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CORPORATE INCOME TAX

Lecturer: Le Phuong Thao, MBA School of Business - International University

Objectives
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After complete this lecture, you are able to

Determine the legal documents on Corporate Income Tax

Understand the scope of Corporate Income Tax Understand the tax bases and methods of tax computation Understand tax registration, withholding, declaration, finalization and refund

Legal Documents on Corporate Income Tax

CIT
Law No. 14/2008/QH12
Decree No. 124/2008/ND-CP
Circular no. 130/2008/TT-BTC

Law No. 32/2013/QH13

Decree No. 92/2013/ND-CP
Circular 141/2013/TT-BTC
guiding the implementation of the Governments Decree No. 92/2013/ND-CP on elaborating the implementation of some articles that comes into effect from July 1, 2013 in the Law on the Amendments and Supplement to the Law on Enterprise Income Tax and the Law on Amendment and Supplement to the Law on Value Added Tax

Circular no. 203/2009/TT-BTC of Oct 20, 2009 Circular no. 66/2010/TT-BTC of Apr 4, 2010 Circular no. 18/2011/TT-BTC of Feb 10, 2011

Scope of Corporate Income Tax

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Corporate income tax payers Sources of income

Corporate income taxpayers

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Any organization producing and trading goods and services which has taxable income (hereinafter referred to as an enterprise), comprising
1. Enterprises established and operating under Vietnamese Laws:

worldwide income (including income sourced from Vietnam and other countries)

2. Foreign enterprises with permanent establishments in Vietnam:

Income sourced from Vietnam Income sourced from overseas activities that is attributed to the permanent establishment in Vietnam

Corporate income taxpayers

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Permanent establishment in Vietnam is

production and business establishment through which foreign enterprises conduct some or all income-generating production and business activities in Vietnam
Including:

Branches, executive offices, factories, workshops, means of transport, mines, oil and gas fields, or other places for extraction of natural resources in Vietnam; Construction sites and construction, installation or assembly works; Providers of services, including consultancy services through employees or other organizations or individuals; Agents for foreign enterprises; Vietnam-based representatives

Taxable Income
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Taxable income include

All income from supply of goods or services (main activities of the enterprises ordinary/primary income)

Other income : income derived not from the business lines in the business registration certificate of the enterprises

Tax Computation
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Taxable income

Turnover

Deductible + exp.

Other taxable income Loss carried forward from previous year

Assessable income

Taxable income

Exempt income

Tax liability

Assessable income

Science &Technology X Tax Fund Allocation Rate

Note: other taxable income is calculated separately on the net basis for each activity

Tax Period
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The Western calendar year OR The fiscal year

Note: if the first or the last tax period is less than 3 months could combine 2 consecutive tax periods into 1

Tax Rate
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The standard CIT rate is 25% (from 1/1/2009)

Enterprises operating in the oil and gas industry are subject to CIT rates ranging from 32% to 50% depending on each project/business. Tax holiday: 0%
Preferential rates: 5% to 20%

Tax Rate
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From 1/7/2013 20% for enterprises with a total revenue for the preceding year not exceeding VND20 billion, For those new established in 2013, or which have the 2012 tax year less or more than 12 months, the criteria would be average revenue not exceeding VND1.67 billion per month in 2013 (by 30.6.2013 only) or in 2012 correspondingly Applicable for all income, except Income from capital transfer, from transfer of capital contribution right, from transfer of real estate, etc Income from exploration and exploitation of oil and gas, rare natural resources, and mineral resources. Income from supply of services subject to special sales tax

Tax Rate
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From 1/7/2013

10% for income from social housing business activities,

Applicable for Income from sales, lease, or financial lease of social housing from 1/7/2013 regardless of the contract signing date

Turnover
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Tax point: The time for fixing turnover to calculate taxable income
In

respect of goods, the time when ownership of the goods was transferred (not the time when the sale invoice was issued) the case of services, the earlier of when the services was completed or when the invoice of the services was issued.

In

Turnover
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VAT deduction method

Turnover

does not include VAT

VAT direct method

Turnover

is the total invoice amount

Turnover for Special Cases

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Turnover on goods sold on installments = the selling price of the goods as for a one-off payment [lump sum price], excluding interest on late payments

Interest is classified as Other income

Example: Car Dealer Co. sells 2 cars on 10 months installment basis.

Total installment payment is VND250 million/car. Lump sum payment price is VND200 million/car Turnover for CIT purposes is 2 x 200 = VND400 million.

Turnover for Special Cases

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For goods and services used for exchange , donations, gifts, internal consumption, turnover is determined by the selling price of products, goods and services of the same or similar kind on the market at the time of use. For goods and services produced by the business that are internally used to continue the business/production process, recognition of turnover is not required

Example: Manufacturer Y produces product A,

Y issued 10 products A to exchange for a number of goods B,

Y used 20 products A to reward their employees. The selling price (excluding of VAT) of product A at the time of exchange and reward is VND20000 per product.

Turnover for CIT purposes is:

(10+20)*20,000 = VND600,000

Turnover for Special Cases

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For processing activities, the turnover is processing fee, including wages, cost of fuel, power, submaterials, and other costs required for the processing

of goods .

Example: Processing company B provides processing service to an exporter. According to the processing contract, B will provide the necessary sub-materials for the processing. During the tax period B issued invoice to the exporter with the details: Processing fees: VND234,000,000 Sub-material costs: VND269,000,000 VND35,000,000

Turnover for Special Cases

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For agency or consignment activities (selling at the price fixed by the principal), the turnover is the receivable commission

Example: Shop X act as agent of Company A on the basis of selling As products at the price fixed by A.
Commission is 20% on selling price. The revenue of As products during the tax period is VND400mil. Turnover for CIT purposes of X is: 400mil * 20% =Shop VND80mil The principal (i.e. Company A in the above example) shall recognize the total sale price by the agent (VND400mil) as its turnover, the commission (VND80 mil) paid to the agent is its deductible expense.

Turnover for Special Cases

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For operating lease assets, turnover is the rent amount receivable for each period under the contract. If the tenant pays rent in advance for many years, the turnover is calculated by dividing the advance rent by the number of years

Example: According to the machinery lease contract, the monthly rent amount is VND15mil. The lessee prepaid the rent for a period of 24 months starting from 1 March 2009 to the lessor.

Taxable turnover for 2009 tax period: 15 mil *10months = VND150mil Taxable turnover for 2010 tax period: 15mil *12months = VND180mil Taxable turnover for 2011 tax period: 15mil*2months = VND30mil

Turnover for Special Cases

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For lending activities, finance leasing activities, turnover is the

receivable interest or rental receivable in the tax period .

For transportation, turnover shall be the total monies receivable from transportation of passengers, luggage and cargo. For electricity and clean water supply, it is the sum of money indicated on the value-added invoice. The time of determining turnover used for calculating taxable income is the day on which electricity meter readings are certified and recorded on electricity or clean water bills. Example: An electricity bill is recorded with an electricity meter reading from December 5 to January 5. Turnover recorded on this bill will be used for January.

Turnover for Special Cases

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For golf course business activities , turnover is the proceeds from the sale of membership cards and golf playing tickets and other revenues in a tax period. For insurance and reinsurance activities, turnover is the amount of insurance premium revenue base , collecting fees for agency services ( loss assessment , claims review , request for reimbursement Tuesday , compensation handling 100 %) reinsurance fees, reinsurance commissions and others income after deduction of the refund or reduction of premiums, etc.

Turnover for Special Cases

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Construction and installation, turnover shall be the value of the works or items of work or the value of the entire project works which were tested, accepted and handed over For prize-winning game business activities (casinos, prize-winning video games and betting entertainment), turnover is the excise taxinclusive proceeds from these activities, excluding prizes paid to customers. For securities trading, turnover is the proceeds from securities brokerage, dealing, issuance underwriting, investment portfolio management, financial consultancy and investment, investment fund management, fund certificate issuance, market organization and other securities services under law. For derivative financial services, turnover is proceeds from the provision of derivative financial services in a tax period.

Turnover for Special Cases

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For business cooperation contracts

If revenue sharing: turnover is the revenue each party is entitle to under the contract.
If product sharing: turnover is the sale price of the products shared to each party If pre-tax/ after-tax profits sharing: turnover is the sum of goods or service sales under the contract. The contracting parties shall appoint one of them as a representative to issue invoices, record turnover and expenditures and determine pre-tax profits divided to each party.

Pre -tax sharing: Each party shall fulfill its enterprise income tax obligation under current regulations. After-tax sharing: the appointed party shall declare and pay enterprise income tax on behalf of the other parties.

Deductible expenses
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Expenses
actually directly

arise

related to creation of the turnover and taxable income in the tax assessment period, adequate invoices and vouchers as required by law.

have

Non-deductible Expenses
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1.

Expenses which do not meet the general deductibility conditions, except the value of losses from natural disasters and other unforeseen circumstances with no compensation, Depreciation of fixed assets is not deductible if

2.

The fixed assets are not used for business activities

There is no document supporting that the fixed assets are owned by the business (except for finance-leased ones)
Depreciation of fully depreciated assets The depreciation expense s are not recorded and monitored in the company accounting books The depreciation expense s are not in accordance with the prevailing regulations (circular 203/2009/TT-BTC dated 20/10/2009)

Non-deductible Expenses
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Straight-line method

Historical cost
Stipulated Duration of use

Level of depreciation =
Example: Company A buys a power generator

The invoice amount of VND210 mil. Transportation cost VND10 mil. Installation, commissioning, tests cost totals VND20 mil.

The economical life of the machinery is 12 years.

The duration of use is expected to be 10 years which is in accordance with the stipulated duration of use in circular 203. The generator is put into use from 1 July 2009.

Non-deductible Expenses
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Depreciation expenses for CIT purpose is calculated as follow:

Historical cost:

210 + 10 + 20 = 240 mil

Annual depreciation:

24/10=24 mil

First year depreciation:

24/12*6 = 12 mil

Note: If the Company is profitable and would like to make faster depreciation using straight line method for technology changes, the depreciation expenses are capped at 2 times of normal expense under straight line method

Ex: the company want to depreciate the generator asap to upgrade to a more advanced one, the allowed period would be 5 years (i.e. 2 times faster than the 10-year period).

Non-deductible Expenses
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Adjusted reducing balance method

Used for the sectors with quickly development or technology changes

Applied only for fixed assets which meet the following conditions:

New invested fixed assets (not second hand) Machinery and equipment, or instruments for measurement and testing

Non-deductible Expenses
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Adjusted reducing balance method

Annual depreciation level

= reducing balance x accelerated depreciation rate

Accelerated depreciation rate

= Straight line method depreciation rate x adjusted ratio 1 Straight line method depreciation rate = X Duration of use Duration of use (t) t<= 4 yrs 4yrs < t < 6yrs t > 6yrs Adjusted ratio 1.5 2 2.5 100

Non-deductible Expenses
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Company A buys a brand new machinery for producing electronic chips at a historical cost of VND2,000 mil. The duration of use is determined to be 5 years under circular 203. The machinery and equipment is put into use from 1 January 2006. Depreciation expenses for CIT purpose is calculated as follow:
Straight line method depreciation rate = 1/5 * 100 = 20% Accelerated depreciation rate = 20% * 2 = 40%

Non-deductible Expenses
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Year
2006 2007 2008 2009 2010

Reducing balance

Calculation

Annual depreciation
800,000 480,000 288,000 216,000 216,000

Accumulated depreciation
800,000 1,280,000 1,568,000 1,784,000 2,000,000

2,000,000 2,000,000*40% 1,200,000 1,200,000*40% 720,000 432,000 216,000 720,000*40% 432,000/2 432,000/2

Non-deductible Expenses
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For enterprises which do not have business of transportation, tourism, or hotel in their business registration certificates, the following depreciation expenses shall not be deductible:
The

depreciation amount corresponding to the excess over VND1.6bil of historical cost entire depreciation expenses of civil airplanes or yachts

The

The restriction applied for purchases from 1/1/2009

Non-deductible Expenses
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Example:

Kingstar Ltd. is a company specialized in assembling electronics for export, it bought a Mercedes sedan for its General Directors business travel in April 2009 at the value of VND3 bil and is depreciating the car over 6 years, which is within the range of circular 203.

2009 accounting depreciation: (9/12)*(VND3,000/6) = VND375 mil

2009 deductible depreciation expense (9/12)*(VND1,600/6) = VND200 mil

Non-deductible Expenses
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Upgrading vs. Repaid expense:

Expenses incurred for upgrading, improving the assets shall be added to historical cost for depreciation.
Repaid expenses must be accounted fully for the current year or amortized for maximum of 3 years

Note: A tax deduction is allowed for depreciation of fixed assets during production suspension periods of less than 9 months (if due to seasonal production) and 12 months (if due to repairs, maintenance or relocation)

Non-deductible Expenses
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Any portion of costs of raw materials, materials, fuel or goods which

are used in excess of the reasonable consumption levels.

Example: Cost of good sold charged to P&L for the tax period is VND250mil of which cost of raw materials used for production of goods that exceeds the reasonable consumption level determined by the

business is VND15mil
Deductible cost of good sold = 235mil

Enterprises shall establish its own reasonable consumption levels of raw material and only disclose to the Tax office the main level of basic products.

Non-deductible Expenses
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Employee remuneration expenses which are not actually paid or are not stated in a labour contract, collective labour agreement, and the financial rules of the company.

Salaries, wages and allowances payable to laborers which, upon the expiration of the time limit for submission of annual tax finalization dossiers, have actually not been paid. Unless enterprises make provision salary funds for the subsequent years to ensure uninterrupted payment of salaries.

Yearly provision levels <= 17% of current years salary funds

Salaries and wages of owners of private enterprises or one-member limited liability companies (owned by a single individual); remunerations paid to founders and members of members councils or boards of directors who do not personally participate in administering goods production and trading or service provision activities.

Non-deductible Expenses
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Company payroll shows that (VND000):

Salary 1,278,000 Bonus 200,000 Total payable 1,478,000 Less personal income tax and statutory contribution withheld Net payable to the employee

(350,000) 1,128,000

Out of the total bonus, there was VND100mil paid to some permanent employees without any bonus policy mentioned in labour contracts signed with the company. So, salary and allowance cost of CIT purposes is VND1,478mil 100mil= 1,378mil

Non-deductible Expenses
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Expenses for uniforms of employees paid in cash or in kind over VND 5,000,000 per person per year Expenses for employees which are not strictly business-related

medical insurance premium (ex: AON Care) golf membership and fees incentives for initiatives, improvement without basis ( ex: no internal regulations)

Interest on loans corresponding to the portion of charter capital not yet contributed; Interest on loans from non-economic and non-credit organizations exceeding 1.5 times the interest rate set by the State Bank of Vietnam;

Non-deductible Expenses
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The excess portion over the deductibility limit of expenses for advertising, promotion, and marketing expenses: 10% of total other deductible expenses or 15% for newly-established enterprises for the first 3 operating years Expenses are subject to deductibility limit:

advertisement, marketing, sales promotion brokerage commissions guest reception, festivities, conferences, Support for marketing, expense subsidy, payment discount Newspapers given away as gift by news agency

Expenses are not subject to deductibility limit:

Commission for insurance brokers, agents selling goods at fixed price and multi level marketing expense for market research, such as survey, exploration, interview, and information collection, analysis and assessment expense for product display and introduction and organization of trade fairs and exhibitions, such as expense for opening showrooms

Non-deductible Expenses
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Template for calculation of the disallowed A&P expenses

(1) Total cost of trading in goods and services for the period per the company accounts. Less: Non-deductible expenses . Less: Cost of goods sold (for trader) Less: Advertising/promotion and other expenses subject to limit (2)Deductible expenses for the purposes of calculating the deductibility limit of advertising/promotion and other expenses (3)Allowed advertising/promotion and other expenses (10% of 2) (4) Actual advertising, promotion and other expenses X X X (X) (X) X X (X) X

(5)Non-deductible advertising/promotion and other expenses (4-3)

Non-deductible Expenses
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Example: Company A was established in 2008. In 2009, it made an enterprise income tax finalization report containing the following expense data:

Expense for advertisement, marketing, sales promotion and brokerage commissions; expense for reception, protocol and conferences; expense in support of marketing and payment discount; expense for press agencies newspapers given as presents or gifts directly related to production and business activities, with adequate lawful invoices and documents: VND 250 million. Total expenses allowed to be included in expenses (excluding expenses for advertisement, marketing, sales promotion and brokerage commissions; expenses for reception, protocol and conferences; expense in support of marketing and payment discount; expense for press agencies newspapers given as presents or gifts directly related to production and business activities): VND 2 billion.

Calculate total deductible expenses for the year 2009

Non-deductible Expenses
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Provisions for stock devaluation, bad debts, financial investment losses, product warranties, or construction work which are not in accordance with the prevailing regulations;

Management expenses allocated to permanent establishments in Vietnam by the foreign company s head office which are not in accordance with the regulations;

Non-deductible Expenses
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Unrealized foreign exchange losses due to the revaluation of foreign currency items other than account payables at the end of a financial year; Donations for education, health care, natural disasters, or building charitable homes for the poor where without supporting document or with ineligible ones Administrative penalties, fines

Fines under economic contracts should be deductible

Creditable input value added tax, corporate income tax, and personal income tax. Further details can be found in Section IV, Part C of Circular 130, and in Circular 18

Other Taxable Income

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1.

Income from capital or securities transfer

2.
3.

Income from real estate transfer

Income from asset ownership or use right, including copyright royalties in any form paid for asset ownership or use right; royalties from intellectual property rights; and income from technology transfer under law. Income from transfer or liquidation of assets (except real estate) and other valuable papers.
Income

4.

= turnover - residual book value - expenses related to the asset transfer or liquidation.

Other Taxable Income

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Income from interest and charges on deposit, from lending under all forms according to the law

Income from foreign currency trading, from realized foreign exchange difference
Reversion of provisions which are not fully used by the due date Bad debts written off which are now collected

Account payables of which creditors are unidentified

Receipts of fines for economic breaches (after deducting payable fines) Income which was omitted in previous years Difference in revaluation of assets for capital contribution, transfer upon split, merger consolidation, etc Refunds of import duty or export duty related to the current year shall be recorded as a decrease in expense, while refunds of the previous year shall be considered as other income and taxed at 25%. Other income items:

Further details can be found in Section V, Part C of Circular 130, and in Circular 18

Exempt Income
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1.

Income from cultivating, breeding, rearing and growing aquatic products of organization established under Co-operative Law. Income from providing technical services that directly serve for agricultural activities such as watering, plant disease prevention, harvesting agricultural products, etc. Income from carrying out R&D contracts or from product sales during trial production, from selling products made from new technology which was first applied in Vietnam, exemption only applies to the first year.

2.

3.

4.

Income from production, trading of goods or providing services of enterprises having at least 51% employees who are disabled or HIV-infected, etc.. Income from capital contribution in domestic companies after the investing companies have paid CIT (or exempt from CIT)

5.

Further details can be found in Section IV, Part C of Circular 130

Losses Carried Forward

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Losses incurred in a quarter may be carried forward to the following quarters of the same tax year. Losses are required to carry forward entirely and continuously within 5 years from the year in which the loss occurred.

Losses of incentivised activities can be offset against

profits from non-incentivised activities, and vice versa. Losses/gains from the transfer of real estate are

Losses Carried Forward

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JetBlue co., has the profit/loss position as follows. It is entitled to a 2 years tax holiday (CIT exempted) from the first profitable year. Year 2007 2008 2009 Profit/Loss (100,000) 50,000 60,000 Loss carried forward Assessable income -

2010 2011

80,000 100,000

(80,000) (20,000)
100,000

80,000

The losses cannot be carried forward as above !!!!!! The loss must be carried forward to 2008, then 2009

No benefit from such losses carried forward

Tax Incentives
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Tax incentives are granted based on regulated encouraged

sectors and difficult socio-economic locations.

The sectors which are encouraged include education, health care, sport/culture, high technology, environmental protection, scientific research, infrastructural development and computer software manufacture.

The two preferential rates of 10% and 20% are available for 15 years and 10 years respectively, starting from the commencement of operating activities. When the preferential rate expires, the CIT rate reverts to the standard rate.

Tax Incentives
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Taxpayers may be eligible for tax holidays and reductions. The holidays take the form of a complete exemption from CIT for a certain period beginning immediately after the enterprise first makes profits, without taking into account losses carried forward, of the applicable rate.

where the enterprise has not derived profits within 3 years of the commencement of operations, the tax holiday/tax reduction will start from the fourth year of operation.

Tax Incentives
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Criteria for eligibility for these holidays and reductions are set out in the CIT regulations. (Decree 124) Additional tax reductions may be available for engaging in manufacturing, construction, and transportation activities which employ many female staff, or employ ethnic minorities. Tax incentives do not apply to other incomes

Income from the sale of scrap from production process being subject to CIT incentive shall be subject to CIT incentive. On the contrary, such income shall be considered as other income and taxed at standard rate.

Administration
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Provisional quarterly CIT returns must be filed and taxes must be paid by the 30th day of the first month of the subsequent quarter. Final CIT returns are filed annually. The annual CIT return must be filed and submitted not later than 90 days from the fiscal year end. The outstanding tax payable must be paid at the same time the annual CIT return is submitted. Where a taxpayer has dependent branches in different provinces, a single CIT return is required. However, manufacturing enterprises are required to allocate tax payments to the various provincial tax authorities in the locations where they have manufacturing branches. The basis for allocation is the proportion of expenditure spent by each branch over the total expenditure of the company. The standard tax year is the Western calendar year. Companies are required to notify the tax authorities in case of using a tax year other than the Western calendar year.

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THE END