TAXATION IN VIETNAM Ken Atkinson Managing Partner Eleanor L. Roque Tax Director

1. TAXATION IN VIETNAM Ken Atkinson Managing Partner Eleanor L. Roque Tax Director

2. OUTLINE • Corporate income tax • Personal income tax • Value added tax • Withholding tax on foreign contractors • Import and export tax • Other taxes • Repatriation • Accounting and auditing

3. Corporate Income Tax • Generally - 28% on net taxable income • Taxable net income = taxable turnover less reasonable expenses plus other taxable income in the tax period. • Pending amendment on CIT law will lower the CIT rate to 25%.

4. Tax incentives • Preferred areas of investments (such as those involving high technology, labor intensive, education and training, construction and development and projects implemented in remote areas) • Reduced tax rate: • 20% for ten years • 15% for 12 years or • 10% for 15 years • Pending amendment seeks to remove the 15% rate

5. Tax incentives (cont.) • Income tax holiday • 50% reduction of CIT for a certain number of years during the incentive period. • Newly established business may also be entitled to two years tax holiday and 50% reduction of tax payable in the next two succeeding years.

6. Allowable deduction Business expense will not be deductible if: • Unsupported by invoices and vouchers in accordance with regulations, or supported by unlawful invoices and voucher; • Unrelated to the creation of revenue and taxable income within any one tax period; or • Paid by some other funding source

7. Losses • Allowed to carry forward net operating losses for a maximum period of five years. • No carry back is allowed

8. Tax declaration and payment • Taxpayers subject to CIT shall file and pay taxes on quarterly and annual basis. • The quarterly income tax return - 30th day of the following quarter. • The annual CIT finalization return - 90 days from the end of the fiscal or calendar year.

9. Capital assignment tax • Subject 28% corporate income tax on the gains. • Taxes on transfer by foreigners shall be withheld and paid by the assignee. • Taxes on transfer by Vietnamese individuals or organizations shall be declared and paid by the transferor. • Tax planning of investments to address the capital assignment tax

10. Transfer of land use rights • 28% corporate income tax on the gains. • After calculation of the 28% tax, additional income tax shall be paid on the residual income at the rate of 05% to 25%. • Pending amendment seeks to remove the tax on residual income.

11. Dividends • Dividends received by corporate shareholders are generally not subject to CIT. • Dividends received by individuals are currently exempt and shall be subject to 5% tax starting 2009. • No profit remittance tax is imposed.

12. Transfer pricing • Related party transactions must be conducted at arm’s length and must comply with the transfer pricing rules and documentation requirements. • Parties are related if: • they hold directly or indirectly at least 20% of the equity or the total property of the other business establishment. • significant suppliers, customer and funding relationships, e.g., controls 50% of the turnover of sales (calculated on the basic of each type of products) of the other business establishment.

13. Personal Income Tax Taxable income includes: • regular income such as salaries, wages, overtime pay, allowances, bonuses; and • irregular income such as income from technology transfer and winnings from lotteries.

14. Tax rates • For 2008, the tax rates are from 0% – 40% for Vietnamese and resident foreigners. Non-resident foreigners are subject to tax at 25%. • Starting 2009- tax rates shall be 0% to 35% for Vietnamese and resident foreigners. Non-resident foreigners shall be subject to 20% tax.

15. Residency • Resident – if present for 183 days or more within twelve (12) months from the date of entry into Vietnam • Resident foreigner - subject to tax on his worldwide income while non-resident foreigner is subject to tax only on income earned in Vietnam even if paid abroad

16. New PIT Law • Other types of income shall be subject to the following tax rates:

17. VALUE ADDED TAX VAT RATES- • Exempt • 0% on exported goods and services • 5% on essential goods and services • 10% - Standard rate

18. VAT calculation methods: 1. Tax Credit Method: VAT payable=output VAT – creditable input VAT 2. Basis of added value VAT Payable amount = added value of taxable GS x VAT rate

19. Refund of VAT Taxpayers who maybe considered for refund include: • Organizations following tax credit method • having input tax amounts not fully credited for 3 or more consecutives months • Exporters with input VAT of more than VND200M for the month • Newly invested business establishments • paying VAT by tax credit method • No operation- no output tax • Investment duration for 1 year or more • Refund every year or every quarter if more than VND200M

20. Withholding Tax on Foreign Contractors If not adopting VAS a. VAT- directly on the basis of added value b. Corporate income tax- at a rate as a percentage of turnover

21. Value Added Tax Directly on Basis of Added Value Amount of VAT payable = Added value x VAT rate

22. CIT Rates as a percentage of taxable turnover

23. IMPORT and EXPORT TAXES Import and Export duties • Export: Export is encouraged and thus, almost goods and services being exported are exempt from tax. Export duties are only charged on a few items, basically natural resources such as minerals, forest products and scrap metal. Rates range from 0% - 45%. The price for the computation of export duties is the Free-On-Board (FOB) price of the invoice. • Import Duties Generally, all goods crossing Vietnamese borders are subject to import duties.

24. Import taxes Importation of raw materials from other countries • MFN rate • AFTA-CEPT rate • Ordinary rates (150%)

25. Other taxes • Stamp duty The regulated fees are divided into groups such as fee applicable in the area of commerce; fee applicable in the area of agriculture, forest and aquaculture; fee applicable in the area of manufacturing and construction etc. • Property taxes The rental of land use rights by foreign investors is the only form of property tax. The rates vary depending upon a number of criteria.

26. Other taxes (cont.) • Special Sales Tax (cont.) Special sales tax rates range from 10% to 75%. Goods and services subject to the special sales tax are also subject to the VAT with a rate of 10%. Special sales tax on imports is calculated on the basis of price of taxable import plus import duties plus VAT • Natural resources tax Industries exploiting Vietnam’s natural resources including petroleum, forests, minerals, fisheries and natural water are subject to natural resources tax.

27. REPATRIATION Enterprises with foreign owned capital and foreign business co-operation parties shall be required to open a specialized foreign currency deposit account at a bank authorized to deal in foreign currency: • Direct investment capital foreign currency account • Indirect investment capital VND account • Loan capital account

28. Special foreign currency deposit accounts • Transfers into and out of Vietnam of legal capital or capital for implementation of a business co-operation contract by foreign investors • Transfers into and out of Vietnam of medium- and long-term foreign loan principal; • Transfers out of Vietnam of interest and fees on medium- and long-term foreign loans for the purpose of repayment of foreign loans;

29. Special foreign currency deposit accounts (d) Remittance out of Vietnam of legal profit and other income of foreign investors; (e) Withdrawals of capital for the purpose of transfer into the foreign currency deposit account of an enterprise with foreign owned capital or a foreign business co-operation party; (f) Deposits of capital from foreign currency accounts of enterprises with foreign owned capital or foreign business co-operation parties.

30. Accounting and Auditing • Must follow Vietnamese Accounting System (VAS) • Must be in Vietnamese language and in Vietnamese Dong • Statutory audit is required for foreign invested enterprises