Four steps to managing your Vietnam corporate income tax obligations

The taxation compliance obligations of a company in Vietnam are time consuming and complicated, especially in comparison to more developed countries.

The requirements are ever changing, with a significant number of lodgements required on a quarterly and annual basis. Investors need to pay critical attention to their tax strategy development, making sure their internal corporate policies match with the Vietnamese tax compliance requirements. Considering the potential ramifications, companies doing business in Vietnam should always have an effective risk strategy for taxation compliance.

1. Understand the tax incentives your corporate entity may be able to take advantage of in Vietnam

Tax incentives in Vietnam can take a number of forms, based around encouraged sectors, locations and project scales, and are granted to new investment projects. In addition, the Government passes incentives from time-to-time for SME businesses which can reduce the primary tax rate applicable during specified tax years.

1. Sectors: Encouraged sectors include high-tech enterprises, software development, education, health, environmental protection, scientific research, agricultural and aquatic product processing, renewable energy and infrastructure development.
2. Locations: Encouraged locations include areas with difficult socio-economic conditions, certain Economic Zones, certain High-tech parks, and approved Industrial Parks.
3. Project Scale: Large manufacturing projects, meeting either of the below criteria:
   1. Projects with a total capital of VND6,000 billion or greater, disbursed within 3 years of being licensed, and:
      • Minimum annual revenue of VND10,000 billion by the 4th year of revenue generation, or
      • Regularly employing more than 3,000 employees by the 4th year of operations.
   2. Projects with a total capital of VND12,000 billion or greater, disbursed within 5 years of being licensed and using technologies approved in accordance with applicable laws:

Incentives provided take two forms, both of which can apply concurrently

1. Tax Holidays and Exemptions. These usually apply from the first profit-making year, or the fourth revenue generating year, and result in a specified period where no tax will apply (often 2-4 years) and/or a 50% reduction of tax for a specified length of time.
2. Preferential Tax Rates. These preferential rates can reduce applicable CIT rates to between 10 and 17%, and apply from 10 years to indefinitely for certain projects.

Read the article below containing recently released guidance on tax incentives for computer programming activities.

2. Determine the application of effective corporate income tax rates in Vietnam and the treasury planning, including leakages that may incur in your company’s business cycle

Corporate Income Tax in Vietnam is calculated based on assessable income, where ‘CIT Payable’ equals with ‘Assessable Income’ * ‘CIT rate’. By definition, assessable income is represented by Total Revenue – Deductible Expenses + Other Income – Carried forward losses.

Tax losses can be carried forward for a maximum of 5 years after the loss-making year. Carry back of losses is not permitted, and there is no concept of group loss sharing or consolidated tax relief.

Depending on the business’ industry, the Corporate Income Tax (“CIT”) can be substantially different, varying from 20% standard Corporate Income Tax (“CIT”) rate applicable to enterprises in Vietnam on assessable income, up to 32% – 50% tax rates for the oil and gas, and other extractive industries.

However, the standard CIT rate of 20% is prevalent in most industries and sectors, making Vietnam one of the most tax efficient countries in the region from this perspective.

3. Determine and maximize your company’s deductible expenses to help you efficiently manage the corporate tax liability

All of the basic expenses necessary to run a business in Vietnam are generally tax-deductible, including office rent, salaries, equipment and supplies, telephone and utility costs, legal and accounting services, professional dues. However, in order to be deductible, expenses must:

1. Relate to the generation of revenue;
2. Be incurred in relation to business activities as permitted with the company’s business license;
3. Be supported by appropriate invoices or relevant documents; and
4. Where expenses are VND20 million and above, be settled by non-cash payment (i.e. bank transfer).

Prescribed Non-Deductible Expenses can take many forms as described below with specific examples:

• Depreciation expenses for fixed assets not following regulations, i.e.
  1. not for business purposes;
  2. not supported by appropriate documentation; and
  3. exceeding the regulated depreciation rates;
• Labor expenses recorded but not actually paid or amounts not stipulated under labor contracts, collective labor agreements or the company’s financial policies;
• Staff welfare expenses exceeding one-month’s average salary;
• Costs of raw materials, supplies, fuel, power and goods exceeding reasonable consumption levels detailed by the Government;
• Interest on loans from non-banks exceeding 1.5 times of the interest rate announced by the State Bank of Vietnam;
• Interest expenses exceeding 20% EBITDA for enterprises with related party transactions;
• Interest on loans corresponding to the portion of charter capital not yet contributed;
• Periodical accrued expenses not fully paid at the end of the period;
• Provisions for financial investment losses, inventory devaluation, bad debts, product warranties or construction work, not in accordance with the prevailing regulations;
• Unrealised foreign exchange losses due to the year-end revaluation of foreign currency items other than accounts payable;
• Overhead costs allocated to a Permanent Establishment by foreign companies exceeding the amount determined based on the revenue-based allocation ratio;
• Contributions to voluntary pension funds and purchase of voluntary pension insurance or life insurance for employees exceeding VND3 million per person/month;
• Administrative Penalties, fines and late payment interest;
• Donations other than certain donation contributions for education, health care, natural disaster or building charitable homes;
• Certain expenses related to the issuance, purchase and sale of shares.

4. Maintain ongoing compliance with corporate income tax obligations, including quarterly and yearly tax planning

Provisional Corporate Income Tax is required to be calculated and remitted on a quarterly basis, no later than 30 days following the end of a quarter.

Annual final Corporate Income Tax returns, calculations and remittance of the balance of CIT payable (if any) are to be completed within 90 days from the end of the financial year.

Where the total provisional CIT submitted is less than 80% of the full-year final CIT, then the shortfall is subject to late payment interest from the date of the Quarter 4 provisional payment date.

The standard tax (financial) year in Vietnam is from 1 January to 31 December. Enterprises can, however, elect to adopt an alternative tax (financial) year in certain circumstances, where the alternate year ends on either 31 March, 30 June or 30 September.