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In 2012, Vietnam adopted several reforms that will take effect this year. In this article, KPMG’s tax advisors Nam Nguyen and Jeff Sea summarise the major changes. The global economic meltdown continued to hit every corner of the world and Vietnam was not an exception. The year 2012 continued to pose great challenges to businesses in Vietnam and witnessed the country facing domestic economic and financial issues including the continuing setback of the property market, businesses’ low liquidity and poor-performing loans in the banking sector etc.
Although further economic stimulus and reform programs were put in place to help businesses cope with the situation, concerns of further declines continued to dog businesses and the government despite resilient efforts.
The year 2012 also witnessed significant reforms in Vietnam’s tax environment. The National Assembly passed several changes in the Tax Administration Law, Personal Income Tax Law, and Labour Code which will be effective from 2013. The tax reforms were also brought by the release of various Decrees and Circulars on Corporate Income Tax (CIT), Value Added Tax (VAT) and Foreign Contractor Tax (FCT), much of which continued the roadmap of tax reform announced earlier by the prime minister in 2011. The key changes are as follows.
Firms can take some simple steps to avoid being caught between a rock and a hard place
Corporate Income Tax
In July 2012, the Ministry of Finance (“MoF”) issued Circular 123/2012, replacing several former Circulars. Circular 123/2012 consolidated the tax rules and interpretations provided in various “Official Letters” issued earlier and provided clarifications of the application of tax incentives, some of which were welcomed by businesses, while others were received with much debate and mixed reaction.
Much debate centered on the clarification of unavailability of tax incentives to income from expansion of investment and investment in “newly established enterprises,” which have undergone changes in the legal form and ownership or which have inherited assets or other commercial advantages of a former enterprise. Circular 123/2012 also confirms that no tax incentive is available to gains from real estate transactions (derived by businesses other than eligible real estate businesses), and transfer of projects or mining rights.
Circular 123/2012 restricts the use of losses from ordinary business activities to offset against “other income” to defer tax incentive period and/or to reduce tax liabilities. It also prohibits the distribution of tax losses to JV partners after dissolution. However, the rules on carry-forward of tax losses were expanded to allow interim quarterly rollover of tax losses. Tax concessions for small- and medium-enterprises (SME) and labour intensive enterprises
The slow economic growth in 2012 continued to warrant the government’s support for SMEs and labour-intensive enterprises, which are regarded as the important economic sectors of the economy contributing approximately 47 per cent GDP and 40 per cent State Budget and accounting for 97 per cent of over half a million registered businesses in Vietnam (according to www.baomoi.com).
The National Assembly passed Resolution 29 granting various tax reliefs, including 30 per cent CIT reduction for 2012 to eligible SMEs and labour intensive enterprises. In addition, several tax deferral schemes were introduced to help these enterprises. The tax deferral schemes included: a nine-month deferral of pre-2010 CIT debts till October 2012, a deferral of 2011 CIT debts to January 2013, a six-month deferral for the VAT liability of April and May 2012 and a nine-month deferral of the VAT liability of June 2012.
Tax incentive adjustments for export enterprises
Effective January 1, 2012, following Vietnam’s WTO commitments, export based tax incentives have been abolished. Taxpayers who were granted export-based tax incentives may now elect an alternative tax incentive scheme and notify the tax authorities of their election. Detailed guidance for making such an election is available in Circular 199/2012 recently released by the MoF on November 15, 2012.
Value Added Tax
Effective March 1, 2012, Circular 06/2012 took effect and introduced several key changes including: prescribing additional exempt transactions and services (relating to insurance, financial services, security trading, debt factoring, currency trading, health, education and vocational training); introducing a new list of VAT-ignored (rather than exempt) transactions whereby buyers may still claim the associated input tax, and hence a relief from VAT leakage; fine-tuning the VAT treatments for services provided by non-residents, disposal of assets by non-business entities or individuals, disposal of mortgages held by credit institutions, and intercompany transfer of fixed assets etc.
Circular 06 also clarifies the application of 0 per cent VAT to in-country import/export activities, prescribes specific VAT treatments for international transport and logistics services, and allows input credit for VAT suffered by buyers in various situations, including natural shrinkages and damages of inventories, consumption of supplies for mixed purposes, advertising, marketing and promotion, internal consumption.
Foreign Contractor Tax
The FCT regime has also undergone several changes as a result of the changes in CIT and VAT regimes. Circular 60/2012 took effect on 27 May 2012 and introduced several changes including the imposition of FCT on cross-border trading transactions conducted in the forms of DDP/DAT/DAP of INCOTERM and in-country import/export transactions.
Also, several on-line transactions are now taxable including advertising, marketing, and training.
Some of the deemed withholding VAT and CIT rates have also been changed. For instance, the CIT withholding rates have reduced from 10 per cent to 5 per cent for interest and from 2 per cent to 0.1 per cent for overseas re-insurance commissions, while the deemed CIT rate for management services in hotels, restaurants and casino has increased from 5 to 10 per cent.
Tax relief for low income earners and investors in 2012
In addition to the tax concessions granted to selected SMEs and labour intensive enterprises, the National Assembly passed Resolution 29 granting Personal Income Tax (PIT) exemptions to individuals. A tax free threshold for the combined employment and business income (after deduction of personal and dependent relief) was set at VND5 million per month, instead of being taxed at 5 per cent. The exemption applied for six months from July to December 2012.
Dividends (other than dividends from joint stock banks, investment funds or credit institutions) and other investment income were exempt from PIT in 2012, instead of being taxed at 5 per cent.
Relevant changes in Labour Code in 2013
There have been also several changes to the Labour Code which will take effect from 1 July 2013 and have relevance to taxation of individuals. The personal and dependant deductions for PIT will increase by 2.25 times to VND9 million and VND3.6 million, respectively. These deductions will be adjustable if the inflation rate fluctuates more than 20 per cent. Retirement income from voluntary pension funds will be exempt from PIT and contributions to such funds will be deductible for PIT purpose, subject to a cap.
Effective May 1, 2013, maternity leave period for female employees will increase from 4 months to 6 months and female employees may not take maternity leave more than two months in advance and may not return to work within the first four months. Retirement ages (60 for male and 55 for female) will be extended up to five years, for employees with special expertise or management skills. During probation, an employee must be paid at least 85 per cent of the normal salary (instead of the current 70 per cent), the hours from 10pm to 6am must be treated as night shift hours. Public holidays have increased from nine days to 10 days and the period of a work permit has been reduced from three years to two years.
Connecting the dots, spotting the future
Besides the tax concessions granted to SMEs and labour intensive businesses mentioned above, year 2012 also witnessed unprecedented increases in tax audit and inspection activities by the tax authorities targeting both domestic and foreign invested enterprises (FIE) in Vietnam.
The taxation landscape is changing faster and becoming more complex than ever and hence the greater challenges facing businesses. While the country’s shifting economy, continuing tax reforms, increasing tax revenue deficits and escalating pressures to generate tax revenue are factors driving the changes in tax authorities’ behavior and focus, toward the end of 2012, attention was directed toward FIEs with long loss-making history.
Some businesses were even publicly named and faced publicity issues surrounding transfer pricing, which is currently being perceived rather negatively by tax authorities and critics.
Corporate social responsibility is becoming a topic of debate associated with transfer pricing.
Some critics even called for public boycott of the products of the FIEs concerned.
As Vietnam continues to stride in the global economy, further tax reforms are expected to continue to bring the country in alignment with international practices, and support businesses to grow and face new challenges in 2013. While it could be challenging for tax authorities to balance between the pressures to generate tax revenue and to maintain Vietnam’s pro-business image to attract investment (especially FDI), staying abreast with the increasing complexities and sophistication of the tax environment and maintaining good corporate citizen image could be equally challenging for many businesses in the forthcoming years.
The views expressed by the authors here do not necessarily represent the views and opinions of KPMG.