Corporate Income Tax ("CIT") incentives for software production

Going along with the development of science and technology and industrial revolution 4.0, the National Assembly and Government have promulgated by many policies to support the development of Information Technology (“IT”) industry in Vietnam in order to enhance the competitiveness of IT enterprises as well as the investment attraction strategy, in which the Corporate Income Tax (“CIT”) incentives policy stands out to further promote the development and application IT in Vietnam.

In this Article, we discuss the available tax incentives for software product manufacturing/service enterprises.

Tax incentives for software production project

Per current tax regulations, the tax incentives level of software production project is considered best favorable with below scheme:

• Preferential rate 10% for 15 years^(*)
• 04 years of tax exemption ^(**) and 50% of tax rate deduction for the next 09 years.

(*) the first year of 15 years counting from the first year generating revenue from a new investment project;

(**) from the first year the enterprise has taxable income from a new investment project to enjoy tax incentives. In case the enterprise does not have taxable income in the first 03 years, counting from the first year generating revenue from a new investment project, the period of tax exemption/reduction is from the 4th year.

Moreover, during the enjoying CIT incentives period, in case of the enterprise has carried out many business activities and earned incomes at the same time are entitled to CIT incentive (including: preferential tax rates & tax exemption and deduction) and are not entitled to CIT incentive, the enterprise is recommended to record separately such aforesaid types of incomes/ revenues to apply and declare accurately CIT rate for each specific activity.

Besides the attractive tax incentives/ priorities that the Government has reserved for software product manufacturing enterprises;, to enjoy such aforementioned tax incentive/ priorities, the enterprises are required to comply with the following laws/ regulations from both the tax authority and Ministry of Information and Communications when doing its business in Vietnam.

Which software products are eligible for CIT incentives in Vietnam?

According to the definition of current IT regulations, software product means software, and accompanying documents/ manuals which are produced and displayed or stored in any form and can be purchased, or transferred to other subjects for using.

Thus, the difference of  software products eligible for CIT incentives compared to others, which are classified into the system software based on “Appendix 1- SOFTWARE PRODUCTS LIST” stipulated in Circular No. 09/2013/TT-BTTTT dated 08 Apr 2013 of the Ministry of Information and Communications (“Circular 09/2013”).

Define the stages of software products manufacturing process and the conditions for determining the related stages of software productions

Supplementing stages of software products manufacturing process stipulated in Circular No. 13/2020/TT-BTTTT issued by the Ministry of Information and Communications dated 03 Jul 2020 (“Circular 13/2020”), which replaces Circular No. 16/2014/TT-BTTTT (“Circular 16/2014”), effective since 19 August 2020, in general there is not much change, still includes the following 7 stages:

• Stage 1: Define the requirements;
• Stage 2: Analysis and design
• Stage 3: Programming and coding;
• Stage 4: Software examination and experimentation;
• Stage 5: Software product completion and packaging;
• Stage 6: Installation, transferring, instruction, and maintenance the software product; and
• Stage 7: Publishing and distributing software products.

However, a significant change between Circular 13/2020 and Circular 16/2014 is the condition for determining the activities of manufacturing the software products. The software production process of IT enterprises must include the certain procedures for CIT incentives purpose as well as the required supporting documents for proving each stage performed by its enterprise during operations.

According to the conditions regulated in Circular 13/2020, the enterprise must satisfy the following conditions:

1. Perform either Stages 1: Define the requirements or Stage 2: Analysis and design; and
2. Indicate software productions by complying the preparation of relevant documents following each production stages during manufacturing.

Common challenges and embarrassments the software products manufacturing enterprises are facing with tax authorities

Although having the legal basis on (i) identify the software service/production (ii) required supporting documents for each stage of software production, (iii) tax incentives regime is introduced by competent authorities, the IT enterprises may find difficulties to arrange such required supporting documents and may be challenged by the tax authority due to insufficient supporting documents/ evidences for proving or explaining such its manufactured software is software product;

In another hand, the Ministry of Information and Communications may not have the procedure to assess and support the enterprises to issue any Certificates on confirming such software products/ software services/ hardware/ electronic products manufactured are software products and qualified as software products. Therefore, up to present, the responsibility for explaining the software production activities belongs to enterprise itself.

The planning points

The potential challenges from the tax authority mentioned above may lead to significant impact to financial position of software production enterprises as well as requires the enterprises having the clear strategy to protect tax incentives position of enterprises. The software production enterprises are advised to conduct below action plans:

• Design the internal working flow to ensure maintain the stages of software products manufacturing process relatively in line with the regulations of Circular 13/2020, especially including: either “Stages 1: Define the requirements” or “Stage 2: Analysis and design”, as described above;
• Design the document/reporting chains to obtain sufficient supporting documents following each stage of the manufacturing process as a basis for explaining/ proving to the Tax Authority, if being requested during the tax audit event;
• Besides improvement of internal working process/documents, the enterprises are recommended to seek for the guidance on applying CIT incentives from the local tax authority to protect your tax position in the future; and
• The building of software products manufacturing process along with the compliance of the above guidelines is considered as quite complicated, requires practical industry knowledge and expertise; therefore, it is suggested that the enterprise should seek the advice from professional experts for this regards.