VIETNAM TAXATION – OUTLOOK ON THE EUROPEAN UNION

VIETNAM FREE TRADE AGREEMENT (EVFTA)

By Oliver Massmann

The recently formed Government has manifested its ambition to support reforms especially

related to business. Short after the oath of inauguration, it organized a conference with

Vietnamese enterprises leading to the issuance of Resolution 35/2016/NQ-CP dated 16 May

2016. The main focus was to improve the investment environment. Nevertheless, some

difficulties remain and review of tax policies is required from some specific perspectives.

Granting tax incentives

The Government can grant preferential incentives to foreign enterprises through investment

licensing or certificate, the most secure way for enterprises to obtain their incentives despite

tax law amendments. However, some local tax departments do not agree with the

Government’s policy on incentives and oblige enterprises to apply the current regulations

regardless of enterprises’ incentives. This reluctance is a breach in the Government’s

protection over investment and investors and must be prevented.

Official Letter 12404/BTC-TCT and Circular 96/2015/TT-BTC, both issued by the Ministry

of Finance (MOF), grant Corporate Income Tax (CIT) incentives for enterprises established

before 01st January 2014 and not yet operational. Some local tax departments have refused to

recognize such incentives and asked enterprises to amend their charter while making their

business starts in 2014 in order to be entitled to CIT incentives. This request is acting towards

the MOF’s willingness to boost investment and should be dropped out.

According to tax offices, any project planning the increase of enterprises capacity or fixed

assets is necessarily considered an investment if increase of capacity was equivalent to

increase of capital. Tax authorities then rescind CIT incentives because they believe that

investment certificates are no longer updated due to the increase. Yet, initial investment

certificates do not mention capacity and should remain updated as long as increases solely

concern enterprise capacity and not capital. A regulation should precise that project

expansion may only be investment when there are adjustments on capital investment.

Decree 218/2013/ND-CP issued by the Government, extends preferential tax rate application

to 15 years for investment projects under VND6 million (~ US$260,000). To ensure a fairer

treatment towards businesses, different levels could be established such as 3 years of

preferential tax rate application for projects between VND 10 to 20 billion (~ US$450,000 to

US$900,000).

According to the draft Decree No. 12, bonuses and commissions granted based on sale

volume are deductible expenses for enterprises. Nevertheless, agents being individuals or

organizations must pay taxes on these sum of money as such expenses are related to business

activities. It would be more convenient for agents to have their commissions and sale bonuses

exempted of VAT invoices.

On the other hand, benefits granted to employees should be extended in part to their family:

welfare or recreational expenditures, visa application fee for employees’ families, etc.

Through these benefits, a longer relationship between the company and the employee is

ensured. Expenses for employees’ families are deductible for companies if stated in labor

contract or in companies’ Labor policy. Decree 218/2013/ND-CP should then be amended.

Resolving tax payment issues

Tax-related regulations are often amended and interpreted differently from one year to

another. As tax inspections often take place a long time after the corresponding fiscal year, it

seems impossible for companies to know what to comply with. Many enterprises have to pay

penalties and high interests because of changing regulations between the time of tax payment

and the time of tax inspection. Besides, many businesses are chased for unpaid taxes due to

errors from the tax office, even though the taxes were duly paid. In the tax office, the

members of the staff are not dedicated enough to reconcile tax obligations and payments.

An annual tax inspection or a change in the method of calculating penalties and late payment

interests should be considered. In addition, the nomination of a task force exclusively for

reconciling tax obligations and payments would be a good improvement.

Understatement of payable tax or overstatement of tax refund is liable to a fine of 20% of the

difference between the tax payable and declared or paid tax amount. Households or

individuals stated in Article 107 of the Law on Tax Administration are exempted from the

fine. Enterprises are sometimes in overpaid position and are still charged with a fine when the

inspection occurs regardless of the intention to make a false declaration or not. The

implementation of clearer regulations would avoid confusion and wrongful declaration

leading to fines in such cases.

Late tax payment is also subject to penalty . Yet, several contradictory documents have been

issued and it became complicated to determine on what basis to calculate the late payment

interest. Indeed, Circular 26/2015/TT-BTC issued by the Ministry of Finance states a rate of

0.05% per day accordingly to the deficit of the tax payable until the tax is fully paid, for taxes

declared before January 1st 2015 and found insufficient after the same date. Circular 130

contends that the late payment interest is regulated for each period. The two documents

provide inconsistent guidelines, thus putting enterprises in a very delicate situation.

Article 14 of Circular 78/2014/TT-BTC states that transfer of Limited Liability Company

requires filling a form equivalent to real estate transfer, regardless of the percentage real

estate represents in the company assets. Moreover, since indirect capital transfer is

considered taxable income in Vietnam and in the country of origin, a double taxation in both

countries applies. The system should be rethought and the application of deferred tax assets

(DTA) should be considered.

Explaining VAT calculation and refund

Circular 130/2016/TT-BTC (Circular 130) provides a tax refund for short-term investment

(under 12 months) with special provisions for businesses not executable within a year such as

ship construction. Value Added Tax (VAT) can then be refunded for a few years only until

the ship is completed and exported abroad, regardless of the total investment. This specific

case should be extended to other similar industries.

Circular 130 is referring to declaration period for tax refund and elaborates the whole system

around this notion without giving a clear definition and measurement. According to Circular

130, VAT is not refundable for domestic sale activities but is refundable up to 10% of the

revenue generated by exported goods and services. However, the distinction is thin for

enterprises doing both activities.

Besides, VAT refund for trading of imported and exported goods is not clearly explained in

Article 1 of Circular 130., notably for determining the activities eligible for VAT refund.

Circular 119/2014/TT-BTC adds that input VAT deduction requires non-cash payment except

for gifts and donations, but excludes samples and test items.

In addition, some imported goods and services are subject to 5% VAT notably in health care

industry according to Article 10.11 of Circular 219/2013/TT-BTC guiding the

implementation of the Law on VAT. Article 10 of draft Decree guiding Law 106/2016/QH13

prevents businesses with 5% VAT to be entitled to VAT refund. The input costs related to

such businesses being subject to 10% VAT and the input VAT not refundable are significant

amount for enterprises to maintain their activities.

The services exported and “consumed outside Vietnam” have a VAT rate of 0%, whereas a

VAT rate of 10% applies when such services are consumed in Vietnam. Tax authorities often

focus on the place the service is performed more than on the place it is used. The notion of

export services should be reviewed without allowing differing interpretation so that one

definition – based on the location of the consumer – and one rule prevail.

Under the Vietnamese Law, warranty is a service the supplier provides at the expense of the

buyer but not attached to goods or services delivery. Circular 103/2014/TT-BTC issued by

Ministry of Finance made clear that warranty attached to goods delivered at Vietnam’s

borders were not submitted to withholding tax. For the contracts signed prior to Circular 103,

the situation is not clear and the Ministry of Finance should establish clear provisions.

Furthermore, guidelines on provisions for foreign suppliers’ responsibility would help ensure

the efficiency of free warranties for the buyer.

Circular 39/2014/TT-BTC sets out the criteria of issuing invoices as a condition to determine

the finished date of service provision without explaining the term “finished”. It may depend

on type, frequency or period (per month, per hour) of service. More details on the definition

of finished service and the calculation of the payment time should be provided.

Outlook on the EVFTA

The EVFTA signed on December 2 2015, will offer great investment opportunities for

Vietnam. With elimination of almost all tariff barriers (85% right after the EVFTA’s entry

into force, 99% a few years after), the automotive industry as well as trades in sectors such as

textile and footwear will be boosted.

The Government is already supporting foreign investment by implementing a favorable

policy and strict respect of a stable economy and a controlled inflation. We can expect that

the EU will influence the resolution of tax issues and will impose fixed and determined tax

rules to apply in Vietnam.

Most important issues

- Local tax departments should be clearly guided about enterprises’ incentives and the

notion of project expansion.

- The taxation system with declarations and incentives in several documents, is too

complex for enterprises to comply with. The tax refund calculation method must be clearly

stated to help taxpayers apply regulations properly.

- Granting VAT refund for business establishments exporting goods and services and not

for businesses with output VAT at 5% may be regarded as discrimination in term of taxes

among businesses.

If you have any question on the above, please do not hesitate to contact Mr. Oliver

Massmann under omassmann@duanemorris.com . Oliver Massmann is the General Director

of Duane Morris Vietnam LLC.

Thank you very much!