On 8 August 2019, the Ministry of Finance issued Circular 48/2019/TT-BTC (Circular 48)providing guidance on the accounting and tax treatment of provisions for devaluation of inventories, losses on investments, doubtful debts and warranties for products, services and construction work, all of which have an impact on the deductibility of related expenses for Corporate Income Tax (“CIT”) purposes.
Who is subject to the circular?
Circular 48 applies to all enterprises established and operating under Vietnamese laws.
Credit institutions and foreign bank branches are also required to follow this Circular, (replacing the specific requirements for credit institutions as stated in the previous Circular), other than for credit risk provisions which are subject to specific guidance from the State Bank of Vietnam and the Ministry of Finance.
Enterprises operating in a certain specific fields (insurance, securities, capital investment, debt trading, retailing of deferred / instalment goods) are also subject to the guidance in Circular 48, however they are also subject to separate regulations issued by the Ministry of Finance.
When are provisions to be made or revised?
Provisions are to be made, settled or revised when preparing the Annual Financial Statements (Clause 2, Article 3), instead of at the end of the financial year according to the previous regulations.
Significant changes in Circular 48
Provisions for decreases in carrying values of inventories
Enterprises are now permitted to make provisions for decreases in the carrying value of inventories that are stored outside of the enterprise’s warehouse, such as goods in transit and consignment goods for sale (Clause 1, Article 4).
Removing provisions for losses/devaluation of offshore investments
A significant change in Circular 48 is that enterprises are no longer permitted to make provisions for losses/devaluation of offshore investments (Clause 2, Article 2 and Clause 4, Article 3). Existing provisions for offshore investments (if any) that enterprises carried forward up to the effective date of the Circular are to be reversed and recorded as a decrease in expenses at the time of preparation the 2019 financial statements (Clause 5, Article 8).
Provisions for doubtful debts
- Circular 48 applies a “Provisioning Rate” scheme for determining the provision for doubtful debts due from individual customers. Telecommunication and retail enterprises can now make a provision for 100% of a doubtful debt if the balances are overdue by 12 months, instead of three years as prescribed in previous regulations.
Provisioning Rate Telecommunication and Retail Enterprises Other Enterprises 30% of the value of the debt 3 months – less than 6 months 6 months – less than 1 year 50% of the value of the debt 6 months – less than 9 months 1 year – less than 2 years 70% of the value of the debt 9 months – less than 12 months 2 years – less than 3 years 100% of the value of the debt ≥1 year ≥3 years