There are significant challenges for investors in the implementation of corporate income tax incentives for expansion investment projects in Vietnam because the law is often changing, as discussed by Tran Nguyen Mong Van and Nguyen Hung Du, of Grant Thornton.
Foreign investors need to understand the incentives that Vietnam currently offers because there are tax benefits in optimizing tax expenses and minimizing tax collection. There are also penalties for incorrectly applying the incentives.
Definition of “Expansion Investment Project”
- An investment project that expands its scale, capacity, applies new technologies, reduces pollution or improves the environment and belongs to the incentive investment sectors and/or is located at encouraged locations (including qualifying economic and high-tech zones and certain industrial zones) and meets one of the following conditions is regarded as an expansion investment project:
- historical cost of fixed assets added when the investment project is completed and has started operating is at least 20 billion dong ($865,123) for expansion projects in corporate income tax (CIT) incentives investment sectors or at least 10 billion dong for expansion projects operating in locations with difficult socio-economic conditions;
- percentage of historical cost of additional fixed assets is at least 20% higher than total historical cost of fixed assets prior to the expansion;
- percentage of the design capacity after expansion investments is at least 20% higher than the design capacity stated in the techno-economic study report prior to the initial investment.
Expansion investment projects (including expansion projects licensed or implemented during the period from 2009 to 2013 which were not entitled to any CIT incentives) that meet the above criteria are also entitled to CIT incentives.
CIT incentives do not apply to expansion investment projects that are formed as a result of a merger and acquisition of a current enterprise or investment project.
Applicable CIT Incentives
If the above conditions are met, the enterprise could decide whether:
(i) its expansion investment project enjoys CIT incentives according to the current implementing projects for the residual period (including preferable tax rates and tax reduction or exemption periods, if any); or
(ii) it applies the same duration for tax holidays for the increased portion of income derived from investment expansion (not entitled to preferential tax rates) equivalent to the duration of tax exemption or reduction period applicable to new investment projects operating in the same locality or sector which is eligible for CIT incentives.
If the enterprise chooses to apply (i), the expansion investment project must fall into the regulated encouraged sectors or encouraged locations eligible for CIT incentives stipulated under Decree No. 218/2013/ND-CP simultaneously with the sectors or locality with the operating investment project.
If the expansion investment project belongs to an incentive investment sector/area but fails to satisfy any one of the conditions above, the CIT incentives will be applied to the expansion project for the remaining period according to the implementing project (if any).
Increased Portion of Income Derived from Investment Project for Expansion
Enterprises account separately for the portion of income derived from expansion investment projects eligible for tax incentives. Otherwise, income from the expansion investment projects eligible for tax incentives is determined based on the ratio between historical costs of fixed assets which are formed by the expansion investment over the total historical costs of fixed assets of the enterprise.
- The exemption or reduction period is calculated when the enterprise has taxable income from the incentivized activities for the new investment project. If an enterprise has not derived taxable income within three years of the commencement of generating revenue from the incentivized activities, the tax holiday/tax reduction will start from the fourth year of operation.
If an investment project of a company is eligible for CIT incentives with regular purchases of machinery/equipment between 2009 and 2013 but does not meet the above conditions for it to be regarded as an investment project for expansion, the portion of income derived from the additional investment is entitled to the same incentives as the current implementing project from tax year 2014 for the residual term.
Investment projects for expansion in the previous taxable year (i.e. 2009 to 2013) are allowed to access more favorable tax incentives available under the currently amended or new law on CIT for the residual project period which is applicable from taxable year 2015. This entitlement is specifically applicable in the following cases:
- expansion projects licensed or implemented during the period from 2009 to 2013 that were not previously entitled to any CIT incentives;
- onvestment projects commencing operations in industrial zones from 2009 to 2013 that were not previously entitled to any CIT incentives;
- investment projects located in areas that were not previously designated as encouraged before January 1, 2015.
The regulations on the conditions to enjoy CIT incentives are complicated. The guidance to classify new investment, regular investment and expansion investment (these are subject to different incentive regimes) is not entirely clear. In addition, the ability to apply tax incentives is conditional on compliance with the strict accounting system, license and operation requirements. Taxpayers are required to self-assess their eligibility for the tax incentives. The tax authorities focus on reviewing taxpayers’ fulfillment of the conditions in a tax audit.
Companies should prepare the supporting documents to prove the company’s fulfillment of the conditions in advance as well as an official letter from the tax managing authority confirming that CIT incentives are applied for the expansion investment project of the company.
Foreign investors should carefully select the most suitable regulations and clarify the tax incentives available. Seek professional advice if necessary.
Tran Nguyen Mong Van is Director of Tax Services and Nguyen Hung Du is Partner of Tax Services, Grant Thornton Vietnam.