Corporate Income Tax (CIT) is a direct tax levied on the taxable income of businesses, including income from manufacturing, trading goods, services, and other income as regulated by the law. In this article, RSM Vietnam will analyze important aspects of Corporate Income Tax.
Taxpayer for Corporate Income Tax
As stipulated in Article 2 of the Corporate Income Tax Law, the taxpayer for Corporate Income Tax is an organization engaged in the production and trading of goods and services with taxable income (hereinafter referred to as the enterprise), including:
Enterprises established under the laws of Vietnam.
Foreign enterprises (hereinafter referred to as foreign enterprises) established under foreign laws with a permanent establishment or no permanent establishment in Vietnam.
Cooperatives established under the Cooperative Law.
Public non-business units established under the laws of Vietnam.
Other organizations engaged in production and business activities with taxable income
Corporate Income Tax Rates
Corporate Income Tax rates applicable to companies are stipulated in the Corporate Income Tax Law. The standard Corporate Income Tax rate is 20%. The Corporate Income Tax rate for companies operating in the exploration, prospecting, and extraction of oil and gas in Vietnam ranges from 32% to 50%, depending on the specific location and conditions of each project. The Corporate Income Tax rate for companies engaged in the exploration, prospecting, and extraction of certain rare and precious resources is either 40% or 50%, depending on the location.
Corporate Income Tax Incentives
Corporate Income Tax incentives are applicable to new investment projects in encouraged investment sectors or geographical areas, as well as large-scale projects. Expansion projects (including expansion projects that were permitted by competent authorities or implemented during the period from 2009 to 2013 without enjoying Corporate Income Tax incentives) that meet certain specific conditions are also eligible for Corporate Income Tax incentives from 2015 onwards. New investment projects and expansion projects do not include projects formed through mergers or restructuring.
The encouraged investment sectors in Vietnam, as promoted by the Government, encompass education, healthcare, culture, sports, high technology, environmental protection, scientific research, and technology development, infrastructure development, processing agricultural and aquatic products, software production, and renewable energy.
New or expansion projects in the production of products listed in the prioritized supporting industry product list are also eligible for Corporate Income Tax incentives if they meet one of the following criteria:
i. Industrial support products for high technology; or
ii. Some industrial support products for the following industries: textiles - garments; leather - footwear; electronics - informatics; automobile manufacturing and mechanical engineering.
Areas encourages for investment include economic zones, high-tech zones, certain industrial zones, and economically and socially disadvantages areas.
Large investment projects in the manufacturing sector (excluding projects producing goods subject to special consumption tax and mineral exploitation projects)
Projects with a capital scale of 6 trillion VND or more, disbursed within a maximum of 3 years from the date of initial investment approval, and meeting at least one of the following criteria:
ii. Achieving minimum annual total revenue of 10 trillion VND no later than the fourth year from the year of revenue commencement; or
iii. Employing over 3,000 workers no later than the fourth year from the year of revenue commencement
Projects with a capital scale of 12 trillion VND or more, disbursed within 5 years from the date of investment license issuance, and utilizing technology as assessed under relevant regulations.
Starting from January 1, 2016, a preferential tax rate of 10% is applicable for a period of 15 years, and a preferential tax rate of 17% is applicable for a continuous period of 10 years starting from the year of generating revenue from eligible activities. The duration of preferential treatment may be extended in certain specific cases. After the expiration of the preferential tax rate, the regular corporate income tax rate will apply. A preferential tax rate of 15% is applied to certain business sectors for their entire operation. Some sectors of a social nature (such as education and healthcare) enjoy a tax rate of 10% throughout their operation.
Taxpayers may be entitled to tax exemptions or reductions. The tax exemption period is calculated continuously within a certain period from the first year a company generates taxable income from eligible activities, followed by a reduction period with a tax rate reduced by 50% compared to the applicable tax rate. However, in cases where a company does not have taxable income in the first 3 years from the first year it has revenue from business operations eligible for tax incentives, the tax exemption/reduction period is calculated from the fourth year from when the company starts its business operations. Specific criteria for tax exemption and reduction are stipulated in the corporate income tax regulations.
Additionally, companies engaged in manufacturing, construction, and transportation that employ a significant number of female workers or ethnic minority individuals are eligible for additional tax reduction incentives.
Starting from January 1, 2018, small and medium-sized enterprises (SMEs) will enjoy certain corporate income tax incentives, including lower corporate income tax rates (different criteria will be applied to qualify as an SME).
A resolution on certain corporate income tax policies to support the development of small and medium-sized enterprises (SMEs) has been drafted to consider proposals to reduce the corporate income tax rate applicable to SMEs to 15%-17% and introduce various tax incentives, including a two-year corporate income tax exemption for SMEs immediately after their establishment.
The corporate income tax incentives, in this case, apply when specific conditions related to sectors and industries are met and do not apply to other types of income (except for certain income directly related to the investment incentive sector, such as income from scrap metal disposal). These other types of income encompass a wide range of sources.
Determining taxable income subject to CIT
Taxable income subject to CIT for the tax period is determined by subtracting deductible expenses from the total revenue, regardless of whether it is generated domestically or abroad, and adding other taxable income.
Taxpayers must prepare an annual CIT finalization return, which shows the adjustments between accounting income and taxable income.
Expenses that cannot be deducted
Actual expenses related to production and business activities, supported by invoices and documents as required by law, including bank transfer documents for invoices valued at VND 20 million or more and not on the list of non-deductible expenses, are deductible for CIT purposes. Some examples of non-deductible expenses include:
Depreciation of fixed assets exceeding current regulations.
Salaries and wages for laborers not actually paid or not specifically stipulated in individual labor contracts or collective labor agreements or the company's financial regulations.
Employee benefits (including some benefits provided to employees' relatives) exceeding one month's average salary. Health insurance and non-compulsory accident insurance premiums are also considered employee benefits.
Amounts exceeding VND 3 million per month per person allocated to voluntary retirement funds, voluntary pension insurance, and life insurance for employees.
Research and development fund allocations not in compliance with current regulations.
Provisions for the unemployment support fund and payments for unemployment benefits to employees exceeding the provisions of the Labor Law.
Business management expenses allocated by overseas companies to their permanent establishments in Vietnam exceeding the allocation based on revenue during the period.
Interest payments corresponding to the registered capital shortfall according to the capital contribution schedule in the company's charter.
Interest expense for production and business loans to non-economic organizations or credit institutions exceeding 1.5 times the basic interest rate announced by the State Bank of Vietnam at the time of borrowing.
Interest expense exceeding 30% of the total pre-tax accounting profit, interest expense, and depreciation. Provisions, accruals, and use of reserves such as inventory discount reserves, bad debt reserves, losses on financial investments, product warranties, goods, or construction not following the Ministry of Finance's guidelines on reserve allocation.
Exchange rate differences due to re-evaluation of foreign currency-denominated items, excluding exchange rate differences due to re-evaluation of outstanding debts at the end of the tax period.
Sponsorship expenses, except for sponsorships in education, healthcare, scientific research, disaster relief, or charity housing for the poor with proper documentation.
Administrative fines for administrative violations, late payment penalties, and service fees paid to related parties not meeting the deductible conditions.
For certain companies such as insurance companies, securities trading businesses, and lottery businesses, the Ministry of Finance provides specific guidance on deductible expenses when calculating corporate income tax (CIT).
Companies established and operating in accordance with Vietnamese law are allowed to set aside a maximum of 10% of their annual taxable income for the establishment of a Scientific and Technological Development Fund before calculating CIT. However, certain conditions must be met to qualify for this deduction.
Loss transfer
A company that incurs a loss after settling taxes is allowed to carry forward the entire and continuous loss to offset against taxable income in the following years for a period not exceeding 5 years, starting from the year following the year in which the loss was incurred.
Losses from business activities eligible for CIT incentives can be offset against profits from business activities that are not eligible for CIT incentives, and vice versa. Losses from real estate transfer activities and investment project transfers can be offset against profits from business activities. Companies are not allowed to carry back losses. Vietnam currently does not have regulations regarding the offsetting of profits and losses between companies within the same group.
Tax declaration and payment
Companies are required to make quarterly provisional tax payments based on their estimated tax liability. The total amount of provisional CIT paid for the first three quarters of the year must not be less than 75% of the CIT payable according to the annual final settlement. If the provisional tax payments for the quarters are lower than the prescribed amount, the company must pay the tax deficiency along with late payment interest (currently around 11% per annum) from the due date of the third quarter. The final CIT settlement is done annually. The deadline for submitting the CIT final settlement and paying the CIT is the last day of the third month from the end of the fiscal year.
In cases where taxpayers have dependent accounting branches or units in different provinces or centrally-run cities, they only need to submit their CIT declaration documents at the location where their main office is registered. However, manufacturing companies must allocate the tax amount payable to the respective tax authorities in the provinces where their dependent production facilities are located. The allocation is based on the cost ratio of each production facility to the total cost of the company. However, for dependent units or business locations with income eligible for CIT incentives, the company must determine the CIT amount payable separately (without allocation).
The typical fiscal year for tax calculation is the Gregorian calendar year. In cases where a company uses a fiscal year (meaning a fiscal year different from the Gregorian calendar year), it is required to notify the local tax authority accordingly.
Profit repatriation
Foreign investors are allowed to repatriate profits abroad at the end of the fiscal year or when ending their direct investment activities in Vietnam. Foreign investors are not allowed to repatriate profits if the invested company has accumulated losses.
Foreign investors must directly or through authorization inform the tax authorities of the profit repatriation at least 7 working days in advance before executing the profit repatriation.
How can RSM Vietnam support businesses?
Businesses require a dynamic partner to accompany and assist them in timely monitoring, review of emerging issues, and potential risks.
Understanding this, our tax experts are always ready to provide businesses with valuable services to ensure compliance and help identify potential tax risks and savings opportunities. Furthermore, with years of collaboration with the General Department of Taxation, local tax departments, and other government agencies, we also assist businesses in working more effectively with the government and tax authorities.
Our services include:
Corporate Income Tax Return Support Service.
In-depth Tax Review Services.
Regular Consulting Services.
Tax Audit Support Services.
Case-by-Case Advisory Services.
Assistance in Applying for Double Taxation Avoidance Agreements (DTA).
Government Relations Support.
Feel free to contact us today to explore how our tax consulting experts can assist with your corporate income tax compliance needs.
RELATED CONTENTS:
Latest guide on corporate income tax calculation 2021
6 things to know about post-tax profit in corporate income tax
Comments