The circular provides guidance on corporate income tax incentives and deductions in Vietnam. It reintroduces tax incentives for certain industrial zones and changes incentives for new projects and business expansions. For deductions, it increases the cap on advertising expenses from 10% to 15% of expenses and makes other changes such as capping casino expenses and restricting education deductions. The circular also clarifies treatment of unrealized gains, advertising expenses for real estate, transfer pricing documentation, and prorated tax rates for non-December year-ends.

1. NEW CIRCULAR 78 ONCORPORATE INCOME TAX
INCENTIVES AND DEDUCTIONS
By Oliver Massmann
On June 18, 2014, Vietnam’s Ministry of Finance published Circular 78, which provides
additional guidance regarding Decree 218 on corporate income tax (CIT). The Circular will
come into effect on August 2, 2014 and will be effective for the whole 2014 tax year. In the new
Circular, the Vietnamese government has reintroduced tax incentives for investments in certain
industrial zones. Industrial zones that do not qualify for CIT incentives are those in the inner
districts of HCM City, Hanoi, and Hai Phong as well as those located in type 1 provincial cities.
The Circular includes a number of changes regarding CIT incentives and deductible expenses.
CIT incentives: CIT incentives are available for a “new project” as well as a “business
expansion.” A “new project” is a project that has been issued an investment certificate for the
first time and does not need to be a new company. It can also be an investment project that had
been issued its investment certificate before 2014, but generated its first revenue after January 1,
2014. It is, however, necessary that an amended investment certificate be issued after January
2014. “Business expansion” requires that there be a project in an encouraged sector or location
and one of the following conditions are met: If the investment is located in an encouraged sector,
the historical costs of the fixed assets must increase at least VND20 billion, or they must increase
VND10 billion for investment into an encouraged location; or The historical costs of the fixed
assets increase at least 20 percent compared with the total historical cost of fixed assets before
the business expansion; or The design capacity has increased at least 20 percent compared to the
design capacity before the business expansion. If a project is provided CIT incentives because of
its sector, then the profit from the sale of scraps and foreign exchange differences in relation to
its main activities and other direct income (except interest from term deposits) are entitled to the
CIT incentives. If a project is provided CIT incentives because of its location, all profits are
entitled to CIT incentives, except for profits from capital assignment, transfer of immovable
property and from services subject to special sales tax.
Deductible expenses: For deductible expenses, the cap on the deductibility of Advertising and
Promotion (A&P) expenses has been increased from 10 percent to 15 percent. For a trading
entity, the purchase price of goods must be excluded from the expense base for A&P cap

2. calculation purposes. The purchase price of goods includes import duty, special sales tax and
environment tax. Gifts to customers are CIT deductible but are still subject to the A&P cap.
However, payment discounts are no longer subject to the A&P cap. For casino or gaming
activities, deductible management expenses are capped at four percent of revenue. In order to be
CIT deductible, the most updated salary needs to be mentioned in the labour contract or its
appendix. School fees for the children of expatriates are not CIT deductible commencing from
pre-school. For the online purchases of air tickets, evidence of non-cash payment and the
boarding pass are required for CIT deductibility purposes. These documents are not required if
the air ticket is purchased from an airline or agent and supported by a VAT invoice.
Other changes: Other changes that fall within Circular 78 include the reversal of provisions and
net unrealised foreign exchange gains relating to the main business activities of a taxpayer are no
longer treated as other income. Furthermore, A&P expenses for a real estate company will be
recognised in the first year of handover of real property instead of in the year incurred. Capital
assignments with a value of VND20 million or over must be supported by documents evidencing
non-cash payment. If not, the tax authorities have the right to deem the transfer price for CIT
purposes. Lastly, for entities with an alternate tax end of the year (i.e. not December 31), the
applicable CIT rates will be applied on an apportionment basis, e.g. July 1 to December 31, 2013
has a CIT rate of 25 percent and January 1 to June 30, 2014 has a CIT rate of 22 percent.
Should you have any question, please contact Uomassmann@duanemorris.comU;