Pwc-vietnam tax pocket book 2020 – pwc/vn Vietnam Pocket Tax Book 2020 Special Sales Tax 32 • – Studocu

pwc/vn

Vietnam

Pocket Tax

Book 2020

Special Sales Tax 32
• Taxable Price
• Tax Credits
• Tax Rates

Natural Resources Tax 34

Property Taxes 35

Environment Protection Tax 36

Import and Export Duties 37
• Rates
• Calculation
• Exemptions
• Refunds
• Export Duties
• Other taxes potentially imposed on imports
• Customs Audit

Personal Income Tax 41
• Tax Residency
• Tax Year
• Employment Income
• Non-employment Income
• Non Taxable Income
• Foreign Tax Credits
• Tax Deductions
• PIT Rates
• Administration

Social, Health and Unemployment 46
Insurance Contributions

Other Taxes 48

Tax Audits and Penalties 49

Accounting and Auditing 50

Appendix I – Double Taxation Agreements 53

PwC Services in Vietnam 56

Contacts 58

The information in this booklet is based on current taxation regulations and
practice including certain legislative proposals as at 31 December 2019.

This booklet is intended as a general guide. Where specific transactions
are being contemplated, definitive advice should be sought.

A summary of Vietnam taxation

Tax Rates

Enterprises (generally companies) are subject to the tax rates imposed
under the CIT Law. The standard CIT rate is 20%. Companies operating in
the oil and gas industry are subject to CIT rates ranging from 32% to 50%
depending on the location and specific project conditions. Companies
engaging in prospecting, exploration and exploitation of certain mineral
resources are subject to CIT rates of 40% or 50%, depending on the
project’s location.

Tax Incentives

Tax incentives are granted to new investment projects based on regulated
encouraged sectors, encouraged locations and the size of the project.
Business expansion projects (including expansion projects licensed or
implemented during the period from 2009 to 2013 which were not entitled
to any CIT incentives previously) which meet certain conditions are also
entitled to CIT incentives from 2015. New investment projects and business
expansion projects do not include projects established as a result of certain
acquisitions or reorganisations.

The sectors which are encouraged by the Vietnamese Government
include education, health care, sport/culture, high technology,
environmental protection, scientific research and technology
development, infrastructural development, processing of agricultural
and aquatic products, software production and renewable energy.

New investment or expansion projects engaged in manufacturing
industrial products prioritized for development are entitled to CIT
incentives if they meet one of the following conditions:
i. the products support the high technology sector; or
ii. certain products which support the garment, textile, footwear,
0uelectronic spare parts, automobile assembly, or mechanical sectors.

Locations which are encouraged include qualifying economic and
high-tech zones, certain industrial zones and difficult socio-economic
areas.

Corporate Income Tax (“CIT”)

Large manufacturing projects (excluding those related to the
manufacture of products subject to special sales tax or those exploiting
mineral resources) are entitled to CIT incentives as follows:

Projects with total capital of VND6,000 billion or more, disbursed
within 3 years of being licensed, meeting either of the following
criteria:
i. minimum revenue of VND10,000 billion/annum by the 4th year
wwwof operation; or
ii. head count of more than 3,000 by the 4th year of operation.

Projects with total capital of VND12,000 billion or more, disbursed
within 5 years of being licensed and using technologies appraised in
accordance with relevant laws.

From 1 January 2016 onwards, the two common preferential rates of 10%
and 17% are available for 15 years and 10 years respectively, starting from
the commencement of generating revenue from the incentivised activities.
The duration of application of the preferential tax rate can be extended in
certain cases. When the preferential rate expires, the CIT rate reverts to
the standard rate. The preferential rate of 15% will apply for the entire
project life in certain cases. Certain socialised sectors (e. education,
health) enjoy the 10% rate for the entire life of the project.

Taxpayers may also be eligible for tax holidays and reductions. The
holidays take the form of an exemption from CIT for a certain period
beginning immediately after the enterprise first makes profits from the
incentivised activities, followed by a period where tax is charged at 50% of
the applicable rate. However, where an enterprise has not derived taxable
profits within 3 years of the commencement of generating revenue from the
incentivised activities, the tax holiday/tax reduction will start from the fourth
year of operation. Criteria for eligibility for these holidays and reductions
are set out in the CIT regulations.

Additional tax reductions may be available for companies engaging in
manufacturing, construction and transportation activities which employ
many female staff or ethnic minorities.

From 1 January 2018, certain incentives, including a lower CIT rate are
granted to small and medium enterprise (“SMEs”) (various criteria apply in
order to be considered an SME).

Overhead expenses allocated to a permanent establishment (“PE”) in
Vietnam by the foreign company’s head office exceeding the amount
under a prescribed revenue-based allocation formula;
Interest on loans corresponding to the portion of any charter capital not
yet contributed;
Interest on loans from non-economic and non-credit organisations
exceeding 1 times the interest rate set by the State Bank of Vietnam;
Certain interest exceeding the cap of 20% of EBITDA. Recently, it has
been proposed to ease the deductibility cap from 20% to 30% of
EBITDA;
Provisions for stock devaluation, bad debts, financial investment losses,
product warranties or construction work which are not made in
accordance with the prevailing regulations;
Unrealised foreign exchange losses due to the year-end revaluation of
foreign currency items other than accounts payable;
Donations except certain donations for education, health care, natural
disaster or building charitable homes for the poor or for scientific
research;
Administrative penalties, fines, late payment interest;
Service fees paid to related parties that do not meet certain conditions.

For certain businesses such as insurance companies, securities trading
and lotteries, the Ministry of Finance provides specific guidance on
deductible expenses for CIT purposes.

Business entities in Vietnam are allowed to set up a tax deductible
research and development fund to which they can appropriate up to 10%
of annual profits before tax. Various conditions apply.

Losses

Taxpayers may carry forward tax losses fully and consecutively for a
maximum of five years.

Losses arising from incentivised activities can be offset against profits from
non-incentivised activities, and vice versa. Losses from the transfer of real
estate and the transfer of investment projects can be offset against profits
from other business activities. Carry-back of losses is not permitted. There
is no provision for any form of consolidated filing or group loss relief.

Administration

Provisional quarterly CIT returns are no longer required. Enterprises are
instead required to make quarterly provisional CIT payments based on
estimates. If the provisional quarterly CIT payments account for less than
80% of the final CIT liability, any shortfall in excess of 20% is subject to late
payment interest (currently as high as 11% per annum), applying from the
deadline for payment of the Quarter 4 CIT liability.

Final CIT returns are filed annually. The annual CIT return must be filed
and submitted not later than the last day of the third month after the fiscal
year end. The outstanding tax payable must be paid at the same time.

Where a taxpayer has a dependent accounting unit (e. branch) in a
different province, a single CIT return is required. However, manufacturing
companies are required to allocate tax payments to the respective
provincial tax authorities in the locations where they have dependent
manufacturing establishments. The basis for allocation is the proportion of
expenditure incurred by each manufacturing establishment over the total
expenditure of the company.

The standard tax year is the calendar year. Companies are required to
notify the tax authorities in cases where they use a tax year (i. fiscal year)
other than the calendar year.

Profit Remittance

Foreign investors are permitted to remit their profits annually at the end of
the financial year or upon termination of the investment in Vietnam. Foreign
investors are not permitted to remit profits if the investee company has
accumulated losses.

The foreign investor or the investee company are required to notify the tax
authorities of the plan to remit profits at least 7 working days prior to the
scheduled remittance.

Furthermore, taxpayers are required to make declarations of information

contained in the local file and master file. This implies that this information
should be available before the TP declaration forms are submitted to the
tax authority. The TP declaration forms must be submitted together with the
annual CIT return within 90 days from the fiscal year end date.

Decree 20 gives the tax authorities the power to use internal databases for
TP assessment purposes in cases where a taxpayer is deemed
non-compliant with the requirements of Decree 20.

Taxpayers engaged in related party transactions solely with domestic
related parties could be exempt from the requirements to disclose
information on such transactions in the TP declaration forms, where both
parties have the same tax rate and neither party enjoys tax incentives.

TP Documentation

Companies which have related party transactions must also prepare and
maintain contemporaneous TP documentation. Decree 20 introduces a
three-tiered TP documentation approach to collect more tax-related
information on multinational companies’ business operations,
specifically, master file, a local file and country-by-country report
(“CbCR”). The three-tiered TP documentation has to be prepared before
the submission date of the annual tax return, which gives taxpayers just
90 days (from the fiscal year end date) to complete the year’s TP
documentation.

If the taxpayer’s ultimate parent resides in Vietnam and has worldwide
consolidated revenues in the fiscal year of over VND18,000 billion, the
ultimate parent company in Vietnam is responsible for preparing and
submitting the CbCR. However, if the ultimate parent is outside Vietnam,
the Vietnamese entity is responsible for obtaining a copy of the ultimate
parent company’s CbCR and submitting this upon request by the tax
authorities.

A taxpayer is exempt from preparing TP documentation (but not all other
aspects of the Decree) if one of the following conditions is met:

has revenue below VND50 billion and total value of related party
transactions below VND30 billion in a tax period; or

concludes an advance pricing agreement (“APA”) and submits annual
APA report(s); or
has revenue below VND200 billion, performs simple functions and
achieves at least the following ratios of earnings before interest and tax
to revenue from the following business: distribution (5%), manufacturing
(10%), processing (15%).

TP audits

There has been a marked increase in the number of transfer pricing audits
performed in recent years, with these adopting an increasingly
sophisticated approach, often challenging the validity of comparables cited
in TP documentation.

Substance over form principle

Decree 20 emphasises the need for closer scrutiny of all related party
transactions to ensure that value creation is actually generated from
intra-group transactions. The substance over form principle is especially
relevant to CIT deductibility and TP documentation must support such
related party transactions.

Intercompany service charges

Decree 20 provides various criteria for the tax deductibility of intercompany
service charges, notably, a taxpayer needs to demonstrate that the
services provide commercial, financial and economic value, and provide
evidence of the reasonableness of the service charge calculation method.
A tax deduction will not be allowed for intercompany service charges where
the direct benefit or additional value to the taxpayer cannot be determined,
such as duplicated services, shareholder costs.

20% of EBITDA cap on interest deductibility

Decree 20 introduces a 20% EBITDA cap on the tax deductibility of total
interest costs. Whilst Decree 20 is the guiding tax regulation applicable to
associated enterprises, it appears that the 20% EBITDA cap could be
applied to interest on both related party and third party loans.

Scope of Application

Foreign contractor tax is applied to foreign organisations and individuals
undertaking business or earning income sourced from Vietnam on the
basis of agreements with Vietnamese parties (including foreign owned
companies). FCT is not a separate tax, and normally comprises a
combination of Value Added Tax (“VAT”) and CIT, or Personal income tax
(“PIT”) for income of foreign individuals.

Payments subject to FCT include interest, royalties, service fees, leases
rentals, insurance premiums, transportation fees, income from transfers of
securities, and from goods supplied within Vietnam or associated with
services rendered in Vietnam.

Certain distribution arrangements where foreign entities are directly or
indirectly involved in the distribution of goods or provision of services in
Vietnam are subject to FCT – e., where the foreign entity retains
ownership of the goods, bears distribution, advertising or marketing costs,
is responsible for the quality of goods or services, making pricing decisions,
or authorises/hires Vietnamese entities to carry out part of the distribution
of goods/provision of services in Vietnam.

Cases where FCT is exempt include pure supply of goods (i. where the
responsibility, cost and risk relating to the goods passes at or before the
border gate of Vietnam and there are no associated services performed in
Vietnam), services performed and consumed outside Vietnam and various
other services performed wholly outside Vietnam (e. certain repairs,
training, advertising, promotion, etc.).

Dividends

No withholding or remittance tax is imposed on profits paid to foreign
corporate shareholders.

Interest

A withholding tax of 5% CIT applies to interest paid on loans from foreign
entities. Offshore loans provided by certain government or semi-government

Foreign Contractor Tax (“FCT”)

institutions may obtain an exemption from interest withholding tax where a
relevant double taxation agreement or inter-governmental agreement
applies.

Interest paid on bonds (except for tax exempt bonds) and certificates of
deposit issued to foreign entities is subject to 5% withholding tax.

Royalties

FCT applies to payments to a foreign entity for the right to use or for the
transfer of intellectual property (including copyrights and industrial
properties), transfer of technology or software.

FCT Payment Methods

Foreign contractors can choose among three methods for tax payment –
the deduction method, the direct method and the hybrid method.

Method One – Deduction Method

This entails the foreign contractor registering for VAT purposes and filing
CIT and VAT returns in the same way as a local entity. Foreign contractors
can apply the deduction method if they meet all of the requirements below:

They have a PE or are tax resident in Vietnam;
The duration of the project in Vietnam is more than 182 days; and
They adopt the full Vietnam Accounting System (“VAS”), complete a tax
registration and are granted a tax code.

The Vietnamese customer is required to notify the tax office that the foreign
contractor will pay tax under the deduction method within 20 working days
from the date of signing the contract.

If the foreign contractor carries out multiple projects in Vietnam and
qualifies for application of the deduction method for one project, the
contractor is required to apply the deduction method for its other projects
as well.

The foreign contractor will pay CIT at 20% on its net profits.

Royalties

Financial derivatives

Services 5% 5%

Exempt

Exempt

Construction, installation without supply
of materials, machinery or equipment.

5% 2%

Transportation 3% (3)

Supply of goods in Vietnam or
associated with services rendered in
Vietnam (including in-country
export-import and import, distribution of
goods in Vietnam or delivery of goods
under Incoterms where the seller bears
risks relating to the goods in Vietnam)

Restaurant, hotel and casino
management services

Construction, installation with supply of
materials, machinery or equipment.

Interest

Transfer of securities

Other activities

Industry Deemed VAT rate(2) Deemed CIT rate

Exempt

(1)

2% 2%

Exempt (4)

Exempt

1%

5% 10%

3%

2%

5%

2%

10%

0%

2%

VAT will not be payable where goods are exempt from FCT-VAT or
where import VAT is paid upon importation
The supply of goods and/or services to the oil and gas industry are
subject to 10% VAT rate. Certain goods or services may be VAT
exempt or subject to 5% VAT.
International transportation is subject to 0% VAT
Computer software licenses, transfers of technology and intellectual
property rights (including copyrights and industrial properties) are VAT
exempt. Other royalties may attract VAT.

(1)

(2)

(3)

(4)

Double Taxation Agreements (“DTAs”)

The CIT withholding taxes may be affected by a relevant DTA. For
example, the 5% CIT withholding on services supplied by a foreign
contractor may be eliminated under a DTA if the foreign contractor does
not have profits attributable to a PE in Vietnam.

Vietnam has signed around 80 DTAs and there are a number of others at
various stages of negotiation. Please see the summary at Appendix I – list
of DTAs. The signed DTA with the United States of America is not yet in
force.

There are various guidelines on the application of DTAs. These include
regulations relating to beneficial ownership and general anti-avoidance
provisions. DTA entitlements will be denied where the main purpose of an
arrangement is to obtain beneficial treatment under the terms of a DTA
(treaty shopping) or where the recipient of the income is not the beneficial
owner. The guidance dictates that a substance over form analysis is
required for the beneficial ownership and outlines the factors to be
considered, which include:

Where the recipient is obligated to distribute more than 50% of the
income to an entity in a third country within 12 months;
Where the recipient has little or no substantive business activities;
Where the recipient has little or no control over or risk in relation to the
income received;
Back to back arrangements;
Where the recipient is resident in a country with a low tax rate;
Where the recipient is an intermediary or agent.