The taxation system in Vietnam is characterized by its marked sophistication, which can pose numerous challenges for foreign investors entering the market for the first time. Yet, to overcome the market entry barriers, investors are advised to consult the leading local experts. Thus, the support from trusted local advisors will help them in navigating through and complying with Vietnam tax regulations, focusing on their key business operations.
In general, most business activities in Vietnam are subject to five common types of taxes: Corporate Income Tax (CIT), Personal Income Tax (PIT), Value-Added Tax (VAT), Foreign Contractor Tax (FCT). This article will provide you with a quick note on the important tax regulations for doing business well in Vietnam.
Corporate Income Tax (CIT)
As with most other nations, CIT in Vietnam is a direct tax levied on the profits made by companies or organizations. Regardless of the origin of the organization, whether it is a foreign enterprise with a Vietnam-based subsidiary or whether a permanent establishment, all income earned in Vietnam is subject to CIT.
General information about CIT
In prevalent practice, the tax financial year in Vietnam starts from January 1 and ends on December 31. Yet, enterprises can adopt an alternative tax financial year in certain circumstances. Meanwhile, Vietnam tax law regulates provisional CIT to be calculated and remitted on a quarterly basis, no later than the last day of the following month from quarter end.
The standard CIT rate is 20%. However, a 17% CIT rate shall be applied to corporations with total revenue of less than VND 20 billion. Additionally, there are a few cases of exemption. In particular, oil and gas specialized companies are subject to CIT rates from 32% to 50% depending on the location and specific project conditions. Meanwhile, companies engaging in prospecting, exploration and exploitation of certain mineral resources are under CIT rates of 40% or 50% based on the project’s location.
Foreign enterprises can continuously carry their tax losses forward for a maximum of five (05) consecutive years after the loss-making year. Yet, the carryback of losses is not permitted, and there is no concept of group loss sharing or consolidated tax relief in the Vietnam tax system.
CIT calculation
CIT is calculated under Circular 96/2015/TT-BTC of the Ministry of Finance, following which:
CIT Payable Amount = [Assessable Income - Deduction for establishing a Science and Technology Fund] x CIT Rate
in which,
Assessable Income = Total Revenue - Deductible Expenses + Other Income - Carried Forward Losses - Tax-Exempted Income.
To be deductible, expenses must:
- Be related to the generation of revenue
- Be incurred in relation to business activities as permitted by the company’s business license
- Be supported by appropriate invoices or relevant documents
- Be settled by non-cash payment, where expenses are VND 20 million and above, (i.e. bank transfer)
CIT incentives
Vietnam tax incentives in CIT can take various forms, depending on encouraged sectors, locations and project scales, and are granted to new investment projects. For example, for foreign investors venturing in Vietnam, they can enjoy the preferential tax rate of 10% for 15 years with the implementation of investment projects in high-tech zones or in the field of scientific research and technological development, among others.
Value-Added Tax (VAT)
A tax on goods and services known as a value-added type tax (VAT) is one that businesses collect gradually but ultimately bill in full to customers.
Goods and services (including goods and services purchased from foreign sources) used for production, trading and consumption in Vietnam are subject to Value Added Tax (VAT). Regardless of whether they have Vietnamese-based resident establishments or not, organizations and individuals producing and trading VAT taxable goods and services in Vietnam have to pay VAT.
Enterprises declare and remit monthly VAT on the 20th of the following month. Meanwhile, for taxpayers whose turnover did not exceed 500 billion VND in the previous year, they can declare and pay quarterly VAT by the last day of the month following the end of the quarter.
VAT calculations
Currently, Vietnam is applying two VAT calculation methods: Credit method and Direct method. Each business can choose one of these two methods to apply in their accounting system with consistency. However, the first method (the Credit Method) is more commonly used because of its convenience.
The VAT Credit Method is specified as follow:
Payable VAT amount = Output VAT amount – Creditable input VAT amount
The VAT Direct Method is specified as follow:
Payable VAT amount = Added value of sold goods or services * VAT rate
Where: Added value of sold goods or services = Selling price – Purchasing price of goods or services.
VAT Invoices and E-invoices
Tax law requires VAT invoices to be issued by enterprises in Vietnam for all of their sales transactions. Without receipt of a eligible VAT invoice in either paper or e-invoice), VAT credits will not be available and no CIT deduction will be applicable for taxpayers.
Under the current regulations, from 1st July 2022, 100% of enterprises in Vietnam will be required to apply e-invoicing, thus removing the old paper-based VAT invoicing system permanently. This digital conversion of the tax management method brings about significant benefits as it helps foreign enterprises reduce their administration costs and risks. In addition, the new e-invoicing system can contribute to creating a healthy, transparent, and bureaucracy-free business environment for international companies.
VAT refund
Investors could apply for a VAT refund in case they use the credit method to declare VAT and are manufacturing/ selling the outputs which are subject to VAT. In addition, if the project is currently under the investment phase and has started operating, investors could be eligible for a VAT refund. Furthermore, a VAT refund could be applied on the provision that accumulated creditable input VAT on goods and services purchased for investment purposes is equal to or above VND 300 million.
Personal Income Tax (PIT)
Personal Income Tax or PIT applies to tax residents and non-tax residents; an individual must pay the personal income tax, on all of their annual income, including wages, salaries, dividends, interest, and other types of income. Generally, the foreign investors are deemed as a local tax resident if they resided in Vietnam for no less than 183 days in 12 consecutive months, or have a permanent establishment here.
Tax residents are subject to PIT on their worldwide income on a progressive sliding scale from 5% – 35%, whereas non-tax residents are only charged on their Vietnam-sourced income at a flat rate of 20% on employment income, and different rates on other types of income, depending on the specific regulations.
Taxable employment income items include salary and all types of remuneration and benefits, with the exception of payments for business trips, telephone charges, and stationary costs, office clothes, overtime premiums, among others. On the other hand, taxable non-employment income includes: business income, investment income, gain on sale of shares, gain on sale of real estate, among others.
Non-taxable income includes:
- Interest earned on deposits with credit institutions/banks and on life insurance policies;
- Compensation paid under life/non-life insurance policies;
- Retirement pensions paid under the Social Insurance law (or the foreign equivalent);
- Income from transfer of properties between various direct family members;
- Inheritances/gifts between various direct family members;
- Monthly retirement pensions paid under voluntary insurance schemes;
- Income of Vietnamese vessel crew members working for foreign shipping companies or Vietnam international transportation companies; and
- Income from winnings at casinos.
The Vietnamese tax year is the calendar year. However, where in the calendar year of first arrival foreign investors are present in Vietnam for less than 183 days, their first tax year is the 12-month period from the date of arrival.
FCT applies to foreign organizations or individuals who run a business or earn income in Vietnam based on a contract or an agreement with a Vietnamese party (as a main foreign contractor), or another foreign contractor to implement a part of the contractual scope of works (a foreign subcontractor).
The components of FCT
FCT comprises both CIT and VAT, but in some cases, may also include PIT.
FCT is levied on services provided or consumed inside Vietnam, and supply of goods accompanied by services, or in which the delivery point is inside Vietnam. Additionally, foreign enterprises bear FCT with construction and installation, interest, royalties, trademarks, penalty/compensation, income from transportation activities, and securities transfer.
Although, due to a few exceptions provided by Vietnamese legislation, not all foreign contractors are subject to the FCT.
FCT declaration
There are 3 methods used in declaring FCT: direct method, declaration method (also known as the deduction method, and the hybrid method)
Direct method
The Vietnamese party declares and pays FCT when the direct approach is applied. The Vietnamese party is in charge of filing the contracts with the appropriate tax authorities, withholding, and paying the necessary FCT to the regional tax authority. The foreign contractor cannot be paid until this is completed.
Declaration method:
Under this method, the foreign contractor is similarly taxed as the Vietnamese contractor or corporation. This suggests that, foreign contractors will be required to disclose and pay CIT at the applicable rate of 20% on their net profit from the project/contract. This is calculated by subtracting the total deductible expenses from total revenue. When adopting the declaration method, the foreign contractor is required to pay VAT on the difference.
By doing so, foreign contractors are required to comply with particular accounting and tax filing regulations as Vietnamese enterprises
Hybrid method:
With the hybrid method, foreign contractors can register and pay for VAT using the deduction technique while still being able to pay CIT based on gross revenue using the direct method. If the foreign contractor is operating in Vietnam under a contract with a term of at least 182 days and keeps accounting records that adhere to the pertinent accounting norms and guidelines set forth by the Ministry of Finance, this method is acceptable.
Using this method, the foreign contractor must register the technique with the local tax office and declare and pay tax directly to the tax authority.
Other taxes
Import-Export tax
If cargo and goods are imported, exported through the Vietnamese border, or in case domestic goods are brought into a non-tariff barrier and goods from non-tariff into the domestic market, investors are subject to the taxation:
On the other hand, investors are exempted from import and export tax if
- Goods are transited through Vietnamese border, goods in transit by Vietnamese government regulations,
- Aiding goods and grant aid goods,
- Goods from non-tariff barrier to other country, goods are imported into non-tariff area and use only in this area, goods are used from non-tariff area to another non-tariff area,
- Goods when export are oil and gas relating to natural resources consumption tax.
The rate of the import and export tax varies, depending on whether goods and services are under preferential tariff or not.
Natural Resources Tax (NRT)
With industries exploiting Vietnam’s natural resources, investors are subject to NRT. In case natural water is used for agriculture, forestry, fisheries, salt industries, and sea water is used for cooling purposes, qualified investors may be exempt from NRT.
The tax rates depend on the types of natural resources, ranging from 1% to 40%. Meanwhile, crude oil, natural gas, and coal gas are taxed at progressive tax rates depending on the daily average production output.
Environmental protection tax (EPT)
EPT is an indirect tax which is applied on the production and importation of certain goods with effect on the environment. The calculation of the tax is equal to the absolute amount on the quantity of the goods. From 1st January, 2019, the tax rate is applied from VND 500/kg for restricted use chemicals to VND 50.000/ kg for plastic bags. In 2020, the National Assembly approved a new law on environmental protection, yet no change is specified to the tax rates.
Excise Tax
Excise tax is applied to several luxury goods and non-essential items. Generally, SCT-subjected goods and services are also subject to VAT. SCT is levied on each item only once, and SCT refunds are available for exported goods upon request by the taxpayers in certain cases.
How can foreign investors avoid tax non-compliance in Vietnam?
Unfamiliar and stranged with the business environment in Vietnam, foreign investors will make undesirable mistakes regarding tax regulations. However, the errors can be minimized with the support from top domestic consulting firms as they get Vietnam legal system and market characteristics in the palm of their hand. Viettonkin Audit is such a firm! We are made up from a team of top-notch experts in the industry with decades of experience. Thanks to our deep-insight knowledge and timely information updates, we provide our clients with the best and helpful advice. In this way, our clients can focus on their business and harvest successful results. Let us be your big supporter!
