Vietnam’s Revised Corporate Income Tax

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Sept 26 – Vietnam’s National Assembly approved the new Corporate Income Tax (CIT) reduction from 28 to 25 percent on June 3, 2008. Finance Minister Vu Van Ninh told Thanhnien News that the loss of tax revenue of VND5 trillion will be worthwhile in order to allow companies in Vietnam to become more competitive.

The revised incentive regime provides two preferential tax rates, the 20 percent tax rate which will apply for 10 years and the 10-percent tax rate which will apply for 15 years; it dropped the 15 percent tax rate.

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The 20 percent tax package will include additional incentives like a CIT exemption of up to two years and a CIT reduction of 50 percent for up to four subsequent years. Its beneficiaries are new business establishments from investment projects which are implemented in a region on the list of geographical areas with difficult socio-economic conditions.

The 10 percent tax package includes a CIT exemption of up to four years and a CIT reduction of 50 percent for up to nine subsequent years. Its beneficiaries are newly established businesses from investment projects operating in economic zones, high-tech zones and in a region on the list of geographical areas with difficult socio-economic conditions.

In addition, the benefits are also extended to those operating in sectors like education-training, vocational training, health care, culture, sport and environment, software producing industry, science research and technology development and investment in developing important infrastructure to the State.

Currently, tax exemption or reduction is applicable from the first profitable year. With the implementation of the new tax regime, the above tax incentives will be applicable from the year in which revenue is generated. The changes will also be relevant to existing taxpayers who have yet to start using tax incentives, i.e. those who have not generated a profit.

There will also be no tax exemption and reduction for “business expansion”, with the exception of accelerated depreciation. Relocated enterprises are no longer entitled to enjoy tax exemption and reduction like before.

Expenses will be deductible if they are not specifically identified as being non-deductible, properly substantiated and related to the production or trading of an enterprise. This general deductibility clause in the new draft law will, unfortunately, also retain a 10-percent cap on advertising and promotion expenses.

With the implementation of the new law, the tax payer who has branches in different provinces will be required to allocate the tax payment to the respective provincial tax authorities in the locations where it operates.

The companies are also allowed to allocate a maximum 10 percent of their annual taxable incomes for R&D activities in Vietnam (only). However, if the R&D funds are only partially utilized (i.e. less than 70 percent) or are utilized for a different purpose other than R&D within 5 years, the company will pay the corresponding CIT and interest rate charges.

A new regulation will also prevent businesses from enjoying tax deductions on workers’ perks if they paid employees above the regulated maximums on benefits like healthcare, insurance and food allowances.

The majority of lawmakers remained hopeful that the increasing numbers of business openings will make up for the drop in tax revenues.