Tax is a hot topic in Vietnam at the moment with the unprecedented introduction of changes to three major tax laws effective from January 1, 2009, being the Corporate Income Tax (CIT), Value Added Tax (VAT) and Personal Income Tax (PIT) plus changes in how foreign contractors are to pay the CIT and VAT (Circular 134/2008/TT-BTC).

However, there have already been some amendments to these tax laws offering opportunities to assist enterprises and employees during the current difficult times (Decision 16/2009/QD-TTg) and now the new Special Sales Tax (SST) is effective from April 1, 2009. We look at some of these tax amendments that have been introduced as part of the government’s solution to the economic crisis and the major effect of the SST.

Corporate Income Tax

The government is offering two reprieves in relation to CIT with small- and medium- sized enterprises (SMEs) being the most advantaged. SMEs can apply both supports of (i) a 30 per cent reduction in the CIT payable in the last quarter of 2008 and for the whole of 2009 and (ii) delayed payments of CIT.

The delayed payments can be applied by all SMEs but also extends to large enterprises for income from business activities of (i) manufacturing of mechanical engineering products for production, building materials being bricks, tiles, lime and paint, textiles and garments, footwear and electronic components; (ii) processing of agricultural, forestry, or seafood products; (iii) construction, assembly and installation; (iv) tourism; (v) food products; and (vi) fertiliser business.

The deferment provides an extension of nine months for each CIT tax quarterly payment in 2009 (Circular 03 and Circular 12/2009/TT-BTC). The deferment of the CIT will assist the cash flow for some enterprises until the economy improves but such enterprises will need to carefully plan to be able to make CIT payments at the end of the deferment period.

To qualify as an SME, the enterprise must either (i) have registered chartered capital of VND10 billion (approx. $561,000) or less as of January 1, 2009 or for new enterprises registering after January 1, 2009, on their initial business registration or investment certificate or (ii) have 300 or less employees on a weighted average during the fourth quarter of 2008, not counting employees with short term contracts of less than three months.

For enterprises that were established after October 1, 2008, then there must be less than 300 paid staff in the first full month (30 days) after the first generation of turnover. The 30 per cent reduction is on the payable CIT so it is applied after any reductions from other incentives, such as the preferential tax rate from the CIT law or the enterprise’s investment certificate. SMEs can apply the deferred payment on the CIT payable after the 30 per cent reduction has been applied.

While these CIT solutions to the economic crisis can be applied by both domestic enterprises and those with foreign investment or ownership, those enterprises that pay CIT on deemed turnover as they have not implemented an accounting regime with invoices and source documents and are not registered to pay CIT in accordance with declarations are not able to apply the CIT solutions, so presumably foreign contractors that have their CIT payments withheld and paid for by the Vietnamese party to the contract, will not be able to apply the CIT incentives.

VAT issues

In December 2008, the new Decree (123/2008/ND-CP) implementing the new VAT law raised the VAT on a number of items from 5-10 per cent from January 1, 2009. Then as part of the government’s stimulus package (Decision 16) the VAT on these items were reduced back to 5 per cent from February 1, 2009 to the end of December 2009 (Circular 13/2009/T-BTC).

VAT invoices for goods subject to the discounted VAT should show VAT as (“10 per cent x 50 per cent”) and while sellers of the goods need to be aware of their obligation to reduce the VAT payments, buyers should be aware of their entitlement to reduced VAT rates and ensure they are paying to correct rate by checking their invoices.

There are 19 groups of items affected, the most significant being for (i) cars and car components including engines, gear boxes, clutches and their parts; (ii) certain mechanical engineering products used for production, but excluding consumer products; (iii) certain industrial concrete products; (iv) computers, computer parts and printers; (v) cargo handling; (vi) transport, excluding international transport; and (vii) hotels and tourism services.

While the VAT on cars was reduced from the February 1, 2009 we note that the Special Sales Tax (SST) on cars with nine seats or less changed from April 1, 2009, resulting in an increase in SST for more powerful cars while dropping that for smaller cars with smaller engine capacity (see more in “Discouraging the use of high-capacity automobiles”).

The reduction by 50 per cent in VAT has also been extended to a number of goods on the preferential import tariff list and which are imported between February 1, 2009 and December 31, 2009 (Circular 18/2009/TT-BTC). There are many items included in this list including some cars and car components and the preferential VAT rate on these also applies for domestic consumption and purchases for manufacturing purposes.

PIT in focus

The government is requiring all enterprises to not withhold PIT from their employees from the January 1, 2009 to May 31 inclusively (Circular 27/2009/TT-BTC). However, this does not alleviate the enterprises from their duties under the new PIT laws to register all their employees for tax codes, collect their employees’ declarations on dependents, and declare the PIT payable. This deferred payment includes PIT payable on lease agreements, where the lessee is required to declare and pay taxes on behalf of the lessor (L807/2009/TCT-TNCN).

In relation to any PIT that is subject to the deferral, employers must (i) apply to the tax office for reimbursement of any PIT that has already been paid to the tax office; (ii) reimburse all employees for any tax already withheld from employees; (iii) not withhold any further deferred PIT during the deferment period; and (iv) continue to calculate and declare the PIT which would normally be deducted but is now deferred.

While the salary and wages type income of residents, both Vietnamese and foreigners, is the main income on which the PIT is deferred, there are others and the type of incomes to which the deferment applies varies between resident and non-residents. Non-residents cannot defer PIT payments on their salary and wages, so enterprises should still withhold, declare and make PIT payments for non-residents who for the purpose of the deferment includes:

(i) people living overseas; (ii) people leaving Vietnam before June 30, 2009, for example, resident foreigners whose contracts terminate before the June 30, 2009; or (iii) persons arriving in Vietnam from January 1, 2009 with an undetermined exit date and who do not have a permanent residence in Vietnam or a house lease of at least a 90-day term, for example, someone who arrives after the January 1, 2009 without a labor contract of at least six months evidencing they will meet the residence requirements under the PIT laws.

All enterprises should now be aware that under the new PIT laws “salary and wages” have been extended to include certain other types of income even where there is no employment or labor contract such as commission payments.

While the government is hoping that employees will spend the deferred PIT to boost the economy, there are some concerns, particularly amongst the employers as what will happen at the end of the deferment period especially since the government’s announcement that both the employer and tax offices will be jointly liable to recover any tax that becomes payable after the deferment.

Employers should keep full records of those that receive the deferred PIT payments, including names, tax codes, ID cards or passport numbers, permanent addresses, contact addresses and deferred tax amounts to be able to fully co-operate with the tax authorities attempts to recover any deferred PIT should this be required in the future (OL 807/2009/TCT-TNCN).

The government will not be announcing their intentions in relation to these deferred payments until May or after the end of the deferment and in which case most employees will have spent the money. So how is the PIT to be paid if the government decides to collect it but on the other hand can the government afford to not collect the money particularly at a time when the economic crisis is likely to have already caused a drop in state revenue from other taxes?

Other assistance for the economic crisis

The government has released a number of other solutions to ease the way through the economic crisis including the offering of subsidized interest rates for loans from banks and finance companies. The government is offering a 4 per cent subsidy on interest rates for a maximum eight months for short term loans in Vietnamese dong drawn down between February 1, 2009 and December 31, 2009 (Decision 131/2009/QD-TTg).

The government is hoping the assistance provided will reduce manufacturing costs, and ensure enterprises are able to maintain their production and reduce job losses. There are certain industries and sectors that have been excluded from using the subsidised interest rates of which mining was originally included however, the government recently amended this and mining companies can now apply for the subsidised loans for certain mining activities.

Import and export duties are commonly utilised as a means of stabilising domestic markets so it is no surprise to see rapid fluctuations during the current crisis. In 2008 there were rapid variations for export duties on iron and non-alloy steel and for petrol the import duty has risen from 15 per cent in September 2008 to 40 per cent in December 2008 and back down to 20 per cent by February 2009.

The government is also offering longer time limits to pay the import duties on raw materials and supplies used for production of goods for export but only to those duty payers that have not breached the laws on customs, are not in arrears and have a good record of compliance with customs laws (Circular 05/209/TT-BTC amended by Decision 383/QD-BTC).

For some enterprises, these various measures may not alleviate the effects of the down turn in the economy and they may still need to lay off some workers. The government has issued guidance on reducing employees due to the down turn and has specified that the down turn is not considered a “force majeure” for this purpose (Official Letter 4812-LDTBX-LDTL).

The enterprise has a number of options including agreements with workers to either suspend or terminate labor contracts or unilaterally terminate labor contracts with appropriate severance allowances, or restructure with re-training where possible. The best option depends on the circumstances of the enterprise, but all enterprises need to be careful that whichever option they choose the legal requirements in the labor code are strictly complied with for that circumstance.

While many of the tax deferments, reduced rates for taxes and interest on loans may ease current cash flow problems, enterprises will need to give careful consideration as to how any tax debts are going to be paid at the end of the various deferments and at a time when reduced interest rates and taxes will be ending. Enterprises will need to do some careful planning to ensure that the deferment is not putting off the inevitable.

Discouraging the use of high-capacity automobiles

The SST laws are effective from the April 1, 2009 (Law on Special Sales Tax and Decree 26/2009/ND-CP) and the significant changes are for those cars with nine or less seats and the introduction of SST applied to motorbikes over 125cm3.

The cars with 24 seats or less have always been subject to the SST, but the new law changes the categorisation of them, so instead of just three taxable groups depending on the number of seats, there is now three categories depending on the number of seats and then for those cars with nine seats or less, being the types of vehicles used by consumers, there are a further three categories depending on the engine size.

The SST is clearly being used as means to manipulate the car market, by, in our assumptions, (i) discouraging private ownership by vehicles with high consumer demand, having the highest tax rates; (ii) reducing the purchase of the more powerful consumer vehicles, thereby reducing fuel consumption, improving safety on the roads and alleviating some of the traffic problems caused by poor infrastructure; and (iii) encouraging environmentally friendly vehicles by having reduced SST rates for environmentally friendly cars, such as hybrids and those run from bio-fuels and electricity.

However, the effects of the SST may well be overridden by the many incentives currently in place to assist enterprises during the economic crisis as the automobile industry is able to manufacture cars cheaper than ever at the moment with reduced (i) import duties on components (Circular 38/2009/TT-BTC); and (ii) reduced VAT from 10-5 per cent on cars and certain car components like engines, gear boxes, clutches and their parts, including those items specified on the preferential import duty list.

by VILAF lawyers

Source: Vietnam Investment Review - 6 April 2009