THE MINISTRY OF FINANCE THE MINISTRY OF FINANCE CIRCULAR No. 74-TC/TCT OF OCTOBER 20, 1997 GUIDING THE IMPLEMEN-TATION OF TAX PROVISIONS APPLICABLE TO THE INVESTMENT FORMS UNDER THE LAW ON FOREIGN INVESTMENT IN VIETNAM - Pursuant to the Law on Foreign Investment in Vietnam adopted by the National Assembly of the Socialist Republic of Vietnam on November 12, 1996; - Pursuant to the current tax laws and ordinances of the Socialist Republic of Vietnam and the Government decrees detailing the implementation of the tax laws and ordinances; - Pursuant to Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam; - Pursuant to the Regulation on branches of foreign banks and joint venture banks operating in Vietnam, issued together with Decree No. 189-HDBT of June 15, 1991 of the Council of Ministers (now the Government) of the Socialist Republic of Vietnam; - Pursuant to Decree No. 36-CP of April 24, 1997 of the Government issuing the Regulation on industrial zones, export processing zones and high-tech zones; The Ministry of Finance provides the following guidance for the implementation of tax provisions applicable to the investment forms under the Law on Foreign Investment in Vietnam: PART I GENERAL PROVISIONS I. SCOPE OF APPLICATION: 1. This Circular shall apply to: - Joint venture enterprises and enterprises with 100% foreign-invested capital established under the Law on Foreign Investment in Vietnam. - Joint venture banks of Vietnamese and foreign banks; branches of foreign banks operating in Vietnam. - Joint venture enterprises established under the agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments. If an agreement contains provisions regarding the tax obligations of joint venture enterprises which vary with the guidance in this Circular, such provisions of the agreement shall apply - Foreign parties to business cooperation contracts (or foreign business cooperation parties for short) under the Law on Foreign Investment in Vietnam. Particularly for the parties to build-operate-transfer (BOT) contracts, build-transfer-operate (BTO) contracts and build-transfer (BT) contracts, if the operation regulation issued by the Government contains provisions regarding tax obligations of these parties which vary with the guidances in this Circular, such provisions of the regulation shall apply. 2. This Circular provides guidance for the various taxes prescribed in the Law on Foreign Investment in Vietnam and other taxes and financial obligations such as turnover tax, special consumption tax, license tax, natural resources tax, land, water and sea surface rents, etc., applicable to foreign invested enterprises and foreign business cooperation parties in accordance with the legal documents currently in force of the Socialist Republic of Vietnam. II. TERMS AND EXPRESSIONS USED IN THIS CIRCULAR ARE CONSTRUED AS FOLLOWS: The terms and expressions used in this Circular are construed as the same as those already defined in the Law on Foreign Investment in Vietnam and Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam. Other terms and expressions in this Circular are construed as follows: - "Tax year" is the calendar year starting on January 1st and ending on December 31st every year. In case a foreign invested enterprise or business cooperation party is allowed by the Ministry of Finance to apply a twelve-month fiscal year other than the calendar year, the tax year shall be the fiscal year that the foreign invested enterprise or business cooperation party is allowed to apply. - The "first year of profitable business" is the first fiscal year during which profit is made without offsetting losses carried forward from previous years. - A "market price-free transaction or trading contract " is a transaction or trading contract that is influenced by unusual commercial relationship such as transaction between associated companies... - "Associated companies": Two companies shall be regarded as associated companies in the following cases: (i) One company contributes to the prescribed capital or stock capital of the other; (ii) Both companies are subject to direct or indirect control by another company, or both companies receive share capital contributed by another company. PART II GUIDANCE FOR THE IMPLEMENTATION OF TAX PROVISIONS I. PROFIT TAX: 1, Taxable subjects: All profits from any economic activity of foreign invested enterprises, foreign business cooperation parties, joint venture banks or branches of foreign banks in Vietnam shall be subject to profit tax, including: - Profits from business activities. - Profits from other activities. 2. Taxpayers: Foreign invested enterprises, foreign business cooperation parties, joint venture banks, and branches of foreign banks in Vietnam shall pay profit tax. In case a foreign company invests at the same time in many enterprises or business cooperation contracts, profit tax shall be calculated separately for each enterprise or each business cooperation contract (each enterprise or each business cooperation contract is a tax payer). 3. Determination of taxable profit: Taxable Total Total valid profit of = income - and reasonable + Other profits the tax of the expenditures year year of the year For foreign invested enterprises, the taxable profit may be reduced by the losses that can be carried forward under Article 61 of Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam. The carry-forward of losses is made by carrying forward all losses of any tax year to the profitable year subsequent to the year of loss, and these losses may be offset by the profits of subsequent years, or losses of one year may be divided evenly to subsequent years of profit expected by the enterprise. Upon the commencement of its production and business activities an enterprise must register with the tax agency its method of loss carry-forward and follow through this registered loss carry-forward method and time. The period of loss carry-forward shall not exceed 5 years. a/ Total income of the year: The total income of a foreign invested enterprise or a foreign business cooperation party includes all incomes from the sale of products, the provision of services and other incomes of the enterprise or foreign business cooperation party in the tax year. The tax office shall have the right to re-determine the incomes if the enterprises fail to declare fully their incomes or the incomes have not been determined on the basis of trading or transaction contracts according to the market price. With regard to business cooperation contracts in the form of production sharing, the income from the sale of products shall be determined as follows: - If the shared products are sold on the Vietnamese market, the income shall be determined according to the selling price of the products sold on the Vietnamese market. - If the shared products are exported, the income shall be determined on the basis of the FOB export price at Vietnamese ports. If the foreign party fails to provide the sale price or the sale of products is carried out not according to the principle of market price-based transaction and trading, the income shall be determined according to the anti-price transfer principles stipulated in Section IV, Part III of this Circular. b/ Reasonable and valid expenditures of the year: The expenditures related to the generation of the taxable profit of the tax calculation period earned by a foreign invested enterprise or foreign business cooperation party, regardless of the accounting system in use, shall include the following: b1- Costs of raw materials, materials, energy, fuel and goods actually used in the production or business process or the provision of services. b2- Salaries, wages and payments having the nature of salaries and wages, mid-shift meals and allowances paid to Vietnamese and foreign employees under labor contracts and/or collective labor agreements in accordance with the labor legislation applicable to foreign invested enterprises b3- Depreciation of fixed assets used in the production or business process and the provision of services and expenses on their repair. Depreciation of fixed assets shall be determined at a fixed rate for the whole duration the fixed assets are used and in accordance with the provisions of Decision No. 1062-TC/QD/CSTC of November 14, 1996 of the Minister of Finance. Fixed asset depreciation amounts which are in excess of the rates stipulated by the Ministry of Finance, depreciation amounts of fixed assets already fully depreciated, depreciation amounts of fixed assets not being used in the production or business process such as fixed assets to be liquidated or transferred for the establishment of a new joint venture, etc., shall not be included in the expenditures for determining the taxable profit. In case a Vietnamese party contributes the value of its land use right to the prescribed capital or to the business cooperation capital with, the depreciation of the fixed assets being the value of such land use right shall be effected for a period from the time the enterprise or business cooperation parties start production and business operations to the end of the period of the capital contribution by the Vietnamese party. Example: Enterprise A received its investment license on January 3, 1995 for an operating duration of 30 years. The Vietnamese party contributed its capital by the value of its land use right for 30 years from the date the investment license is granted. Enterprise A started its operation on July 3, 1997. Thus the period for depreciation of the land use right value contributed to the joint venture shall be 27 years and 6 months. b4- Expenses on scientific and technological research, innovations and technological modification. b5- Bank fees, payments of loan interests within the limit of the ceiling lending interest rate announced by the State Bank of Vietnam for domestic loans, bank fees and interest payments under credit contracts already approved by the State Bank of Vietnam with regard to overseas loans. If a credit contract has not yet been approved by the State Bank of Vietnam, the interest rate and bank fees shall be determined by the actual payments consistent with the provisions of the credit contract but not in excess of the ceiling lending interest rate announced by the State Bank of Vietnam. For branches of foreign banks and joint venture banks, they are reasonable interest payments and discounts paid for deposits, loans or other financial instruments Interests paid for loans related to the prescribed capital, statutory capital, or allocated capital (for banking activities) shall not be included in reasonable and valid expenditures for calculating the taxable profit. b6- Expenses directly related to the circulation and sale of products or the provision of services, such as maintenance expenses, packaging expenses, loading and unloading expenses, transportation costs. b7- Payments to social and medial insurance funds for employees as the obligation of the enterprise. b8- Expenses for insurance over responsibilities and assets under the insurance policies signed with Vietnamese insurance companies or other insurance companies licensed to operate legally in Vietnam (hereafter referred to as insurance enterprises). With regard to voluntary insurance transactions for which, according to international practice, an enterprise seeking for insurance may choose where to buy it, or if, at the time the insurance need arises, which the insurance enterprises cannot satisfy, then the to-be-insured enterprise may get insured at a foreign insurance company. Insurance expenses shall be included in the expenditures for determination of the taxable profit. The Ministry of Finance may require, in case of necessity, insured enterprises to prove that the insurance enterprises are not able to meet the insurance need or the international practice related to insurance. Any insurance expenses paid by an insured enterprise to a foreign insurance company which are not in accordance with the provisions of Vietnamese law shall not be included in the expenditures for determination of the taxable profit. b9- Mailing charges, printing costs, warehouse, office and laboratory maintenance expenses, labor safety and environmental protection costs; recruitment and training expenses; security guard, fire prevention and fight expenses. b10- Expenses on the procurement or use of technical documentation and services. Expenses for the transfer of technology, copyright, patents, trademarks under technology transfer contracts and license contracts already approved by the Ministry of Science, Technology and Environment or other competent agencies. b11- Expenses on meetings of the Managing Board of a joint venture enterprise in compliance with its Statute and/or resolutions of the Managing Board. b12- House and land rentals. If an enterprise makes advance payments for house and land rents for many years, these rentals shall be amortized throughout the use duration. b13- Payments for lease of assets, machinery and equipment. In a long-term lease, the rental shall be amortized throughout the use duration. b14- Expenses paid to management companies under management-hiring contracts already approved by the Ministry of Planning and Investment. b15- Other expenses not yet specified above such as those for advertising, marketing and sale promotion directly related to the production and business activities of the enterprise, and brokerage. The total expenses shall not exceed 5% of the total reasonable and valid expenditure already mentioned for determination of the taxable profit. For enterprises operating in the trade sector, the total allowable expenditure shall not include the purchase costs of the goods sold. b16- Payments of taxes, fees and charges having the nature of tax (except for profit tax and profit remittance tax). All the above expenses must be supported by valid vouchers, any expense without valid vouchers shall not be included in the allowable expenditure for determination of taxable profit. c/ Other profits Other profits of foreign invested enterprises and foreign business cooperation parties include: c1- Interests on bank deposits, loan interests (excluding enterprises engaged in credit business), difference between foreign exchange sale and purchase, securities acquisition and sale difference, exchange rate difference (except for exchange rate difference resulting from revaluation of the cash balance, deposits, cash in transit, debts recoverable and payable originating from a foreign currency other than the currency permitted for accounting purpose shall not be included in other profits). c2- Profit earned from the right to own and use the enterprise�s assets including profit (or loss) from liquidation of assets. In case of losses and damages caused to the enterprise�s assets by subjective reasons, losses related to these assets shall not be accounted into other profits or other losses, and the wrongdoer(s) must be identified so that compensation shall be made in accordance with the regulations . c3- Incomes recovered from bad debts that have been already written off from accounting records; from payable debts of which the creditors cannot be identified; incomes discovered from the production and business operations in previous years that had been omitted. c4- Profits from an enterprise�s contributed capital Profits earned from overseas business activities shall be accounted into other profits for determination of taxable profit. With regard to profits earned from business activities carried out in the countries that have signed agreements on avoidance of double taxation with Vietnam, the provisions of such agreements shall apply. After-profit tax profits earned from the transfer of the enterprise�s contributed capital and from joint venture or cooperation activities with local enterprises shall not be accounted into other profits for determination of taxable profit. c5- Other profits d/ With regard to enterprises operating in the field of property leasing such as house or office leasing or infrastructure businesses receiving advance rent payments for a number of years, the taxable profit shall be determined as follows: Taxable Taxable profit Taxable profit profit of = derived from + derived from the year (A) advance payment other activities turnover (B) in the year (C) of which: B = Total advance payment turnover - Turnover tax payable on advance payment turnover - Expenses related to the generation of taxable turnover (D) Expenses related to the generation of taxable turnover (D) are determined for each of the following activities: d1- Costs for infrastructure construction or construction of houses and offices by enterprises engaged in house- or office-leasing or infrastructure businesses; For enterprises engaged in house- or office-leasing or infrastructure businesses, these are the costs for construction of infrastructure or houses and offices directly related to the area for rent with rental to be collected in a lump sum. If the rental is collected in advance and the leasing period is shorter than the minimum use time specified in the use bracket for the use of fixed assets stipulated in Appendix 1 issued together with Decision No. 1062-TC/QD/CSTC of November 14, 1996 of the Ministry of Finance, construction costs shall be amortized throughout the actual leasing period. Enterprises may register the time for the use of fixed assets in accordance with the provision in Point b3 above. Example: Enterprise A is engaged in office leasing. In 1996 it leased 1,000 m 2 of office space to Enterprise B for 10 years with the rental of 1,000,000 USD ($), 1,000 m 2 to Enterprise C for 30 years with the rental of 3,000,000 $, and 1,000 m 2 to Enterprise D for 30 years with the rental of 3,000,000 $. Assuming that the cost for construction of 1m 2 of office space for rent is 1,250 $ and pursuant to Appendix 1 of Decision No. 1062-TC/QD/CSTC the minimum use time of durable buildings is 25 years. In these cases the construction cost shall be amortized as follows (assuming that Enterprise A has registered a house depreciation time of 25 years): - For turnover from leasing office to Enterprise B, the amortized construction cost for determination of taxable profit for 1996 shall be: Construc- 1,250 $/m 2 x 1,000 m 2 tion cost = ------------------------------- x 10 years = 500,000$ 25 years - For turnover from leasing office to Enterprises C and D, the amortized construction cost for determination of taxable profit shall be: Construction cost = (1,250 $/m 2 x 1,000 m 2 ) x 2 = 2,500,000 $ In case the actual costs of a number of construction items have not yet been determined in the tax year, they shall be temporarily determined on the basis of the cost estimate in the economic-technical feasibility study, and shall be amortized to the area for rent with rental to be collected in a lump sum. Upon the completion of the construction, payment of the construction cost shall be made on the basis of the actual cost, and any differences between the actual and estimated construction costs shall be adjusted in the business results of the fiscal year subsequent to the year of completion of the construction. d2- Other costs arising in the year shall be amortized to the advance payment turnover, specifically: Expenses arising Total amount of other costs in the year arising in the tax year Advance amortized to = --------------------------------- x payment advance Total turnover of the year turnover payment turnover - For enterprises engaged in house and office leasing or infrastructure business that are in the tax grace period, the taxable profit on the advance p

Thông tư 74/TC-TCT