Tax Briefcase

Corporate income tax incentive for business of socialization activities

Business of socialization activities have been developed as an alternative way of supplying public goods and services. The socialization incentives have been applied to attract growing capital, which directly linked the social performance of an enterprise with its profitability.

Referencing from a study led by British Council, at the year of 2018, there were more than 19,000 social enterprises in Vietnam. Encouragingly, more than 60% of the business achieved profit or surplus, while 6% broke even and only 10% made loss[1]. Accordingly, it is clear that there is huge potential in Vietnam to further grow the business model of socialization activities.

By this article, Grant Thornton Vietnam would like to launch the discussion on Corporate Income Tax (“CIT”) incentive applicable for business of socialization activities during the period from 2009 to 2020. We do believe that our article will provide with a view of CIT incentive as a strong base for investment decision in this potential area.

CIT incentive for business of socialization activities

Under current regulations[2], enterprises whose business activity engages in education, vocational training, healthcare, culture, sport, environment, and judicial assessment could enjoy the most favourable CIT incentive of 10% tax rate for the project’s lifetime. In addition, tax holiday and reduction are granted to new investment project as described below:

  • 4 years of tax holiday and 9 years of CIT 5% applied for new investment project located in encouraged area
  • 4 years of tax holiday and 5 years of CIT 5% applied for new investment project not located in encouraged area

The tax holiday, tax reduction is continuously applied after the enterprise first makes profits from the incentivised activities. However, where an enterprise has not derived taxable profit within 3 years of the commencement of generating revenue from the incentivised activities, the tax holiday/tax reduction will start from the fourth year of operation.

Furthermore, income that is re-invested to the company’s operations in line with the laws applicable for each socialised sector, will be subject to tax exemption.

In comparison with the previous laws applied up to August 2014[3], there are three (03) significant supplements that should be aware as following:

  • Tax holiday and reduction are eligible for new investment project entitled to tax incentive, instead of new enterprise established under investment project subject to tax incentive
  • Income be re-invested to the company’s operations will be exempted from taxation
  • Judicial assessment is eligible for social business sector

CIT incentive eligibility

Decree 69[4] regulates the government policy on supporting for public sectors of education, vocational training, healthcare, culture, sport, environment, and judicial assessment. Accordingly, three (03) decisions listed below were issued providing detail guidance on facilities, operating standards, operational scale, etc. However, each of seven (07) activities is subject to the management and supervision of specific authorities. Whereby, to be eligible as a business of socialization activities, beside running the business in line with regulations on social activities in general, an enterprise has to ensure that its business are complied with the specific rules of each industry as well as the technical requirement (if any).

                           Regulations

Sectors

Decision 1466[5]

(effective from 07 Nov 2008)

Decision 693[6]

(effective from 06 May 2013)

Decision 1470[7]

(effective from 22 Jul 2016)

Education

x

x

x

Vocational training

x

x

 

Healthcare

x

x

x

Culture

x

x

 

Sport

x

 

 

Environment

x

x

 

With respect to judicial assessment, it is listed as a public sector under Circular 156[8] which took effect from 15 December 2014. However, until now, there have no clear guidance on activities scope as well as conditions required to conduct such business by non-government organizations. Furthermore, from tax perspective, judicial assessment business has been subjected to full CIT incentive from tax year 2015 while only enjoyed a part of CIT incentive, taxable exemption on income being re-invested, applicable from 02 August 2014.

On a separate note, in case a new investment project of environment protection is not eligible as socialization sector, the preferential CIT rate of 10% for 15 years could be applied.

Notable points on tax compliance requirement

We highlight 2 main points below that should be noted by an enterprise upon reporting the financial transactions:

  • Lack of accounting records is a basis for assessing Vietnamese Accounting Standards ("VAS") non-compliance. The tax authorities can treat VAS non-compliance as a basis for tax re-assessment and/or withdrawal of CIT incentive.
  • A company is required to separately account the income from production and business activities eligible for CIT incentive from those ineligible (if any). Failure of separation record, the ratio (%) of the turnover or deductible expenses for business activities eligible for tax incentive will be used to determine the taxable income.

Despite of the attraction of CIT incentive applicable for business of socialization activities in Vietnam, most investors have been challenged due to being unfamiliar with the legal system and compliance procedure. Fulfilling the regulated requirement and being licensed to operate in the field of socialization is a prerequisite. If an investment project fails to satisfy conditions of investment incentive for a certain period of time, the incentive during such period might be withdrawn accordingly. Therefore, from tax perspective, the incentive implementation should be annually reviewed to ensure the compliance and assess any risks incurred. Professional assessment could be considered as an efficient alternative in this regard.

Disclaimer

This article provides general recommendations in accordance with current Vietnamese laws and regulations in effect as of the publication date. For specific circumstance, readers should seek proper advice with respect to the topic discussed herein.

[1]Social enterprise in Vietnam published on March 2019, led by the British Council, conducted by the Central Institute for Economic Management, supported by United Nations ESCAP and Social Enterprise UK

[2] CIT Law 14/2008/QH12, effective 01 January 2009; CIT Law amendment, effective 01 April 2014; Decree 218/2013/ND-CP, effective on 15 February 2014; Circular 78/2014/TT-BTC, effective on 02 August 2014; Circular 96/2015/TT-BTC, effective on 06 August 2015

[3] CIT Law 14/2008/QH12, effective 01 January 2009; Decree 124/2008/ND-CP took effect from 01 January 2009 to 15 February 2014; Decree 122/2011/ND-CP took effect from 01 Mar 2012 to 15 February 2014; Circular 130/2008/TT-BTC took effect from 18 January 2009 to 10 September 2012; Circular 123/2012/TT-BTC took effect from 10 September 2012 to 02 August 2014

[4] Decree 69/2008/ND-CP takes effect from 24 June 2008

[5] Decision 1466/QD-TTg, effective from 07 November 2008

[6] Decision 693/QD-TTg, effective from 06 May 2013

[7] Decision 1470/QD-TTg, effective from 22 July 2016

[8] Circular 156/2014/TT-BTC, effective from 15 December 2014