Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence. Setting Up a Business in Vietnam

Transcription

1 Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence Setting Up a Business in Vietnam

2 Welcome to Dezan Shira & Associates and to the emerging Asia markets of China, India and Vietnam. Since 1992, Dezan Shira & Associates has been doing business in the region. Our firm was one of the first and is currently one of the very few cross-border practices operating in emerging Asia. The countries we work in are evolving rapidly as are the respective legal and tax environments. As a professional services firm, Dezan Shira & Associates combines both business advisory and tax disciplines under one roof. When added to our extensive, local knowledge of each of the markets we operate in, Dezan Shira & Associates is able to provide a uniquely strong platform to help clients take their businesses forward. Do you want to do business in Vietnam? Whether you already have a presence in the country or are new to this fascinating market, this guide is a practical introduction to wholly foreign-owned enterprises, the most popular foreign direct investment vehicle in Vietnam. Our expertise in this area is just one aspect of the specialized business advisory and tax services that our team of experts in Vietnam have to offer. Welcome to emerging Asia. Welcome to Dezan Shira & Associates. Setting up a Business in Vietnam Fast facts about Vietnam: Fast and stable economic growth Huge, untapped domestic market Government incentives and programs to attract more foreign investors Low wage rates for its large and relatively young labor market Investment environment Vietnam is located south of China with a population of over 86 million and total area of 331,690 square kilometers. Vietnamese is the native language spoken in the country, with English quickly gaining popularity. The country is divided into 63 provinces with five cities accorded provincial status. These include: Can Tho, Danang, Hanoi, Haiphong, and Ho Chi Minh City. Economy Economic reforms in the country began in earnest in The "doi moi" or renovation led the way for Vietnam to transition from a command economy to a socialist-oriented market economy. Private ownership of businesses was allowed in the country after years of collective market management. Business in Vietnam consists mainly of large state-owned and privately-held companies. In addition, deregulation opened certain sectors to foreign investment while the state maintained control over the strategic industries. This led the Vietnamese economy to slowly improve raising per capita income from US$220 in 1994 to US$1,080 in The country has abundant mineral and agricultural resources with rice, coffee, tea, and rubber its main export products.the Vietnamese economy grew by 8 percent from 1990 to 1997 and 7 to 8.5 percent from 2000 to 2005 making it one of the fastest growing economy in the region. Despite the effects of the Global Financial Crisis, the Vietnamese economy continued to report robust growth at 5.3 percent in The Asian Development Bank and the government forecasts growth to reach 6.5 percent in DEZAN SHIRA & ASSOCIATES

3 GDP GROWTH Year Real GDP in Thousand Real GDP Growth Billion VND Rate (%) Source: International Monetary Fund and Vietnam s General Statistics Office Organizations and external relations By 2007, the country had established diplomatic relations with 172 nations and joined Asia-Pacific Economic Cooperation in November, Its economic growth was among the highest in the world from 1997 to Vietnam s phenomenal growth led to the country joining the World Trade Organization in 2007 as its 150th member and acceptance as a nonpermanent member of the United Nations Security Council in Infrastructure Vietnam s infrastructure remains underdeveloped.it is estimated that Vietnam will need to entice US$150 billion worth of investments in the infrastructure sector alone to be able to continue to develop the economy. Since the 1990 s, there has been remarkable improvement in Vietnam s transportation, power generation, and communication system. However, infrastructure still does not meet the growing demands of investors and businesses. There are 43 main ports in the country but only nine are able to carry 50,000 ton tankers due to rudimentary port infrastructure and lack of deepwater seaports. The nine capable ports struggle with frequent congestion and shipment delay. Electricity supply is also a major concern for manufacturing businesses because of frequent power blackouts. Currently, Vietnam s electric network covers 100 percent of districts, 97.3 percent of communes and 94.7 percent of rural households. In industrial zones and in the cities of Haiphong and Ho Chi Minh City, electricity generation is still not enough to meet power needs. Apart from waterways, Vietnam has around 20 airports including three major international gateways: Noi Bai serving Hanoi, Danang serving Danang City, and Tan Son Nhat serving Ho Chi Minh City. Tan Son Nhat is the largest handling 70 percent of international passenger traffic. Vietnam s road system is about 222,179 kilometers long and only 19 percent of it is paved, mainly national roads and provincial roads. Local transportation is dominated by motorcycles and automobiles. Vietnam government has been working on attracting private investment in infrastructure by encouraging Public-Private Partnerships (PPP) projects. Currently, a high speed railway using Japanese technology is under construction and the road system and telecommunication sector can be expected to grow rapidly over time. Vietnam is piloting PPP investment in the following infrastructure projects: Roads, bridges, tunnels, ferries Railway, railway bridges, railway tunnels Urban transport Airports, seaports, river ports Fresh water supply system Power plant Infrastructure development and public services supply projects as decided by the Prime Minister Incentives and difficulties Realizing the importance of foreign investment, the government has been devoting efforts to improve the business environment by offering tax incentives and enhancing the quality of the basic infrastructure. Apart from those measures, the state has continued to lower commodity and service charges, while also removing the two-price policy for electricity, telecommunications, and transport, as well as the application of uniform prices to both domestic and foreign-invested enterprises. According to the World Bank Group s Doing Business Report 2010 that ranks countries in terms of the quality of their business regulations, Vietnam s rank dropped from 91st place to 93rd, out of the 181 countries included in the survey. CHALLENGES OF STARTING A BUSINESS IN VIETNAM COMPARED TO OTHER ECONOMIES Indicator Vietnam East Asia & Pacific OECD Average Procedures (number) Time (days) Cost (% of income per capita) Min. capital (% of income per capita) Source: The World Bank Group, Doing Business 2010 DEZAN SHIRA & ASSOCIATES 3

4 BUSINESS REGISTRATION PROCESS Pre- Fill in the application forms Registration Prepare documents needed Registration Submit all materials to relevant agencies to get the investment certificate Post Registration Obtain seal-making license and make a company seal I Post Registration Apply for a tax code at the Municipal Taxation Department and pay business license tax II Post Registration III Post Registration IV Open a bank account using the company seal Make annoucement on newspaper to notify the establishement of the company Pay business license tax Buy pre-printed VAT invoices or print self-printed VAT invoices The main problem areas include the lack of protective regulations toward foreign investors and tedious registration procedures and the administrative burden of doing taxes. The challenges of the registration process include the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income per capita. Understanding the legal environment Legislation The main legal framework for foreign direct investment (FDI) in Vietnam is basically composed of two laws Unified Law on Enterprises (ULE) and Common Law on Investment (CLI) which were passed by the National Assembly on November 29, 2005 and entered into force on July 1, The ULE, CLI, and their lower level legal documents cover most aspects of the investment procedure in Vietnam from business registration to operation. Commercial Law 2006 stipulates the condition and procedures necessary to set up representative offices and commercial branches in Vietnam. Investment sectors and regions entitled to incentives The government encourages investors to focus in the following sectors and regions: 1. Sectors in which investment is entitled to incentives: High technology, scientific research, and technological development Development of important infrastructure facilities for the state Production of software products Education and training, occupational training, health care, culture, sport, and the environment Production, construction, or transportation industries which employ many female employees Enterprises employing ethnic minorities 2. Regions in which investment is entitled to incentives: Regions with difficult socio-economic conditions, such as mountainous regions, remote or underdeveloped regions Industrial zones, export-processing zones, economic zones and high-tech zones The government regularly issues lists of sectors and regions qualified for investment incentives. The types of incentives will be determined by specific tax, land and other related regulations. Conditional investment sectors applicable to foreign investors For some sectors, foreign investors are only allowed to do business if they meet set conditions required by the Vietnamese government. Those sectors include: Broadcasting and television Production, publishing, and distribution of cultural products Mining and processing of minerals Establishment of infrastructure for telecommunications networks, transmission and provision of internet and telecommunications services Establishment of public postal networks and provision of postal services and delivery services Construction and operation of river ports, seaports, airports and airfields 4 DEZAN SHIRA & ASSOCIATES

5 Transportation of goods and passengers by rail, air, land and sea, and inland waterways Harvest of marine resources Production of cigarettes Real estate business Investment in distribution Education and training Hospitals and clinics The conditions may be in the form of requirements for the establishment of a company, the scope of project, the amount of capital, the domestic and foreign ownership structure of the project, and the type of legal entity allowed for the investment project, to name a few. These conditions are subject to revisions by the Vietnamese government. Forms of investment and enterprises According to the law, the main types of foreign direct investment include: 100 percent foreign-owned enterprises (FOE); joint venture between domestics and foreign investors (JV); investing in contractual forms of business cooperation contract (BCC);buildoperate-transfer contracts (BOT); build-transferoperate (BTO) and built-transfer (BT) projects, in which 100 percent of FOEs and JVs can be set up in forms of separate legal entities stipulated by the Law on Enterprises. The Law on Enterprises allows foreign investors to set up businesses under a form of limited liability company (LLC) with one member only or with two or more members; joint stock company (JSC) and partnership. For foreign investors investing in Vietnam for the first time, the new establishment of a LLC or JSC will be required to attach an investment project. The investment certificate shall also be the business registration certificate of the LLC or JSC. Furthermore, foreign companies with ongoing business relations with Vietmam can set up representative offices or branches in Vietnam. Forms of direct investment (i) Foreign-owned enterprises: Under Vietnamese law, a 100 percent FOE is a legal entity established by one or more foreign investors under a form of LLC or a shareholding company (SC) or a JSC. (ii) Joint ventures: A joint venture may be established as a LLC with more than one member, as a JSC or as a partnership and is a legal entity with limited liability. Profit and risk are distributed among the parties in proportion to their charter capital contributions to the JV unless the parties have agreed to otherwise in the joint venture contract. Conversion from a JV into a 100 percent FOE is now allowed pursuant to the Investment Law. (iii)business cooperation contracts: This is an agreement signed by multiple parties, typically by a foreign investor and a local company with the objective of jointly conducting business operations in Vietnam on the basis of mutual allocation of responsibilities and sharing of profits or losses, without creating or forming a legal entity in Vietnam. This form of business is usually used for short and medium-term projects lasting five to fifteen years in sectors where participation is restricted, such as oil, gas, and telecommunication services. To coordinate the daily operation of a BCC, a coordination board can be set up when necessary, with presence of the equal nominees from the parties. A foreign business cooperation party may set up an executive office in Vietnam to act as its representative in the performance of the BBC. (iv) Build-operate-transfer projects/ Build-transferoperate projects / Build-transfer projects: These types of projects are implemented on the legal basis of a written contract signed by foreign investors and an authorized government agency. These types of projects are introduced by the government to entice international capital into the infrastructure sector and help spur development on a commercially viable basis. Business scope ranges from traffic, electricity production and business, water supply or drainage, waste treatment and other sectors as stipulated by the prime minister. For both BOT and BTO, investors are allowed to commercially operate within a fixed period to be able to earn back he capital investment. However, for BOT, the projects are handed to the government after operation, while for BTO, the transfer procedures happen before the operation starts. Additionally, for BT projects, investors will be offered other projects or opportunities to gain back their capital investment in BT projects. Forms of enterprises (i) Limited liability company: A legal entity established by its members by way of capital contribution to the limited liability company. This type of enterprise can either have one member or a two or more members although the number DEZAN SHIRA & ASSOCIATES 5

6 of members cannot exceed 50. A member of an LLC is responsible for debts and other liabilities of the company within the amount of capital that they commit to contribute to the company and is not free to transfer their capital shares. There is no floor limit in the charter capital of foreign investors in LLC. The management structure of an LLC consists of the member s council, the chairman of the member s council, the director or general director, and controller or board of supervision where the LLC has more than ten members. (ii) Joint-stock company: A legal entity established by its founding shareholders on the basis of their subscription of company's shares. The charter capital of a JSC is divided into shares and each founding shareholder holds a number of shares corresponding to their subscribed and paid shares into the JSC. A JSC is required to have at least three shareholders regardless individuals or institutions, locals or foreigners with no maximum limit on shareholders. Shareholders are free to transfer their shares, except founding shareholders ordinary shares within the first three years and voting preference shares. There is no floor limit in the charter capital of foreign investors. The management structure of a JSC includes the shareholders general meeting, the board of management, the chairman of the board of management, general director and a board of supervision where the JSC has more than ten individual shareholders or if a corporate shareholder holds more than 50 percent of the shares. (iii) Partnership: A partnership may be established between an individual or a legal entity and a general partner, who must be an individual. The general partner has unlimited liability for the operations of the partnership. However, in case of JV, it is very difficult for the Vietnamese government to control foreign individuals or organizations and require them to take responsibility with their entire property. Consequently, on average foreign partners will be limited liability. Other forms of foreign business and investment in Vietnam (i) Representative office As the name of this type of entity indicates, a representative office is only for representing the parent company, increasing business opportunity, and supervising the implementation of the contracts signed by its parent company and local party and not for local direct sales because representative offices are not allowed to issue invoices. A representative office does not constitute an independent legal entity. Consequently, this type of entity is exempted from the corporate income tax and only personal income tax is applied. A representative office is suitable for the initial stage of market penetration since there is no requirement for registered capital. In order to obtain permission for a representative office, the parent company should legally operate in its incorporated country for at least one year. On average the business period for representative offices are five years, subject to renewals if necessary. (ii) Commercial branch A commercial branch is the subsidiary of a parent company and is not a separate legal entity according to Vietnam law. There is a prerequisite requirement stipulating that the parent company must operate in its home country for at least five years before setting up a branch in Vietnam. It can carry out commercial activities although the scope of these commercial activities are still strictly limited in Vietnam. Usually a commercial branch can execute contracts, earn profit, and remit it back to the home country as well as open bank accounts. The issued license will specify the scope of activity allowed. Corporate income tax, personal income tax, and other issues need to be considered when opening a commercial branch. Company names Vietnam has comparatively strict rules in place in terms of naming enterprises. For foreign invested enterprises, the name may contain words in foreign language only if it is the overseas registered name of that enterprise. No identical company name can be registered within the same city or province. Investment certificate and issuing agency Foreign investors must have a legitimate project when entering Vietnam market. The procedures of obtaining an investment certificate, also known as business registration certificate, can be classified into two categories: registration or evaluation, depending on the size and sector of the project. For non-conditional sectors and non-special investment projects in which investment capital is below VND300 billion (about US$16.6 million), only registration is required. For an investment project in which investment capital is VND300 billion or more, or in conditional sectors, 6 DEZAN SHIRA & ASSOCIATES

7 or which belongs to the category of special projects, evaluation procedures apply. Different entities will be required to submit different documents in order to apply for a business or an investment. Under Vietnamese laws, all documents which are granted by the foreign government must be notarized and legalized. Concurrently, such notarized and legalized documents are required to be translated into Vietnamese with the Vietnamese language version certified by a competent authority. For any project outside export processing zones (EPZs) or industrial zones (IZs), the application documents are required to be submitted to the provincial department of planning and investment, and the investment certificate will then be issued by the provincial people s committee. In particular, special projects will be evaluated and approved by the prime minister. For projects in EPZs and IZs, application documents need to be submitted to the management committees, except for special projects which need to be handed to provincial department of planning and investment. The investment certificate for all projects inside the EPZs and IZs, including special projects, will be issued by the management committee of the EPZs and IZs. Documentation for registration The documents needed for registration will vary depending on the entity of choice. Generally there are several documents that every foreign investor is required to submit, such as application form for investment certificate and other documents to prove financial capability. Representative office and branch (non-incorporated entities): A certified copy of the certificate of incorporation and any amendments of the parent company A certified copy of the parent company s memorandum and articles of association A certified copy of the parent company s audit report in its latest financial year and issued by an auditing company A notarized copy of the office lease contract; and a notarized copy of chief representative s passport or branch head s passport. Joint venture enterprises and wholly foreign owned enterprises for LLC and JSC A certified copy of the certificate of incorporation and any amendments of the parent company (if applicable) A certified copy of the memorandum and articles of association of the parent company (if any) Technical-economic explanation or feasibility study for a LLC or JSC (if any) Share certificates Bank statements or any statements certifying the legal status and financial capacity of investors. Business cooperation contracts Business cooperation contract Technical-economic explanation or feasibility study for a BCC Statements certifying the legal status and financial capacity of investors Draft technology transfer contract or technical assistance contract (if there is any technology transfer or technical assistance) Environmental impact assessment report Application file for land lease or in principle agreement on premise lease (if applicable) Planning certificate and preliminary design indicating the proposed architecture of the project (if applicable) Build operate transfer projects Build-operate-transfer contract Technical-economic explanation or feasibility study for a BOT/BTO/BT Statements certifying the legal status and financial capacity of investors Draft technology transfer contract or technical assistance contract (if there is any technology transfer or technical assistance) Environmental impact assessment report Planning certificate and the preliminary design indicating the proposed architecture for the project Duration of registration/evaluation For non-incorporated entities such as representative offices and branches, certificates should be issued within 15 working days upon receiving valid documents. For incorporated entities, the duration will depend on whether evaluation is needed. For those projects that need registration only, investors should expect about 15 days before the issuance of an investment certificate. Where the evaluation process is needed, duration will vary. Projects that are not required to be approved by the prime minister will need 20 to 25 working days before getting an investment certificate. Projects that do need the prime minister s approval will need approximately 37 days to get an investment certificate. Post-registration procedures After getting an investment certificate, companies need to obtain a seal and a seal-making license DEZAN SHIRA & ASSOCIATES 7

8 from the sdministrative department for social order (ADSO), under the Municipal Police Department. The documents required for application includes an application form provided by ADSO and a notarized copy of business registration certificate or investment license. After obtaining the seal, companies need to apply for a tax code at the Municipal Taxation Department and then open a bank account. A bankissued application form, the company s business registration certificate, the company charter, the company seal, the company tax code, and the resolution of the management board on the authorized signatures are needed for application of a bank account. Apart from that, a newspaper announcement is needed to notify the public of the establishment of the company. The news should include the company name; headquarter address, branches, or representative offices; line of business; charter capital; full name, home address, nationality, identity card number, passport or other relevant personal certification, and the number of establishment or business registration of company owner or members; full name, resident address, nationality, number of identification card, and passport or other personal certification of the company's legal representative; location of business registration. After that, enterprises need to pay for a business license tax, costing anywhere from VND1 million to VND3 million, depending on the registered charter capital of the company. Enterprises will also need to buy pre-printed VAT invoices from the Municipal Taxation Department. Companies may opt to use customized VAT invoices pending government approval. Moreover, enterprises need to register with the local labor office to declare use of labor, and register employees with the Social Insurance Fund for the payment of social, health, and unemployment insurance. Charter capital Charter capital is the amount of capital that all shareholders or members of a company are willing to contribute and is stated in the company charter. It is generally equal to the par or stated value of all outstanding stocks in case of a JSC. Investors cannot increase or decrease the charter capital amount without prior approval from the local licensing authority. Charter capital can be used as working capital to operate the company. Charter capital can be 100 percent of the total investment capital or loan capital to form the total investment capital of the company. Loan capital includes shareholders loans or third-party finance. There are some sectors requiring a certain amount of legal capital such as securities, credit institutions, insurance, and gold production. Legal capital means the minimum amount of capital that is required by law for an enterprise to be established. Charter capital must be at least equal or higher than legal capital required for a sector. Legal capital applicable to securities companies is as follows: Securities brokerage: VND25 billion Securities self-investing: VND100 billion Underwriting securities issuance: VND165 billion Securities investment consultancy: VND10 billion The minimum level of legal capital of a fund management company in Vietnam shall be VND25 billion. Regarding insurance companies, the minimum capital required for life insurance companies is VND300 billion, for non-life insurance ones is VND600 billion and for insurance broker ones is VND4 billion. For production of gold jewelry and fine art objects, enterprises operating in Hanoi and Ho Chi Minh City must have a minimum legal capital of VND5 billion; and enterprises operating in other provinces and cities must have a minimum legal capital of VND1 billion. Regarding ingot gold production, enterprises must have a legal capital of VND50 billion or more. Understanding the tax environment Tax issues are unavoidable for any investor. As the current system in Vietnam is in the process of transition, every foreign investor needs to understand what their liabilities are, both as an individual and a business, and whether they are eligible for any relief or exemptions. Tax planning is a complicated matter as the tax regime levies different types of taxes at different rates for business in different areas and sectors. This section endeavors to give a brief introduction on some main taxes in Vietnam s tax system, which are applicable to foreign investment in Vietnam including: 8 DEZAN SHIRA & ASSOCIATES

9 LEGAL CAPITAL APPLICABLE TO CREDIT INSTITUTIONS IS AS FOLLOWS No. Description Applicable from BANK 1. Commercial bank State commercial bank VND3 trillion VND3 trillion Join stock commercial bank VND1 trillion VND1 trillion Joint venture bank VND1 trillion VND3 trillion Wholly foreign-owned bank VND1 trillion VND3 trillion Branch of foreign bank US$15 million US$15 million 2. Bank for social policies VND5 trillion VND5 trillion 3. Investment bank VND3 trillion VND3 trillion 4. Development bank VND5 trillion VND5 trillion 5. Cooperation bank VND1 trillion VND3 trillion 6. People credit fund Central people credit fund VND1 trillion VND3 trillion Local people credit fund VND100 million VND100 million II NON-BANK CREDIT INSTITUTION Financial company VND300 bn VND500 bn Financial leasing company VND100 bn VND150 bn Corporate income tax Value added tax Special consumption tax Personal income tax Corporate income tax Corporate income tax is only applicable to those incorporated entities such as LLC, JSC and commercial branches that bring in profits. According to the Law on Corporate Income Tax which came into effect on January 1, 2009, the standard CIT rate is 25 percent applied for both domestic and foreign invested enterprises. Particularly for companies involved in activities of prospecting, exploring and mining of petroleum and gas and other rare and precious natural resources, the CIT rate is from 32 percent to 50 percent depending on each special project and business establishment. Tax incentives are available for investment projects in specific sectors and areas, with the purpose of boosting the economy, education, and technology of regions with difficult socio-economic conditions as well as those in high-tech zones and economic zones. For detailed information of tax incentives, please see the table below: The tax incentives above apply from the year revenue is generated. Companies whose tax exemption is still pending under old CIT law where the taxpayer has not yet generated a profit have to start using tax incentives from the effective date of the law on January 1, The corporate income tax law has a general deductibility clause that allows expenses to be deductible if they are CORPORATE TAX INCENTIVES Incentive Additional Incentives Beneficiaries 20% CIT rate, applicable for 10 years 10% CIT rate, applicable for 15 years CIT exemption: up to 2 years; 50% reduction for up to 4 subsequent years CIT exemption: up to 4 years; 50% reduction for up to 9 subsequent years Newly established companies in areas with difficult socioeconomic conditions. Newly established companies: in areas with extremely difficult socio-economic conditions, economic zones, high-tech zones; investing in the high-tech sector, producing software, scientific research and technology development, or infrastructure considered extremely important by the state; operating in industries such as educational training, vocational training, health care, culture, sports and environment. *Note: there is clear classification of regions socio-economic conditions, please ask our experts for more information. DEZAN SHIRA & ASSOCIATES 9

10 the following: properly substantiated, related to the production or trading of an enterprise, and are not specifically identified as being non-deductible. However, the law will retain the 10 percent cap on advertising and promotional expenses, which means only 10 percent out of total expenses of the company can be allowed from ad and promotion. If the company pays more than 10 percent, the extra will not be deductible when calculating corporate income tax. Newly-established enterprises will be allowed a 15 percent cap on A&P expenses in the first three years as from the date of establishment. The CIT law also entitles a company to set aside 10 percent of its annual taxable income for research and development purpose only if this expense is spent within the country and within five years. If the research and development fund is not used within that time or less than 70 percent of it is spent or it is used for another purpose other than research and development, then the company will have to refund the tax exemptions garnered from the fund plus interest. If a taxpayer has branches in various provinces then they will be required to allocate the tax payment to the corresponding provincial tax authorities in the locations where it operates. The period of loss carry forward is five years. However, loss incurred from the transfer of immovable property can only be compensated by income derived from the same business activity. Value added tax Value added tax is levied on the added value of almost goods and services generated during the process of production, circulation and consumption in Vietnam (regarding some categories of goods and services, they are subject to special consumption tax). For goods and services purchased from abroad, VAT applies on the duty paid value of imported goods and services. The importers must pay VAT at the same time when they pay import duties to customs office. According to the law on value added tax which was effective from January 1, 2009, there are three VAT rates: 0 percent, 5 percent and the standard rate of 10 percent. The tax rate of 0 percent applies to exported goods and services, international transportation, except cases involving the transfer of technologies or intellectual property rights abroad; offshore reinsurance services; credit provision, capital transfer and derivative financial services; post and telecommunications services; and exported products which are unprocessed mined resources and minerals. The tax rate of 5 percent applies to essential goods and services like water supply, fertilizer, insecticides, medicine, educational and training equipment and tools, baby toys, scientific and art books, natural agro-forestry products, animal feeds, and services for scientific and agricultural applications (15 categories of goods and services in total). The standard tax rate of 10 percent is applicable to everything else. Imported fixed assets such as equipment, machinery, transport and construction materials used for scientific research, technological development, oil and gas exploration and exploitation activities will be exempted from VAT. Companies will be given an allowance of six months to correct errors in declaration and deduction of input VAT. Expenses amounting to more than VND20 million must be made through the bank system for the input VAT to be credited. Special consumption tax Special consumption tax (SCT) applies to goods and services which are considered as luxury items. The current SCT law classifies objects subject to two categories: commodities (cigarettes, alcohol, beer, cars, motorbikes, airplanes, yachts, gasoline, air-conditioners, playing cards and joss papers, and articles) and certain services (discos, massage, karaoke, casino, jackpot games, golf and lottery), in which others will be valid from April 1, 2009 and regulations applied to beer and alcohol valid from January 1, Personal income tax According to the PIT law, effective since January 1, 2009, PIT is levied on worldwide income of Vietnam residents while on Vietnam-source income of nonresidents. Residents are defined as those living in Vietnam for 183 days or more in 12 consecutive months or in a calendar year, having a residence in the country or a leasing contract in Vietnam with a term of 90 days or more. Non-residents are those who do not satisfy the conditions mentioned previously. The PIT rate for non-residents is a flat rate of 20 percent. Personal income tax has ten types of levied earnings: earnings from business activities; wages received from employers; capital investment; capital transference; property transference; prizes won; copyright; commercial franchising; income from securities such 10 DEZAN SHIRA & ASSOCIATES

11 SPECIAL CONSUMPTION TAX RATES Level Goods and services Tax rate (%) I. Goods 1 Cigarettes; cigars 65 2 Alcohol: over 20% proof From 01/01/2010 to 31/12/2012 From 01/01/2013 under 20% proof 3 Beer From 01/01/2010 to 31/12/2012 From 01/01/ Cars under 24 seats under 9 seats: <2,000cc; 2,000cc-3,000cc; >3,000cc 45; 50; seats seats 15 cars using electric power: 9 seats; seats; seats 25; 15; 10 5 Motorbike over 125cc 20 6 Airplane 30 7 Yacht 30 8 Gasoline 10 9 Air conditioners (less than 90,000 BTU) Playing cards Joss papers, joss articles 70 II. Services 1 Disco 40 2 Massage, karaoke 30 3 Casinos, jackpot games, entertainment with betting 30 4 Golf 20 5 Lottery as inheritance; and capital contribution in economic institutions and business facilities. Earnings exempted from the PIT include: income from real estate transference between husbands and wives; natural parents and children including siblings; earnings from life insurance contracts; overseas remittance; retirement salary; scholarship money; and earnings from compensation for insurance contracts. The progressive tax benchmark for residents employment income will be classified under seven tax grades. The lowest tax grade, for those a monthly taxable income of VND5 million or less, will be at 5 percent while those earning between VND5 and VND10 million will be taxed at 10 percent. There will be a tax reduction of VND4 million per month or VND48 million annually for taxpayers. The tax reduction for each dependent is pegged at VND1.6 million per month or VND19.2 million annually. Qualified dependents are children aged below 18 years old, children over 18 years old, but earning a low income, or having to support disabled parents. PERSONAL INCOME TAX RATES Taxable Income Rate (%) Residents Non-residents Interest 5 5 Dividends 5 5 Inheritances 10 Sale of securities - On the gain On the sales proceeds Sale of real estate - On the gain On the sales proceeds 2 2 DEZAN SHIRA & ASSOCIATES 11

12 Tax bracket INCOME IS TAXABLE AT THE FOLLOWING FLAT RATES Yearly taxable income (million VND) Monthly taxable income (million VND) 1 Up to 60 Up to Over 60 to 120 Over 5 to Over 120 to 216 Over 10 to Over 216 to 384 Over 18 to Over 384 to 624 Over 32 to Over 624 to 960 Over 52 to Over 960 Over Tax rate (%) Transfer pricing Regulations on transfer pricing in Vietnam is contained in Article 9 of the Foreign Investment Law, Ministry of Finance Circular 74, Circular 89, and Circular 13. Formal transfer pricing guidelines and documentation requirements have been finalized by the Ministry of Finance Circular 117 in Unlike the old transfer pricing regulation in Circular 13 of 2001, which only applied to the transactions between entities with foreign investment capital in Vietnam and their related parties, the new rules have included both domestic entities and foreign related parties under scrutiny. There is an especially high risk of transfer pricing audit for multinational enterprises that keep reporting loss, but are still expanding their business in Vietnam. The basic principle is that every transaction needs to be at arm s length. Disclosure of related party transactions is required in the annual tax return. The definition of related party is very broad in Vietnam. The threshold of control is as low as 20 percent, which is much lower than that of other countries. Other than capital investment, large scale of purchase, supply and lending relationships between otherwise unrelated parties are also included. The five transfer pricing methodologies in OECD guidelines are usable in Vietnam. They are the following: comparable uncontrolled price; resale price; cost plus; comparable profits; and profits split. There is no special preference of any method over others; however, Vietnam tax authorities require most suitable to the conditions surrounding the transactions with the most complete and reliable source of information and data for analysis and comparison. Based on the documentation requirement for transfer pricing purposes, enterprises involved in inter-company transactions need to prepare sufficient proof, such as industry and functional analysis, a selection and application of the most appropriate transfer pricing methods, accounting books, invoices, vouchers and other documents related to tax calculation, tax payment and tax settlement. Other than those, contemporaneous records are required, which means records need to be prepared at the time when a related-party transaction happens. All the documentation should be written in the Vietnamese language. Transfer pricing regulations impose a compliance burden to enterprises with related-party transactions. Penalties specifically for transfer pricing is not stated in the new regulation. However, non-arm s length transfer pricing are subject to adjustment for CIT purposes. Heavy penalties will be applied to enterprises who demonstrate tax evasion and underpayment. Useful resources Vietnam Briefing Asiainfo.org International Monetary Fund Ministry of Planning and Investment: Foreign Investment Agency The World Bank Group: Doing Business For more professional advice in setting up a business in Vietnam vietnam@dezshira.com 12 DEZAN SHIRA & ASSOCIATES

13 Foreign Direct Investment, Company Formation, Tax and Due Diligence Advice Throughout Vietnam Please contact our offices for due diligence, incorporation and tax advice on matters relating to foreign direct investment in Vietnam or Hanoi Office Room 1028, 10F, Pacific Place Bldg 83B Ly Thuong Kiet Street Hoan Kiem District Hanoi Vietnam Tel Fax Saigon Office 16F Saigon Tower 29 Le Duan Street District 1 Ho Chi Minh City Vietnam Tel Fax