VIETNAM TAX ISSUES – OUTLOOK ON THE EUROPEAN UNION VIETNAM FREE TRADE AGREEMENT (EVFTA)

1. VIETNAM TAX ISSUES – OUTLOOK ON THE EUROPEAN UNION
VIETNAM FREE TRADE AGREEMENT (EVFTA)
The recently formed Government has manifested its ambition to support reforms especially related to
business. Short after the oath of inauguration, it organized a conference with Vietnamese enterprises
leading to the issuance of Resolution 35/2016/NQ-CP dated 16 May 2016. The main focus was to
improve the investment environment. Nevertheless, some difficulties remain and review of tax policies is
required from some specific perspectives.
Granting tax incentives
The Government can grant preferential incentives to foreign enterprises through investment licensing or
certificate, the most secure way for enterprises to obtain their incentives despite tax law amendments.
However, some local tax departments do not agree with the Government’s policy on incentives and oblige
enterprises to apply the current regulations regardless of enterprises’ incentives. This reluctance is a
breach in the Government’s protection over investment and investors and must be prevented.
Official Letter 12404/BTC-TCT and Circular 96/2015/TT-BTC, both issued by the Ministry of Finance
(MOF), grant Corporate Income Tax (CIT) incentives for enterprises established before 01st
January 2014
and not yet operational. Some local tax departments have refused to recognize such incentives and asked
enterprises to amend their charter while making their business starts in 2014 in order to be entitled to CIT
incentives. This request is acting towards the MOF’s willingness to boost investment and should be
dropped out.
According to tax offices, any project planning the increase of enterprises capacity or fixed assets is
necessarily considered an investment if increase of capacity was equivalent to increase of capital. Tax
authorities then rescind CIT incentives because they believe that investment certificates are no longer
updated due to the increase. Yet, initial investment certificates do not mention capacity and should remain
updated as long as increases solely concern enterprise capacity and not capital. A regulation should
precise that project expansion may only be investment when there are adjustments on capital investment.
Decree 218/2013/ND-CP issued by the Government, extends preferential tax rate application to 15 years
for investment projects under VND6 million (~ US$260,000). To ensure a fairer treatment towards
businesses, different levels could be established such as 3 years of preferential tax rate application for
projects between VND 10 to 20 billion (~ US$450,000 to US$900,000).
According to the draft Decree No. 12, bonuses and commissions granted based on sale volume are
deductible expenses for enterprises. Nevertheless, agents being individuals or organizations must pay
taxes on these sum of money as such expenses are related to business activities. It would be more
convenient for agents to have their commissions and sale bonuses exempted of VAT invoices.
On the other hand, benefits granted to employees should be extended in part to their family: welfare or
recreational expenditures, visa application fee for employees’ families, etc. Through these benefits, a
longer relationship between the company and the employee is ensured. Expenses for employees’ families
are deductible for companies if stated in labor contract or in companies’ Labor policy. Decree
218/2013/ND-CP should then be amended.
Resolving tax payment issues

2. Tax-related regulations are often amended and interpreted differently from one year to another. As tax
inspections often take place a long time after the corresponding fiscal year, it seems impossible for
companies to know what to comply with. Many enterprises have to pay penalties and high interests
because of changing regulations between the time of tax payment and the time of tax inspection. Besides,
many businesses are chased for unpaid taxes due to errors from the tax office, even though the taxes were
duly paid. In the tax office, the members of the staff are not dedicated enough to reconcile tax obligations
and payments.
An annual tax inspection or a change in the method of calculating penalties and late payment interests
should be considered. In addition, the nomination of a task force exclusively for reconciling tax
obligations and payments would be a good improvement.
Understatement of payable tax or overstatement of tax refund is liable to a fine of 20% of the difference
between the tax payable and declared or paid tax amount. Households or individuals stated in Article 107
of the Law on Tax Administration are exempted from the fine. Enterprises are sometimes in overpaid
position and are still charged with a fine when the inspection occurs regardless of the intention to make a
false declaration or not. The implementation of clearer regulations would avoid confusion and wrongful
declaration leading to fines in such cases.
Late tax payment is also subject to penalty . Yet, several contradictory documents have been issued and it
became complicated to determine on what basis to calculate the late payment interest. Indeed, Circular
26/2015/TT-BTC issued by the Ministry of Finance states a rate of 0.05% per day accordingly to the
deficit of the tax payable until the tax is fully paid, for taxes declared before January 1st
2015 and found
insufficient after the same date. Circular 130 contends that the late payment interest is regulated for each
period. The two documents provide inconsistent guidelines, thus putting enterprises in a very delicate
situation.
Article 14 of Circular 78/2014/TT-BTC states that transfer of Limited Liability Company requires filling
a form equivalent to real estate transfer, regardless of the percentage real estate represents in the company
assets. Moreover, since indirect capital transfer is considered taxable income in Vietnam and in the
country of origin, a double taxation in both countries applies. The system should be rethought and the
application of deferred tax assets (DTA) should be considered.
Explaining VAT calculation and refund
Circular 130/2016/TT-BTC (Circular 130) provides a tax refund for short-term investment (under 12
months) with special provisions for businesses not executable within a year such as ship construction.
Value Added Tax (VAT) can then be refunded for a few years only until the ship is completed and
exported abroad, regardless of the total investment. This specific case should be extended to other similar
industries.
Circular 130 is referring to declaration period for tax refund and elaborates the whole system around this
notion without giving a clear definition and measurement. According to Circular 130, VAT is not
refundable for domestic sale activities but is refundable up to 10% of the revenue generated by exported
goods and services. However, the distinction is thin for enterprises doing both activities.

3. Besides, VAT refund for trading of imported and exported goods is not clearly explained in Article 1 of
Circular 130., notably for determining the activities eligible for VAT refund. Circular 119/2014/TT-BTC
adds that input VAT deduction requires non-cash payment except for gifts and donations, but excludes
samples and test items.
In addition, some imported goods and services are subject to 5% VAT notably in health care industry
according to Article 10.11 of Circular 219/2013/TT-BTC guiding the implementation of the Law on
VAT. Article 10 of draft Decree guiding Law 106/2016/QH13 prevents businesses with 5% VAT to be
entitled to VAT refund. The input costs related to such businesses being subject to 10% VAT and the
input VAT not refundable are significant amount for enterprises to maintain their activities.
The services exported and “consumed outside Vietnam” have a VAT rate of 0%, whereas a VAT rate of
10% applies when such services are consumed in Vietnam. Tax authorities often focus on the place the
service is performed more than on the place it is used. The notion of export services should be reviewed
without allowing differing interpretation so that one definition – based on the location of the consumer –
and one rule prevail.
Under the Vietnamese Law, warranty is a service the supplier provides at the expense of the buyer but not
attached to goods or services delivery. Circular 103/2014/TT-BTC issued by Ministry of Finance made
clear that warranty attached to goods delivered at Vietnam’s borders were not submitted to withholding
tax. For the contracts signed prior to Circular 103, the situation is not clear and the Ministry of Finance
should establish clear provisions. Furthermore, guidelines on provisions for foreign suppliers’
responsibility would help ensure the efficiency of free warranties for the buyer.
Circular 39/2014/TT-BTC sets out the criteria of issuing invoices as a condition to determine the finished
date of service provision without explaining the term “finished”. It may depend on type, frequency or
period (per month, per hour) of service. More details on the definition of finished service and the
calculation of the payment time should be provided.
Outlook on the EVFTA
The EVFTA signed on December 2 2015, will offer great investment opportunities for Vietnam. With
elimination of almost all tariff barriers (85% right after the EVFTA’s entry into force, 99% a few years
after), the automotive industry as well as trades in sectors such as textile and footwear will be boosted.
The Government is already supporting foreign investment by implementing a favorable policy and strict
respect of a stable economy and a controlled inflation. We can expect that the EU will influence the
resolution of tax issues and will impose fixed and determined tax rules to apply in Vietnam.
Most important issues
- Local tax departments should be clearly guided about enterprises’ incentives and the notion of
project expansion.
- The taxation system with declarations and incentives in several documents, is too complex for
enterprises to comply with. The tax refund calculation method must be clearly stated to help taxpayers
apply regulations properly.
- Granting VAT refund for business establishments exporting goods and services and not for
businesses with output VAT at 5% may be regarded as discrimination in term of taxes among businesses.

4. If you have any question on the above, please do not hesitate to contact Mr. Oliver Massmann under
omassmann@duanemorris.com . Oliver Massmann is the General Director of Duane Morris Vietnam
LLC.
Thank you very much!