CIT rate down to 22 per cent

Many firms have unsuccessfully lobbied to have the A&P cap abolished as they claim it is obsoletePhoto: Le Toan

The National Assembly last week passed the revised Law on Corporate Income Tax (CIT) which cut the CIT rate from 25 to 22 per cent, effective from January 1, 2014. The rate is then planned to fall further, to 20 per cent in 2016. The law-making body also controversially decided to retain the Advertising and Promotional (A&P) cap which many business have lobbied to discard.

The changes implement one of the pillars of the government’s Taxation Reform Strategy for the period 2011-2020, to reduce the CIT rate gradually by 2020.

“The initial proposal had been a reduction to 23 per cent, so a reduction to 22 per cent in 2014 and 20 per cent in 2016 as well as the 20 per cent rate for SMEs, is welcome,” said Thomas McClelland, tax partner of Deloitte Vietnam.

McClelland said the reduction in the CIT rate would have an immediate impact in terms of reduction in government revenue while the benefits in terms of increased investment and GDP growth would be felt over the longer term as the new investments take some years to be realized. Smaller incremental effects on GDP in the short term are predicted due to increased consumption. 

In addition, the revised law raised the cap on A&P expenses from 10 to 15 per cent, instead of a removal as proposed by the business community.

Currently, the Law on Corporate Income Tax (CIT) only recognises  maximum A&P expenses of 10 per cent (or 15 per cent for the first three years) of the total cost base, which means that any exceeding A&P spending above that ceiling is not eligible for tax reduction.

McClelland called it “the biggest disappointment” of the revised law.

This has been an issue that foreign companies have lobbied for many years as it can significantly increase their effective tax rate. In fact, regardless of the new reduced tax rate their effective tax rate could be significantly higher due to the A&P cap. The issue is equally important for local companies although they have remained relatively silent on the issue.

“Policymakers have always, in arguments against the removal of the cap, contended that it only affects a very small number of taxpayers. Yet the reason for not increasing the cap to 15 per cent is apparently due to the effect such action would have on government tax revenues,” said McClelland.

“It will unfortunately now be up to another 5 years before the CIT Law is again comprehensively amended and gives a chance of a change, hopefully at this time a full removal of the cap will be possible,” he added.

Previously, the initial draft Law on CIT planned to reduce the CIT rate from the current 25 per cent to only 23 per cent, 1 per cent higher than the final rate.

The additional 1 per cent reduction from July 1 would cause a VND9 trillion ($432.7 million) loss to the state budget, according to the Ministry of Finance (MoF). In the first quarter of 2013, budget collection was only 20.6 per cent of the year plan, while in previous years it had been around 25-27 per cent.

However, McClelland suggested the reduction in the tax rate would  have a more positive effect in the long rather than short term.

“The other aspect with the reduction in the CIT rate is the effect that this will have on new foreign direct investment (FDI) into Vietnam. The government is clearly cognizant of what is happening in other countries in the region. For example, in order to improve Thailand’s competitiveness prior to the implementation of the ASEAN Economic Community in January 2015, Thailand reduced its CIT rate to 23 per cent in 2012 and to 20 per cent from January 1, 2013,” he said.

“It is however true that it is not only the tax rate that foreign investors consider but also the overall tax environment,” McClelland added.

The amended law also allows preferential CIT from 10-20 per cent for multiple objects.

Those who are paying 22 per cent CIT now, will bear 20 per cent CIT from Jan 1, 2016, while those with a total revenue under VND20 billion ($962,000) a year will bear a CIT of 20 per cent. The previous year’s revenue will be taken as the base for CIT.

Third, CIT of 10 per cent for the first 15 years is applied for income from newly-invested projects in special difficult areas, in high-tech industrial and economic zones, income of business in agriculture areas which apply high technology.

Low CIT of 10 per cent will be applied for income from social activities. The fields to benefit include education and training, vocational training, healthcare, culture, sport and environment, incomes from social housing projects, print newspapers or publishing.

A CIT of 20 per cent for the first 10 years is applied for income from newly-invested projects in difficult areas, incomes from new investments in high-quality steel, energy saving products, machine productions for agriculture, forestry, aqua-culture, irrigation, animal, fish and livestock feed, and for traditional handicraft businesses.

Finally, CIT of 20 per cent is applied for income from People Credit funds and micro-economic organizations.

The law makers also approved the revised law on Value Added Tax (VAT), which cut 50 per cent of VAT from July 1, 2013 to June 30, 2014 for social housing contracts for lease, sale, and installment purchase under the law.