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Learning to swim in a fast-flowing river
David Fitzgerald, tax partner at PricewaterhouseCoopers Vietnam, offers an expert’s view on the changing tax landscape.
It is a busy time in Vietnam. FDI is surging with committed capital to June 30 expected to be more than the 2007 total. The government continues to implement WTO commitments. And regulatory reforms progress on a daily basis.
Decision No. 1316,1317/QD-NHNN dated June 10 by the State Bank affecting interest rates and the same day announcement about the adjustment of the official exchange form VND16,139 per dollar to VND16,461 requires adjustment in the operations of all businesses in Vietnam.
The increase in the base rate from 12 per cent to 14 per cent has naturally contributed to further realignment of lending and borrowing relationships in the country and financial institutions reacted rapidly to the decision. In other sectors, the profitability of investment projects that involve loan financing are needing to be re-evaluated. The adjustment of the exchange rate has again highlighted the importance of currency hedging for all business involved in foreign trading and services in non-dong currencies.
On June 10, 2008, the Ministry of Labour issued Circular 08/2008/TT-BLDTBXH providing guidelines for the implementation of Government Decree 34/2008/ND-CP dated March 25, 2008 on employment and administration of foreigners working in Vietnam.
This circular is important as demand for foreign employees remain strong as the domestic labour market remains tight, particularly for skilled and management positions. The circular mainly focuses on work permit application procedures, forms and documentation required for the employment of foreigners in Vietnam. The procedures and forms are not significantly different from the existing work permit procedures and continue to provide a significant administrative burden with respect to the work permit application process.
The Joint Circular No. 07/2008/TTLT dated May 30 by the ministries of Labour, War Invalids & Social Affairs and Finance guiding Decree No.11/2008/ND-CP on paying compensation to employers for losses caused by illegal strikes is an important development for many companies, particularly those in the manufacturing sector. The circular well reflects the desire of foreign companies for increased clarity about not only the moral but also the financial responsibility of organisers of illegal strikes.
Further to Government Decree 101/2006/ND-CP dated September 21, 2006, the deadline for re-registration of foreign invested enterprises (licenced under the repealed Law on Foreign Investment) is June 30, 2008. Although re-registration under Decree 101 is not compulsory, the impact of not doing so should be seriously considered.
Foreign entities who decide not to re-register need to be aware that whilst they will be able to continue to operate under their existing investment licences, no amendments to the licenced scope of activities or term of operation will be considered after the re-registration deadline.
This means that non-registering entities will be restricted to the scope of activities under their current investment licence for the remaining term of operation. Re-registered entities will be issued with a replacement Investment Certificate in accordance with the Law on Enterprises and the Law on Investment.
According to the regulations, re-registered entities will not lose any of the rights or incentives (tax incentives, land use rights, etc.) granted under its previous investment licence, except for those tax incentives relating to export requirements which have been repealed as a condition of Vietnam’s WTO accession.
On June 3, 2008, the National Assembly passed the amended Law on Corporate Income Tax (“CIT”) and Law on Value Added Tax (“VAT”). The new Laws will be effective January 1, 2009. Each Law is quite brief and the exact details of how the new and amended provisions will be implemented will only be known once the implementing decrees and circulars are issued.
With a view to continuing to be regionally competitive, Vietnam has reduced the standard CIT rate from 28 to 25 per cent. A tax incentive regime will continue to exist, but in a revised form. In addition to changes to the available incentives, Vietnam has continued the process of refining the sectors entitled to incentives and focusing on those sectors most critical to Vietnam’s development. Of particular interest to many will be the newly introduced three-year time limit from the start of operations to commence using any awarded CIT exemptions.
The rules around deductibility of expenses are broadly similar with current legislation. To the disappointment of most, the limitation on the deductibility of advertising and promotion has been retained at 10 per cent. A 15 per cent limitation has been introduced for newly established entities and is available for the first three years from establishment. The impact of the VAT changes will largely depend on the nature of the goods and services being supplied. However, some changes with more widespread implications include:
-The removal of the VAT exemption for machinery and equipment imported to form fixed assets and which are not locally manufactured. VAT will now be payable on these assets at the time of importation.
-The three-month time limit for claiming input VAT credit is removed. Any incorrect input VAT declaration shall be allowed to be amended within six months from the date of discovery of the tax offence.
-One of the conditions for claiming input VAT credits is that payment must be made through the banking system, except for purchases of less than VND20 million. Currently this requirement applies only to exported goods/services. We expect to see the pace of regulatory reform continue. The remainder of 2008 should see the issuing of implementing regulations to support some of the above mentioned new laws and others issued previously. As always, it will be necessary to monitor the interpretations taken by the implementing authorities as only at this time will the effect of the changes be better understood.
VNN
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