It is important for companies and corporations to be aware of tax impacts and reporting compliance when conducting business in Vietnam. We launch a series of Brief discussion on Tax Finalisation and Profit Remittance Abroad, Corporate Income Tax Incentive for Social Impact Projects, and Tax Breaks for High-tech Transfers. Firstly, below is our discussion on tax finalisation and profit remittance.
Profits from Vietnam remitted abroad by foreign investors are legal profits shared or earned from investment activities in Vietnam after fulfilling all financial obligations towards the Vietnamese State.
Notable points on 2019 Corporate Income Tax (“CIT”) finalisation
CIT finalisation must be done and submitted within 90 days from the end of each financial year. Any payable outstanding tax need to be paid at the same time. Where company stops its business activities within a fiscal year, CIT finalisation is still required to be conduct. It should be noted that submission of audited FS and CIT finalisation returns has been proceeded via electronic system managed by tax authorities since tax year 2018.
Taxable income is defined as the difference between total revenue and deductible expenditures, plus other assessable income. Companies are required to prepare annual CIT returns which include a section for making adjustments to accounting profit to arrive at taxable profit.
Expenses are tax deductible if they relate to the generation of revenue, are properly supported by suitable documentation (including supporting documents proving the existence of transactions) and are not specifically identified as being non-deductible.
Experienced in supporting businesses in different tax situations, we highlight some material expenditures currently subject to deductible expenses with conditions upon conducting CIT finalisation as follows:
- tools, equipment ineligible for fixed assets recognition: be allocated within 3 years at maximum
- land use right with definite term: be amortised based on the duration stated on the land use right certificate
- depreciation cost of 9-or-less-seater car: capped at VND1.6 billion, except cars used for transportation business, tourism business, automobile business
- consumption norm: NO requirement to notify the consumption norm to the tax authority, however, the cap for certain material stipulated by the State is still maintained
- purchase from individuals: NO legitimate invoice required if the business having turnover below VND100 million/year, list of purchased goods/services and payment vouchers are documented instead
- uniform: NO cap if providing in kinds, cap of VND5 million/year/person if paying by cash
- travelling: overseas travelling expenses can be settled via individual’s card; travelling allowances paid according to the company policy with NO cap
- housing expenses of employees of foreign contractor (“FC”): the provision that housing allowance of FC’s employees belongs to Vietnam party’s responsibility must be addressed under the contract
- voluntary fund/insurance: capped at VND1 million/month/person
- life insurance: capped at VND3 million/month/person
- technical documents/patents/technology transfer license/trademarks/right to use trademarks: amortised within 3 years; while capital contribution by business advantage, right to use trademarks is NOT deductible
- interest expenses: capped at 150% for loans from individuals; capped of 20% of EBITDA which is calculated by total net accounting profit (before CIT) generated from business activities plus interests, depreciation and amortisation; in line with fully contributed charter capital. Interest expenses should be recognised into production or business costs within the period incurred, unless they are capitalised.
- realised foreign exchange gain and loss in the basic construction, investment phase/new set-up enterprise not yet in operation: recorded separately, allocated to the financial income/expense in a maximum 5 year period when the fixed assets are put into operation
- realised foreign exchange gain and loss in the basic construction, investment phase/ currently operating enterprise: recognised to the financial income/expense of the year
Although the scheme of expenses in correspondence with assessable revenue is applied to determine the deductible expenses upon calculating CIT liabilities, there still have some expenses not related to the generation of revenue, but be considered as deductible expenses as following:
- provision of vocational education and training for employees
- depreciation of fixed assets used to support the employees and vocational trainings
- direct expenditures on employees’ welfare be capped at 1 month’s average salary
- tuition fee for expatriate’s children studying in Vietnam, from kindergarten to high school
- sponsor expenses with no benefit for education, healthcare, disaster recovery aid, building houses for the poor, scientific research, beneficiaries of incentive policies
- expenditures on prevention HIV, AIDS
- security and defense, education, activities of militia forces
- communist party organisations and social-political organisations in the enterprise
Companies that incur losses after tax finalisation are entitled to carry forward those losses to be offset against the assessable income of future years for maximum of five consecutive years before they expire. Losses on incentivised activities can be offset against profits from non-incentivised activities, and vice versa. Losses from the transfer of real estate and the transfer of investment projects can be offset against profits from other business activities. Carrying back losses are not allowable.
Despite the significantly improved compliance procedure, annual tax finalisation is still a harsh job for the companies. In addition, many tax circumstances which require proper practical guidance in accordance with prevailing regulations still exist. It is recommended that enterprises should address any queries to direct-managing tax department or professional firms for proper clarification.
Discussion on profits remittance
Foreign investors are permitted to remit their profits annually at the end of the fiscal year upon fulfilling all financial obligations towards the Vietnamese State and submitting the audited FS and CIT returns of that fiscal year to the tax department. Annual profits to be remitted are equal to profits shared or earned in a fiscal year plus (+) profits have not been remitted yet minus (-) profits being used, profits being committed for reinvestment in Vietnam.
Upon termination the investment activities in Vietnam, foreign investors can remit profits when fulfilling all financial obligations towards the Vietnamese State, submitting the audited FS and CIT returns of that fiscal year to the tax department and implementing all obligations under the Law on tax administration. Such profits are calculated equivalent to total profits shared or earned minus (-) profits remitted during operational period, profits being reinvested, profits being used in Vietnam.
Before January 2011, profits could be remitted abroad on a quarterly or semi-annual basis in accordance to Circular No. 124/2004/TT-BTC dated 23 December 2004 (“Circular 124”), which took effect until 01 January 2011.
Since January 2011, under Circular 186/2010/TT-BTC dated 18 November 2010 (“Circular 186”), which has been effective from 02 January 2011, offshore remittance of profits can be proceeded on annual basis in cash via the bank account created for direct investment in Vietnam or in kind in accordance to the import-export regulations.
In comparison with the previous one, Circular 186 sets up tighter restrictions on profit remittance of which profits may only be transferred annually. It also addresses the prohibition of profits transferring when there still have accumulated losses after being carried forward under the Law on CIT, even though the enterprise does make profits in current year.
Furthermore, with the application of Circular 186, a notification is required to submit to direct-managing tax department at least seven (07) working days before proceeding the transfer. However, upon dealing with some local tax authorities, including Ho Chi Minh City tax department, we have observed that there has an additional requirement of clearance tax debt reconciliation. Most errors in this case are due to either the lack of data or the overlap of records on the internal system controlled by the tax authorities. Such clearance is quite time consuming, therefore, in some case the company accepts to pay tax debts incurred if it is not material.
Vietnam’s government has developed a more favourable investment environment. There might be a possibility of addressing the inquiries to Ministry of Finance to seek for ruling of periodically profits remittance with the same beneficiary as regulated under Circular 124 as well as clear guidance on tax debt reconciliation currently required by some local tax departments. The approaching could be carried out either by independent entity or by enterprises association or by industries association.
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.