Fundamentals Level Skills Module Taxation (Vietnam) Monday 6 June 2011 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Tax rates and allowances are on pages 2 3. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper F6 (VNM) The Association of Chartered Certified Accountants The Ministry of Finance of the Socialist Republic of Vietnam
SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest VND, unless instructed otherwise. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Value added tax (VAT) Standard rate 10% Reduced rate 5% Corporate income tax (CIT) Standard rate for enterprises 25% Foreign contractor tax (FCT) Value added rates as a percentage (%) of taxable turnover: % 1. Services, leasing of machinery and equipment, and insurance. 50.1 2. (a) Construction and assembly and installation where the tender included the supply of materials, machinery and equipment in the construction work. 30.1 (b) Construction and assembly and installation where the tender did not include the supply of materials, machinery and equipment in the construction work. 50.1 3. Transportation and other business and production. 30.1 Corporate income tax rates as a percentage (%) of taxable turnover: % 1. Trading: distribution and supply of goods, raw materials, supplies, machinery and equipment associated with services in Vietnam. 1 2. Services, lease of machinery and equipment, insurance. 5 3. Construction. 2 4. Other production or business activities and transportation (including sea and air transportation). 2 5. Lease of aircraft, aircraft engines, aircraft spare parts and sea going vessels. 2 6. Reinsurance. 2 7. Assignments [transfer] of securities. 0 1 8. Loan interest. 10 9. Income from royalties. 10 Personal income tax (PIT) Regular income tax rates for Vietnamese citizens and other residents in Vietnam effective from 1 January 2009 Portion of Tax rate monthly assessable % income (VND million) Up to 5 5 Over 5 to 10 10 Over 10 to 18 15 Over 18 to 32 20 Over 32 to 52 25 Over 52 to 80 30 Over 80 35 2
Net to gross calculator N < 4,750,000 G = N/0 95 4,750,000 < N < 9,250,000 G = (N 250,000)/0 9 9,250,000 < N < 16,050,000 G = (N 750,000)/0 85 16,050,000 < N < 27,250,000 G = (N 1,650,000)/0 8 27,250,000 < N < 42,250,000 G = (N 3,250,000)/0 75 42,250,000 < N < 61,850,000 G = (N 5,850,000)/0 7 N > 61,850,000 G = (N 9,850,000)/0 65 Gross basis % Tax G < 5,000,000 5 T = 0 05G 5,000,000 < G < 10,000,000 10 T = 0 1G 250,000 10,000,000 < G < 18,000,000 15 T = 0 15G 750,000 18,000,000 < G < 32,000,000 20 T = 0 2G 1,650,000 32,000,000 < G < 52,000,000 25 T = 0 25G 3,250,000 52,000,000 < G < 80,000,000 30 T = 0 3G 5,850,000 G > 80,000,000 35 T = 0 35G 9,850,000 Notes: G: Gross income N: Net income T: Income tax Personal deductions (per month): Self Dependant VND4,000,000 VND1,600,000 Social insurance, health insurance and unemployment insurance: Rates Social insurance (SI) 6% Health insurance (HI) 1 5% Unemployment insurance (UI) 1% Base salary (per month) From 1 January to 30 April 2010: VND13,000,000 From 1 May to 31 December 2010: VND14,600,000 Rates of exchange The following rates of exchange are to be used in answering all questions in this paper (unless otherwise stated): Euro 1 = VND28,000 USD1 = VND20,000 AUD1 = VND20,000 3 [P.T.O.
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ALL FIVE questions are compulsory and MUST be attempted 1 Vinaconstruct Ltd ( Vinaconstruct ) is a Vietnamese joint stock company in the field of construction. The company is seeking your assistance with regard to their corporate income tax (CIT) return for the year ended 31 December 2010. Vinaconstruct s financial statements for this year were audited by an independent company in February 2011 and the company prepared its draft CIT return on 15 March 2011 as follows: Note VND million A ACCOUNTING PROFIT BEFORE TAX 400,000 B CALCULATION OF TAXABLE INCOME 1 Adjustments to increase profits before tax 186,680 1.1 Adjustments to increase revenue 1 100 1.2 Income tax paid overseas for income received overseas 2 140,000 1.3 Depreciation of assets not in accordance with regulations 3 5,600 1.4 Interest expense in excess of regulatory limit 4 17,000 1.5 Expenses without supporting invoices/vouchers 5 5,000 1.6 Penalty for violation of administrative regulations 6 5,080 1.7 Expenses which are not related to taxable revenue 7 3,400 1.8 Non-deductible employment expenses 8 7,500 1.9 Accruals and provisions which are not actually paid 9 3,000 1.10 Gain/loss on foreign exchange revaluation 10 0 2 Adjustments to decrease profits before tax 3,500 2.1 Non-taxable profits 11 3,500 2.2 Gain/loss on foreign exchange revaluation 10 0 2.3 Other adjustments 0 3 Total taxable income 583,180 C CALCULATION OF CORPORATE INCOME TAX (CIT) 1 Total CIT at common tax rate (25%) 145,795 2 Creditable CIT paid overseas 0 3 Total CIT liabilities 145,795 Notes: During your discussions with Vinaconstruct s accountant, the following explanations were given regarding the various items: 1. This adjustment relates to a cash discount that Vinaconstruct decided to offer a client. The discount is not stipulated in either the contract or the invoice to the client, and it was paid on 31 December 2010, long after the invoice to the client was issued. The client did not make any written acknowledgement for receipt of the discount. Vinaconstruct accounted for this amount as a reduction to revenue in its accounting records. 2. Vinaconstruct has a construction project in Cambodia, the profits from which are subject to Cambodian tax at the rate of 20%. The amount declared in the return is the profits net of this tax. Cambodian tax on profits is akin to corporate income tax in Vietnam. 3. This item consists of the following: Depreciation expense on a stadium for employees: VND2,000 million Depreciation expense on a canteen for employees: VND500 million Depreciation expense on cars and buses for the transportation of employees: VND500 million Depreciation expense on finance-leased machinery and equipment used for construction purposes: VND2,000 million Amortisation for prepayments of expenses of VND3,000 million incurred in 2010 for the major repair of a finance leased machine: VND600 million 4. Vinaconstruct has borrowed VND100,000 million at an interest rate of 17% from QKFN, a Vietnamese finance company. The base rate of interest as announced by the State Bank of Vietnam at the time the money was borrowed was 10%. 5 [P.T.O.
5. This adjustment includes a payment of VND80 million that Vinaconstruct paid to a supplier in early 2010 but for which it has not received any invoice. In 2009, Vinaconstruct had estimated that the expense was VND50 million and booked this amount as an accrued expense in its accounting records in 2009. Vinaconstruct correctly adjusted for this accrued item in its 2009 tax declaration according to the prevailing regulations. 6. This adjustment consists of the following: Penalty for late declaration of foreign contractor tax (FCT): VND70 million Penalty for late construction of a tax office building under a construction contract signed with the provincial tax authorities (the contract is in nature of economic contract): VND5,000 million Penalties for traffic rule violations: VND10 million 7. This adjustment consists of the following, all of which have been supported by proper documents: Civil construction in progress not related to business: VND3,000 million Sponsorship to the National University of Construction for an exam amongst their students about construction techniques: VND50 million Vacation trip for employees: VND150 million Payment of life insurance premium for key employees: VND200 million 8. This adjustment consists of the following: Mid-year bonuses paid to employees; the bonuses were neither stated in the Labour Contract nor in the collective labour agreement: VND5,000 million Salary paid to Vinaconstruct s general director, who is also a member of the Board of Directors: VND2,500 million 9. This adjustment represents a provision for a loss on a construction contract with a client. The contract commenced in 2010 and will be completed in 2011. In 2010, the company invoiced the client an amount of VND25,000 million and incurred costs of VND20,000 million on the contract, which is in line with the contract s progress. The revenue and costs are supported by proper documents, however, Vinaconstruct did not recognise these in its income statement because at the end of 2010, it estimated that the contract overall will make a loss. In particular, the cost to complete the contract in 2011 will be VND28,000 million while the revenue will be only VND20,000 million. Thus it prudently made a provision for the total contract loss of VND3 billion in its 2010 income statement. 10. In 2010, Vinaconstruct had the following foreign exchange gains/losses: Realised gain from foreign exchange: VND2,500 million Realised loss from foreign exchange: VND1,500 million Unrealised gain from foreign exchange: VND4,000 million; of which VND2,000 million is from the revaluation of short-term receivables in foreign currency, VND1,500 million from the revaluation of work-in-progress in a foreign country, and the remaining VND500 million from the revaluation of foreign currency cash. Unrealised loss from foreign exchange: VND5,000 million; of which VND4,500 is from the revaluation of long-term foreign loans and the remaining VND500 million is related to long-term payables in foreign currency. Vinaconstruct has recorded all the realised foreign exchange gains/losses, as well as the unrealised gains/losses on monetary items (receivables, payables and cash) in its income statement (i.e. they are reflected in its profit after tax). Foreign exchange differences from revaluation of work-in-progress and cash are not booked in the Income Statement. However, the accountant did not make any adjustments when he prepared the tax return because he was unsure as to how to deal with these items. Vinaconstruct wishes to utilise the tax treatments specified in Circular 177/2009/TT-BTC for dealing with the above items. 6
11. Vinaconstruct paid in 30% of the charter capital of Hanarchitect, a Vietnamese company. On 5 January 2011, Vinaconstruct received an announcement from Hanarchitect to the effect that Vinaconstruct will receive a dividend of VND3,500 million from Hanarchitect. Required: (a) (b) Explain the principles for the deductibility of the following expenses in accordance with the Circulars which were in effect by 30 June 2010: (i) Training costs for employees which are incurred before the establishment of the company; (2 marks) (ii) Repair costs for finance leased assets incurred by the lessee, where it is stated in the lease agreement that the lessee will be responsible for the repairing costs; (2 marks) (iii) Depreciation costs for non-current assets that have been fully depreciated but are still used. (1 mark) Review the corporate income tax (CIT) declaration prepared for Vinaconstruct Ltd by its accountant (as above), and redraft it, making all relevant adjustments for the items where necessary. Note: You are required to use the same format of the tax declaration as provided in the question above. All workings must be clearly shown. (25 marks) (30 marks) 7 [P.T.O.
2 Mr Thanh Nguyen, 45 years old, is an overseas Vietnamese who is currently an Australian citizen. From 1 January 2010, he was assigned to Vietnam to be the General Director of V Co, a company operating in the area of finance and investment services in Vietnam. In 2010 Mr Thanh spent more than 183 days in Vietnam for his employment. Mr Thanh has an Australian wife, Alanda, 44 years old, and two children: Joshua, 15 years old and Marie, 10 years old. His wife and children live in Australia. Alanda is a lawyer and has a stable employment income in Australia. In the year 2010, Mr Thanh received the following remuneration package from V Co. These remunerations are all in accordance with his employment contract: 1. Cash amount actually received after all deductions: USD157,250. This amount includes a contractual relocation allowance of USD10,000 and a performance bonus of USD36,000. The remaining amount relates to Mr Thanh s net of tax contractual salary after all of the deductions made by V Co referred to below. 2. Housing allowance: Mr Thanh is allowed monthly housing expenses of USD3,500. For his first three months in Vietnam, before he found suitable accommodation, Mr Thanh stayed in a hotel, for which V Co covered all of the costs of USD4,500 per month, without charging the excess back to him. He found a suitable home on 1 April 2010 for a cost of USD2,200 per month, and V Co signed a house rental agreement with the landlord for Mr Thanh, and paid him the difference between the rent and the allowance in cash. This payment is not included in the salary paid in (1) above. His labour contract was properly amended to reflect the actual situation of Mr Thanh for compliance purposes. 3. Children s tuition fees capped at USD40,000 per year. V Co paid total fees of USD60,000 directly to the children s schools in Australia and deducted the excess when paying Mr Thanh s contractual salary. 4. Air fares: During the year V Co purchased five return tickets to and from Australia with a total value of VND150,000,000, two tickets for Mr Thanh and three tickets for his family. V Co s policy is to sponsor only three return air fares per employee and/or spouse per year, and the costs of the remaining air fares were therefore deducted when paying Mr Thanh s contractual salary. 5. Superannuation (a form of pension contribution which is compulsory in Australia): V Co paid AUD38,180 per quarter directly to the authorities on behalf of Mr Thanh. In addition, V Co also paid AUD18,000, of which it born AUD12,000 and deducted AUD6,000 when paying Mr Thanh s contractual salary, as a contribution to a trust in Australia which manages V Co s defined benefit (non-compulsory) pension scheme. 6. Lumpsum medical insurance: V Co paid insurance for Mr Thanh and his family at a cost of USD4,000 per year, directly to the service provider. 7. Annual golf membership: A membership costing USD5,000 in Mr Thanh s name was paid for directly to the issuer by V Co. Mr Thanh often visits the golf club to meet the company s clients. 8. Starting from 1 March 2010, V Co rented a car (including driver) for Mr Thanh at a cost of USD1,000 per month. The rental is paid directly to the car lessor by V Co. Mr Thanh has evidence to prove that his personal usage of the car is 40% of the car s total mileage. 9. Mr Thanh s mother is aged 70. She has no income and lives on Mr Thanh s support. On 30 September 2010, V Co lent Mr Thanh USD250,000 which he gave his mother to purchase an apartment. V Co charged Mr Thanh a market interest rate of 6% per annum on the loan and deducted the interest when paying Mr Thanh s contractual salary on a monthly basis. The employment contract that Mr Thanh signed with V Co provides that the company will bear all Mr Thanh s personal income tax (PIT) in Vietnam. All deductions made from Mr Thanh s salary, if incurred in currencies other than USD, were converted into USD using the relevant cross exchange rate with VND. 8
Required: (a) (i) Calculate (in USD) Mr Thanh s net of tax contractual salary for the year 2010; (4 marks) (ii) Prepare a schedule listing the items of Mr Thanh s 2010 remuneration package, other than his contractual salary, which are taxable and non-taxable respectively. Note: for the purposes of this sub-part, you are not required to translate the amounts from their original currency. (10 marks) (b) Calculate Mr Thanh s annual tax liabilities for the year 2010, using the methodology stated in the Official Letter 3565/TCT-CS dated 14 September 2010. Notes: 1. You should ignore any health insurance in this question. 2. According to Official Letter 3565 above, you should assume no gross up is required for any of the benefits-in-kind paid by V Co on behalf of Mr Thanh directly to providers. (11 marks) (25 marks) 9 [P.T.O.
3 HM Co is a large Vietnamese corporation with diversified operations, including trading and manufacturing. In 2010, HM Co signed the following contracts with foreign companies: Contract 1: For acting as a commission agent for NXN, a Korean company, to sell optical cables in Vietnam. The cables were shipped by NXN to Hai Phong, and HM Co received the goods from Hai Phong, cleared Customs and transported them to its central store. The total revenue that NXN expects to receive from selling the cables in Vietnam is USD500,000. Any value added tax (VAT) in Vietnam will be borne by HM Co; other taxes, if any, will be borne by NXN. The conditions for the contract are that NXN will bear all risks to the goods up to sale. When HM Co sells the cables, it will remit payments to NXN via bank payment after deducting 10% commission and withholding tax in Vietnam, if any. 50% of the cables were sold in Vietnam during 2010, and HM Co made the corresponding payment to NXN on 1 December 2010. Contract 2: For sending a shipment of bamboo-originated products to SCS, a Singapore company for distribution in Singapore. SCS will act as agent for HM Co in Singapore. SCS will charge HM Co a 10% commission on the revenue, plus a fee of USD150,000 for advertising the products in Singapore. Under the contract, HM Co will bear all withholding taxes in Vietnam and Singapore, if any. During 2010, the amount remittable to HM Co was USD1,500,000, net of Singaporean withholding tax, commission and the advertising fee. Contract 3: For importing a shipment of 1,000 brand new laptops from Singtrade, a Singapore trader. The price of the laptops is USD1,000 per unit, CIF Hai Phong. The terms of payment are within one (1) month from receipt of the goods. HM Co received the laptops on 31 January 2010, but informed Singtrade that they wanted to extend the deadline for payment. Thus on 28 February 2010, both parties entered into a separate agreement whereby HM Co acknowledge a debt payable to Singtrade, and that the amount owed will be charged interest at the rate of 10% per annum or pro-rata. HM Co will bear all withholding tax in Vietnam, if any. On 30 December 2010, HM Co instructed SCS (the agent in contract 2 above) to pay directly to Singtrade the whole amount owed to Singtrade by HM Co, and the payment was effected by Singtrade on 31 December 2010. Contract 4: For leasing high-tech equipment from Sumto Corp, a Japanese finance company. HM Co will pay Sumto Corp an upfront lease payment of USD50,000 on the signing of the lease agreement on 2 January 2010, and then an annual amount of USD100,000 on 15 December in each of the next three years. The insurance costs for transportation of the goods to Vietnam amounted to USD20,000 and these were borne by Sumto Corp. In 2010, Sumto Corp also incurred maintenance costs relating to the equipment of USD10,000. All the costs are supported by proper documents. Sumto Corp will bear all the foreign contractor tax (FCT) on this contract. HM s policy is to declare and pay tax upon each payment to a foreign company, but only on the last date before the deadline. None of the above foreign companies need to claim back any input value added tax (VAT) incurred in Vietnam. 10
Required: (a) (b) Explain HM Co s responsibilities from entering the contracts with the foreign companies (as above) with regard to foreign contractor tax (FCT) registration and withholding, declaration and payment in Vietnam, specifying the deadline for each activity. (5 marks) For each of the contracts 1 to 4 above: state, briefly giving reasons, whether HM Co will be required to withhold and pay FCT under the current regulations in Vietnam; if so, state the point of time (date) on which HM Co will have to declare and pay any FCT to the tax authorities in the year 2010; and calculate (in USD) the amount of the value added tax (VAT) portion and the corporate income tax (CIT) portion of the FCT that HM Co will have to pay in the year 2010. If you conclude that no tax is payable in the year 2010, state so. (15 marks) (20 marks) 11 [P.T.O.
4 For the purposes of this question, you should assume that today s date is 30 November 2010. Hong Da Co Ltd ( HDC ) is a Vietnamese company specialising in assembly of and trading in motorbikes. HDC has a famous motorbike brand named Silver Knife. The normal unit selling price of the Silver Knife is VND50,000,000, while the total unit manufacturing cost is VND35,000,000. (a) HDC is considering issuing ten (10) units of the Silver Knife, at no charge, to its sales personnel for them to use for their work. Required: State, giving reasons, whether HDC will have to issue a VAT invoice for the free issue of the ten Silver Knifes to its employees and, if so, state the invoice amount and compute the amount of VAT, if any, that will have to be charged. (3 marks) (b) Recently, HDC successfully registered a promotional programme with the authorities whereby HDC will provide a special discount of 10% of the normal selling price to all customers purchasing Silver Knifes in December 2010. HDC is also considering selling 12 units of the Silver Knife to its 12 employees of the month in December 2010 at the special price of VND30,000,000, as an additional bonus for their outstanding performance. Required: State, giving reasons, whether HDC will have to issue a VAT invoice for the sale of the 12 Silver Knifes to its employees in December 2010 and, if so, state the invoice amount and compute the amount of VAT, if any, that will have to be charged. (3 marks) (c) In October 2010, HDC sold 100 units of the Silver Knife to a dealer in Quang Ninh province. In early November, the dealer returned five (5) of the units to HDC because they contained defects. Required: Advise HDC of the actions they should take to comply with the VAT regulations when receiving the defective units returned from the dealer, in each of the following cases: (i) (ii) The dealer is a VAT payer under the deduction method (i.e. he declares VAT based on output VAT less input VAT); (3 marks) The dealer is a VAT payer under the direct method (i.e. he declares VAT based on value added). (3 marks) (d) HDC also sells Silver Knifes on hire purchase (purchase by instalment payment) to qualified customers, under which the customers pay for the Silver Knifes in 24 equal monthly instalments of VND2,500,000 each over two years. This type of sale was not included in the December 2010 promotional programme referred to in (b) above. Required: Advise HDC on the VAT treatment of its hire purchase sales, state the taxable amount per unit and compute the VAT that will have to be charged on the sale of each motorbike on hire purchase terms. (3 marks) (15 marks) 12
5 (a) The determination of the relevant related parties is the initial but critical step for determining whether a transaction is a related party transaction and, if so, whether any transfer pricing issues arise. Circular 66/2010/TT-BTC dated 22 April 2010 ( Circular 66 ) provides detailed definitions of related parties for this purpose. V Group is a large group in Vietnam in real estate development. V Group holds 80% of the shares of VP1 and 25% of the shares of VP2. VP2 holds 40% of the shares of VP3. The remaining shares of VP3 are held by ABC Investment, a company in which neither V Group, VP1 nor VP2 hold any shares. Required: State whether or not each of the following sets of parties will be considered as related parties in accordance with the definitions in Circular 66: V Group and VP1; V Group and VP2; V Group and VP3; V Group and ABC Investment and VP2 and VP3. Note: you are NOT required to give reasons for your determinations. (5 marks) (b) Name the FIVE (5) acceptable methods for determining arm s length prices for related party transactions (the transfer pricing methodologies) promulgated in Circular 66. (5 marks) (10 marks) End of Question Paper 13