AA company - News Brief 2009

With an aim to provide more detailed guidance on Corporate Income Tax (CIT) incentives under Vietnam’s commitments with the WTO, on 3 March 2009, the Ministry of Finance issued Official Letter 2348/BTC-TCT (OL 2348) on CIT incentives applicable to certain qualified businesses.

Applicable entities

OL 2348 explicitly provides guidance on CIT incentives for the following enterprises:

enterprises with recalled CIT incentives, which were previously granted due to meeting conditions on local content or export ratios in the garment and textile industries
enterprises currently enjoying CIT incentives until 2011 due to meeting conditions on export ratios (except those in the garment and textile business).

Details of tax incentives

OL 2348 reaffirms that if meeting other qualifying criteria for CIT incentives, the above mentioned enterprises will continue to enjoy corresponding CIT incentives for the remaining incentive period.

In particular, enterprises under category (1) above now have the right to choose either of the following options:

continuance of CIT incentives corresponding to the satisfied qualifying criteria for the remaining incentive period, pursuant to the provisions of tax law in force at the time of Investment License issuance
continuance of CIT incentives corresponding to the satisfied qualifying criteria for the remaining incentive period, pursuant to the provisions of tax law in force at the time of amendment as a result of WTO commitments (i.e. 11 January 2007).

With respect to enterprises under category (2) above, from year 2012, they can choose either of the following options:

continuance of CIT incentives corresponding to the satisfied qualifying criteria for the remaining incentive period, pursuant to the provisions of tax law in force at the time of Investment License issuance
continuance of CIT incentives corresponding to the satisfied qualifying criteria for the remaining incentive period, pursuant to the provisions of tax law in force at the time of amendment as a result of WTO commitments (i.e. at the end of 2011).

Qualifying conditions

To qualify for CIT incentives for the remaining incentive period as stated above, enterprises must still be in the middle of their CIT incentive periods as at the date of issuance of OL 2348.

Claiming procedures

OL 2348 provides that enterprises simply need to send a written notice to the local tax office advising their chosen option, without a need to apply for an amended license. Notwithstanding this, enterprises may reserve the right to request the licensing authority to confirm such investment incentives in the Investment Certificate. Qualified enterprises should choose an incentive option that most benefits them and notify the same to the tax office, in accordance with the guidance of OL2348.

Further clarification on computing taxable income from the agreed net package

According to Official Letter No.1578/TCT-TNCN issued on 28 April 2009 by the GDT, the net income stipulated in the Appendix No. 01/PL – TNCN of Circular 84 dated 30 September 2008, which is used in computing the taxable income, should be the amount excluding Personal Income Tax as well as personal and dependent relief of the tax payer.

On this principle, personal and dependent relief shall be subtracted from the agreed net remuneration before grossing-up for coming up with the taxable income in accordance with the formula stipulated in the Appendix 01/PL-TNCN of Circular 84.

Organisations agreeing with employees on a net package should take note of the above regulations for compliance purposes.

On 27 March 2009, the Ministry of Finance (MOF) issued new Circular 62/2009/TT-BTC providing further guidance and clarification for the application of Circular 84/2008/TT-BTC dated 30 September 2008 (Circular 84). The newly-issued Circular 62 covers the following key issues: AND CORPORATE SERVICES

1. Extended definition of non-taxable employment income

One-off relocation allowance for expatriates coming to reside in Vietnam is not taxable. The amount is determined based on the labour contract. School fees for children of expatriate employees up to high school level are not taxable based on provisions of labour contract.

Airfares for one round trip home leave for expatriates is non-taxable with the condition that the airfare provision is mentioned in the labour contract and the ticket indicates the country where the expatriate resides or where his family resides.

Housing allowance paid by the employer on behalf of the employees is taxable based on the actual expenses but not exceeding 15% of total taxable income.

Provision of a motor vehicle for collective use is not taxable. However, the benefit is taxable if the use of the motor vehicle is for a specific individual.

For other benefits such as club memberships, recreational services, PIT will apply only if the payment for membership or for the service is for specific individuals, i.e. the benefit is not taxable if the payment is for the collective use of a number of employees.

Training expenses for knowledge and improvement of skills of employees consistent with their profession, or in accordance with the company’s plan of labour utilisation, is non-taxable.

Midshift meal is not taxable if the employer directly organises meals for the employees. In case the employer directly pays midshift meal allowance in cash to the employees in excess of the amount stipulated by the Ministry of Labour, War Invalids and Social Welfare, the exceeding amount shall be included in the taxable income.

Per diem expenses for stationery, utilities, travelling will not be taxable if the expenses are in accordance with the current regulations of the State.

2. Additional guidance of relief and deduction

Circular 62 provides required conditions to apply independent relief in cases where the dependent is of working age and if they are over working age. According to the guidance, a dependent within working age must meet two conditions (i) be handicapped and unable to work; and (ii) has no income or has average income lower than VND500,000 per month. For dependents past the working age, only the second condition will apply. In respect of dependents who are grandparents, uncles, aunties, brothers, sisters, nephews and nieces, other than the above conditions, the taxpayer claiming relief must be the person who is directly nursing them.

Circular 62 also provides further detailed guidance on required documents to prove the dependent status and procedures to apply in various different circumstances.

Circular 62 verifies that compulsory insurance contributions are deductible when calculating taxable income, interestingly including insurance for professional responsibilities.

3. Guidance on PIT withholding and declaration for non-employment income

Circular 62 provides guidance for withholding and declaration of various types of non-employment income.

For OTC securities trading income, the selling price of securities is the price stated in the sale agreement. If the sale agreement does not indicate the selling price, the price for withholding PIT will be the price declared by the seller, and the seller shall be responsible for the price they declare.

When paying sales commission, wages, salary, or other payments to individuals who perform various services with a total value of VND500,000 or above, the payer shall apply consistently the withholding rate 10% (regardless of whether the recipient has a PIT code or not), except for circumstances subject to specific guidance of the MOF (e.g. insurance agent fee, lottery ticket sales agent)

Individuals who are sales agents having only one source of income and who anticipate that their income after deduction of applicable relief will not be subject to PIT, are allowed to submit a commitment to the payer for temporary exemption from PIT withholding. The payer shall temporarily not withhold PIT and the individuals become responsible for the commitment.

Individuals receiving dividends in the form of shares or share bonuses shall not pay PIT when receiving the shares, but they will be required to pay PIT when they transfer the shares on the basis that this is income from securities transfer and income from capital investment. The taxable amount as income from capital investment shall be the number of shares received times the par value. The taxable amount as income from securities transfer shall be based on the actual transfer price, and

the taxpayer will elect the method of tax calculation, using the deemed taxable method or apply 20% on net income that is the difference between the actual transfer price and the par value.

4. Other guidance on tax administration procedures

Circular 62 also provides further guidance of tax administration for inheritance income, gifts, and property transfer

5. Effective application

Circular 62 will become effective 45 days from the signing date and applies for income arising from 1 January 2009. By issuing Circular 62, the MOF cancels any provisions and guidance in Circular 84 and in any other guidance of the MOF inconsistent with provisions of Circular 62

Deferment in payment of 1% Unemployment Insurance premium and 1% Trade Union fee for the first 6 months of 2009

According to Resolution 32/2008/NQ-CP dated 31 December 2008 of the Government, enterprises are allowed a deferred payment of Unemployment Insurance premium at 1% of the salary fund for qualified employees, and 1% as Trade Union fee for the first 6 months of 2009. Enterprises must pay these dues in full during the last 6 months of 2009.

It appears that the Resolution only allows the deferred payment of the 1% portions applicable to the employers. The Resolution does not mention the 1% contributions for Unemployment Insurance and Trade Union fee respectively on the part of employees. Therefore, it is unclear at the moment as to how enterprises would deal with these contributions from employees. The MOLISA is expected to issue further guidance on the implementation of the above Resolution. We will provide further updates on this subject.

Circular 04/2009/TT-BLDTBXH on Unemployment Insurance

On 22 January 2009, the MOLISA issued Circular 04/2009/TT-BLDTBXH providing detailed regulations on Unemployment Insurance. Circular 04 elaborates the regulations under Decree 127/2008/ND-CP dated 12 December 2008 of the Government on Unemployment Insurance. Generally, Circular 04 provides the methods for calculating unemployment allowances, regulations on vocational training and job search support, health insurance during unemployment periods, unemployment insurance claim procedures, as well as relevant application forms. Circular 04 takes effect from 1 January 2009. Enterprises should comply with the provisions of Circular 04 accordingly.

MOF guidance on VAT on house building, infrastructure development activities with advance collection of buyers’ progress payments as agreed under contracts signed before 1 January 2009

According to Official Letter No. 6992/BTC-TCT dated 18 May 2009 from the MOF, real estate traders, residential housing and infrastructure developers who have collected progress payments from customers before 1 January 2009 and claimed creditable input VAT (or VAT refund) on input materials, goods, expenses used for such real estate trading or housing and infrastructure development activities but have not declared corresponding revenue and output VAT before 1 January 2009, must now issue VAT invoices, declare and pay VAT on the proceeds received before 1 January 2009.

If the above enterprises continue to collect progress payments from customers in 2009, they must issue VAT invoices, declare and pay VAT on the aggregate proceeds received (i.e. both before 1 January 2009 and during 2009). The deadline for declaring VAT on proceeds received before 1 January 2009 is no later than the August 2009 VAT return. With respect to the VAT assessment price, Official Letter 6992 specifies as follows:

Where such enterprises are using land entrusted by the State and paying land use right fees to the State, the VAT assessment price shall be the amount collected less such land use right fees.

Where such enterprises are not using land entrusted by the State, the VAT assessment price shall be the amount collected less the land use right price prescribed by the provincial/ municipal People’s Committee.

Where such enterprises won the land by way of an auction, the VAT assessment price shall be the amount collected less the auctioned price for the land use right. Enterprises engaged in real estate trading, house building, infrastructure development investment activities should take note of the above regulations for correct VAT declaration and payment.

Decree 133/2008/ND-CP on Technology Transfer

On 31 December 2008, the Government issued Decree 133/2008/ND-CP (“Decree 133”) to provide provisions for the implementation of the Law on Technology Transfer. This is a regulatory progress regarding technology transfer, as previous regulations on technology transfer were promulgated on the basis of the Civil Code. Below are the key changes under Decree 133:

Technology transfer contracts are no longer required to be registered with the competent authority (though investors reserve the right to register at their discretion). This has implications on the deductibility of royalties for CIT purposes, as previously only royalties paid for registered contracts were allowed as tax deductible.

Notwithstanding the above, contracts for transfer of encouraged technologies must be register red, so that a certificate on registration and incentive entitlements can be issued.

Registration documentation is now simplified.

Of note, Decree 133 specifies tax incentive regimes to promote technology transfers in accordance with the Law on Technology Transfer, including:

+ CIT exemption on income derived from the technology transferred as part of capital contribution by investors

+ Import Duty exemption on goods directly used for technology development and innovation

+ VAT exemption on imported machinery which cannot be produced domestically

+ CIT exemption for 4 years on income generated as a result of applying encouraged technologies, provided that the tax exemption

value does not exceed 50% of total investment expenditures

+ Import Duty exemption for 5 years on goods imported for the purpose of technology replacement and innovation in areas with difficult or especially difficult socio-economic conditions

+ 50% CIT reduction on income generated from the use of technology in rural, areas and areas with difficult or especially difficult socio-economic conditions

+ CIT exemption for 4 years and fifty percent CIT reduction for the next 9 years, together with exemption from land tax for businesses engaged in technology inventing activities

+ Exemption of technology transfer contract appraisal fees for organisations, individuals accepting technologies in areas with difficult or especially difficult socio-economic conditions.

Decree 133 came into effect from 2 February 2009 (i.e. 15 days after being officially gazetted) and replaces Decree 11/2005/ND-CP dated 2 February 2005 of the Government on technology transfer.

New regulations on Representative Offices in Vietnam of foreign securities institutions

On 26 December 2008 the MOF signed Decision 124/2008/QD-BTC to issue new Regulations on the establishment and operation of representative offices (RO’s) in Vietnam of foreign securities institutions. Under the new Regulations, in addition to foreign securities companies and fund management companies, those allowed to open RO’s in Vietnam in the securities filed now include financial institutions having securities brokerage activities, and/or proprietary trading activities, and/or securities investment advisory activities, and/or securities underwriting activities. In addition, foreign institutions operating in the capital market and permitted to provide asset management services for a limited number of investors may also open RO’s in Vietnam.

Prior regulations on limitation of the number of RO’s (for a maximum of three ROs located in three different provinces/ cities in Vietnam) are now removed. Prior condition on the parent company having at least 3 years of operation is now also removed. Instead, though not explicitly provided for, from the technical requirements of the new Regulations it appears that a foreign securities institution must have at least one year of operation before it can apply to open an RO in Vietnam.

The timeline for processing RO establishment applications is now reduced to 7 business days, from previous 30 calendar days.

Within 5 business days from the date employing an expatriate staff to work for an RO, its parent company must send a report to the State Securities Commission together with all required approvals from other competent authorities related to the employment of such expatriate staff.

Other provisions on the restricted scope of activities, rights and obligations of an RO, the extendable 5-year term of operation for an RO generally remain unchanged compared to the 2004 Regulations. The new Regulations will come into force 15 days from the day being officially gazetted and replaces contradictory

regulations. RO’s governed by the Law on Securities must adjust their operations to comply with the new Regulations within 3 months from the date these new Regulations come into force.