Per month income (five months) 360,000 Grossed up per month ((360,000 15,800)/0 6) 573,667

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2 Fundamentals Level Skills Module, Paper F6 (VNM) Taxation (Vietnam) December 2008 Answers 1 Garth Brooks (a) Where the body paying income can be determined, personal income tax declaration and payment is implemented on the basis of the principle of deduction at the income source. Therefore, each of Garth Brooks employers, as the organisation paying income will have the responsibility of deducting personal income tax from his income prior to the payment of that income and paying the income tax to the State Budget. Individuals who pay personal income tax via a number of bodies paying income should conduct registration for the issuance of a tax code number at the most convenient body and notify their issued tax code number to the other bodies paying income. In Garth Brooks case the most convenient body at the time would have been his first employer Big Bank Finance Management (Vietnam) Limited (BBFMV); and he would have been responsible for notifying Mekong Delta Finance Management (Vietnam) Company Limited (MDFMV) of the code on his change of employment. Income tax in respect of regular income is finalised at the end of the year or upon expiry of the duration of a contract. Either the body paying income or the individual shall aggregate all income and all taxable income during the year and prepare and submit a declaration of tax finalisation. Tax finalisation at the body paying income applies in cases where the individual receives income at one place only; but where an individual has worked at and received income from two or more different places of work, tax finalisation must be conducted at the tax office. Thus, Garth Brooks will be responsible for completing his tax finalisation at the tax office for the year (b) (i) Big Bank Finance Management (Vietnam) Limited (BBFMV) VND ( 000) Regular income Salary (USD60,000 x 16,000) 960,000 Housing allowance (USD18,000 x 16,000) 288,000 Company car (USD9,000 x 16,000) 144,000 Travel (USD5,000 x 16,000) 80,000 Non-compulsory pension (USD6,000 x 16,000) 96,000 Total 1,568,000 Per month income (six months) 261,333 Grossed up per month ((261,333 15,800)/0 6) 409,222 Tax 0% 8, % 12,000 1,200 20% 30,000 6,000 30% 30,000 9,000 40% 329, ,689 Total monthly tax 147,889 Six months 887,334 Mekong Delta Finance Managment (Vietnam) Limited (MDFMV) VND ( 000) Regular income Salary (USD75,000 x 16,000) 1,200,000 Housing allowance (USD17,500 x 16,000) 280,000 Company car (Nil) 0 Travel (USD10,000 x 16,000) 160,000 Non-compulsory pension (USD10,000 x 16,000) 160,000 Total 1,800,000 Per month income (five months) 360,000 Grossed up per month ((360,000 15,800)/0 6) 573,667 Tax 0% 8, % 12,000 1,200 20% 30,000 6,000 30% 30,000 9,000 40% 493, ,467 Total monthly tax 213,667 Five months 1,068,335 11

3 (ii) Tax for 12-month period to 31 December VND ( 000) Regular income Net from BBFMV 1,568,000 Net from MDFMV 1,800,000 Total net 3,368,000 Per month net income (12 months) 280,667 Grossed up per month ((280,667 15,800)/0 6) 441,445 Tax 0% 8, % 12,000 1,200 20% 30,000 6,000 30% 30,000 9,000 40% 361, ,578 Total monthly tax 160, months 1,929,336 Tax paid BBFMV 887,334 MDFMV 1,068,335 Total 1,955,669 Tax payable/(refundable) (26,333) (c) The 401(k) premiums are non-compulsory pension contributions and are therefore, taxable in the case of both employers (BBFMV and MDFMV). The car benefit from BBFMV is taxable. Despite the company policy that the car only be used for business purposes, it was used 90% for personal use and the 10% business use cannot be substantiated. The car benefit from MDFMV is not taxable. The company policy is that the car only be used for business purposes; and there is no other information to contradict that the car was used for anything other than business purposes. 2 (a) VNM Fund Management (VNMFM) (i) Domestic individual investors According to Circular 100 Part III 3, Vietnamese individuals who invest in securities in Vietnam do not, temporarily, have to pay income tax on income amounts being dividends, bond interest, securities purchase/sale differences and other incomes from securities investment. According to Circular 81 Part I 3, income in respect of interest received from bank deposits, bank savings and loans, profits from the purchase of securities, bonds, treasury notes and shares, income from activities of investing in securities and securities purchase/sale differences are temporarily exempted from personal income tax. Thus, under current regulations, there will be no personal income tax payable on any distributions received from the fund by domestic individuals. Domestic corporate investors According to Circular 100 Part II 2.1, in the case of business organisations, other than securities companies and fund management companies, investing in securities is considered to be a financial activity and therefore income from securities investment must be aggregated with income from the other business activities of such an enterprise for the purposes of calculating corporate income tax (CIT). Taxable income from securities investment equals the total value of securities sold in the period minus the total purchase price of those securities and the purchase and selling expenses relating to those securities; plus bond interest received in the case of bondholders. But it will not include dividend profit portions that have already been charged with CIT in the investee enterprise or bond interest from tax free bonds. Securities investment funds are not liable to pay CIT. But where a fund makes a distribution of profits to an investor organisation (except for divided profit portions which have already been imposed with CIT within the enterprises in which the fund invests and bond interest collected from tax-free bond types) the fund (through the securities investment fund management company) shall withhold 20% CIT and declare and pay this tax to the State Budget. However, domestic corporate investors may choose the self-payment mode of taxation and aggregate their income from securities investment with their income from other business activities for tax calculation and payment purposes, according to the CIT regulations. If they choose to operate this mode of taxation, investing organisations must notify the securities investment fund management company of such tax self-payment so that the corresponding tax amounts will not be withheld. 12

4 (ii) Overseas individual investors Both Circular 100 Part III 3 and Circular 81 Part I 3 apply to foreign individuals as well as Vietnamese individuals. Thus, there is no difference in the tax treatment for overseas individual investors, i.e. distributions from the fund will be exempt from personal income tax. Overseas corporate investors The obligation of a securities investment fund to withhold 20% CIT on distributions of profits to investing organisations and declare and pay this tax to the State Budget remains unchanged whether the investing organisation is a domestic or overseas corporate investor. But overseas corporate investors cannot choose the self-payment mode of taxation, thus withholding tax at 20% will always apply in their case. (b) Presumptive corporate income tax (CIT) at the rate of 0 1% is payable on the total value of the bond interest (except for tax free bonds); the total value of the listed equities sold; and the total value of the non-listed equities sold (irrespective of gain or loss). (c) (i) To qualify as a reasonable expense a provision for bad debts must: relate to a debt that has been overdue for two years or more; or to a debt which is subject to special circumstances e.g. the debtor being bankrupt, regardless of time limit; and in total not exceed 20% of the enterprises total collectible debts. In addition, the determination of the provision must be carried out by the senior management of the enterprise. (ii) Other types of qualifying contingency provisions relate to: reductions in the value of inventory; reductions in the value of investments and securities; and the establishment of a fund to pay allowances for the loss of work. Note: only TWO required. 3 (a) (i) John Smith will be subject to the foreign contractors tax regime (FCT). As he holds an independent practising certificate, John does not fall within the definition of an individual, who is not subject to FCT. Therefore John will be subject to FCT and will pay corporate income tax (CIT) and value added tax (VAT) and not be subject to personal income tax (PIT). (ii) FCT regime tax payable: Construction and installation (not including materials) 2007 CIT taxable turnover (VND) CIT (VND) 8,000,000, ,000,000 = 7,600,000,000 7,600,000,000 x 2% = 152,000,000 VAT taxable turnover (VND) VAT (VND) 8,000,000,000 8,000,000,000 x 50% x 10% = 400,000, CIT taxable turnover (VND) CIT (VND) 6,400,000, ,000,000 = 6,080,000,000 6,080,000,000 x 2% = 121,600,000 VAT taxable turnover (VND) VAT (VND) 6,400,000,000 6,400,000,000 x 50% x 10% = 320,000,000 (b) (i) In this case, the UK company would be subject to FCT instead of John Smith, because it is now the UK company which is the foreign contractor and not John. However, in addition, John would be subject to PIT on the salary and any other remuneration earned from the UK company. (ii) The FCT regime tax (CIT and VAT) payable by the UK company would be the same as in (a)(ii) above when John Smith was the contractor, i.e. 2007: CIT VND152,000,000 VAT VND400,000, : CIT VND121,600,000 VAT VND320,000,000 13

5 PIT payable by John Smith (per month): VND ( 000) Regular income (Euro 9,000 x 25,000) 225,000 Tax 0% 8, % 12,000 1,200 20% 30,000 6,000 30% 30,000 9,000 40% 145,000 58,000 Total monthly tax 74,200 4 (a) XYZ Enterprises Limited 1 Tobacco products subject to special sales tax imported price at the border gate plus import duty. 2 Alcohol products subject to import duty and special sales tax imported price at the border gate plus import duty plus the special sales tax (SST). 3 Goods subject to instalment payments the lump sum price of the goods excluding VAT as if by a single payment (excluding interest on instalments). 4 Goods where the invoice states the payment price including the value added tax sale price excluding VAT. 5 Agency and broking activities for the sale of goods and services for commission commission received without VAT. 6 Goods processing processing price excluding VAT but including charges for labour, fuel, power, auxiliary materials, and other expenses of processing incurred by the processor. 7 Residential apartments where the taxable price includes the value of land as provided by the peoples committee sales value less the value of the land provided by the peoples committee. (b) Any excess of input value added tax (VAT) over the output VAT of a particular month may be carried forward and used to offset the VAT liabilities of a future month or refunded. A refund will be available in the following circumstances: 1. Any business establishment that has not been fully credited for input tax for a period of three or more consecutive months. 2. A business establishment exporting goods or services with input VAT on exported goods not credited in any month of VND200 million or more. 3. A business establishment carrying on an investment project of one year or more that has not yet commenced operations (generated any output VAT) on an annual basis or if the investment in assets is greater than VND200 million per quarter, on a quarterly basis. 5 (a) A resident establishment is a business establishment through which a foreign (overseas) company conducts some or all of its income generating business activities in Vietnam. A resident establishment can take various forms, but the definition includes: the agent of an overseas company; and a representative in Vietnam who has authority to enter into contracts in the name of the overseas company. Tiger Property Limited has delegated all responsibilities such as being represented and entering into contracts (making investments) in relation to the Tiger Fund to the fund manager. As the fund manager has delegated all responsibilities to the chief representative in Vietnam, effectively the Fund has an agent or representative in Vietnam, and the chief representative will be entering into contracts (making investments) on its behalf. Therefore the Fund by its activities in Vietnam has created a resident establishment in Vietnam. (b) If the Tiger Fund has a resident establishment in Vietnam, then the Fund will be subject to corporate income tax (CIT) in Vietnam. CIT at 28% will, therefore, be payable on the Fund s taxable income, i.e. its taxable turnover less reasonable expenses plus other taxable income. 14

6 Fundamentals Level Skills Module, Paper F6 (VNM) Taxation (Vietnam) December 2008 Marking Scheme 1 (a) Employers must deduct tax at source 1 0 Employee declares income at most convenient location for tax code purposes 1 0 Notify to other bodies paying income 1 0 Tax finalisation with the employer only when one employer for the year 1 5 Two or more employers, tax finalisation is at the tax office by individual 1 5 (b) (i) BBFMV Salary 0 5 Housing allowance 1 0 Company car 1 5 Travel 1 0 Non-compulsory pension 1 0 Per month income (six months) 0 5 Grossed up per month 1 0 Total monthly tax 1 0 Six months tax 0 5 MDFMV Salary 0 5 Housing allowance 0 5 Company car 1 0 Travel 0 5 Non-compulsory pension 0 5 Per month income (five months) 0 5 Grossed up per month 1 0 Total monthly tax 1 0 Five months tax 0 5 (ii) Tax for 12 months Net from BBFMV 0 5 Net from MDFMV 0 5 Per month net income (12 months) 1 0 Grossed up per month 1 0 Total monthly tax months 0 5 Tax paid BBFMV 0 5 MDFMV 0 5 Tax payable/(refundable) 0 5 (c) Non-compulsory pension contributions are taxable 1 0 BBFMV the car benefit is taxable, with reasons 2 0 MDFMV the car benefit is not taxable, with reasons 1 0 Marks

7 2 (a) (i) Domestic individual investors Domestic investors exempt C Exemption for dividends, interest, capital gains 1 0 Domestic investors temporarily exempt C Exemption for dividends, interest, capital gains, investing in securities 1 0 Domestic corporate investors Financial activities included in income and subject to CIT 2 0 Calculation of tax base 1 5 Securities investment funds no CIT % withholding on distributions 1 0 Choice of self-payment or withholding 1 0 Notification of fund not to withhold 0 5 (ii) C100 and C81 apply to foreign, as well 1 5 No change in treatment/exemptions apply % withholding on distribution 1 0 No choice of how it is taxed 1 0 (b) 0 10% presumptive CIT 1 0 Bond interest 1 0 Total value of securities sold (listed and non-listed) 1 0 Irrespective of gain or loss 1 0 Marks 11 0 (c) (i) Two-year time limit 1 0 Special circumstances with no time limit % of total debts 1 0 Determination by senior management 1 0 (ii) Any two items 1 mark each (a) (i) Subject to FCT regime not PIT 2 0 Not an individual, as holds an independent practising certificate 2 0 (ii) 2007 CIT VAT CIT VAT 2 0 (b) (i) UK company the contractor, subject to FCT regime 2 0 John also subject to PIT 2 0 (ii) CIT and VAT for both years as in (a)(ii) 2 0 PIT

8 4 (a) 1 Imported price at the border gate plus import duty Imported price at the border gate plus import duty plus the SST The lump sum price of the goods excluding VAT on one occasion (excluding interest on instalments) Sale price excluding VAT Commission received without VAT Processing price excluding VAT but including charges for labour, fuel, power, auxiliary materials, and other expenses of processing incurred by the processor Sales value less the value of the land provided by the peoples committee 2 0 (b) Carried forward for offset in future periods 1 0 Not fully credited for three consecutive months 1 0 Exporting establishment and VND200 million per month 1 0 Investment project via commencement of project 1 0 Annual/quarterly if VND200 million per quarter 1 0 Marks (a) Business establishment through which overseas company operates 1 0 Agent 1 0 Representative who enters into contracts 2 0 Analysis of position: Fund manager 1 0 Chief representative 1 0 Conclude re resident establishment 1 0 (b) CIT 1 0 Taxable turnover %