The Grant Thornton Tax Team takes a look back over the evolution of Vietnam’s tax regime.
The Grant Thornton Tax Team takes a look back over the evolution of Vietnam’s tax regime.
Vietnam has undergone significant socio-economic changes in recent years. The country’s tax regime has had several major changes and has continued to develop. As each year passes, Vietnam’s tax and regulatory environment becomes more sophisticated, better aligned with international norms and more business-focused. Here we explore some of the changes in the tax regime that have resulted in Vietnam’s current position as a leading investment destination in Southeast Asia.
Income tax is a key concern for businesses and is one of the areas of Vietnamese tax that has seen the most reform. In the late 1980s and early 1990s, a series of laws were first enforced to implement turnover tax, profit tax and special consumption tax. In the early rules, each industry and sector was subject to a unique tax rate and distinct revenue regulations based on the form of the enterprise and the nature of the industry. As an example, a cooperative and a limited liability company in the same industry and of equivalent size could have been subject to different tax rates.
The profit tax, introduced in 1990, was applicable to both organisations and individuals that had business income. Organisations subject to the profit tax included State-owned enterprises, domestic business entities and foreign-invested enterprises (FIEs). The profit tax was to be imposed on the difference between total revenue and total allowable expenses.
Allowable expenses were to generally include expenses that were incurred generating the profit, however, a number of specific restrictions were in place. Fewer expenses were allowable under the Vietnamese system than were typically allowed under similar systems in other countries in the region.
Stricter deductibility regulations were not the only issue with the early profit tax - different rates were applied to State-owned, domestic and foreign-invested business entities. Profits of domestic businesses were subject to tax rates of between 30 and 50 per cent based on the industry. An additional tax was levied on domestic entities that generated profits in excess of specific thresholds.
Generally, FIEs were given a relatively low rate of 25 per cent provided they didn’t engage in certain activities. FIEs undertaking favoured activities stood to potentially benefit from preferential rates as low as 10 per cent while those in less-favoured industries such as oil and gas may have been subject to considerably higher rates. Domestic entities were not eligible for preferential tax rates.
In 1997, further reform took place that resulted in a corporate tax system that has remained relatively similar since. As Vietnam modernised and became increasingly aware of international business concepts, a number of issues were identified with the profits tax system, specifically relating to new sources of income, and instances in which a single item may be within the remit of several different taxes, and in some instances several different laws that were not always congruent. Accordingly, the profit tax was replaced with corporate income tax (CIT), which took effect in 1999.
The CIT Law defined new sources of income subject to tax but was still relatively strict on which items would be considered deductible. By far the most significant impact of the 1999 CIT Law was the introduction of a single 32 per cent rate for all domestic entities. This new rate represented a departure from the industry-specific rates. However, oil and gas projects would be taxed from 28-50 per cent on a project-by-project basis. FIEs were subject to 25 per cent.
The revised CIT Law of 2004 further developed Vietnam’s tax regime, reducing the rate from 32 per cent to 28 per cent, subjecting domestic and foreign-invested entities to the same regulations and moving from an information notice scheme. In addition, several of the restrictions on allowable expenses and some regulations that had been implemented under the 1999 CIT Law, such as tax refunds, were eased.
Key changes in deductible expenses have been to move from a list of allowable expenses to a list of excluded expenses, providing business with greater flexibility. The CIT law has undergone several changes, lowering the tax rate to 25 per cent for both FIEs and domestic entities, thereby creating a neutral pro-business tax system that is a competitive destination for investments in the region.
In addition to the improvements in the corporate tax regime, the taxation of individuals has also been developed. Previously, foreign and local individuals were subject to separate tax treatments under an ordinance.
However, following the introduction of the personal income tax (PIT) law in 2007, individuals are subject to tax based on their residency status in Vietnam irrespective of the nationality of the individual.
The introduction of the PIT Law was beneficial in providing greater detail of the tax treatment of individuals, and also cemented residency regulations that were closer aligned to international norms. Under the PIT Law a greater number of allowances were granted to individuals. Aside from the general reduction in tax rates and increased tax base, the PIT Law has also been refined to better facilitate the taxation of small business households and entrepreneurs.
In addition to the various improvements that have been made to the corporate and personal tax regulations, Vietnam’s tax administration has undergone dramatic change since the early 1990s. A significant development was the consolidation of tax authority from several different State bodies into a single department: the General Department of Taxation (GDT). Centralising the tax authority has assisted in developing greater transparency and simplifying procedures.
The Law on Tax Administration was introduced in 2007. The Law more clearly defined the rights and responsibilities of both taxpayers and tax officials. This significantly reduced the potential abuse of discretionary powers and cemented greater transparency and understanding of the tax compliance procedures. The transition from an approval to a self-assessment system has generally reduced the administrative burden on taxpayers, but a number of issues still remain.
Several chambers of commerce and working groups lobbied the government, suggesting that compliance with tax regulations in Vietnam had typically been a laborious paper-driven exercise, consuming hundreds of working hours for each entity and lowering productivity as a result of the administrative burden. Following these statements, the government vowed to assist businesses by implementing a series of initiatives. Of these initiatives, one of the most successful has been the move from paper filing to electronic filing.
Electronic declaration was first implemented in 2009 by the GDT on a trial basis, which has expanded to include several cities and economic centres. With assistance from several of Vietnam’s leaders in the telecommunications industry, it is expected that the majority of the country will be able to declare and pay tax electronically within the next five years.
Electronic tax declarations hold some clear benefits, such as reduced costs of compliance for taxpayers. Further, digitised records should facilitate increased efficiency in tax revenue collections, greater transparency in record-keeping, and more effective tax audit selection procedures.
Under a centralised tax agency, the GDT, tax regulations are continually being reviewed and improved to develop the business environment in Vietnam and ensure the regulations are suitable for modern operations.
As an example, revised transfer pricing regulations are planned for release in the near future to account for increased domestic and cross-border related party transactions. We expect that the focus of future reforms will be on further promoting transparency, reducing the administrative burden on businesses, and improving tax collection methods through increasingly sophisticated means.