Tax Watch Update. Issue 15 May Content. Corporate Income Tax (CIT) 2 Value Added Tax (VAT) 3 Personal Income Tax and Work Permit issues 4

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1 Tax Watch Update Issue 15 May 2012 Content Corporate Income Tax (CIT) 2 Value Added Tax (VAT) 3 Personal Income Tax and Work Permit issues 4

2 Corporate Income Tax (CIT) At a glance Qualified small and medium enterprises, and those employ more than 300 employees can defer payment of unpaid CIT of 2011 and backwards (excluding CIT amounts entitled to deferred payments under Decision 04/2012/QD-TTg). 30% reduction of CIT in 2011 is not applicable to companies operating under parents affiliate company form where the parents companies are not small and medium enterprises and hold more than 50% equity property of the affiliate company. The compensation paid to business partner on early termination of contract shall be treated as deductible expense for CIT and the recipient of that compensation will regard that as other income for tax declaration & payment purposes. Violation of the Law on enterprises around legal representative and corrective measures thereof can disqualify the newly set up business entity from application of the CIT incentives. 9 month CIT payment deferral In accordance with Resolution 13/NQ-CP dated 10 May 2012 of the Government, small and medium enterprises (i.e. those meet capital and labour criteries under Decree 56/2009), and those employ more than 300 employees in certain industries are eligible for 9-month payment deferral of unpaid CIT of 2011 and backwards (excluding CIT amounts entitled to deferred payments under Decision 04/2012/QD-TTg dated 19 January 2012). The 9 month payment deferral does not apply to enterprises operating in industries such as lottery, securites, finance, banking, insurance, prodution of goods and services subject to special sales tax or those classified as grade 1, special grade belonging to economic groups, corporations. In addition, Minisry of Finance shall also submit a proposal for 30% reducion of 2012 CIT to National Assembly for consideration and approval. Condition for 30% CIT reduction in 2011 GDT s Official Letter No. 861/TCT-CS dated 13 March 2012 reconfirms that 30% reduction of CIT in 2011 is not applicable to the companies operating under parents affiliate company form where the parents companies are not small and medium enterprises and hold more than 50% of equity of the affiliate company. Deductibility of compensation paid due to early contract termination In accordance with GDT s Official Letter No. 891/TCT-CS dated 14 March 2012, where an enterprise sign an investment cooperation contract with another enterprise, but now wants to terminate such contract and accordingly pays compensation to the investment partner, the compensation shall be treated as deductible expenses for CIT purposes. The recipient of the compensation will treat this as other income for CIT declaration and payment purposes. Application of CIT incentives On 20 March 2012, GDT issued the Official Letter No. 976/TCT-CS confirming no application of CIT incentives by the newly set up business entity if: that business entity s legal representative is also the general director of another company that business entity has applied for amendment of the license around the change of the legal representative. May 2012 Tax Watch Update Page 2

3 Value Added Tax (VAT) At a glance Qualified small and medium enterprises, and those employ more than 300 employees in certain industries are entitled to defer payment of VAT of April, May and June 2012 for 6 months. Invoices issued for sampling and promotional goods are declared under Item No. 5 of the Form No. 01-1/GTGT Goods and services are not summarized in the Form 01/GTGT. The transportation services rendered by a local supplier to EPEs may apply 0% VAT rate if the conditions for application of 0% VAT rate as regulated under Circular 129/2008/TT-BTC are met. VAT payment deferral for April, May and June 2012 Under Resolution 13/NQ-CP dated 10 May 2012 of the Government and Official Letter 6326/BTC-TCT dated 11 May 2012 of Ministry of Finance, qualified small and medium enterprises, and those employ more than 300 employees in certain industries are eligible for deferred payment of VAT liabilities of April, May and June 2012 for 6 months. Declaration of invoices issued for free-of-charge sampling and promotional goods According to Official Letter 985/TCT-CS of the GDT dated 21 March 2012, upon providing free of charge goods for sampling and promotional purposes, business entity is required to issue VAT invoices as required by the regulations and declare such invoices under Item No. 5 named Goods and services which are not summarized in the Form 01/GTGT of the Form 01-1/GTGT. VAT rate applicable to transportation services rendered to export processing enterprise (EPE) In accordance with the GDT s Official Letter 1033/TCT-CS dated 23 March 2012, VAT rate of 0% may apply to transportation services rendered to the EPE provided that the conditions regulated under Circular 129/2008/TT-BTC such as availability of service contract and bank transfer payment documents are met. May 2012 Tax Watch Update Page 3

4 Personal Income Tax (PIT) and Work Permit issues At a glance Official Letter 1025/TCT-TNCN dated 22 March 2012 from the General Department of Taxation ( GDT ) providing guidance for dealing with the offset, refund and filling for the overpaid tax amount in the item Tax amount proposed for refund, whilst Circular 28/2011/TT-BTC dated 28 February 2011 issued by the Ministry of Finance agreed to the offset of the overpaid tax amount against the tax payable amount in subsequent periods. The Tax Authority has been paying more attention to foreign individuals having short term assignments in Vietnam. A recent tax audit resulted on the expenses paid by the Vietnamese party shall being subject to tax. Administrative penalties or fines for late tax payment are also strictly applied. A new rate for the common minimum wage from 01 May2012 will increase to VND1,050,000 per month. Employers need to adjust the statutory insurance contribution levels accordingly. The local Administrative Police are now inspecting the work permits of expatriates who are regularly coming in and out Vietnam. Offset of the overpaid PIT - an inconsistency between the law and the practice of the tax authorities The item 3b, article 14, Circular 28/2011/TT-BTC (Circular 28) allows for the overpaid tax amount to be offset against the tax payable amount in the subsequent period. In reality however, some local Tax Departments do not allow the overpaid tax amount to be offset, but a tax refund application is required due to the short comings in the tax management system. On the 22 March 2012, the GDT recently issued OL No.1025/TCT- TNCN on the subject of offset and refund tax dossiers for PIT refunds guiding that the overpaid tax amount should be filled in the item headed Tax amount proposed for refund in the regulated form for PIT finalization. This means that individuals having overpaid tax amounts as per their finalization return cannot offset against the tax payable amount in the subsequent periods as noted in the form 09/KK/TNCN, and now must apply for a tax refund. Such inconsistency between tax policy and the practice management of the tax authorities will result in many difficulties and confusion to individual taxpayers as the tax refund application process is onerous and very time consuming already. Expenses paid by a Vietnam party on behalf of foreign individuals on short term assignment in Vietnam. As per our recent experience with some Representative Office audits, we would like to note that the tax authorities auditors often pay strict attention to the RO s expenses (e.g. accommodation/ hotel and travelling expenses, etc.) paid on behalf of foreign individuals on short term assignment in Vietnam (less than 183 days during the year) and are requesting that the PIT amount be retrospectively collected in respect of these benefits in kind. Administrative penalties and fines for late tax payment are also being strictly adhered to. Such adherence to the regulations shows that the tax authority are more heavily scrutinizing PIT management in general and are now targeting short-term business travelers in particular. We recommend that individuals and enterprises should examine all of their expense items mentioned above (noting that this list is not limited) and declare accordingly to minimize the possibility of penalties under audit scrutiny. Where foreign individuals are eligible for the conditions for tax exemption under a DTA, they are required to file a DTA application to qualify for the exemption, as DTA exemption is not automatic in Vietnam. May 2012 Tax Watch Update Page 4

5 Noting that payment of expenses by the Vietnam entity for these STA will disallow the application of the DTA. Should you have any concerns, please contact to us for further guidance. The common minimum salary has been increased to VND1,050,000/month from 01 May 2012 On 12 April 2012, the Government signed Decree 31/NĐ-CP on the regulation of the general minimum salary level. Accordingly, the common minimum salary will increase to VND1,050,000/month from 01 May 2012 onwards. This Decree shall take effect from 01/06/2012 and will repeal the Decree 22/2011/NĐ-CP dated 04 April Companies need to consider and adjust the level of health, social and unemployment insurance contributions accordingly. Administrative police now involves in work permit inspections During a regular residence registration check at a hotel in Vung Tau Province, the local administrative police reviewed the passport of a foreigner who regularly comes in and out of Vietnam under a visa exemption, i.e. within 30 days. The police temporarily retained his passport to inspect it further and to confirm the purpose of his trips in and out of Vietnam because he could not confirm that he held a valid work permit. We also note that they requested that he apply for a business visa and not continue to enter the country on the 30 day exemption. This case highlights that the relevant authorities in Vietnam are cooperating closely with one another to manage and control foreigners working in Vietnam. We recommend that organizations and contractors, who employ foreigners, apply for work permits for them as soon as possible to avoid any unnecessary legal problems for the employees as well as the enterprise. By regulations, the expatriate employee is responsible for retaining the issued work permit during its valid period. However, in practice, for avoidance of issues arising from the employee s failure to return the work permit to the employer upon expiry, the employer should enter into an agreement with the employee to retain the original Work Permit whilst the employee keeps a copy. May 2012 Tax Watch Update Page 5

6 Contact For more information on this Tax Watch Update and Tax & Advisory Services of Ernst & Young Vietnam, please contact: Hanoi Office Huong Vu Thanh Trung Nguyen Partner Ernst & Young Assurance Tax Transactions Advisory About Ernst &Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Trang Pham trang.pham@vn.ey.com Hoang Vu Phan hoang.vu.phan@vn.ey.com The Gia Tran the.gia.tran@vn.ey.com Japanese Business Service Fuyuki Anzai fuyuki.anzai@vn.ey.com Ho Chi Minh Office Christopher Butler christopher.butler@vn.ey.com Sarah Jubb sarah.jubb@vn.ey.com Nitin Jain nitin.jain@vn.ey.com Thinh Xuan Than thinh.xuan.than@vn.ey.com Thy Anh Huynh thy.anh.huynh@vn.ey.com Japanese Business Service Takahisa Onose takahisa.onose@vn.ey.com Manager Partner Executive Manager Ernst & Young Vietnam is dedicated to providing the highest quality professional services to all its clients through assisting them to achieve their objectives, whilst realizing the growth aspirations of the firm and our people and making a positive difference to the community it serves. For more information, please visit: Ernst & Young refers to the global organization of member firms of Ernst &Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients Ernst & Young Vietnam Limited. All Rights Reserved. FEA No This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young Vietnam Limited nor any other member of the Ernst & Young Global Limited can accept any responsibility for loss occasioned to any person acting or refraining in this publication. On any specific matter, reference should be made to the appropriate advisor. May 2012 Tax Watch Update Page 6