Highlighting recent tax and customs developments in Vietnam
Foreign Investment – Impact from Proposed Changes of Customs Policy
The Ministry of Finance (“MoF“) has provided an official opinion regarding on-spot import-export in an explanatory letter to the Government concerning the latest draft of the Decree amending customs formalities, dated 28 August 2024. In the opinion, MoF recommended removing the on-spot import-export provision from the draft Decree. This recommendation is based on consultations with several ministries, input from the Deputy Prime Minister, and feedback from business organisations and associations. MoF analysed the potential impact of this move on enterprises involved in on-spot import-export activities. Key points from the explanatory letter regarding the removal include:
- On-spot import-export should be treated as a domestic transaction, thus eliminating the need for customs declarations.
- This removal would save time and reduce costs for both the relevant enterprises and customs authorities.
- One significant consequence of this removal is that enterprises providing processing services to foreign entities who deliver goods in Vietnam as directed by these entities, will no longer be eligible for customs duty refunds, leading to increased pricing for these goods.
If the on-spot import-export provision is abolished, enterprises engaged in processing services for foreign entities will also lose the ability to claim valued-added tax (VAT) refunds, as the delivery of goods in Vietnam will be considered a domestic transaction. This could deter foreign investment in Vietnam, particularly in the establishment of processing and manufacturing enterprises for export, given the current challenges facing Vietnam’s export market.
Tax Policy on Subsidy
The General Department of Taxation (“GDT“) issued ruling no. 4102 on 17 September 2024, providing guidance on tax policy regarding subsidies. According to this ruling, subsidies not classified as other taxable income (i.e. exempt income) can be used for activities related to education, scientific research, culture, art, charity, humanitarian aid, and other social purposes as outlined in item 15, article 7 of Circular 78/2014/TT-BTC dated 18 June 2014.
In this ruling, GDT determined that a subsidy received by an enterprise in the form of a certification from the United States Agency for International Development (USAID) for its product and factory does not qualify as being utilised for the activities specified in item 15, article 7 of Circular 78. As a result, this subsidy should be included as part of the enterprise’s taxable income.
In practice, enterprises must demonstrate that the subsidies they receive are for the activities defined under Circular 78 to qualify for exempted taxable income during tax audits.
Exemption for Transfer Pricings Documentation (“TPD”)
The Binh Duong Tax Department (“BDTD”) issued ruling no. 24130/CTBDU-TTHT on 28 August 2024, providing guidance on exemptions for TPD in a specific case. BDTD highlighted that to qualify for TPD exemption, an enterprise must meet two criteria: (i) has a taxable revenue of less than VND 50 billion for the fiscal year, and (ii) has total transactions with related parties for the fiscal year below VND 30 billion. If either condition is not met, the enterprise is required to prepare and submit TPD to BDTD for legal assessment.
The exemption for TPD is crucial for enterprises engaged in related-party transactions, as tax authorities typically overlook transfer pricing issues during audits. Such issues can significantly alter an enterprise’s tax position, moving it from no tax liability to substantial tax obligations. Recently, Vietnamese tax authorities reported a notable increase in tax liabilities collected from enterprises with related-party transactions for the State Budget.
It is important to note that local tax authorities often reassess the taxable revenue of enterprises during tax audits, which may disqualify them from the TPD exemption criteria. This means many enterprises must prepare and submit TPD for their related-party transactions. The annual TPD must be completed alongside the annual corporate tax finalisation. However, preparing and submitting TPD on time per the auditors’ requests can be challenging due to time constraints. Additionally, if the relevant TPD does not comply with transfer pricing regulations, tax authorities may impose tax liabilities.
For multinational companies, transfer pricing issues in any country can negatively affect investments in other countries if tax authorities suspect similar issues exist there.
If you have any queries on the above, please feel free to contact Nguyen Hung Du, Partner, Tax at du.nguyen@rajahtann.com or any of our team members below.
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