To: The Japanese Chamber of Commerce and Industry in Vietnam – JCCI
(Address: Room 605, Sun Red River Building, 23 Phan Chu Trinh St., Hoan Kiem District, Hanoi,)

Below is the response of General Department of Taxation to document 10/2023JCCI dated 17/7/2023 of JCCI on its proposals regarding tax policies and administrative procedures.

The Appendix hereof contains responses of General Department of Taxation to issues that are relevant to its functions and duties.

For your information./.

ON BEHALF OF GENERAL DIRECTOR
DIRECTOR OF POLICY DEPARTMENT




Luu Duc Huy

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RESPONSE TO PROPOSALS OF THE JAPANESE CHAMBER OF COMMERCE AND INDUSTRY IN VIETNAM (JCCI) REGARDING TAX POLICIES AND ADMINISTRATIVE PROCEDURES.
(Enclosed with Official Dispatch No. 4525/TCT-CS dated October 12^th 2023 of General Department of Taxation)

1. Proposed improvements to tax-related administrative procedures.

a) Refund of value-added tax (VAT)

Proposal:

We find that VAT is not refunded appropriately. This is a major issue to cash flow and causes some enterprises in Vietnam to go bankrupt. When claiming VAT refund, we need to fulfill a lot of requirements and submit documents that are not required by law. This is the main reason for delay VAT refund. We hope the tax refund process will be more convenient and the will be no more unregulated requirements and documents.

For instance, during a VAT inspection, in addition to the documents required by law, transfer pricing confirmation documents were also requested as necessary documents. In another instance, VAT refund was rejected due to incomplete of corporate income tax (CIT) inspection. VAT refund is very important to enterprises, and if VAT refund is rejected due to unregulated requirements, enterprises will face cash flow difficulties, even go bankrupt. In such situations, enterprises cannot develop their financial plans and operate the business properly. If the government and tax authorities do not comply with law, how can they instruct enterprises to comply with law and pay tax lawfully?

If an enterprise has fulfill all conditions for VAT refund, they are entitled to VAT refund. We hope regulations of law will be adhered to without any unregulated requirements in order to protect enterprises' right to VAT refund.

In addition, the Circulars elaborating the Law on Tax Administration also prescribe that the land use right certificate or construction permit are mandatory documents in the tax refund application. In many cases, even the industrial zone management company does not have the land use right certificate. This means the enterprises operating in such industrial zone cannot have such a certificate. The delay in completion of administrative procedures also causes enterprises to waste a lot of time on obtaining the land use right certificate or construction permit. On the other hand, enterprises still need VAT refund to solve their cash flow-related issues but the delay in administrative procedures hinders the VAT refund process. We hope the Ministry of Finance will be more flexible in granting VAT refund and rescind unnecessary regulations.

Besides, even though the Law on Tax Administration already prescribes the time limit for providing VAT refund from the date of submission of the VAT refund application to the date of inspection and refund. However this time limit is not adhered to, thereby causing delay to tax refund process. VAT refund is even rejected for illegitimate reasons such as the CIT inspection is incomplete or the tax authority fails to carry out the tax inspection within 40 days from the date of application submission without any notification. Tax authorities' failure to comply with regulations causes a lot of damage to enterprises. We sincerely hope the Ministry of Finance will have measures to ensure regulations of law are strictly complied with.

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- Clause 3 Article 1 of the Law on Value-added Tax No. 106/2016/QH13 dated 19/4/2016 amending Clause 1 and Clause 2 Article 13 of the Law on Value-added Tax No. 13/2008/QH12 (amended by Law No. 31/2012/QH13) on refund of taxes on investment projects:

“1. ... Where a business establishment has registered to pay VAT using credit-invoice method has a new investment project which is still in its investment stage, VAT on goods/services purchased serving the investment has not been deducted, and the remaining tax is at least VND 300 million, VAT shall be refunded."

- Clause 3 Article 1 of the Government’s Decree No. 49/2022/ND-CP dated 29/7/2022 amending Clause 2 Article 10 of the Government’s Decree No. 209/2013/ND-CP (amended by Decree No. 100/2016/ND-CP) on VAT refund for investment projects:

"3. Amendments to Clause 2 of Article 10:

"2. Business establishments eligible for tax refund regarding investment projects:

a) Business establishments that have registered for business and VAT payment according to the tax credit method (including newly established business establishments from investment projects), have new investment projects (including investment projects divided into several investment phases or investment categories) according to regulations of the Law on Investment in areas of the same or different provinces and cities where their headquarters are located (except for cases prescribed in Point c of this Clause, investment projects on construction of houses for sale, and investment projects that do not create fixed assets) that are in the investment phase or projects on prospection and projects to search, prospect, and develop oil and gas fields that are in the investment phase, and have the input VAT of goods and services incurred during the cumulative investment phase that have not been fully deducted from at least 300 million VND, shall be eligible for the VAT refund.

Business establishments that declare separate value-added tax for investment projects and have to compensate for the input VAT of investment projects with the VAT payable on current business production activities (if any). After the compensation, if the VAT of investment projects that remains after deduction is least 300 million VND, such business establishments shall be eligible for the VAT refund.

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b) Business establishments having conditional business lines shall be eligible for the VAT refund for investment projects as prescribed in Point a of this Clause if their investment projects fall into the following cases:

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b.2) Investment projects in the investment stage that are yet to be required to apply for licenses to engage in conditional business lines issued by competent state agencies according to regulations of laws on investment and specialized laws under one of the following forms: Licenses, certificates, or documents on verification and approval.

b.3) Investment projects that are not subject to licenses to engage in conditional business lines according to laws on investment and specialized laws under one of the following forms: Licenses, certificates, or documents on verification and approval."

- Clause 3 Article 1 of Circular No. 13/2023/TT-BTC dated 28/02/2023 of the Ministry of Finance providing guidelines for the Government’s Decree No. 49/2022/ND-CP dated 29/7/2022 and amending Circular No. 80/2021/TT-BTC dated 29/9/2021 of the Ministry of Finance on VAT refund for investment projects:

"3. Clauses 2 and 3 of Article 18 shall be replaced by the new Clause 2 below:

"2. Business establishments eligible for VAT refund regarding investment projects shall comply with regulations in Clause 3 Article 1 of Government’s Decree No. 49/2022/ND-CP dated July 29, 2022.”

- Point a Clause 2 Article 28 of Circular No. 80/2021/TT-BTC dated 29/9/2021 (amended by Clause 2 of Circular No. 13/2023/TT-BTC dated 28/02/2023 of the Ministry of Finance) on application for VAT refund for investment projects:

"2. Documents that are relevant to the case. To be specific:

a) Refund of VAT on an investment project:

a.1) Copy of the Certificate of Investment Registration or Investment Certificate or Investment License in case the Certificate of Investment Registration is mandatory;

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a.3) Copy of the charter capital contribution certificate;

a.4) Copy of the license for conditional business; certificate of eligibility for conditional business; documents issued by competent authorities permitting the conditional business according to Point c Clause 2 Article 10 of the Government’s Decree No. 209/2013/ND-CP dated 18/12/2013, which is amended by Clause 6 Article 1 of the Government’s Decree No. 100/2016/ND-CP dated 01/7/2016;

a.5) A list of invoices and documentary evidence for purchases according to Form No. 01-1/HT in Appendix I hereof, unless the taxpayer has sent electronic invoices to the tax authority;

a.6) The decision on establishment of the Project Management Board, the project owner's decision on assignment of project management tasks, regulations on organizational structure and operation of the branch or Project Management Board (if tax refund is applied by the branch or Project Management Board)."

Pursuant to regulations of law on VAT: In case there is a new investment project (including new business establishments that are established from the investment project and investment projects that are divided into multiple investment phases or items) in the same or different provinces or centrally affiliated cities (hereinafter referred to as "provinces") from those of the headquarters, and the remaining input VAT on goods and services incurred during the investment stage after deduction is at least 300 million VND, it will be eligible for VAT refund.

The documentation and procedures for VAT refund are specified in Point a Clause 2 Article 28 of Circular No. 80/2021/TT-BTC dated 29/9/2021 of the Ministry of Finance (amended by Clause 2 of Circular No. 13/2023/TT-BTC dated 28/02/2023 of the Ministry of Finance).

b) Tax exemption under double tax agreements (DTAs)

Proposal:

According to the procedures for tax exemption under DTAs specified in Circular No. 80/2021/TT-BTC, after receiving a satisfactory application for tax exemption, the tax authority shall issue a tax exemption decision within 30 days (or 40 days if an inspection visit is necessary) and notify the taxpayer of their eligibility for tax exemption. In many cases, tax authorities do not response within the said time limits after the enterprises have submitted applications for exemption of tax on capital transfer, personal income tax and foreign contractor withholding tax under DTAs. Some is not even responded after 1 year. Many were requested to provide additional documents that are not relevant to the refund claim, such as documents about rationality of the taxes incurred upon the initial capital transfer time or rationality of the buying prices. We sincerely hope the authorities would stop demanding the documents that the transferors cannot obtain, such as fixed asset ledgers of Vietnamese companies that are subjects of capital transfer, etc., and that the authorities would comply with regulations, stop requiring documents and procedures that are not required by law and not relevant to tax refund requirements, and respond enterprises within the time limits.

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Response:

In addition to regulated documents in the tax declaration dossier, the taxpayer also needs to prepare the application for tax exemption or reduction under DTAs according to Article 62 of Circular No. 80/2021/TT-BTC dated 29/9/2021. However, pursuant to Clause 7 Article 17 of the Law on Tax Administration No. 38/2019/QH14 dated 13/6/2019, the taxpayer has the responsibility to:

Provide information and/or materials related to the determination of tax liabilities accurately, fully and promptly, including information on investment value; transaction IDs and contents of accounts opened at commercial banks and/or other credit institutions; explain tax calculation, declared tax and/or tax payment as requested by tax authorities."

Clause 1 and Clause 2 of Article 9 on powers of tax authorities in the Law on Tax Administration No. 38/2019/QH14 dated 13/6/2019:

"1. Request taxpayers to provide information and/or materials related to the determination of tax liabilities, including information on investment value; transaction IDs and contents of accounts opened at commercial banks and/or other credit institutions and explaining tax calculation, tax declaration and/or tax payment.

2. Request relevant organizations and/or individuals to provide information and/or materials related to the determination of tax liabilities and cooperate with tax authorities in implementing provisions on taxation..."

"Pursuant to the above regulations, when processing applications for tax exemption under DTAs, tax authorities might request the taxpayers to supplement information and documents that are only relevant to the information in their tax refund applications in order to correctly determine their eligibility for tax exemption under DTAs.

2. Alternatives of Vietnam to tax incentives and minimum corporate income tax (CIT) rates for each country

a) Permission for enterprises to choose whether to apply the long-term 15% CIT rate or the current tax incentives

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JCCI would like the Ministry of Finance to consider applying the preferential CIT rate of 15% for 20 years to enterprises operating in industrial zones and enterprises operating in the field of software development and renewable energy. In addition, Japan only applies minimum corporate tax to enterprises whose consolidated revenue exceeds 100 billion Yens (7.5 million Euros in OECD). We hope the Ministry of Finance consider introducing a mechanism to allow these companies to choose between new corporate tax incentives or current tax incentives.

Response:

Regarding global minimum tax application, the Ministry of Finance is cooperating with other Ministries and central authorities in drafting and proposing the promulgation of regulations on global minimum tax application. Income inclusion rules (IIR) will be first applied to Vietnamese corporations that are eligible for global minimum tax and have associate companies in other countries so that they will apply a lower rate than the currently minimum rate of 15%. Qualified Domestic Minimum Top-up Tax (QDMTT) will be applied to foreign corporations that are eligible for global minimum tax and have associate companies in Vietnam so that they will apply a lower rate than the currently minimum rate of 15%. Global minimum tax will be applied to Vietnam from 2024. Enterprises that are not eligible for global minimum tax will continue to enjoy CIT incentives for which they are eligible.

b) Reduction in progressive personal income tax

Proposal:

Enterprises take into account not only CIT, but also personal income tax, VAT, foreign contractor withholding tax and social insurance in total amounts payable to state budget to consider which country to invest in. High personal income tax (PIT) rates in Vietnam lead to very high personal income tax payable. This increases the enterprises' burden of labor cost and hinder recruitment. Current per capita income (PCI) and GDP per capita of Vietnam have significantly increased. JCCI would like the Ministry of Finance to consider reducing the maximum PIT rate of 35% when the income reaches 80 million VND per month. To be specific, we propose that the monthly income subject to this rate is 160 million VND. This will help cut labor cost, encourage recruitment and boost investment.

We know there have been proposals to reduce PIT in certain business lines. However, we understand that incomes of employees in these business lines are usually high. Only reducing progressive PIT tax for higher earners will cause inequality and make low earners dissatisfied. We also do not approve of this mechanism because it is impossible to prove workers' actual participation in the work. They can easily evade tax if they know which specific works are eligible for tax reduction. We would like the Ministry of Finance to consider universal reduction in progressive personal income tax.

Response:

The progressive tariff applied to salaries and remunerations has 07 tax brackets starting from 5%. The average rate is 10%. The highest rate is 35%. Current personal income tax policies of Vietnam do not differentiate between Vietnamese nationals and foreigners, incomes earned in Vietnam and overseas. Therefore, Vietnam's progressive personal income tax is highly appropriate for international practice but still adjusted according to the majority of wage-earners in Vietnam. The highest tax rate of 35% only applies to individuals who earn a very high income of at least 100 million per month, and is not high compared to other countries.

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PIT is charged on incomes of individuals. The implementation of PIT policies is very important to the implementation of redistribution policies. Together with other sources of income, revenues from PIT helps develop the state budget fund, which is used for development investment, defense and security, social security, poverty reduction and hunger eradication. In order to accomplish the objectives specified by the Prime Minister in prescribed No. 2114/QD-TTg dated 16/12/2021 promulgating the plan for implementation of Verdict No. 19-KL/TW of the Politburo and the Orientation Scheme for the Law Development Program of the 15^th National Assembly, the Ministry of Finance is reviewing and evaluating various Tax Laws, including the Law on Personal Income Tax. Amendments to the Law on Personal Income Tax will be proposed to Standing committee of the National Assembly at appropriate times under the National Assembly's Law Development Program, following Vietnam's socio-economic conditions and international practice.

c) Application of assistance

Proposal:

JCCI would like the Ministry of Finance to consider providing assistance for land levies, costs of investment in new equipment, research and development, human resources, etc. in appropriate manners such as land levy reduction or exemption, doubling the recorded reasonable costs of investment in new equipment, research and development, human resources, training.

Response:

Regarding this proposal, the Ministry of Planning and Investment will take charge and cooperate with other ministries and central authorities in developing and proposing promulgation of legislative documents on assistance for enterprises.

3. Related-party transactions

a) Promoting application of advance pricing agreement (APA)

Proposal:

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Response:

APAs are applied in Vietnam in accordance with the Law on Tax Administration, the Government’s Decree No. 126/2020/ND-CP, 132/2020/ND-CP and Circular No. 45/2021/TT-BTC. They are voluntary, requested by taxpayers, agreed upon between taxpayers and supervisory tax authorities, or between the tax authority of Vietnam and that of the country that is a member state to the Tax Agreement in case of bilateral or multilateral APAs in order to predetermine CIT liabilities of relevant taxpayers within a certain period of time after the APA is signed.

When an APA is signed between a taxpayer and relevant tax authorities, the taxpayer shall declare and pay tax on the basis of its content. Within the scope of the signed APA, tax authorities will carry out inspections to make sure the taxpayer complies with the APA, not for reassessment of the signed APA. Tax authorities are entitled to carry out tax audit, tax inspection, collect arrears and take actions regarding other contents that are covered by the APA. The taxpayer's request for application of APA during the process does not restrict the tax authorities' rights to tax inspection and tax audit. This is totally conformable with current international practice and recommendation regarding APAs.

b) Consideration of non-price factors during inspection of related-party transactions

Proposal:

When comparing return on sales (ROS) during analysis of related-party transaction prices, independent comparables that have recorded average loss for multiple years or have incurred losses for many consecutive years must be eliminated. We understand that, in theory, these independent comparables must operate continuously.

In case a company cannot operate normally due to Covid-19, the Vietnamese Government's Directives, or scheduled power outages, thus revenue is not generated but expense still sharply increases, assumptions must be adjusted to reflect the effect of non-price factors in ROS analysis. It is the same for enterprises whose ROS rapidly decreases or suffer a loss due to non-price factors, such as underperforming business operation causing cost prices to be higher than selling prices of third parties, low product quality leading to return of products, etc.

During many inspections of transfer prices, non-price factors were not accepted as justifiable explanation because the enterprises could not find information proving the independent comparables are not affected by similar non-price factors such as scheduled power outages or substandard goods. Therefore, we hope tax authorities would stop rejecting them during tax inspections since they currently cannot be proven.

JCCI would like the Ministry of Finance to give directives or provide guidelines for local authorities to carry out tax inspections that take consideration non-price factors in ROS analysis. We made a similar proposal in 2021 but there has been no change to tax inspections in reality. Once again, we hope the Ministry of Finance would consider non-price factors in ROS analysis.

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Considering the effect of Covid-19 or other non-price factors such as scheduled power outages, etc. during analysis, comparison and adjustment of material differences to determine related-party transaction prices of taxpayers as well as during tax audit and tax inspection by tax authorities:

- Regulations on comparability analysis, selection of independent comparables, adjustment of material differences as the basis for determination of related-party transaction prices are prescribed in Article 6 to 11 of Decree No. 132/2020/ND-CP. When compiling the local files on transfer pricing, taxpayers have the obligation to carry out comparability analysis, selection of independent comparables, adjustment of material differences that affect the prices or ROS in order to determine and declare the transfer prices. These files and the declarations of related-party transactions shall be the basis for tax authorities to inspect the taxpayers' compliance.

- The comparability analysis, selection of independent comparables, adjustment of material differences shall be carried out in accordance with the aforementioned regulations. Regarding the factors that affect enterprises' business operation such as: Covid-19, scheduled power outages, if taxpayers have documentary evidence for the material differences caused by these factors between the taxpayers and independent enterprises selected for comparison, this information will be the basis for determination whether the effects are material during comparability analysis, adjustment of material differences prescribed in the Government’s Decree No. 132/2020/ND-CP dated 5/11/2020.

Therefore, information and data must be obtained as the basis for adjustment of material differences.

c) Collection of tax arrears derived from related-party transactions in Vietnam

Proposal:

Some transactions in the same corporation that apply the same tax rate in Vietnam still incur tax arrears that are relevant to related-party transaction prices even though there is no cumulative loss. These enterprises have no motive for transfer pricing, thus collecting tax arrears on these transactions are not reasonable.

JCCI proposes that these transactions be excluded from related-party transactions, or there are guidelines for exempting these transactions from tax inspection and tax audit, or there are regulations that partners' transactions are eligible for tax refund. We made a similar proposal in 2021, which was rejected without satisfactory explanation. The reasons for rejecting our proposal were not relevant to tax policies and related-party transaction prices. Once again, we would like the Ministry of Finance to reconsider our proposal.

Response:

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When enterprises have transactions with related parties in Vietnam or overseas, they must be determined on the principle that these transactions are independent and incur tax liabilities that are commensurate with the value they create.

- In conformity with international practice and instructions of OECD regarding transfer prices, there are no recommendations to exclude related-party transactions with the same tax rates and not cumulative loss from regulations on related-party transactions.

If a taxpayer only has transactions with related parties that pay CIT in Vietnam and apply the same CIT rates, and neither party is eligible for CIT incentives in the tax period, the taxpayer will be exempted from preparing the related-party transaction prices declaration and documentation according to Clause 1 Article 19 of Decree No. 132/2020/ND-CP dated 5/11/2020.

4. Other issues regarding tax inspection time

Proposal:

We learned about some situations in which the tax authority requires a Vietnamese enterprise to declare and pay tax in case the parent company pays salary to seconded employees and then claims reimbursement from the Vietnamese enterprise, Or excluding personnel cost which has not been paid by the Vietnamese enterprise to the parent company from reasonable costs. We would like the Ministry of Finance to instruct local tax authorities to carry out tax inspection in accordance with regulations of law.

Response:

- Taxpayers have the responsibility and obligation to comply with tax laws. During tax audit and tax inspection, tax authorities also have to comply with tax laws.

In case a taxpayer does not concur with the tax authority's verdict after tax audit or tax inspection, the taxpayer is entitled to file a complaint against the tax authority's decision.

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