CIT rate is reduced from 25 percent to 22 percent  by January 1, 2014 to attract more investment to the country.— Photo SBlaw.vn

This article will provide an introduction to corporate income tax in Vietnam.

Tax Rates

The standard CIT rate is 25 percent for both domestic and foreign-invested enterprises (FIEs) in most industries. In an effort to attract more foreign direct investments, boost investment in Vietnamese businesses and to support struggling local enterprises, Vietnamese lawmakers have recently approved the government's proposal to reduce the current CIT rate from 25 percent to 22 percent (the new rate is expected to take effect starting January 1, 2014).

The National Assembly will also cut CIT rates for small and medium-sized enterprises and developers of low-cost housing by 5 percent (to 20 percent) and 15 percent (to 10 percent), respectively.

This new tax rate would put Vietnam at an advantage over other neighboring countries such as China (25 percent), Indonesia (25 percent) and the new rising star Myanmar (30 percent). Having said that, however, other countries such as Thailand do offer a lower CIT rate at 20 percent and also more attractive incentives and tax breaks for newcomers.

Taxable Income

CIT is a direct tax levied on the profits earned by companies or organizations. All income arising inside Vietnam is subject to CIT, no matter whether a foreign enterprise has a Vietnam-based subsidiary or whether that subsidiary is considered a permanent establishment.

Taxable income includes income from production and/or trading of goods and provision of services, as well as other incomes, including incomes from:

l. Capital transfer and real estate transfer;

2. Ownership of or rights to use assets;

3.  Assignment, leasing out and liquidation of assets;

4. Business unreported in previous years;

5. Interest on deposits, loans or income from the sale of foreign currency;

6. Recoveries from contingency reserves and bad debts that were written-off; and

7. Other sources, including activities of production and/or business outside Vietnam.

An enterprise that conducts multiple business activities that are subject to different tax rates should calculate the income for each activity separately, multiplying income from each activity by the corresponding tax rate. In particular, income from real estate transfer must be separately accounted for when declaring and paying CIT and cannot be deducted against incomes or losses from other production and business activities.

Exemptions

Certain incomes are exempt from CIT, such as those earned from scientific research and technological development contracts during the trial production period, and from technical service contracts directly serving agricultural production.

The CIT Law also allows enterprises to set aside a maximum of 10 percent of their annual taxable incomes for research and development if it is spent in the country within five years. If the research and development fund is not used within that time period, is used for incorrect purposes, or less than 70 percent of the fund is used, then the company will have to refund the CIT exemptions on the fund plus interest.

Deductible Expenses

When calculating CIT, FIEs can deduct most expenses paid for production and business activities if supported by adequate lawful invoices and documents. This can be an area of concern for FIEs in Vietnam, as frequently many expenses are barred from being deducted given the fact that they are not supported by official invoices, or that they exceed some pre-determined caps (for example, on advertising, marketing and promotional expenses). This effectively means that in many cases the tax rate of a company will be higher than 25 percent.

However, exceptions apply to the below expenses, which are not deductible:

l. Salaries and wages of owners of private enterprises or one-member limited liability companies (owned by a single individual); remunerations paid to founders and members of members' councils or boards of directors who do not personally participate in administering goods production and trading or service provision activities;

2. Expenses for advertisement and promotion exceeding 10 percent of total deductible expenses. For a new enterprise granted an investment license on or after January 1, 2009, such expenses are capped at 15 percent of deductible expenses for the first three years from the date of establishment. This cap does not apply for new FIEs established as a result of consolidation, separation, split, merger, and any type of ownership transformation;

3. Fines for administrative violations, including violations of traffic law, tax law, business registration, accounting and statistics regulations and other administrative fines as prescribed by law; and

4. Credited or refunded input value-added tax.

Tax Payment

Enterprises shall pay tax in localities where they are headquartered. For an enterprise that has a dependent cost-accounting production establishment (including a processing and assembly establishment) operating in a province or city other than where it is headquartered, the tax amount shall be calculated and paid in both the locality where the enterprise is headquartered and the locality where its production establishment is based.

The CIT amounts payable to the province or city where a dependent cost-accounting production establishment is based is the payable CIT amount in a period multiplied by the ratio between expenses incurred by the production establishment and the total expenses incurred by the enterprise.

Tax must be paid by the taxpayer to the State Treasury in cash or by bank transfer. For the first option, the taxpayer must pay cash to the State Treasury and receive the voucher directly from the state official. The other option is to transfer the payment to the bank account of the State Treasury tax office accredited for such operations. The deadline for tax payment is the same as tax finalization: no later than 90 days from the end of the calendar year.

This article was first published on Vietnam Briefing.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

For further details, visit www.dezshira.com.