Managing Tax Losses in Vietnam
It is common that enterprises may incur losses in certain stages of their business life cycle (e.g. pre-operating investment stage). Therefore, it is essential that enterprises should equip themselves with an adequate understanding of the Vietnam tax regulations when dealing with tax losses in order to accurately determine tax losses and take optimum advantage of the tax loss benefits, in line with the Vietnamese tax laws.
Distinction between Accounting Losses and Tax Losses
Given that there are differences between accounting base (i.e. accounting principles) and tax base (i.e. tax laws), an enterprise's accounting loss is not necessarily the same as its tax loss. An excess of expenses over revenues is considered to be an accounting loss. However, a loss from the tax perspective is a negative taxable income, exclusive of losses carried forward from preceding years, in which taxable income is determined by the sum of revenue and other incomes less deductible expenses under the tax regulations.
Ultimately, any accounting losses incurred during the year are adjusted in accordance with the current tax regulations to arrive at the tax loss. The adjustments can comprise permanent ones and temporary ones. As a result of those adjustments to accounting profit/loss, there will be permanent differences and temporary differences between the accounting loss and the tax loss.
In its financial reporting, an enterprise may record some expenses, which are not deductible for Corporate Income Tax (“CIT”) according to the tax laws (e.g. on account of the legitimacy of invoice and/or supporting documents, nature of the expense and business activities, exceeding the level of capped expenses, etc). Also, certain income should not be included in total taxable income, for tax liability calculation purposes (e.g. tax-exempt incomes). These above-mentioned items lead to the permanent discrepancy between the accounting loss and the tax loss.
This is understood as timing differences, due to applying the accrual basis in calculating the accounting loss compared with the cash basis in calculating the tax loss.
For provisional discrepancy in revenues, which commonly occur with enterprises operating in service sector, accrued revenues and unearned revenues are the main factors causing differences in the accounting loss and the tax loss, resulting from the different points of revenue recognition. For instance, a service provider may report revenue, in its fiscal year as accrued revenue, to ensure the revenue-and-expense matching principle, whilst provision of service has not been completed for revenue recognition under tax rules.
Furthermore, temporary differences in expenses may result from depreciation, accruals, unrealized foreign exchange losses, due to the year-end revaluation of foreign currency items other than accounts payable, etc. Specifically, e accrued expenses, which have not actually been paid, in the reporting period are not allowed for CIT deduction purposes, in compliance with tax regulations. Another difference mentioned above is depreciation of fixed assets, which must be in line with regulatory time frame of useful life under the tax regulations, whereas accelerated depreciation may be preferred and applied by enterprises in certain periods.
Benefits of Tax Losses
Types of Tax Losses
Technically, the principles to classify tax loss are forms and activities causing loss, not the reasons causing loss. Commonly, the types of loss of an enterprise are determined based on their business lines, in which profit/loss of different lines should be separately recorded.
Tax Loss Offsetting
Under the prevailing tax laws, an enterprise performing multiple business activities may be eligible for counterbalance between its profit from ordinary business activities and its negative income from other activities. However, only certain types of income are allowable for offsetting, e.g. loss from transfer of real estate/ investment projects can be offset against the profit of ordinary business activities, but losses from overseas investment projects cannot be offset against domestic profit. Likewise, profit and loss offsetting can be done between activities with tax incentives and those with no incentives.
Tax Loss Carried Forward
When an enterprise incurs tax losses in its year-end CIT finalization return, it is permitted to carry forward that loss in full for a maximum of five consecutive years, starting from the subsequent year of the loss arising.
Obtaining an in-depth knowledge of Vietnam tax regulations, enterprises can mitigate their tax risks during their operation. Most importantly, for new foreign investors intending to enter the Vietnam market, newly established enterprises and enterprises operating with losses, understanding of tax loss related regulations will be helpful for them to estimate future tax expenses and build a smart tax plan for maximum tax efficiency. Obviously, tax efficiency is one of the key factors creating more wealth for enterprises to help facilitate investment and growth.
Talk to Mr Nguyen Hung Du about how Grant Thornton can help your organisation prepare for the shift to indirect taxation.