Government revises VAT guidance

Vietnam is no exception, as the Vietnamese government has taken steps to create better conditions to attract foreign investment, with clearer VAT regulations as part of wider measures to improve competitveness. Lawyers Le Net and Nguyen Thanh Thuy Linh, from LNT & Partners provide a break down of the new changes

The revision to VAT regulations will bring Vietnam more in line with international norms Photo: Hoai Nam

The amendment to the Law on Value Added Tax (VAT), together with Decree 209/2013/ND-CP (Decree 209) and Circular 219/2013/TT-BTC guiding this law, is one of the several positive moves the government has taken to revitalise the Vietnamese business environment.

The following are some noteworthy regulatory changes concerning VAT:

Changing the list of the subjects that are VAT exempt

In contrast to other taxes, VAT is not imposed directly on the taxpayers, but on the end-user. Products excluded from VAT do not necessarily bring any benefit to the taxpayer and instead, they carry with them an additional tax obligation. Therefore, in some cases, taxpayers are critical of policies that place their services outside of the list of subjects to which VAT is applicable.

Services of common sanitary items are a typical case. Under the former VAT laws, such services were not subject to VAT. As a result, all VAT inputs for the service provider, such as acquiring machines, investing in facilities, etc. will not be deducted but were instead determined as a business expenses. In order to encourage investment into this sector, Decree 209 has removed it from the list of subjects that do not apply VAT.

In addition to removing certain subjects, Decree 209 also adds to the list some new subjects, such as sales of assets used as collateral for loans, the provision of credit information, and transfers of capital contribution rights.

One of the most notable changes in Decree 209 is the removal of small household businesses from the list of subjects that need to pay VAT. Business households with an annual revenue not exceeding VND 100 million can now waive their VAT declaration and payment obligations, while all of their goods and services sold and/or provided will not include VAT. Former regulations previously employed a common minimum salary threshold for defining which goods and services were subject to VAT (i.e., goods and services of businesses and individuals with an average monthly income lower than the common minimum salary level were not subject to VAT). Therefore, the new law provides more clarity to the conditions.

New VAT exemptions

VAT exemptions are a new concept in Vietnamese VAT laws. Decree 209 stipulates five types of VAT exemptions, including collecting receivables for damages, bonuses, allowances, emission right transfers and other financial receivables, disposing assets of non-traders, or various prescribed services bought by Vietnamese from foreign parties. For these cases, the enterprise and individual engaging in the conduct will have no obligation to declare or pay VAT.

Perhaps the most important exemption is the one applied to transfers of any investment project for the production and trading of goods and services that are ordinarily subject to VAT. In view of the rebounding M&A activity in Asian countries, this policy is a step towards the right direction in attracting foreign investors.

Support for the real estate market

Vietnam’s real estate market has experienced a poor few years, with many property projects lacking buyers. In an attempt to revive the market, the government has enacted changes to VAT laws. Some new regulations include reducing the tax rate to 5 per cent for transactions relating to social housing and applying a 50 per cent VAT exemption to transactions relating to commercial houses with floor areas of under 70 square metres and a selling price of under VND15 million per square metre.

It is hoped that these changes will revitalise the Vietnamese real estate market – at least, the budget housing segment.

Export services: changing criteria for subjects to apply a 0 per cent tax rate

While the laws of Vietnam promote the notion that exported services should be subject to a 0 per cent VAT rate, the definition of which services are really exported for use out of Vietnam is a controversial matter.

In order to decide the application of the relevant VAT rate, the former decree prescribed the condition of whether the foreign client was holding a permanent establishment in Vietnam. This was unsatisfactory for the tax-payer as well as the state because such criteria did not bring clarity. Decree 209 reinstated a condition applied before the aforesaid former decree, which is that the service must be consumed outside of Vietnam. However, this may make the zero rating for exported services more difficult in most cases since the tax authorities can be expected to take the view that most services sold to customers overseas, if they are performed in and relate to Vietnam, will also consequently be consumed in Vietnam. Service providers should review their VAT treatment of exported services to ensure that the rate of VAT applied is correct.

VAT deduction method

The Law on VAT defines two VAT payment measures: one for tax deductions and one for the direct calculation of VAT. However, the question of which method applies may cause confusion to taxpayers.

Decree 209 provides a new provision whereby enterprises and co-operatives with an annual revenue of less than VND 1 billion can also apply for the tax deduction method on a voluntary basis after having fully complied with the regulations on accounting regimes, accounts, invoices and supporting documents. In comparison with the former regulations, this provision was earmarked to provide an easier and more transparent means for taxpayers to choose which deduction method would be applied.

Removing the time limit for VAT deduction

The six month statutory time limit for declaring and deducting input VAT for invoices has been removed in Decree 209. Now, the declaration of VAT invoices only has to be done before any tax inspections by the tax authorities.

Tax refund

Instead of the former three month limit, VAT refunds under Decree 209 can now be claimed if a taxpayer has accumulated input VAT credit for at least 12 consecutive months or four consecutive quarters. In addition, for the new investment projects or registration of enterprises applying the tax deduction method, the threshold for claiming VAT has increased from VND 200 million to VND 300 million. This new provision is expected to make it easier for taxpayers to seek a tax refund. In practice, tax refunds usually take significant time and costs so the extension of the term for a tax refund may also be beneficial.

Decree 209 has brought with it a large number of positive changes in VAT treatment for both domestic and foreign businesses and investors. It is hoped that such changes will lead the way in promoting the Vietnamese government’s aim to improve transparency in the business environment, bolster Vietnam’s attraction to foreign investors and encourage domestic business activities.n

This article was prepared for reference only, it is not a legal opinion for any particular case. For any further queries please contact our lawyers Net.le@LNTpartners.com for further information and consultation.