Vietnam Tax Developments

By Tom McClelland

Posted: 20th August 2012 09:00

If there is one thing that is certain concerning Vietnam’s tax system it is change.  This has been no different in 2012 with new regulations for all the major taxes.  There have been some positive changes including a new withholding tax Circular in which the interest withholding tax rate (a deemed Corporate Income Tax (“CIT”)) has been reduced from 10% to 5% with effect from 1 March. 
 
Under new VAT regulations applicable since 1 March 2012 however VAT is now imposed on interest paid to enterprises that are not financial institutions.  This appears to be a policy measure introduced to discourage lending by domestic non-credit institutions.  It is unclear to what extent the impact on loans from offshore lenders was considered when this rule was formulated.  It has nevertheless been confirmed; at least at local tax authority level that interest on foreign loans is also subject to VAT in addition to the 5% CIT.
 
There are currently discussions at Prime Ministerial level regarding potentially removing the application of VAT to interest.  Until there is a formal response from the Prime Minister the local tax authorities take the view that VAT applies.
 
Also in relation to interest the 5:1 debt-to-equity thin capitalisation rule which was included in draft CIT regulations that would have been effective from early 2012 was not finally implemented.  It appears that further time was required to consider the full implications. 
 
On the basis of recent discussions with Ministry of Finance policy makers there remains an intention to introduce a thin-capitalisation rule, possibly in the new Law on CIT to be introduced to the National Assembly in 2013.  It is appears that the rule it will be considered again from the beginning including by having reference to the rules of other countries, therefore the likely ratio is uncertain at this time.
 
In terms of other future reforms there is an intention to reduce the CIT rate which will likely be included in the new Law on CIT.  Indications from policy makers currently are that the CIT rate will be reduced from the current 25% rate to 20%.  It is also intended that the top Personal Income Tax rate will be reduced from 35% to 30% from 2014.
 
Areas where change is desired but uncertain is with respect to the long standing issue of the restriction on deductibility of advertising and promotional expenditure which, for some major FMCG companies means their effective tax rate is up to 50%.  But will the proposed reduction in tax rates be enough to attract new foreign investment into Vietnam where there is intense competition from other countries in the region?
 
Vietnam’s tax incentives have become much more focused since 2009 to specific higher value added industries such as Hi-tech and in locations that are seen as disadvantaged.  Export related incentives were finally fully phased out in 2012 in accordance with Vietnam’s WTO commitments.
 
The removal of incentives for business expansion since 2009 in particular is a major issue for many manufacturing companies that have incentives for their original businesses but cannot obtain them for their expansion.
 
The reduction in incentives was formulated at a time when Vietnam was receiving massive foreign investment in late 2007 early 2008 which led to overheating of the economy.
 
 It is hoped that as the new Law on CIT is being developed that there will be a review of the tax incentive regime in the current environment and at a minimum reconsideration of the re-introduction of incentives for business expansion.
 
Tax Approach Of The Tax Authorities
 
The past year has been one where many domestic companies have experienced reduced profits or have incurred losses.  Government revenue from corporate tax has been reduced.  At the same time fiscal stimulus measures, including tax payment deferrals and tax reductions for SMEs and labour intensive industries were introduced.
 
The result of this lowered tax revenue has meant that the tax environment has become more difficult, in particular for foreign investors.  The regularity of tax audits has increased.  The tax regulations are being applied very strictly together with the imposition of penalties.
 
Transfer pricing continues to have the priority focus for the Tax Authorities who continue to enhance their audit capacity through the establishment in 2012 of specialist transfer pricing teams at the central and local tax authority levels.  Training of tax officers is ongoing, including by the Australian and Japanese Tax authorities and under a programme sponsored by the European Union. 
 
The Tax authorities are continuing to build their own database of comparable from Vietnamese companies.  At present cross-border related party services charges are a particular focus of the tax authorities which are routinely being denied a deduction on tax audit.
 
An Advance Pricing Agreement (APA) Regime is intended to be introduced in 2014.  At present there is a pilot programme being undertaken by the Tax policy Department of the General Department of Taxation. 
 

Tom McClelland is one of Vietnam’s most experienced tax specialists, having advised a wide range of businesses, both international and domestic on all areas of Vietnam taxation since 1998.  Tom has over 20 years of international tax experience, originally commencing his career in New Zealand.
 
Tom has led the corporate income tax advisory and structuring for many offshore investors in a diverse range of industries in Vietnam from oil and gas, consumer goods and financial services to media, information technology and real estate. He was the principal tax advisor to foreign investors seeking to acquire stakes in two of the three largest SOE equitisations in Vietnam and to the purchaser in Vietnam’s largest private equity transaction.
 
Tom is heavily involved in tax policy in Vietnam and contributing to the development of Vietnam’s tax regime.  He is also the Chairman of the Taxation Committee of the European Chambers of Commerce in Vietnam, and the Co-Chair of the Tax Working Group of the World Bank sponsored Vietnam Business Forum, the main platform for structured dialogue between the Government and business.
 
Tom is the co-author of the first published guide to Vietnam Taxation: CCH Taxes in Vietnam – An Overview.
 
Tom McClelland can be contacted by phone on +84 8 3911 0727or alternatively via email at tmcclelland@deloitte.com


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