1 COPORATION INCOME TAX INCENTIVE IN VIETNAM- OPPORTUNITIES and CHALLENGES FOR FOREIGN DIRECT INVESTMENT Enschede, March 2014 Ph.D. Ly Phuong Duyen Academy of Finance, Viet Nam

2 CONTENTS 1. Introduction 3. Corporation Tax Incentives in Vietnam 4. Opportunities and Challenges 2. Foreign Investment in Vietnam 5. Conclusions

3 INTRODUCTION  Corporation Income Tax Law has been approved by Vietnam’s National Assembly in 1997, with effect from  CIT Law has been changed three times: in 2003, 2008 and 2013  The Corporate Income Tax in Vietnam provides for a series of tax incentives for different types of industries and their geographical location.

4 FOREIGN INVESTMENT IN VIETNAM  An average rate of attract FDI in Vietnam : 8.3% of GDP in the last five years ( ),  among the highest rates in the whole of the global frontier and emerging Asian space.  Much of the FDI inflows into Vietnam come from more developed Asian countries: Japan, Singapore and Korea.

5 FOREIGN INVESTMENT IN VIETNAM  Sectors that have seen significant FDI inflows in recent years include banks, property and infrastructure.  However a shift is underway, with a rise in FDI into manufacturing, retail and technology, among others. Flows are becoming less speculative in nature than in some instances in the past, and they do more to add value and create jobs.

FOREIGN INVESTMENT IN VIETNAM Year Number of projects Total registered capital (Mill. USD) (*) Implementation capital (Mill. USD)

7 CORPORATION INCOME TAX INCENTIVES Before 2004:  CIT incentives varies from foreign company to domestic company From 2004 to present:  the same CIT incentive regulations has been applied to both domestic and foreign company

8 CORPORATION INCOME TAX INCENTIVES IN VIETNAM 1.Source of Tax Law 2.Regulations

9 SOURCE OF TAX LAW 1.The Corporation Income Tax Law No. 14/2008/QH12 of June 3, 2008; 2.The Tax Administration Law No. 78/2006/QH11 of November 29, 2006 ; 3.The Government’s Decree No. 124/2008/ND-CP of December 11, 2008; 4.The Government’s Decree No. 122/2011/ND-CP of December 27, 2011; 5.Circular No. 123/2012/TT-BTC of July 27, 2012

10 CORPORATION INCOME TAX INCENTIVES IN VIETNAM 1.Tax holiday, 2.Investment allowance and tax credits, 3.Reduced tax rates, 4.Loss carry forward, 5.Depreciation and 6.Special zone incentives;

11 TAX HOLIDAY 1.Four (4) years of tax exemption, 50% reduction in the tax amount payable for 9 succeeding years for: 2.Four( 4) years of tax exemption, 50% reduction in the tax amount payable for 5 succeeding years : 3.Two (2) years of tax exemption, 50% reduction in the tax amount payable for 4 succeeding years.

12 TAX HOLIDAY 1.4 years of tax exemption, 50% reduction in the tax amount payable for 9 succeeding years for:  Newly established enterprises from investment projects in areas with specially difficult socio-economic conditions, in economic zones and in high-tech zones;  Newly established enterprises from investment projects in the sectors of high-tech, scientific research and technological development, investment in development of specially important infrastructure facilities of the State, and production of software products;  Newly established enterprises operating in the sectors of education and training, occupational training, health care, culture, sport and the environment.

13 TAX HOLIDAY 2. Four( 4) years of tax exemption, 50% reduction in the tax amount payable for 5 succeeding years :  for enterprises newly established engaged in socialization in localities not in the list of localities with socio-economic difficulties or with extreme socio-economic difficulties. 3. Two (2) years of tax exemption, 50% reduction in the tax amount payable for 4 succeeding years for:  enterprises newly established from investment project localities with socio-economic difficulties

14 REDUCE TAX RATE 1.The tax rate of 10% for 15 years. 2.The tax rate of 10%  apply to enterprises operating in the sectors of education and training, occupational training, health care, culture, sport and the environment. 3.The tax rate of 20% for 10 years  to newly established enterprises from investment projects in areas with difficult socio-economic conditions. 4.The tax rate of 20%  apply to agricultural service co- operatives and to people's credit funds.

15 REDUCE TAX RATE The tax rate of 10% for 15 years.  Newly established enterprises from investment projects in areas with specially difficult socio-economic conditions, in economic zones and in high-tech zones ;  Newly established enterprises from investment projects in the sectors of high technology, scientific research and technological development, investment in development of specially important infrastructure facil ities of the State, and production of software products.

16 INVESTMENT ALLOWANCE AND TAX CREDITS Enterprises established and operating under the law of Vietnam  shall be entitled to deduct a maximum of ten ( 10 ) per cent of their annual assessable income in order to establish the Science and Technology Development Fund of the enterprise.

17 LOSSES CARRY FORWARD 1.Enterprises which suffer a loss shall be entitled to carry forward the loss to the following year and will be set off against assessable income.  Losses may be carried forward for a maximum period of five (5) years as from the year following the year in which the loss arose. 2.Enterprises which suffer a loss from activities being real property transfers shall only be entitled to carry forward the loss to assessable income from such activities.

18 DEPRECIATION Enterprises operating  efficiently and  economically and  Profitability shall be entitled to apply accelerated depreciation but not more than 2 times of the rate of depreciation determined under the straight-line method for rapid technological innovation.

19 SPECIAL ZONE INCENTIVES - EXEMPT INCOME 1.Incomes from farming, breeding, aquaculture, salt production of cooperatives 2.Undistributed incomes of of private organizations, which make investment in education, health, and other fields. 3.Income from transfer of certified emission reductions (CERs)

20 SPECIAL ZONE INCENTIVES - EXEMPT INCOME 4.Income from the performance of duties by the State Development Bank Vietnam (VDB), Bank for Social Policy (BSP) 5.Incomes from transfer of technologies that are prioritized to be to organizations and individuals in localities facing extreme socio-economic difficulties.” 6.Income earned from activities of production [and/or] business in goods and services by enterprises employing specified numbers of disabled people, reformed addicts and people infected with HIV.

21 OPPORTUNITIES and CHALLENGES

22 OPPOTUNITIES 1.Benefit : Investors can have more benefit base on reduction a tax liabilities. 2.Diversified options to investors: There are several types of CIT incentives with favorable tax treatment may provide many opportunities to investor when they having decision process: sectors, fields, zones. 3.Equality of competition with domestic enterprises

23 CHALLENGES 1.Forgone revenues: the losses in tax revenue from CIT incentives may bring burden to other indirect tax, such as VAT, excise duties… 2.Resource allocation (neutrality) costs: originated when CIT incentives create distortions on investment choices among sectors or activities instead of correcting market failures.

24 CHALLENGES 3. Enforcement and compliance costs:  These costs increase with the complexity of the tax system and the system of fiscal incentives (in terms of qualifying and reporting requirements, different schemes).  There is a problem of perception of lack of fairness when targeted incentives are used, which reduces compliance and, therefore, increases enforcement efforts.

25 CHALLENGES 4.Lack of transparency :  When the rationale for granting tax incentives is based more on discretionary and subjective qualification requirements, instead of automatic and objective requirements, they can originate rent-seeking behaviour and facilitate officials’ abuse on the granting process.

26 CONCLUSIONS

27 1.Tax incentive seems to be a budget expenditure in a developing countries. It is favorable manner of government because it is easier to provide and not require an actual expenses of fund or cash subsidies. CONCLUSIONS 2.There are several types of CIT incentives applying in Vietnam. Its treatment and requirement varies from sectors to zones 3.Realizing the challenges of tax incentives in general, CIT incentives in particular is prerequisite issues when having investment decision.

28 I would like to sincerely thank the School of Finance & Accounting, Saxion University of Aplied Sciences for providing financial support for my trip to the Netherland to attend this excellent meeting. Acknowledgements

29 Thank you for your attention!

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