Vietnam’s new Law on Corporate Income Tax was enacted by the National Assembly on June 3 2008 (CIT Law 2008) and became effective on January 1 2009. The aim is to reduce the general tax rate to help enterprises improve their financial positions and procure new technology and equipment.
The main differences between the Law on Corporate Income Tax of 2003 (CIT Law 2003) and CIT Law 2008 are below:
The income of business entities in all economic sectors, professional organisations and foreign corporations with production and trading activities in Vietnam will be governed by CIT Law 2008. Individuals and family businesses conducting business are subject to the Law on Personal Income Tax. Under CIT Law 2003, certain individual and family businesses were subject to corporate taxes.
Under CIT Law 2008, the corporate tax rate has been reduced from 28% to 25%. For certain industries such as oil and gas, and other resource exploration sectors, the applicable tax rates are between 32% and 50%. Previously, the range was from 28% to 50%.
Current tax incentives are less favourable than those under CIT Law 2003: CIT Law 2008 provides for two preferential tax rates of 10% and 20%. Under its predecessor, there were three preferential tax rates – 10%, 15% and 20%.
The 10% rate applies to newly established enterprises operating in areas with difficult conditions and sectors where investment is encouraged – education, health, vocational training, advanced technology, research and development (R&D), and software production – for 15 years. Corporate taxpayers under this category are entitled to a tax exemption not exceeding the first four years and a 50% reduction in tax for nine subsequent years.
The 20% rate applies to newly established enterprises with investment projects in areas with difficult socio-economic conditions for a period of 10 years. Corporate taxpayers under this category are entitled to a tax exemption not exceeding the first two years and a 50% reduction in tax for four subsequent years.
Under CIT Law 2008, such preferential rates, exemptions and reductions are applicable from the first year in which revenue is generated instead of from the first profitable year under CIT Law 2003.
CIT Law 2008 sometimes allows corporations to establish a pre-tax “R&D fund” of up to 10% of their taxable income. However, if the funds are only partially utilised (less than 70%) or are utilised for a purpose other than R&D within five years, the corporation must pay all taxes plus interest.
CIT Law 2008 mandates businesses pay taxes in the locality – the province or city – where their head office is registered. However, if they have a branch in another province or city, then payable taxes shall be assessed and apportioned between the province or city of its head office and that of its branch.
Vietnam’s tax system is now more sophisticated and provides detailed regulations to companies. For example, Decree 124-2008-ND-CP, issued on December 11 2008, provides clarification on several CIT Law 2008 provisions, such as those determining taxable income from capital and intellectual property transfers, and asset leases; provisions determining corporate “turnover”; and to what extent the formulae for calculating “business management expense” limits paid to foreign parent companies are deductable for tax purposes.
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