Vietnam tax reform in 2009 erns & young presentation

Vietnam tax reform in 2009 -erns & young presentation

Vietnam Tax Reform in 2009 Corporate taxes & Customs Nam Nguyen, Partner

1 Recent Tax Legislation

2 Major Changes in:

• Corporate Income Tax & Tax Incentives

• Value Added Tax

• Special Sales Tax (proposed)

3 Administration

4 Tax Treaty Developments

5 New Tax Treaty Procedure

6 Permanent Establishment Issues

7 Common Tax Audit Issues

8 New Customs Regulations

Recent Tax Legislation

ƒ Four new tax laws will take effect in 2009:

ƒ Corporate Income Tax (CIT) Law

ƒ Personal Income Tax (PIT) Law

ƒ Value Added Tax (VAT) Law

ƒ Special Sales Tax (SST) Law (draft)

ƒ The 1st three laws have been passed but implementing regulation and guidance are expected to be released by the end of 2008 The draft SST Law is expected to take effect from 2nd quarter of

2009

ƒ Overall, the changes are aimed to bring in lower tax rates, wider scope of application, improved administration and transparency, alignments with international tax practices

Legislative Framework

Laws

Circulars

Ordinances

Decrees, Decisions

Tax rulings (or “Official Letters”)

National Assembly (“NA”)

Ministries

NA’s Standing Committee

Government

Ministries, General Departments

Changes in Corporate Income Tax (1/2)

Scope of

application

All enterprises, including corporate entities, sole proprietorship, independent practitioners, individuals earning property rental income

► Only corporate entities.

► All others will be taxed under the Personal Income Tax (PIT) Law

Tax rates

- Standard rate

- Oil & gas rates

- Incentive rates

► 28%

► 28% - 50%

► 10%, 15%, 20%

► 25%

► 32% - 50%

► 10%, 20%

Capital

gains/losses

from real

estates

Capital gains are taxable at 28%

plus applicable surtax at graduated rates from 10% to 25%.

► Capital gains are taxable at 25%

► The surtax will be abolished.

► Capital gains are not entitled

to tax any relief

► Capital losses are only tax deductible against capital gains

Changes in Corporate Income Tax (2/2)

Deductions ► A taxpayer may deduct only

expenses specified as allowable deductions.

► A deduction for interest expenses on non-bank loans

is capped at 120% of the rate offered by commercial banks.

► Deduction for advertisement & Promotion (“A&P”) expenses is capped

at 10% of specified allowable deductions

► A taxpayer may deduct any expenses other than those specified as prohibited deductions, but the list of prohibitions is longer

► The cap on interest expense on non-bank loans is increased to 150%

► The 10% cap on A&P expenses remains, but new companies enjoy 15% for the first 3 years following incorporation.

Research &

Development

provision

► Not regulated ► 10% of taxable income tax-free

but at least 70% of the provision must be utilised within 5 years.

Depreciation ► Accelerated deprecation at

200% is allowable

► The 200% accelerated depreciation no longer allowable

Changes in Corporate Tax Incentives

20% ► Promoted industries or areas

with difficult socio-economic conditions (“difficult area”)

► “Difficult areas” criteria only

15% ► Promoted industries and

difficult areas

► Removed

10% ► Specially promoted industries,

or areas with especially difficult socio-economic conditions

(“especially difficult areas”)

► Especially difficult areas, Hi-tech zones, or hi-Hi-tech

industries

Tax holiday ► Begins from 1st year of

taxable profit (before losses carried forward)

► Begins from 1 st year of taxable profit but not later than the 4 th year of operation

Changes in Value Added Tax

Exempt categories 28 categories 25 categories

Equipment/vehicles

(not available in

VN) imported to

form fixed assets

International

transportation

Financial derivatives Not regulated Exempt

Deductibility of input

VAT

Input VAT for purchase invoices reported later than 3 months is not creditable

A claim of VAT input can be made within 6 months

Proposed Changes in Special Sales Tax

Taxable

goods &

services

Goods: cigarettes, cigars, alcohol,

beers, cars below 24 seats, gasoline, air-conditioners etc.

Services: dancing clubs, massage,

karaoke, casino, poker machines, golf, lottery etc.

Tobacco products; dual purpose vehicles with two seat rows or above (eg pickup trucks, vans); motorcycles of at least 750cc; aircrafts and yachts for private use; electronic betting machines;

Current rates Proposed rates

Alcohol products 15%, 20%, 30% or 75% 20% or 55%

Motorcycles above 175 cc,

aircrafts, yachts

ƒ Traditionally, tax audits were conducted on annual basis

ƒ New procedures released in May 2008 Tax audit methodologies have changed from comprehensive/ substantive approach to ad-hoc and risk based approach

ƒ Selection of tax audit targets is based on compliance history and targets are classified into two groups:

9 Taxpayers with poor compliance history include: incomplete

returns or late filings; inaccurate declarations of tax liabilities

or frequent tax corrections; being visited by tax authorities at least 3 times during the year; owing tax debts and delaying tax payments

9 Taxpayers with irregularities include: having refundable VAT

but not claimed or VAT refund claims abandoned; or 20%

fluctuation in revenue or in the amount of tax payable

Tax Audit & Investigation

Stringent tax audit/investigation procedure:

ƒ A notice of tax audit/investigation is sent to the taxpayer at least 3 working days prior to the audit/investigation

ƒ The taxpayer may submit a request of deferral within 5 working days following the date of notice

ƒ The tax audit/investigation commences within 10 working days, unless a deferral is granted

ƒ The tax audit/investigation may last up to 5 working days and

extendable to another 5 working days An investigation may last

up to 30 working days

ƒ The tax auditors/investigators communicate their findings to the taxpayers within 5 working days following conclusion of the

audit/investigation

ƒ The taxpayer has 10 working days to lodge an appeal

Tax Penalties & Statutory Limitations

ƒ As self-assessment is now applied widely, tax audits are not less frequent but penalties are tougher:

9 Administrative penalties – up to VND5 million (US$300)

9 Interest penalty – 0.05% of the tax shortfall per day

9 Tax penalty – 100%-300% of the tax shortfall

ƒ Statutory limitation for application of penalties:

9 2 years for administrative non-compliance

9 5 year for tax evasion not subject to criminal prosecution, late tax payment, under-declaration

ƒ No statutory limitation for tax re-assessment and claw-back

Tax Treaty Developments

ƒ Vietnam has entered tax treaties with over 45 countries

ƒ Most tax treaties follow the OECD treaty model

ƒ Tax treaty procedures were time-consuming, involved much

paperwork and required tax authority’s pre-approval

ƒ Improved procedures (based on self-assessment) for claims of tax treaty relief have recently been introduced

ƒ Most local tax departments now process tax treaty applications

New Tax Treaty Procedure:

ƒ Submit a claim of tax treaty relief to the withholding entity at least 15 days before the date of execution of the contract (e.g employment contracts or service contracts etc.)

ƒ Submit a Certificate of Residence issued by home country’s tax

authority, not later than the 1st quarter of the following tax year

Permanent Establishment (PE)Issues

ƒ The new tax law defines a PE very broadly, which includes “an

agent that regularly represents the foreign company to deliver

goods or services in Vietnam”.

ƒ Currently, PEs are mainly taxed under the deemed withholding tax regime Thus, PE’s tax exposure is manageable at present, but this may change after 2008 Improved treaty procedures (ie self-assessment) help mitigating PE risks

ƒ Previously, approval by the tax authority required for tax relief Now, such a relief may be self-assessed

ƒ Under the new tax law a PE may attract the following sources of income to Vietnam’s taxation:

9 Worldwide income derived through a PE in Vietnam;

9 Income not derived through the PE but has a source in Vietnam

ƒ A PE may be subject to tax reporting requirements like other

corporate entities

Common Tax Audit Issues

ƒ Personal Income Tax – taxable benefits in kind of expatriates, bonuses

ƒ Foreign contractor’s withholding tax – service/trading income

ƒ Tax deductibility limit on advertising and promotion (A&P)

expenses

ƒ Tax deductibility of inter-company charges (eg management fees, overhead allocations, interest expenses on shareholder’s loans and foreign loans)

ƒ Indirect taxes (VAT or Special Sales Tax), especially disposal of goods by way of other than ordinary sales (eg trial products, sales rebates/ discounts, distributors’ margins etc.)

ƒ Capital gains from real estate transactions

ƒ Tax incentive entitlements

New Customs Regulations

► Import Licensing

- Decision 24/2008/QD-BCT issued 1 August 2008 on Automatic Import License requirements

► Customs Valuation

- Decree 40/2007/ND-BTC of 16 March 2007 on Customs Valuation of Imported and Exported Goods

- Guiding Circular 40/2008/TT-BTC of 21 May 2008

Import Licensing

► Decision 24 (effective 11 September 2008):

► Covers a wide range of products (initially 36/97 chapters covered

in the import tariff; now reduced to 10 chapters)

► An automatic import license is required for each batch of goods

► Application must be made to the Ministry of Industry and Trade (registration dossier must include: application; business reg

certificate; sale contract; payment voucher/ bank confirmation; bill of lading, etc)

► Supposed to be “automatic” but license must be obtained, which

is granted within 10 days of submission of the registration

► Burdensome for frequent importers and those who use airfreight, hence delays are common

Customs Valuation

► Customs value is the value determined for the purpose of assessing import duties

► Circular 40 provides detailed guidelines on customs valuation

(effective 18 June 2008) – a move away from arbitrary customs values

► The Circular is based on the WTO/GATT valuation system, which enables the fair and standardised system of customs valuation

► Circular 40/ WTO’s Valuation Methods Hierarchical Sequence:

► Transaction Value of Identical Goods

► Transaction Value of Similar Goods

Thank you

For further information, please write to:

nam.nguyen@vn.ey.com

or call: +84 8 8245252 ext.: 8300