Our July 2020 publication of our Tax and Accounting Updates covers the Decree increasing loan interest deductibility caps for Corporate Income Tax, National Assembly approval for reductions in Corporate Income Tax rates for 2020 for small and medium businesses, possible decreases in Social Insurance contributions for certain high-accident industries, along with and our regular review of recent Official Letters released by the Tax Authorities.
Decree 68: increasing loan interest deductibility cap for corporate income tax
The Vietnamese Government issued Decree 68/2020/ND-CP on 24 June 2020 (“Decree 68”), amending interest deductibility for companies subject to Transfer Pricing obligations in Decree 20 /2017/ND-CP (“Decree 20”).
Accordingly, the total deductible loan interest expense (after deducting interest income from deposits and lending) for a tax period is capped at 30% of total net profit generated from business activities plus loan interest expense (after deducting interest income from deposits and lending) and plus depreciation expense incurred in the period (“EBITDA”).
Under the old regulations, deductibility was capped at 20%, thus enterprises will be entitled to an additional 10% deduction when calculating CIT under Decree 68.
Interest expenses exceeding the 30% cap can be carried forward and deducted in future periods for up to 5 consecutive years. Where interest expense in a year subject to the cap is less than 30%, non-deducted interest carried forward from prior periods can be claimed up to the maximum claim of 30% for that tax period.
Additional cases excluded from application of the interest deduction cap include:
- Loans by taxpayers that are credit institutions as defined in the Law on Credit Institutions or insurance firms as defined in Law on Insurance Business
- Loans by the Government from ODA loans and concessional loans
- Loans granted for implementing national programs (including New Rural Area Development program and Sustainable Poverty Reduction program)
- Loans granted for implementing State social welfare policies (projects on relocation housing, housing for workers and students, and other public welfare projects).
The Decree is effective from 24 June 2020 and it applies for corporate income tax period in 2019.
Reduction in corporate income tax for 2020 for small and medium businesses
On 19 June 2020, the National Assembly approved a reduction in Corporate Income Tax for small and medium businesses for the 2020 tax year.
Enterprises that meet the specified criteria are eligible for a 30% reduction in CIT for 2020, resulting in most taxpayers reducing their CIT rate from 20% to 14%.
Eligible taxpayers are those with turnover of less than VND200 billion (approx. USD8.6 million) and less than 200 employees.
We are awaiting the release of implementing regulations for more information on applying this CIT reduction taxpayers.
Reduction in social insurance contributions for eligible employers
The Vietnamese Government released Decree 58/2020/ND-CP on 27 May 2020, which provides eligible employers with a reduced rate of Social Insurance Contributions (for their Occupational Accidents and Disease portion), effective from 15 July 2020.
At present, compulsory monthly employer Social Insurance Contributions total 17.5%, representing:
- Retirement & Death Fund 14%
- Sickness & Maternity Fund 3%
- Occupational Diseases & Accident Fund 0.5%
Employers operating in specified industries with a high risk of occupational accidents and diseases will be entitled under this Decree to a reduction in the Occupational Diseases and Accident Fund contribution to 0.3% (from 0.5%), where the meet the following criteria:
- have not been subject to administrative or other penalties for violations of occupational safety, sanitation or social insurance for the past 3 years,
- have undertaken accurate and on-time reporting for occupational accidents and occupational safety for the past 3 years, and
- occupational accidents arising over the past year have decreased by 15% compared to the average for the last 3 years (or otherwise have no accidents in the past 3 years)
Where employers meet the above criteria, they can submit an application to the Ministry of Labour, Invalids and Social Affairs (“MoLISA”) for an approval. The approval will be valid for a 3 year period, and can be renewed.
Industries regarded as being at high risk of occupational diseases and accidents include (per Circular 7/2016/TT-BLDTBXH issued by MoLISA) include:
- Plastic & rubber based chemical production
- Metal production
- Ship Building
- Power generation and transmission
- Fisheries and aquatic processing
- Garment, apparel and footwear manufacturing
- Scrap and recycling activities
- Environmental Cleaning
Official letters released
Official Letters are releases showing the Tax and other Authorities’ interpretation and application of Vietnam’s Taxation Laws, providing guidance to taxpayers in Vietnam.
Tax obligations on capital transfers
On 4 May 2020, the Ho Chi Minh City Department of Taxation (“HCMCDT”) issued Official Letter 4266/CT-TTHT on tax obligations from capital transfers.
When shareholders of a company, enterprises and/or individuals, engaged in a capital transfer the tax obligations are determined as:
- Value Added Tax (“VAT”): Capital transfer is not subject to VAT (Clause 8, Article 4 of Circular 219/2013/TT-BTC) and the transferring enterprise is responsible for issuing VAT invoice as guided in Appendix 4 to Circular 39/2014/TT-BTC.
- Corporate Income Tax:
- Assessable income on the transfer is determined as transfer price less purchase price less transfer costs (Article 14 of Circular 78/2014/TT-BTC) and the applicable CIT rate is 20% (Article 11 of Circular 78/2014/TT-BTC).
- Where the transferred party is a foreign company not established and operated under the Law of Investment and Law of Corporate, the Vietnam transferring company is responsible for declaring and pay CIT on behalf of the foreign company.
- Personal Income Tax (“PIT”):
- For Vietnam tax residents: Assessable income is the transfer price less purchase price less other reasonable costs attributable to the transfer with an applicable PIT rate of 20% (Article 11 of Circular 111/2013/TT-BTC)
- For non-residents: Assessable income is the total transfer price not deducting any costs with an applicable PIT rate of 0.1% regardless of the transfer being carried out within Vietnam or offshore.
- The transferred enterprise is responsible to declare and withhold PIT on the capital transfer if the transferring individual is not a Vietnam tax resident
Conditions for foreign contractors to self-declare taxes in Vietnam
On 4 May 2020, HCMCDT issued Official Letter 4249/CT-TTHT on Foreign Contractor Tax (“FCT”) declarations and payments.
Where a foreign contractors (regardless of whether they are main contractors or subcontractors) meet the conditions specified in Clauses 1 and 2, Article 8 of Circular 103/2014/TT-BTC, they can apply for a Tax Identification Number to self-declare VAT under deduction method and CIT based on percentage of revenue (or “hybrid method”).
The foreign contractors are required to meet all of the below conditions:
- Having a permanent establishment in Vietnam
- Having business operations in Vietnam under a main contract or subcontract of 183 days or longer from the contract effective date, or
- Apply the Vietnamese accounting regime, have tax registration and a Tax Identification Number
Late payment interest on import tax
On 5 May 2020, the General Department of Customs released Official Letter 2916/TCHQ-TXNK, providing guidance on late payment interest calculations for import tax.
According to Clause 1, Article 106 of the Law on Tax Administration amended and supplemented in Clause 3, Article 3 of Law 106/2016/QH13, if a taxpayer fails to pay taxes by the deadline, or the extended deadline, or the deadline stated in the notification of the tax authority or the deadline for implementing decision of the tax authority, it must pay the full tax amount and late payment interest at the rate of 0.03% per day on the delayed tax amount for each day after the deadline.
For tax debts arising before 1 July 2016, if taxpayers have not yet paid to the State, including tax arrears collected through the inspection and examination results of authorities, are transferred to the level of late payment under this provision.
Where supplemented declarations give rise to additional tax payments, the payment deadline for the underpaid tax amount is the payment deadline for such declaration (Clause 4, Article 42 of Circular 38/2015/TT-BTC).