There has been a substantial economic transition shifting from the agriculture sector to the industrial sector over the years in Vietnam. Supporting Industry (SI) plays an important role in such a transition and is one of the leverages that boost the industrial development as it provides crucial solutions to investors in manufacturing industries to overcome the obstacles of cost, quality and market share. In recent years, the government has introduced policies to encourage the growth as well as maintain the competitiveness of SI investment in Vietnam.
What is a Supporting Industry?
Pursuant to the laws, supporting industries are defined as industries that involve manufacturing materials, accessories, components and spare parts used for assembling finished goods.
Pursuant to Decree 111/2015/ND-CP(1), supporting industries specialize in supply of raw materials, spare parts, and components to manufacturing industries, which includes electronics and mechanical engineering industries; garment and textile, leather, and footwear industries; hi-tech industries and the automotive industry. The list of prioritized supporting industrial products is promulgated in the Appendix of Decree 111/2015/ND-CP.
Pursuant to Decree 111/2015/ND-CP, tax incentives are available for organizations and individuals manufacturing products from the list of prioritized supporting industrial products.
Pursuant to Circular 55/2015/TT-BCT(2), in order to be entitled to corporate income tax (CIT) incentives, a new investment project in manufacturing supporting industrial products must qualify for one of the following:
- prioritized supporting industrial products that can be domestically manufactured before January 1, 2015 (as listed in Appendix 1 of Circular 55/2015/TT-BCT) and are granted with a Certificate of Conformity to EU technical Regulations (standards promulgated by European Committee for Standardization) or equivalents (if any);
- supporting industrial products listed in the list of prioritized supporting industrial products in Decree 111/2015/ND-CP but not listed in Appendix 01 of Circular 55/2015/TT-BCT.
Also defined in Circular 55/2015/TT-BCT, a new investment in manufacturing products of supporting industry includes:
- a project implemented for the first time or operated independently of the current project; or
- a project which is currently operating and expands its scale, enhances productivity, innovates technology for the purpose of manufacturing supporting industrial products, which is incorporated with new equipment, production process of which the production capacity increases by at least 20%.
CIT incentives: income from investment in manufacturing supporting industrial products is entitled to exemption for the first four years, a 50% reduction for the subsequent nine years, and a preferential tax rate of 10% for 15 years.
The preferential tax rate takes effect from the year of generating revenue, while tax holidays are continuously applied after the company first makes a profit. Where a company has not derived any taxable profit within three years of the commencement of generating revenue, tax holidays will start from the fourth year of operation. Nevertheless, the CIT incentives will only take effect from the year when a certificate of CIT incentives is granted by the competent authorities.
Import duties: an exemption on import tax for imported machines and equipment to form fixed assets.
Value-added tax (VAT): income from SI can be declared on a quarterly basis. If a company generates income from both supporting industrial products and from other business activities, it shall declare VAT on a quarterly basis or may declare VAT on a monthly basis and notify such to its managing tax authorities.
Land rental fee: investment projects of manufacturing in the field of SI, also known as secondary projects, are exempted from land rent for seven years. Investment projects in craft villages and projects on technical infrastructure located in the SI zone will be eligible for an exemption for 11 years.
Certificate of CIT Incentives
CIT incentives for supporting industrial manufacturing projects are not automatically applied but are subject to application and approval of the competent authorities. The certificate of CIT incentives for manufacturing prioritized supporting industrial products is the basis of CIT incentives acceptance and application. The competent authorities that are responsible to review and issue the certificate of CIT incentives include:
- competent provincial authorities where the project is implemented; or the Ministry of Industry and Trade shall confirm CIT incentives granted to small and medium-sized projects.
- the Ministry of Industry and Trade shall confirm CIT incentives for other cases.
The procedure of a SI project’s review and appraisal should normally include the following scopes:
- the suitability of the project with regulations in Decree No. 111/2015/ND-CP;
- legal proceedings of the project;
- project feasibility and rationality of technological and technical solutions that apply to the project;
- financial ability and the effectiveness of the project;
- the qualification of the environmental protection measures.
Certificate of CIT incentives can be withdrawn if it falls into one of the following cases:
- during operation, there are changes in products subject to incentives but the changes are not duly reported to the competent authorities;
- after 18 months from confirmation of tax incentives, the project does not manufacture the products registered for tax incentives;
- other cases recommended by the government’s inspectors.
If withdrawn, the investor is required to indemnify for the granted incentives.
Changes in the Laws
Decree 12/2015/ND-CP(3), guiding on Law No. 71/2014/QH13(4), provides the application of tax incentives transition for investment projects located in areas not eligible for incentive areas before January 1, 2015 but becoming incentive areas from January 1, 2015. However, it does not regulate the tax incentive transition for investment projects in sectors notentitled for incentive sectors prior to January 1, 2015 but turning into incentive sectors from January 1, 2015 (for e.g. projects in manufacturing SI products). Also, Circular 21/2016/TT-BTC(5) also provides CIT incentives applicable for supporting industry projects for the tax year 2015, which means that whether or not the SI projects implemented before 2015 are eligible for incentives is still ambiguous.
In addition, the criteria that allow ongoing projects to expand in investment scope, enhance capacity, and apply technological innovation in manufacturing supporting industrial products incorporated with new equipment and production process with an increase in productivity of at least 20%, to be eligible for CIT incentives, have not been explicit and clear from a technical viewpoint. In fact, how to quantify the increase in investment scope, increase in capacity, increase in technology, or how to determine a 20% increase in productivity still remains questionable.
At the time of writing, the Ministry of Finance is drafting a decree that amends the tax laws, including CIT incentives granted for sectors of manufacturing supporting industrial products. In particular, a company with new investment projects or expansion investment projects manufacturing supporting industrial products, which were implemented before January 1, 2015, qualify for the conditions of manufacturing supporting industrial products as per the laws on tax and the laws on SI, and has been granted a certificate of CIT incentives for manufacturing supporting industrial products, will be entitled to CIT incentives for the remaining period (from the tax year where this draft decree takes effect). The draft decree is expected to take effect from tax year 2020.
Furthermore, the government is also in the midst of drafting a resolution to promote the development of SI in Vietnam, which is expected to remove obstacles in mechanisms and release more policies to improve the investment environment for SI potential investors. The draft resolution would focus on the technical areas, such as SI development policies, credit incentives, tax and land incentives and other promotional improvements.
Tax incentives for SI projects have always been an emerging issue for SI investors. Upon or during implementation, SI project owners are highly recommended to:
- proactively review the manufacturing status of the project in order to qualify for the conditions to be eligible for incentives for SI projects even in the past, present or future because incentives can be withdrawn at any time upon an inspection;
- check the conditions to meet the standards of the EU and carefully evaluate the success rate of applying tax incentives;
- prepare the application dossiers of request for a certificate of CIT incentives in a timely manner. Failure to obtain this certificate can result in a late application of CIT incentives and create unnecessary impact on the project’s cash flow;
- study and understand the inspection trends and practice of the competent authorities, not only the tax authorities but also the commercial authorities, the licensing authorities, because failure in handling the inspections can directly or indirectly create a negative impact on the currently applied CIT incentives packages.
Valerie Teo is a Tax Partner and Nguyen Tan Tai is a Tax Manager of Grant Thornton Vietnam.