Amending, supplementing corporate income tax incentives - opportunity for whom?

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The role and impact on Vietnam’s economy

Investment expansions were entitled to CIT incentives from 1993, which significantly encouraged enterprises to increase capital to develop business and production activities. However, the abolition of CIT incentives for investment expansions in the period 2009-2013 put enterprises at a disadvantage when continuing to expand investments or lead to them deciding to temporarily postpone or cancel the investment expansion plans.

Meanwhile, investments in IZs were entitled to CIT incentives later (from 2004) but given the fact that more than 80% of IZs are located in crucial economic areas and do not belong to localities with difficult or extremely difficult conditions, the termination of CIT incentives for IZ in the period 2009-2013 was also a shock for the business community, especially for enterprises having foreign investment (“FDI”).

Notably, in the period 2009-2013, Vietnam’s economy faced many difficulties due to the strong impact of the global economic crisis. The removal of the incentives the investment expansions and investment in IZs of enterprises could be recognized as an action of “sharing the burden with Vietnam” to overcome the economic crisis.

At this stage, the regime of CIT incentives for investment expansions and investment into IZs are basically reinstated in the prevailing CIT Law. However, the additional issue to be considered is the regime of “compensation for disadvantages” for enterprises having investment expansions and investment into IZs in the period 2009-2013.

2014 – Start of a sequence of solutions

In the first 10 months of 2014, the Government and the Ministry of Finance have developed timely solutions and proposals to amend and supplement tax policies, in which CIT incentives are a focus. The initiative is the Conference of the Prime Minister’s discussions with enterprises (April 2014), followed by Resolution 63/NQ-CP (“Resolution 63”) of the Government (August 2014), Decree 91/2014/ND-CP issued to realize the measures subject to the jurisdiction of the Government in Resolution 63 (October 2014) and the Draft Law amending, supplementing a number of articles of tax laws to solve difficulties for production and business to realize the measures subject to the jurisdiction of the National Assembly in Resolution 63 (expected to be approved in 2014).

The first group of measures in Resolution 63 and now specified in Decree 91/2014/ND-CP have really highlighted that economic and investment conditions face many difficulties, and thus help solve a number of obstacles:

- The inconsistency between investment licenses and differences in treatment of tax authorities toward original investment and investment expansion projects.

- The risk of decreasing additional investment capital for projects operated in IZs in localities with favorable socio-economic conditions.

- The disadvantage caused by the change in policies for enterprises entitled to CIT incentives due to export ratio.

The group of measures subject to the jurisdiction of the National Assembly in Resolution 63 is a breakthrough, notably the proposal to the National Assembly to approve the principle of treatment of CIT incentives where there are changes in CIT regulations, thereby creating the initiative for the Government and the Ministry of Finance to provide guidance for CIT incentives following amendment and supplementation of CIT policies. Furthermore, the Government also proposes to the National Assembly to approve CIT incentives for investment project with “ultra large” scale (investment capital from 12,000billion) in manufacturing sector (except for project manufacturing products subject to special sales tax, minerals exploitation projects) using advanced technologies, modern techniques and having disbursement of no later than 5 years from the licensing time. In terms of form and issuance time, instead of Resolution of the National Assembly as under initial plan of the Government, now it shall be in form of Law amending, supplementing a number of articles of tax laws to solve difficulties of production and business to enhance the effective application period and is expected to be approved by the National Assembly in 2014.

Opportunity for whom?

With the new and timely measures as above, immediately when the Draft Law amending, supplementing a number of articles of tax laws to solve difficulties for production and business (Draft Law) proposed to the National Assembly is approved in the 8^th meeting, National Assembly VIII, the opportunity for the entitlement of CIT incentives will open for at least the following enterprises:

The first category is enterprises having investment projects with distinguishable development phases which would be entitled to CIT incentives for remaining time from 1 Jan 2014 for investment phases in period 2009-2013 previously considered by tax authorities as investment expansion and not entitled to CIT incentives.

The second category is enterprises having new investment projects or investment expansion projects not entitled to CIT incentives before the effectiveness of the Law amending, supplementing a number of articles of tax laws (e.g. 1 December 2014) which now satisfy the incentive conditions under CIT regulations newly amended, supplemented will likely be entitled to tax incentives for the remaining time from the time the amended, supplemented CIT regulations become effective, inclusive of notable cases as below:

- Enterprises having investment expansion projects in the period 2009-2013 belonging to sectors, localities subject to CIT incentives prescribed in the Law amending, supplementing a number of articles of CIT Law No.32/2013/QH13 and Law amending, supplementing a number of articles of tax laws, inclusive of industrial zones not belonging to localities with favorable socio-economic conditions regulated in Decree 91/2014/ND-CP.

- Enterprises having new investment projects before 2014 having “ultra large” scale (investment capital of VND12,000bil and above) in manufacturing sector (except for projects manufacturing products subject to special sales tax, minerals exploitation projects), using advanced technologies, modern techniques and having disbursement no later than 5 years from the licensing time.

SEVERAL ISSUES TO BE CLARIFIED IN THE DRAFT LAW

In terms of contents, the Draft Law is general guidance and shall be specified by Decrees and Circulars, however there are still issues needing clarification as follows:

Content 1 – Principle for treatment of CIT incentives in case there are changes in tax regulations (Point 6, Article 1, Draft Law)

“Enterprises have investment projects eligible to CIT incentives under CIT regulations at the time of granting license or Certificate of Investment. Where there are changes in CIT regulations and enterprises satisfy incentive conditions under newly amended, supplemented regulations, enterprises have the right to choose between enjoying the incentive tax rate and tax exemption and deduction under regulations at the licensing time or under supplemented and amended regulations for remaining time since the supplemented and amended CIT regulations becomes effective.”

When studying such content, a number of enterprises have raised questions for common cases as below:

- In case enterprises have investment projects entitled to CIT incentives under regulations at licensing time, and investment expansion projects in the period 2009-2013 not entitled to CIT incentives, now the investment expansion projects satisfy incentive conditions under regulations, whether such investment expansion projects are entitled to CIT incentives for the remaining time?

- In case established enterprises have original investment projects and investment expansion projects not entitled to incentives under regulations at licensing time but now satisfy incentive conditions under new regulations, whether enterprises are entitled to CIT incentives for remaining time for both original investment projects and/or investment expansion projects?

For the specific answers, in case the Draft Law is approved, relevant contents of Decrees and Circulars guiding Law must be studied. At this stage, under our analysis, it is seen that the above regulation has two possible interpretations:

Interpretation 1: Two sentences in Point 6, Article 1, Draft Law above have a mutual relation.

Only enterprises which are objects of Sentence 1 (“Enterprises have investment project entitled to CIT incentives under CIT regulations at the time of granting license or Certificate of Investment) are allowed the option to enjoy CIT incentives under the guidance of Sentence 2 (Where there are changes in CIT regulations and enterprises satisfy incentive conditions under newly amended, supplemented regulations, enterprises have the right to take options between enjoying the incentive tax rate and tax exemption and deduction under regulations at the licensing time or under supplemented and amended regulations for remaining time since the supplemented and amended CIT regulations becomes effective.)

Interpretation 2: The two sentences 1 and 2 in the above paragraph are totally independent and both provide general principle guidance.

- Sentence 1 is a general guidance and in principle, enterprises shall self-assess their incentives with reference to CIT incentives regulations at the time of granting license or investment certificate.

- Sentence 2 provides general principle that enterprises, whether entitled to CIT incentives or not before amended, supplemented CIT regulations, but now satisfy conditions under amended, supplemented CIT regulations:

+ For enterprises currently entitled to CIT incentives under CIT regulations at licensing time shall be allowed to take one of two incentive options as in Sentence 2.

+ For enterprises not entitled to CIT incentives before amended, supplemented CIT regulations shall be entitled to tax incentives under option 2 of the Sentence (entitled to incentive tax rate and tax exemption, deduction under newly amended, supplemented CIT regulations for remaining time from the effective time of amended, supplemented CIT regulations).

In author’s opinion, in case the Draft Law is approved, the guiding Decrees and Circulars should provide specific guidance under Interpretation 2 for following reasons:

- In case enterprises having investment projects are entitled to CIT incentives under tax regulations at the licensing time but the incentive period is over at the time tax regulations change, if under Interpretation 1, such enterprises can only choose option 2 for incentives. In this case, there are not so many differences for enterprises as in Interpretation 2.

- Regulation as under Interpretation 1 shall cause disadvantages for enterprises having investment projects not entitled to CIT incentives previously, now satisfying incentive conditions under the newly amended, supplemented CIT regulations but still not be eligible for CIT incentives for remaining time from the amended, supplemented CIT regulations become effective.

Content 2- CIT incentives for “ultra large” projects in the manufacturing sector (Sub-point 2, Point 2, Article 1, Draft Law):

“2. Supplement to the end of point 1, clause 7, Article 1, Law No.32/2013/QH13 as follows:

Income of enterprises from operating investment projects in manufacturing sector (except for projects manufacturing products subject to special sales tax, minerals exploitation projects) having investment capital scale of a minimum twelve thousand billions, using advanced technologies, modern techniques and disbursement no later than 5 years from investment licensing time.”

For projects satisfying conditions in sub-point e above, in case the Draft Law is approved, shall be entitled to CIT rate of 10% for 15 years and for cases of special investment attraction, the application time of the 10% rate shall be extended but for no more than 15 years.

The notable point is that in comparison with Resolution 63, the Draft Law has supplemented the condition of “using advanced technologies, modern techniques”. It could be understood that besides the factor of large capital scale, Vietnam encourages projects to also use “advanced technologies, modern techniques” to promote the technology transfer and training for domestic human resources.

However, to ensure the practicality, such condition needs careful considerations, at least the requirement of “modern techniques” should not be added due to the lack of definition[1], and the requirement of “using advanced technologies”, even with legal base references (Law on technology transfer and Circular 04/2014/TT-BKHCN)[2], still raises below issues:

- Regulations of Law on Technologies transfer No.80/2006/QH11 are only general guidance and difficult to apply for the assessment of “advanced technologies”.

- Circular 04/2014/TT-BKHCN only guides the assessment of production technologies level of enterprises or sectors, whereas the Draft Law considers level of technologies used for investment projects, so that the application may not be suitable.

- Circular 04/2014/TT-BKHCN are newly issued and comes into practice in 2014, there are not sufficient information to assess the efficiency, effectiveness of the Circular, so that it may lead to obstacles when determining the level of “advanced technologies” of enterprises or projects.

- The necessity is questionable as the object of encouraging enterprises to use advanced technologies though CIT incentives are realized in Article 13 and Article 14 of prevailing CIT Law.

Content 3- Effectiveness (Point 1, Article 6, Draft Law):

“Article 6. Implementation

1.This Law shall be effective from 01 January 2015.”

It could be understood that the effective date of 01 January 2014 in the Draft Law is proposed due to 02 main reasons:

i) The expected time the Draft Law is approved by the National Assembly is near the end of 2014 (8th meeting, National Assembly XIII happening from 20 October 2014 to 28 November 2014) and the regulation on validity time of legal documentations needs to be ensured (no sooner than forty five days from the announcement date or signing date).

ii) This is the Law amending, supplementing a number of articles of 5 different tax laws and thus the date of 1 January 2015 shall not cause obstacles for tax declaration arising from the changes in tax policies.

However, the expected effectiveness of the Article 1 regarding CIT in the Draft Law shall cause an issue of “interruption” on the CIT incentive policies and the unfairness among enterprises entitled to CIT incentives. In particular, in comparison with enterprises applying the Law amending, supplementing a number of articles of CIT Law No.32/2013/QH13 and Decree 91/2014/ND-CP to enjoy CIT incentives from 2014, the enterprises applying new regulations on CIT incentives under the Draft Law shall be subject to a reduction of 1-year entitlement to CIT incentives for the remaining time, leading to disadvantages.

SEVERAL RECOMMENDATIONS

The new measures on CIT incentives are proposed to broaden the incentive range to support enterprises overcome difficulties in production and business, especially for the demand of capital for reinvestment. However, there still exist several issues which cause disadvantages for enterprises, especially FDI, for example:

- Enterprises having investment expansions in IZs in the period 2009-2013 and generating income in first years and now satisfying incentive conditions under newly amended, supplemented CIT regulations, in case being entitled to CIT incentives for remaining time, the benefits are not considerable as the maximum incentive level is only tax exemption in 2 years and 50% tax deduction in following 4 years.

Recommendations

Not include the income from new investment projects in IZs in the range of tax exemption of maximum 2 years and 50% tax deduction of maximum 4 following years. Instead, we recommend the Point 1 and Point 2, Article 14 of the current CIT Law to be amended, supplemented and added into the Draft Law as Point 7, Article 1 as follows:

“7. Point 1 and Point 2 Article 14 is amended and supplemented as below:

“1. Incomes of enterprises from the execution of new projects of investment provided for in Clause 1 and Point a Clause 2 Article 13 of this Law, incomes of hi-tech enterprises, hi-tech agricultural enterprises and income of enterprises from implementation of new investment projects in industrial zones, except for industrial zones belong to localities with favorable socio-economic conditions under regulations are eligible for tax exemption for no more than 4 years, and eligible for 50% reduction in tax for no more than the next 9 years.

2. Income of enterprises from implementations of new investment projects regulated in clause 3 Article 13 of this Law shall be exempted from tax for no longer than two years and deducted 50% payable tax for no longer than four following years.”"

Also, in the Decree guiding Law amending, supplementing a number of articles of tax laws to solve difficulties for production and business which includes the amendment and supplementation of Article 16 (tax exemption, deduction) of Decree 218/2013/ND-CP, it should regulate that income from new investment projects in IZs shall be entitled to tax exemption, deduction with higher level under 1 of 2 options as below:

- Option 1: tax exemption of no longer than 4 years and 50% tax deduction of no longer than 9 following years.

- Option 2: tax exemption of no longer than 4 years and 50% tax deduction of no longer than 5 following years.

- In case the National Assembly, the Government and the Ministry of Finance approve and provide guidance on the implementation of principle for CIT incentives treatment where there are changes in CIT regulations (Point 6, Article 1, Draft Law) under Interpretation 1 as aforementioned, enterprises having investment projects (new or expansion) previously not entitled to CIT incentives, but now satisfying the incentive conditions under newly amended, supplemented regulations shall not be entitled to CIT incentives like enterprises having similar new investment projects or investment expansion projects from 2014.

Recommendations

The National Assembly, the Government and the Ministry of Finance approve and provide guidance on the implementation of principle for CIT incentives treatment where there are changes in CIT regulations (Point 6, Article 1, Draft Law) under Interpretation 2 as aforementioned, so that enterprises having investment projects (new or expansion) previously not entitled to CIT incentives, but now satisfying for incentive conditions under the newly amended, supplemented regulations are entitled to CIT incentives like enterprises having similar new investment projects or investment expansion projects from 2014.

Specifically, Point 6, Article 1, Draft Law or Decree and Circular guiding Law amending a number of articles of tax laws to solve difficulties of production and business should clearly regulate as below:

“Where there are changes in CIT regulations and enterprises satisfy incentive conditions under newly amended, supplemented regulations, enterprises have the right to take options between enjoying the incentive tax rate and tax exemption and deduction under regulations at the licensing time (if any) or under supplemented and amended regulations for remaining time since the supplemented and amended CIT regulations becomes effective.”

Issue arising from the assessment of “advanced technologies, modern techniques”

As discussed above, the requirement of “modern techniques” currently lacks definition and the condition of “advanced technologies” has legal base references which are not really clear and the effectiveness is not fully evaluated in practice. Therefore, the condition of “advanced technologies, modern techniques” surely will cause obstacles on legal base for both enterprises as well as tax authorities in terms of application and administration of CIT incentives under such content. This will increase the admin procedures and compliance time of enterprises, leading to a contrary direction with the orientation and policies of lessening tax administrative procedures, bringing favorable conditions for current enterprises of the Government and the Ministry of Finance.

Recommendations:

At this stage, the content of “advanced technologies, modern techniques” should not be included in the regulation of Sub-point e, Point 2, Article 1 of the Draft Law. Such condition shall be considered to be supplemented in the next time of amending, supplementing CIT regulations, after the legal base for “advanced technologies, modern techniques” are regulated by the Government and the Ministry in charge (e.g. Ministry of Science and Technologies) more specifically.

Therefore, we recommend the Subpoint e, Point 2, Article 1, Draft Law to be amended as below:

“2. Supplement to the end of point 1, clause 7, Article 1, Law No.32/2013/QH13 as follows:

Income of enterprises from operating investment projects in manufacturing sector (except for projects manufacturing products subject to special sales tax, minerals exploitation projects) having investment capital scale of minimum twelve thousand billions and disbursement of no later than 5 years from investment licensing time.”

· Effectiveness from 1 January 2015 and the issue of “interruption” and unfairness of policies on CIT incentives

As analyzed above, the expected effectiveness (from 1 January 2015) of Article 1 of CIT incentives in the Draft Law is causing “interruption” in CIT incentive policies and difficulties for enterprises entitled to CIT incentives.

Recommendations

As the 8th meeting, National Assembly XIII occurs from 20 October 2014 to 28 November 2014, in case the Draft Law is approved before 17 November 2014, it still ensure the regulation on validity of legal documentations (no sooner than forty five days from the announcement date or signing date) for the Article 1 regarding CIT in the Draft Law to be applied to CIT period 2014 while the effectiveness of 01 January 2015 of the Draft Law for 4 other taxes remains unchanged.

Therefore, we recommend the Article 6, Draft Law to be amended as below:

“Article 6. Implementation

- This Law shall be effective from 01 January 2015. Particularly, the regulations in Article 1 of this Law shall be applied for CIT period from 2014”.

Summary

Amendment and supplementation of CIT incentives in the Draft Law is the most breakthrough, notably solutions of the Government in 2014 on CIT to solve difficulties for production and business. The opportunity will open for many enterprises, especially enterprises having new investments, investment expansions in IZs in the period 2009-2013 and are currently still facing with lots of difficulties. However, remaining issues analyzed above need to receive consideration from National Assembly and the Government for revision in order to ensure the high consistence, equality and applicability of the amendment and supplementation of CIT incentives in the Draft Law.