When a business is established, there are a lot of legislations that a business owner should bear in mind so that your company can work smoothly without falling into illegal activities. Besides preparing necessary documents to register a business and building a structure map of the company, leaders had better have in-depth knowledge about tax reporting. Each country may have different regulations on tax reporting. This article provides you with information about corporate income tax and how to do tax reports for Vietnamese and foreign companies.
Corporate Income Tax
What is Corporate Income Tax (CIT)?
Based on Vietnamese Law on Corporate Income Tax, taxable income comprises income earned from activities of production and/or business in goods and services and other income as followed. Other taxable income includes income from capital transfers and from real property transfers; income from the ownership of or right to use assets; income from the transfer, leasing out or liquidation of assets; income being interest on deposits, loans or sales of foreign currency; income being recoveries from contingency reserves; income earned from bad debts which were written-off and are now recoverable; income being debts payable to unidentifiable creditors; income from business omitted in previous years, and other income including income receivable from activities of production and/or business outside Vietnam.
Who has to pay CIT?
Corporate taxpayers are all domestic and foreign entities that invest in Vietnam - for example, firms incorporated in Vietnam under Vietnamese laws and those which are incorporated under foreign laws and conduct a business in Vietnam. These business entities conduct activities of production [and/or] business in goods and services which earn taxable income.
There is no concept of tax residency for CIT. Business organizations established under the laws of Vietnam are subject to CIT and taxed on worldwide income. CIT shall be applicable to foreign income. There are no provisions for tax incentives for such income.
Foreign organizations conducting business in Vietnam without setting up a legal entity in Vietnam and/or having Vietnam-sourced income are considered foreign contractors, irrespective of whether the services are performed inside or outside Vietnam. Payments to foreign contractors are subject to Foreign Contractor Tax (FCT), which consists of value-added tax (VAT) and CIT elements.
Several types of taxes that companies need to know will be mentioned consisting of corporate income tax, tax incentives, tax holiday, employment incentives, R&D fund, penalty and/or Interest for underpayment of taxes.
Corporate Income Tax (CIT) Rate
Corporate Income Tax is divided into two categories: standard rate and preferential rate.
Regarding the standard rate, the standard rate is 20%. Enterprises operating in the oil and gas industry are subject to CIT rates ranging from 32% to 50%, depending on the location and specific project conditions. Meanwhile, enterprises engaging in prospecting, exploration, and exploitation of mineral resources (e.g. silver, gold, gemstones) are subject to CIT rates of 40% or 50%, depending on the project’s location.
In terms of the preferential rate, the two preferential rates of 10% and 20% for 15 years and 10 years, respectively, are available starting from the commencement of generating revenue from the incentivized activities. From 1 January 2016, enterprises entitled to the pre-2016 preferential CIT rate of 20% will enjoy the rate of 17% instead. When the preferential rate expires, the CIT rate reverts to the standard rate. Besides, certain socialized sectors (e.g. education, health) enjoy the 10% rate for the entire life of the project.
Nevertheless, there have been some changes in the CIT rate since 2020. Vietnam’s National Assembly on June 19 approved a 30% corporate income tax cut for the 2020 financial year. The reduction will apply to all businesses with revenue of less than US$8.8 million (VND200 billion) for 2020. The official resolution is expected to take effect 45 days after approval and will be applied for the financial year of 2020. The government is expected to issue an official document within this timeframe to provide further guidance on the implementation of the tax break.
Tax incentives
Tax incentives are granted based on regulated encouraged sectors, encouraged locations, and size of the projects.
Encourage sectors are education, health care, sport/culture, high technology, environmental protection, scientific research, and technology development, infrastructural development, processing of agricultural and aquatic products, software production, and renewable energy.
Encouraged locations should be qualifying economic and high-tech zones, certain industrial zones, and difficult socio-economic areas.
In regard to the size of the project, large manufacturing projects with investment capital of more than VND 6 trillion disbursed within three years of being licensed can also qualify for CIT incentives if:
- The minimum revenue is VND 10 trillion per year by the fourth year of operations at the latest, and
- The minimum headcount is 3,000 by the fourth year of operations at the latest.
The preferential incentive rate applied for large manufacturing projects can be extended for a maximum additional 15 years if the project manufactures goods having ‘international competitiveness’ whose revenue exceeds VND 20 trillion per annum within five years from the first year of revenue generation.
Large manufacturing projects include projects with investment capital of VND 12 trillion or more, disbursed within five years of being licensed (excluding those related to the manufacture of products subject to SST or those exploiting mineral resources) and using technologies appraised in accordance with relevant laws.
Furthermore, new investment projects engaging in manufacturing industrial products prioritized for development will be entitled to CIT incentives if the products support:
- The high technology sector, or
- The garment, textile, and footwear; information technology (IT); automobiles assembly; or mechanics sector and were not produced domestically as of 1 January 2015, or, if produced domestically, they meet the quality standards of the European Union (EU) or equivalent.
Additionally, investment projects are allowed to access more favorable tax incentives available under an amended or new law on CIT for the remaining project period, from the tax year 2015. This entitlement is specifically applicable to the following cases:
- Expansion projects licensed or implemented during the period from 2009 to 2013 that were not previously entitled to any CIT incentives.
- Investment projects commencing operations in industrial zones during the period from 2009 to 2013 that were not previously entitled to any CIT incentives.
- Investment projects located in areas that were not previously designated as encouraged.
Tax holiday
The holidays take the form of a complete exemption from CIT for a certain period beginning immediately after the enterprise first makes profits, followed by a further period where tax is charged at 50% of the applicable rate. However, where the enterprise has not derived profits within three years of the commencement of operations, the tax holidays/tax reduction will start from the fourth year of operation.
Criteria for eligibility to the tax holiday or reduction are pointed out in the CIT regulation as follow:
- Four years of tax exemption and nine subsequent years of 50% reduction shall be applied to:
+ Income earned by enterprises carrying out new investment projects entitled to 10% CIT.
+ Income earned by enterprises carrying out new investment projects in the socialized sectors and difficult socio-economic areas.
- Four years of tax exemption and 50% tax reduction for five subsequent years shall be given to income earned by enterprises carrying out new investment projects in the socialized sectors and in regions not included in the list of difficult socio-economic areas.
- Two years of tax exemption and four subsequent years of 50% reduction shall be applied to:
+ Income earned by enterprises from carrying out new investment projects in regions with difficult socio-economic conditions.
+ Income earned by enterprises from carrying out new investment projects, including the production of high-grade steel, production of energy-saving products, production of machinery or equipment used to serve agricultural, forestry, fishery, or salt production, production of irrigational equipment, production and refinement of foodstuff for cattle, poultry, or aquatic products, and development of traditional trades.
+ Income earned by enterprises that carry out new investment projects in industrial zones (except for industrial zones located in regions with favorable socio-economic conditions).
Employment incentives
Additional tax reductions may be available for engaging in manufacturing, construction, and transportation activities that employ several female staff and/or ethnic minorities. CIT reduction must correspond with the actual payment for those employees.
R&D fund
Business entities in Vietnam are allowed to set up a tax-deductible R&D Fund. Enterprises can appropriate up to 10% of annual profits before tax to the fund. Various conditions apply.
Especially, those who pay the tax later than the required time will subject to the penalty as follow:
- Late payment interest at 0.03%/late day
- An administrative penalty of 20% of the under-declared amount
- Tax evasion is subject to an administrative penalty from 1 to 3 times the evaded tax amount.
How to do tax reporting for Vietnamese companies and foreign companies
To do Corporate Income Tax, businesses need to follow two biggest steps including tax compliance and financial statement.
Tax compliance
Compliance Requirements
- Assessment system: Self-assessment
- Three types of filling:
- Annual return filing (submitted no later than 90 days from the end of the fiscal year)
- Ad hoc (transaction-based) returns (i.e. the 10th day following the date of incurrence of tax liability). Ad hoc returns are applicable for certain transactions such as transfer of shares, transfer of the real estate, etc
+ Return for the cessation of business, completion of the contract, change of ownership, or reorganization (i.e. the 45th day following the event or completion of the transaction)
Electronic/manual submission:
- Electronic tax filing is compulsory to business entities located in areas having IT infrastructure (most of cities/provinces in Vietnam)
- In some specific cases that the taxpayers cannot submit online, manual submission is accepted.
- Tax returns for submission must be in Vietnam dong.
- For documents that are in foreign languages, they must be briefly translated into Vietnamese.
Requirement to prepare tax computation/return in functional currency:
Tax returns for submission must be in Vietnam dong.
Documents to file with tax return:
Audited financial statements are generally required (applicable to foreign-invested enterprises, listed enterprises, etc). Other supporting documents shall be required when the tax authorities carry out a tax audit.
Language to file return, computation, and supporting documentation(s):
Language in the tax return and supporting documents for tax purposes must be in Vietnamese. Where the documents are in a foreign language, the taxpayers must briefly translate into Vietnamese and take self-responsibility for the accuracy of the translation.
Payment of Tax:
Quarterly provisional payment is required. If the provisional quarterly payments account for less than 80% of the total corporate income tax liability per annual return, the shortfall in excess of 20% is subject to late payment interest (0.03% per day), counting for the deadline for payment of the fourth quarter corporate income tax liability.
Financial Statements/Auditing
All enterprises in Vietnam are required to adopt the Vietnamese Accounting Standards and System (VAS) as a statutory financial reporting framework.
Audited annual financial statements must be submitted to the following competent offices within 90 days following the last day of each fiscal year:
- The city of the provisional tax office
- The Ministry of Finance or the provincial Department of Finance
- The licensing authority in the case of Foreign Invested Enterprises (FIEs)
- The General Statistics Office (GSO); and
- For enterprises located in the Export Processing Zone (EPZ) or Industrial Zone (IZ), the EPZ or IZ Management Board.
- A fiscal year can be selected by the reporting entity to be any 12 month period ending on 31 March, 30 June, 30 September or 31 December.
Periodicity of the Local Books to be closed: Annually for most entities. Listed entities are required to prepare interim financial statements quarterly. Financial Statements Language must be in Vietnamese. Documents to be presented with the Financial Statements: Annual report is required for public companies and listed entities. Accounting records and financial statements are required to be in Vietnam Dong. Other foreign currency can be used only if stipulated requirements are met.
Filing Due Date is around 90 days from the reporting date for annual financial statements. Plus, the filing format can be printed, except for entities that are required to publish information on the stock market who must publish information in electronic format on the website or on the stock exchange.
However, if a company is not obliged to the regulation, the company will be fined. Non-compliance relating to the preparation and filling the Financial Statements is subject to penalties from 5million VND up to 100million VND. This non-compliance includes late or no submission, incorrect content, and format in accordance with the accounting regulations.
READ FURTHER: How to Set up a Franchising Business in Vietnam.
In conclusion, the article focuses on tax reporting in Vietnam, in particular, corporate income tax. Besides corporate income tax, several types of taxes or payments that enterprises should be aware of when investing in a certain project are tax incentives, tax holidays, employment incentives, R&D fund. Furthermore, this article also provides you with knowledge about steps to do a tax report in Vietnam for either Vietnamese companies or foreign companies. If you would like to do a tax report or research further on the Vietnamese market, Viettonkin is always ready to help you.
