Vietnam vs. China: Corporate Income Tax
By Dezan Shira & Associates
Posted: 28th January 2013 09:48
Many foreign investors operating in China today are looking at Vietnam as a sort of additional “province” or alternative hub to integrate into their current Chinese or Asian supply chain. This is particularly true in sectors where China and Vietnam often compete, such as leather goods, shoes, textiles, furniture and light electronics. This list is set to expand as Vietnam is upgrading its industrial base to high-end and high-tech manufacturing investments. Small-sized companies, however, are often discouraged by the idea that expanding into another country would mean massively increasing overheads or that the returns would not be worthwhile when considering the initial investment.
After comparing the costs of registering and maintaining representative offices in the first article, this piece now looks at the current regulations on corporate income tax as they apply to foreign investors to check whether Vietnam offers any additional advantages over its neighboring country to the north.
China Corporate Income Tax: Past and Present
Let’s start with a look at China’s previous CIT law, just as a comparison exercise that might help us to understand the evolution behind FDI regulations for both China and Vietnam. The “Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises” which was valid from July 1991 until it was replaced in March 2007, was a completely different regime that distinguished foreign-invested from domestic-invested companies and where the former had many preferential tax advantages. The main aspects of the 1991 Income Tax Law were:
- Article 5: Standard national rate at 30 percent, plus an additional local rate at 3 percent.
- Article 7: Reduced tax rate at 15 percent for FDI engaged in production or business operations and established in special economic zones (i.e. Shenzhen, Xiamen, Shantou, Zhuhai and Hainan).
- Article 7: Reduced tax rate of 24 percent for FDI engaged in production established in coastal economic open zones, or in the old urban districts of cities where special economic zones or economic and technological development zones are located (i.e. Guangzhou and Tianjin).
- Article 8: Exemption for the first two years of profit making activities for FDI involved in manufacturing scheduled to operate for a period of not less than 10 years. Additional 50 percent reduction from the third to fifth years of operation.
- Article 10: A 40 percent refund on CIT paid on profits of foreign investments in China reinvested in the country.
In short, from the early 1990s until March 2007, most of the newly-established foreign invested manufacturing companies in Mainland China would enjoy two years’ tax exemption and the ensuing three years would see 50 percent reduced rates. In addition, the CIT rate would depend on the location where the investment was located. This could vary from 15 percent in Shenzhen and Zhuhai, to 24 percent in Guangzhou or Qingdao, or 30 percent in Xi’an or Changsha.
However, from January 2008, China adopted the “Law of the People’s Republic of China on Enterprise Income Tax” which set the CIT rate applicable to both foreign-invested and domestic-invested companies operating in China at 25 percent.
This has been an epochal reform from the previous regulation which provided preferential advantages for foreign-invested enterprises. Under the 2008 CIT Law, the corporate income tax is now the same no matter the location, the scope of the investment, nor whether the investment is domestic or foreign invested.
Although Chapter IV provides details on preferential tax policies for industries and projects which have major support from the state, exemptions and reductions exist for income derived from farming, forestry, and qualified projects of environment protections or energy and water conservation. Furthermore, preferential reduced tax rates of 20 percent exist for small income enterprises and a reduced 15 percent tax rate may apply for high and new technology enterprise supported by the State. However, it must be noted that these qualifications must often be obtained annually and require long and costly procedures.
Back to the Future: Vietnam’s Tax Incentives Reminiscent of Past Chinese Practices
Corporate income tax in Vietnam is regulated by the “Law on Enterprise Income Tax (resolution No. 14/2008/QH12),” which was promulgated by the National Assembly in June 2008. The law intends to define and regulate enterprise income taxpayers, taxable incomes, tax-exempt incomes, tax bases, tax calculation methods, and tax incentives. Interestingly, the law not only applies to enterprises registered under Vietnamese law, but also to enterprises established under foreign laws with or without Vietnam-based permanent establishments.
According to Article 10 of the 2008 law on income tax, the standard tax rate is 25 percent, except for activities related to prospecting, exploring, and exploiting oil and gas and other precious and rare natural resources which might vary between 32 percent and 50 percent. What stands out in the 2008 law, however, are the cases that fall under tax rate incentives, exemptions, and reductions under Articles 13, Article 14 and Article 15 (which somehow bear similarities to incentives offered in China over the last few decades).
The tax rate incentives under Article 13 are relatively lower to the standard one and apply to:
1. Newly-established enterprises under investment projects in geographical areas with extreme socio-economic difficulties, economic zones or hi-tech parks: Tax rate of 10 percent for 15 years.
2. Newly-established enterprises under investment projects in the domains of high technology, scientific research and technological development, development of State infrastructure projects of special importance, or manufacturing of software products: Tax rate of 10 percent for 15 years.
3. Enterprises operating in educational training, vocational training, healthcare, culture, sports and environmental domains: Tax rate of 10 percent.
4. Newly-established enterprises under investment projects in geographical areas with socio-economic difficulties: Tax rate of 20 percent for 10 years.
5. Agricultural service cooperatives and credit funds for individuals: Tax rate of 20 percent.
6. Large-scale and hi-tech projects of investment of particular interest: Tax rate of 10 percent for 15 years.
Commencement dates for the duration of tax rate incentives specified in Article 13 are counted from the first year the invested company has turnover.
Tax exemption and reduction duration incentives under Article 14 include:
1. Newly-established enterprises under investment projects in geographical areas with extreme socio-economic difficulties, economic zones or hi-tech parks: Entitled to four years full CIT exemption and a subsequent nine years of 50 percent CIT reduction.
2. Newly-established enterprises under investment projects in the domains of high technology, scientific research and technological development, development of State infrastructure projects of special importance, or manufacturing of software products: Entitled to four years full CIT exemption and a subsequent nine years of 50 percent CIT reduction.
3. Newly-established enterprises operating in educational training, vocational training, healthcare, cultural, sports and environmental domains: Entitled to four years full CIT exemption and a subsequent nine years of 50 percent CIT reduction.
4. Newly established enterprises under investment projects in geographical areas with socio-economic difficulties: Entitled to two years CIT exemption and a subsequent four years of 50 percent CIT reduction.
Commencement dates for the duration of tax exemptions or reductions specified in Article 14 are counted from the first year the enterprise has taxable income. In cases where the enterprise has no taxable income for the first three years starting from the first year it has turnover, the tax exemption or reduction duration is counted from the fourth year.
Finally, Article 15 lists “other cases eligible for tax reductions” as follows:
1. Production, construction or transport enterprises which employ many female laborers: Entitled to reduction of enterprise income tax amounts equal to additional expenses for female laborers.
2. Enterprises which employ many ethnic minority laborers: Entitled to reduction of enterprise income tax amounts equal to additional expenses for ethnic minority laborers.
It is worth keeping in mind that government decision processes are somewhat slower in Vietnam than in China, and that incentives are usually tied to Vietnam’s lesser developed areas and/or specific sectors. Moreover, being each project specific, they can be many reasons why an investor might choose China instead of Vietnam and vice versa.
However, investors typically do not decide on which country to invest in solely because of the local tax regime; they are often led by many considerations. In recent months, we’ve been seeing a growing interest in Vietnam from investors interested in finding a manufacturing platform to export back home, or to other plants they have around Asia. Doing so takes advantage of Vietnam’s favorable tax incentive regime as well as abundant double tax agreements and low labor cost which are currently about 2.5 times lower than Mainland China. In addition, it is worth noting that China’s standard withholding tax on profit repatriation is 10 percent, while Vietnam does not currently have such a tax.
This article was first published on Vietnam Briefing, and is the second article in a series dedicated to comparing the costs and ease of doing business in Vietnam and China from the standpoint of a foreign investor.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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