Chapter 5: CIT

CIT is a tax whose base is income of corporations and other economic entities. The core part of the base is the profit from bz of a company. Other incomes can also be subject to be taxed

Characteristic: a direct tac, less sensitive than PIT, depend on the efficiency of taxpayrers’ bz, and is regarded as a withholding of PIT

1.      TAX BASES

·         TAXED INCOME

Taxed income = Taxable income - (Tax- exempt income + Losses carried forward )

·         TAXABLE INCOMES

•         Taxable incomes in a tax period include income from goods production and trading and service provision and other incomes.

•         Taxable income in a tax period is determined as follows:

Taxable income = (Turnover - Deductible expenses) + Other incomes

TAXABLE INCOMES

BASE TURNOVER

•         The base turnover is the total sales of commodities and services, surcharges, and price subsidies earned by business establishments.

•         Quantity discount, value of rejected goods and price reduction due to poor quality are excluded out of the base turnover. However, cash discount and discount for early payment are not subtracted out of the base turnover.

–                    For business establishments that pay value added tax (VAT) under credit method, base turnover is VAT-exclusive turnover

–                    For business establishments that pay VAT under subtraction method, base turnover is VAT-inclusive turnover.

Criteria: Expenses are deductible if they are not in the list of non-deductible expenses stipulated by legislation and meet the following two criteria:

     (i)            they are actual expenses and used for generating income or for the purpose of business;

   (ii)            they are proved by valid invoices, vouchers and documents stipulated by legislation

Conditions For Tax Deduction: Business expense has to fulfill all the following conditions in order to secure a deduction:

–        the scope of expense refers to ‘outgoings and expenses’;

–        the expenses have to be ‘wholly and exclusively’;

–        incurred;

–        in the production of gross income from that business source.

·         Non-deductible expenses

(1)   Tax penalties and legal fines

These fines include

–        fines for violations of traffic law,

–        violations of business registration regulations,

–        violations of accounting and statistics regulations,

–        violations of tax law, and

other administrative violations

(2)   Expenses covered by other sources

These expenses include

–         payment paid by social insurance fund for health expenses of employees,

–         payments covered by the government for public services etc.

(3) Overhead expenses allocated by an overseas parent company to a Vietnamese establishment over the permitted amount by the law of Vietnam:The criterion for allocation of these expenses is the turnover. This means the overhead expense allocated to Vietnamese establishment depends on the ratio between the turnover of the Vietnamese establishment and the turnover of the parent company.

(4) Provisions exceed the level allowed by legislation

Provisions include

–        provisions for price decreases of goods left in stock,

–        lost financial investments,

–        bad debts and warranty for products, goods and construction and installation works,

–        and such provisions used in contravention of the Finance Ministry’s guidance on deductions for setting up provisions.

(5) Materials and commodities expenses that exceed the consumed norms built and noticed to the tax office by the business establishment and the actual ex-warehousing cost of the materials

(6) Fixed asset depreciation that does not meet the stipulations by legislation on depreciation

- Criteria: valid vouchers, used for producing income, comply with the stipulations

a/ Expense for depreciation of fixed assets not used for goods production and trading or service provision activities.

b/ Expense for depreciation of fixed assets without papers evidencing that they belong to enterprises (except for finance-leased ones).

c/ Expense for depreciation of fixed assets which are not managed, monitored and reflected in enterprises’ accounting books under current regulations on fixed asset management and cost accounting.

d/ Depreciation in excess of the level prescribed in the Finance Ministry’s current regulations on fixed asset management, use and depreciation.

e/ -  Depreciation corresponding to part of the historical cost in excess of VND 1.6 billion/car, for passenger cars of 9 seats or less for which use registration and fixed asset depreciation accounting are made on or after January 1, 2009 (except cars exclusively used for the commercial passenger transportation or for tourism and hotel business);

            -  Depreciation of fixed assets which are civil aircraft and yachts not used for commercial cargo, passenger or tourist transportation.

g/ Depreciation of fixed assets which have been wholly depreciated.

h/ For works on land used for both production and business and other purposes, depreciations of the value of works on land corresponding to the area of land not used for production and business activities must not be included in reasonable expenses.

(7) Payments of interest on loans that is equivalent to the lack of the charter capital

Interests on loans for production and business activities borrowed from entities other than credit institutions or economic organizations, in excess of 150% of the prime interest rate announced by the State Bank of Vietnam at the time of loan provision.

Interests on loans contributed to the charter capital or interests on loans paid corresponding to the insufficient charter capital amount to be contributed according to the schedule indicated in the enterprise’s charter, even when the enterprise has commenced production and business activities.

(8) Salaries and wages of the owner of the private enterprises and remuneration paid to the founding members of companies who do not directly take part in the administration of goods production and trading or service provision

 a/ Salaries, wages and other accounted amounts payable to laborers which have actually not been paid or have been paid without invoices or documents as prescribed by law.

b/ Bonuses to laborers which are not of salary nature, and bonuses for which the payment conditions are not specified in labor contracts or collective labor agreements.

c/ Salaries, wages and allowances payable to laborers which, upon the expiration of the time limit for submission of annual tax finalization dossiers, have actually not been paid, unless enterprises make deductions for setting up provision funds for addition to the subsequent year’s salary funds to ensure uninterrupted payment of salaries and not for any other purposes. Enterprises may decide on annual provision levels not exceeding 17% of their realized salary funds.

d/ Salaries and wages of owners of private enterprises or one-member limited liability companies (owned by a single individual); remunerations paid to founders and members of members’ councils or boards of directors who do not personally participate in administering goods production and trading or service provision activities.

(9) Salaries and remuneration payable written in book but not actually paid or actually paid to employees but having invalid vouchers

(10) Any expenses without invoices or vouchers or with invalid vouchers

(11) Credited or refunded input value-added tax; enterprise income tax; personal income tax.

(12) Prepaid expenses that do not comply with stipulations by law

(13) Donations:In general, donations are not deductible except for donations for education, health care, natural disaster recovery and building houses for the poor as stipulated by legislation

(14) Some expenses that exceed the controlled level stipulated by law

            In-kind expense for laborers’ clothing without invoice; in-kind expense for laborers’ clothing in excess of VND 5 million/person/year.

Deductions for contributing to

Ø              social insurance funds- 22%: 16% + 6%

Ø               health insurance funds (4.5 %- 3%, 1.5 %)

Ø               unemployment insurance fund (2%- 1%. 1%)

Ø               and trade union funds ( 2%)in excess of prescribed limits. Contributions to higher-level management funds and contributions to associations’ funds in excess of limits set by the associations

Ø  Expenses for advertisement, marketing, sales promotion and brokerage commission; expenses for reception, protocol and conferences; expense in support of marketing and payment discount; expense for press agencies’ newspapers given as presents or gifts directly related to production and business activities,

                        àin excess of 10% of total deductible expenses;

                        àfor a new enterprise (that are granted business registration certificates on or after January 1, 2009), such expenses in excess of 15% of deductible expenses for the first 3 years from the date of establishment.

Total deductible expenses exclude restricted expenses specified at this Point;

For commercial activities, total deductible expenses exclude costs of goods sold;

The above restricted expenses for advertisement, marketing, sales promotion and brokerage commissions exclude

•         Insurance brokerage commissions under the law on insurance business;

•         Commissions paid to agents selling goods at fixed prices;

•         Expense for market research, such as survey, exploration, interview, and information collection, analysis and assessment;

•         Expense for market development and survey;

•         Expense for consultants to conduct research and development and assist with market survey;

•          Expense for product display and introduction and organization of trade fairs and exhibitions, such as expense for opening showrooms or stalls for product display and introduction;

•         Expense for hiring places for product display and introduction;

•          Expense for raw materials and instruments to support product display and introduction;

•         Expense for the transportation of products for display and introduction.

•         R & D FUND

•         Deduction for scientific research and technology innovation funds

•         A maximum amount of 10 percent of base income is deductible, so that the business establishment can have funds for scientific research and technology innovation.

•         Within 5 years since the year of deduction, if less than 70 percent of the scientific research and technology innovation funds is used or used for other purpose than scientific research and technology innovation, the establishment has to pay income tax on the non-used or for-wrong-purpose used part of the funds. Besides, the establishment has to pay interest for the non-used or wrong-purpose used part of the funds.

•         The interest applicable is the interest for a-year-treasury bond. The interest payment period is over two years.

Other taxable incomes

Sales margin of securities dealing.

Income from activities related to industrial property rights and copyright.

Other incomes from property ownership.

Income from land use right or land rent or transfer rights: Income of these kinds is calculated separately and losses from this activity can only be carried forward to the following tax year of income from land use right or land rent right transfer. It cannot be carried forward to the following tax year of incomes from other sources.

Gains from property transfer or liquidation: In case of property liquidation, the taxable income is determined by the following formula:

            Taxable income from liquidation=Liquidation turnover-Liquidation expenses-Book value at the time of liquidation

Interest on deposits, loans and goods sold on deferred payment.

            Received interest > payable interest: other taxable income

            Received interest < payable interest: Deductible expenses

Margin from sales of foreign currencies or foreign exchange rate difference.

Year-end balance of provisions according to regulations by law.

Recovered bad debts that were written off from accounting books.

Debts payable to unidentifiable creditors.

Income amounts from goods production and trading or service provision activities in previous years, which had been missed for booking but later discovered.

Income amounts from goods production and trading or service provision activities overseas.

Income received from overseas goods production and trading or service provision activities.

•         Offshore-investing Vietnamese enterprises earning incomes from overseas production and business activities shall declare and pay enterprise income tax under Vietnam’s Law on CIT. The enterprise income tax rate used for calculating and declaring tax on incomes earned overseas is 25%.

•         The offshore-investing Vietnamese enterprise is entitled to subtract the tax amount already paid overseas in the host country (including dividend tax), provided that the to-be-subtracted amount must not exceed the income tax amount calculated under Vietnam’s Law on CIT

Exempt incomes: The following incomes are exempt from corporate income tax:

Income from cultivation, animal husbandry and aquaculture products of cooperatives and entities, which are founded under the Act of Cooperatives;

Income from the performance of technical service contracts in direct service of agriculture;

Income from the performance of contracts on scientific research and technological development;

Income from the sale of products during the period of trial production in strict accordance with the production process, but for no more than 6 months since the commencement of the trial production;

Income from the sale of products made by new technologies applied for the first time in Vietnam, but for no more than 1 year since the application of these new technologies to the production;

Income from goods production and trading or service provision activities carried out only by disabled people, HIV acquired people and recovered drug addicted people;

Income from job training exclusively for ethnic minority people, disabled people, children in exceptionally difficult circumstances, and social evil victims;

Income received from a join-venture to business with other internal enterprises for which corporate income tax has been paid;

Donations received for education, scientific research, cultural and art activities, charities and other social activities in Vietnam.