;

- A fine of 10% of the under-declared amount is charged for false declarations

of tariff which lead to lower tax amounts payable or a higher tax refund which
is self-detected and self-declared by the taxpayer within 60 days since the date
of customs declaration made and before the date of the customs office’s
announcement of post clearance audit; for other cases of under-declaration of
tariff, the late payment fine is 20%;

- A fine of up to 3 times the total amount of tax evaded is charged for acts of tax
evasion or tax fraud.
- A fine imposed on a person aged between full 16 and under 18 years for his/her
tax laws’ violation must not exceed half of the fine level applicable to adults;
if the violator has no money, his/her parent or guardian is responsible to pay
the fine for him/her.

Depending on the nature and severity of violations, individuals or organizations

violating the tax laws may also be subject to an additional sanctioning form of
confiscation of exhibits and means used for commission of tax laws’ violation.

Apart from the above sanctioning forms, violators may also be subject to the
following obligations:

- Compulsory full payment of tax debts the amounts of tax evaded or tax fraud
into the state budget;

- Destruction of invoices, documents and accounting books which are printed

and issued in contravention of law, excluding invoices, documents and
accounting books which are exhibits that must be kept to be used as proof of
violation.

 Criminal punishment

If the amount of tax evaded is substantial, the offender is considered to be a

criminal and be punished under the Criminal Code of Vietnam. According to this
code, tax evader can carry a prison sentence of up to 7 years and at the same time
can be charged a fine up to 5 times of the total amount of tax evaded .

8.4. TRANSFER PRICING AND ANTI-TRANSFER PRICING RULES

8.4.1. CONCEPTS

According to website “hooperand.co.uk”, transfer pricing refers to the pricing of

goods, services, funds and tangible and intangible assets transferred within an
organization, between internal divisions or to cross border associates. Since the
prices are set within the organization, they are deemed to be “controlled” i.e. the
typical market mechanisms that establish prices for similar transactions between
third parties may not apply. The transfer prices selected will affect the allocation
of the organization’s total profit among the different parts of the group. This has
provided scope in the past for multi-national entities to manipulate internal
pricing mechanisms setting transfer prices on cross-border transactions in a way
to reduce their taxable profits in high tax jurisdictions and to increase their taxable
profits in lower tax jurisdictions. These practices created major concerns for tax
authorities, leading to a rise in transfer pricing regulations and enforcement, and
making transfer pricing a major tax compliance issue for multi-national
companies.5

Transfer pricing can also occur in domestic trading transactions between parties
that have special relationships. By defining the traded goods or services at a
certain price higher or lower than the arm’s length price, the related parties may
avoid or evade taxes.

8.4.2. ANTI-TRANSFER PRICING RULES

8.4.2.1. Transfer pricing methods

In order to curb transfer pricing, a principle has been followed for years and it is
known as “Arm’s length price principle”. There are two groups of methods
available to determine arm’s length price. These are traditional methods and non-
traditional methods.

Traditional methods: This category includes methods such as the comparable

uncontrolled-price method, the resale-price method, and the cost-plus method:

The comparable uncontrolled-price method is the primary pricing method.

It requires a direct comparison to be drawn between the price charged for a

specific product in a controlled transaction and the price charged for a closely
comparable product in an uncontrolled transaction in comparable circumstances.
The comparable uncontrolled-price method is the most preferred method because
it is the most direct and reliable way to apply the arm’s length principle.

Where there are no comparable sales, the resale-price method is employed. This
method is based on the price at which a product which has been purchased from
5
http://www.hooperand.co.uk/guide-to-uk-taxation-for-foreign-investors
a connected enterprise, is resold to an independent enterprise. The resale price is
then reduced by an appropriate gross margin, to cover the reseller’s operating
costs, so as to provide an appropriate profit, having taken into consideration the
functions performed, assets used and risks assumed by the reseller. The balance
is then regarded as the arm’s length price. This method in effect works back from
the sale price of the product to unrelated parties outside the group and determines
an appropriate mark-up percentage for the sales between related parties. The
resale-price method is most appropriate where the reseller does not add
significant value to the product.

The cost-plus method requires an estimation of an arm’s length consideration by

adding an appropriate mark-up to the costs incurred by the supplier of goods or
services in a controlled transaction. This mark-up should provide for an
appropriate profit to the supplier, in the light of the functions performed, assets
used and risks assumed. This method is most suitable when services are provided
or where semi-finished goods are sold between connected parties and where they
have concluded long-term buy and supply arrangements. The mark-up is
determined with reference to the mark-up earned by a similar independent
supplier in an uncontrolled transaction bearing similar risks and employing
similar assets to those of the taxpayer.

In general a flexible approach is used when applying the above transaction based
methods. Where there are any differences between the controlled and the
uncontrolled transactions that have a material effect on the final price, such
differences may be accounted for through reasonable adjustments. However, even
with such flexibility there are cases where the degree of comparability is not
satisfactory.

Non-traditional methods: These methods are referred to as profit-based methods.

Examples are the transactional net-margin method and the profit-split method.

The transactional net-margin method examines the net profit margin that a
taxpayer realizes from a controlled transaction, relative to an appropriate base of,
for example, costs, sales or assets. The profit-level indicator of the tested party is
compared to the profit-level indicators of comparable independent parties.

Under the profit-split method, the combined profit is identified and split between
the connected parties in a controlled transaction. The profit is split by
economically approximating the division of profits that would have been
anticipated and reflected in an agreement made at arm’s length price. The profit-
split method is usually applied where transactions are so interrelated that they
cannot be evaluated separately.

Different countries may accept different methods of regulating the transfer

pricing. In Vietnam, according to the Decree N o 20/2017/ND-CP dated 24
February 2017 on tax administration for enterprises engage in transfer pricing,
the methods for determining arm’s length prices of products in associated
transactions include:

- The arm’s length price comparison method;

- The profit-comparison method (including the resale price method; the cost plus
method and the net profit margin comparison method);

- Method for allocation of profits between related parties;

These methods will be discussed in more detail in the next sections.

(1) The arm’s length price comparison method

♦ Cases to apply this method

The arm’s length price comparison 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 arm’s length price comparison 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.

♦ Method of calculating the transfer price

Price of products in related-party transactions is adjusted based on the arm’s

length price or the value point within the standard arm's length range of
independent comparables as stipulated by law. Where the product price is quoted
on the domestic and international exchange of commodities or services, the price
of products in the transfer pricing shall be determined according to the price of
product quoted at the comparable time and in the same or similar conditions.
Taxpayers purchasing machinery or equipment from foreign related parties must
provide records or documents evidencing purchase prices thereof in accordance
with the arm’s length principle upon the purchase time. For new machinery or
equipment, the price in the transfer pricing is the price on the invoice
demonstrating that the related party has purchased such machinery or equipment
from the independent party. For used machinery or equipment of which the
invoice or original document evidencing purchase is issued on the purchase date,
asset revaluation shall be subject to applicable legislation on guidance on
management, use and setting-aside of fixed asset amortization.
The result achieved from the transfer pricing is the taxable price used for
declaring and determining the corporate income tax amount payable but does not
cause any reduction in taxpayers’ tax obligations to the state budget.
(2) The profit-comparison method

♦ Cases to apply this method

This method shall be applied in the cases where taxpayers do not have database
and information in order to apply the arm’s length price comparison method;
taxpayers cannot compare product-based transactions on the basis of specific
transactions in specific products in the same or similar conditions; aggregation of
transactions is carried out in order to ensure conformity to the business nature and
reality, and successful selection of profit margins of appropriate independent
comparables; or taxpayers fail to either exercise autonomy over the entire
business chain or participate in execution of general or specific related-party
transactions under the provisions of Clause 3 Article 7 of Decree 20.

♦ Application principle

Profit-comparison method shall be applied according to the principle that there is

none of differences in operational functions, assets and risks; economic
conditions and accounting and bookkeeping methods taken into consideration in
a comparison thereof between taxpayers and independent comparables have
material effects on the profit margin. Where there are material differences in
profit margins, then these material differences must be eliminated.

Such factors as business functions, assets and risks and economic conditions that
have material effects on profit margins include factors relating to assets, capital
and costs; right to control and make a decision in reality to serve the purpose of
performing main functions of taxpayers; nature of business industry and market
for production and consumption of products; accounting and bookkeeping
method and cost structure of products; economic conditions in which transactions
occur.
Other factors determined based on the reality of execution of transactions
performed by related parties include commercial or financial relationships of
multinational corporations, technical assistance, disclosure of trade secrets,
know-how, utilization of employees working under single or dual employment
regime and economic conditions of a business industry or sector in which
taxpayers are operating. Comparability factors other than those mentioned above
include product specifications and contractual terms and conditions. Where
taxpayers doing business by performing their routine functions, without
performing strategic decision-making functions and engaging in transactions of
low added value comprise production or distribution enterprises which are not
exposed to inventory risk or market risk and do not have sales revenue or costs
arising from uses of intangible assets, they shall not have to incur operating losses
arising from these risks.

♦ Method of calculating the transfer price

The profit-comparison method shall help identify the relevant gross or net profit
margins of taxpayers by using the gross or net profit margins of selected arm’s
length comparables for comparison. Deciding on which profit margin where the
gross profit or net profit is relative to such bases as total sales, costs or assets is
selected shall vary depending on the nature and economic conditions of
transactions; functions of taxpayers and accounting or bookkeeping methods of
related parties. The bases for determination of the profit margin including sales
revenue, costs or assets are data included in accounting records of taxpayers
which are not subject to control taken or decision on prices of related-party
transactions made by related parties.

The profit-comparison method is specified by the following method: (i) The

resale price method; (ii) The cost plus method; (iii) and The net profit margin
comparison method.

- The resale price method: The purchase price (cost) of a commodity, service or
asset sold by a related party shall equal (=) the resale price (net sales) of that
commodity, service or asset resold to an independent party minus (-) the gross
profit divided by the selling price (net sales) of a taxpayer less (-) certain other
costs charged for the purchase price, such as import duties, customs fees,
insurance costs or international shipping costs (if any). The gross profit relative
to the selling price (net sales) of a taxpayer, which is determined by comparing it
with that of independent comparables, shall equal (=) the selling price (net sales)
of a taxpayer multiplied (x) by the gross profit relative to the selling price (net
sales) of selected independent comparables.

The gross profit relative to the selling price (net sales) of independent
comparables 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
comparables which are selected for adaptation to principles stipulated by law.

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

- The cost plus method: 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.

The gross profit relative to the cost of a taxpayer, which is determined by

comparing it with that of independent comparables, shall equal (=) the cost paid
by a taxpayer multiplied (x) by the ratio of gross profit to the cost paid by selected
independent comparables.

The gross profit relative to the cost paid by selected independent comparables
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 comparables which
are selected for adaptation to principles stipulated by law.

The transfer selling price (or net sales) which is adjusted for independent
comparables shall be the price for taxation, declaration of costs and determination
of corporate income tax obligations which must be paid by a taxpayer.
- The net profit margin comparison method: 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
comparables, 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 comparables which
are selected for adjustment to or identification of taxable income and tax
obligations of a taxpayer in conformity with the principles stipulated by law.

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.
(3)Method for allocation of profits between related parties

♦ Cases to apply this method

This method 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, and is not covered under the provisions
of Clause 1 and 2 of Article 7 of Decree 20.
 ♦ 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 transfer pricing must be
determined by using the same accounting method in the full time length of
application of this method.

♦ Calculation method

Adjusted profit of a taxpayer shall be allocated based on total profit of related-

party transactions, including actual or potential profits likely to be obtained by
parties engaging in the transfer pricing. Adjusted profit of a taxpayer is expressed
as primary profit plus extra profit. The primary profit is calculated according to
the profit-comparison method referred to in Clause 2 of Article 7 of Decree 20.
The extra profit is calculated on pro rata basis relative to one or certain factors
such as sales, costs, assets or employees of related parties engaging in the transfer
pricing and in conformity with the arm's 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 adjusted profit of a taxpayer shall be considered as the basis for determining
the taxable income and corporate income tax amount payable, but shall not reduce
tax obligations to the state budget.
8.2.4.2. Determination of costs for assessment of tax in certain specific cases
for enterprises engaged in particular related-party transactions

a) Non – deductible expenses for specific cases

Related-party transactions which neither agree with the arm's length nature of
transactions nor contribute to creating operating sales revenue or income of a
taxpayer shall not incur any cost qualified as allowable tax deductions within a
specified tax period, including: (i) Payments to a related parties that does not
perform any business operations relating to the industry or business activities in
which a taxpayer is operating; (ii) Payments to a related party that performs
business operations, but have the scale of assets, number of employees and
operating functions incommensurate with the transactional value that this related
party has obtained from a taxpayer; (iii) Payments to a related party that does not
have any right or responsibility relating to assets, commodities or services
rendered to a taxpayer; (iv) Payments to a related party that is a resident entity
within a country or territory that does not collect corporate income tax, and that
does not contribute to creating sales revenue or added value from business
activities of a taxpayer.

b) Conditions for deductions of services which are rendered between related

parties

(i) Except for payments referred to in Point b of Clause 2 of Article 8 of Decree

20, a taxpayer can claim deductions for its service costs from tax within a
specified tax period when meeting the following requirements where its services
rendered have commercial, financial and economic value and are directly used in
business activities of a taxpayer; services rendered by related parties are
confirmed as already supplied only in the same conditions under which
independent parties pay for these services; the arm's length principle and transfer
pricing method or the method of allocation of service costs between related
parties must be consistently applied in the entire corporation to payment of costs
of similar services of which a taxpayer must provide a contract, evidencing
documents, invoices and information concerning the method of calculation,
factors of allocation and policies on prices within the corporation.

Where there is a connection with centers performing specialized functions and

synergies in creating the added value for the corporation, a taxpayer must
determine total value created from these functions and identify the level of profit
allocation proportionate to value of participation by related parties from which
relevant costs of services paid to a related party to perform coordination or service
supply functions in arm’s length transactions of same or similar nature have been
deducted.

(ii) Service costs that are not qualified as deductions from taxable incomes
encompass costs arising from services rendered for the sole purpose of providing
other related parties with benefits or values; services rendered to provide benefits
for shareholders of related parties; services for which costs are repeatedly charged
due to multiple related parties render the same services, or in which the added
value offered to a taxpayer is unspecified; services which are, in nature, benefits
obtained by a taxpayer as a member of a corporation and costs that a related party
adds to third-party services rendered through a related intermediary without
adding any value to these services.

c) Cap of interest expense

Taxpayer’s total loan interest cost arising within a specified tax period qualified
as a deduction from income subject to corporate income tax shall not exceed 20%
of total net profit generated from business activities plus loan interest costs and
amortization costs arising within that period.

The cap of 20% does not apply to taxpayers who are subjects of application of
the Law on Credit Institutions and the Law on Insurance Business.
8.2.4.3. Safe harbor for transfer pricing documentation

A taxpayer shall be exempted from the transfer pricing documentation

requirements only if it is engaged in a related-party transaction with other
Vietnamese taxpayer that subject to the same corporate income tax rate as applied
to the taxpayer and where neither of them enjoy corporate income tax incentive
within a specified tax period.

A taxpayer shall be responsible for declaration of transfer pricing information but

shall be exempted from the transfer pricing documentation in the following
circumstances:

(i) Taxpayer is engaged in the transfer pricing but the total revenue arising within
a specified tax period is less than VND 50 billion and the total value of the related-
party transactions arising within a specified tax period does not exceed VND 30
billion;

(ii) Taxpayer already entering into Advance Pricing Agreement (APA) has
submitted the annual report in accordance with legislation on Advance Pricing
Agreement;

(iii) Taxpayer performing business activities by exercising routine functions,

neither generating any revenue nor incurring any cost from operation or use of
intangible assets, generating sales of less than VND 200 billion, as well as
applying the ratio of net operating profit before loan interest and corporate income
tax relative to sales revenue, engages in related-party transactions in the following
sectors:

- Distribution: At least 5%;

- Manufacturing: At least 10%;

- Toll manufacturing: At least 15%.