Long awaited VAT path is set to be outlined

The Ministry of Finance last week posted a draft circular guiding credit institutions’ value added tax (VAT) treatment on its website for comment.

The draft circular is applicable to  banks, non-bank credit institutions, microfinance and people’s credit funds,  foreign bank branches and  representative offices of foreign credit institutions, other foreign organisations engaging in banking activities.

“It is great that there is specific guidance on the VAT treatment of credit institutions as the last time there was specific VAT guidance for credit institutions was Circular 157 in 1998, more than 12 years ago,” said Thomas McClelland, tax partner of Deloitte Vietnam.

The draft circular sets out lists of VAT and VAT exempt activities. 

VAT-able activities include banking services, foreign currency trading, gold/silver/precious stone trading and selling assets to secure loans for debt recovery.

VAT exempt activities include credit granting services, deposits, fees in relation to international credit cards, foreign exchange gains from revaluation of monetary items at the year’s end or from pre-operating periods.

McClelland said the lists appeared to be comprehensive. “However, there are other specific issues which have concerned banks which are not specifically addressed. For example, the VAT treatment of commitment, loan arrangement and capital integration participation fees.” 

Derivatives are not covered in this draft circular, but the overall tax treatment of derivatives should be finalised soon. The draft circular also provides further guidance on whether a bank fee receipt could be considered an invoice. 

“This has been a big issue for banks in the past. The draft circular now allows credit institutions to use fee receipts as VAT or sales invoices on the condition that such transaction documents are printed out from the system and provides the necessary information for the determination of transactions and tax declaration,” McClelland said.

There is guidance provided for VAT calculation methods, which basically follow the provisions of the general VAT Circular 129/2008/TT-BTC provisions. Under direct method, trading of gold/silver/gems and foreign currency must be separately accounted for.

Under the credit method, if no separation of input VAT can be made for VAT-able and VAT exempt supplies, allocation of input VAT is allowed.  However, the total revenue to calculate the ratio is regulated to include VAT-able revenue, exempt revenue and also the positive difference in income derived from trading of gold, silver, gems and foreign currency. 

“There is no further guidance as to which comprises of this positive difference and we assume it is the amount on which VAT payable is calculated under direct method. We find this formula unfair for banks as they have already paid VAT under direct method.  By adding up this positive difference, the amount of deductible input VAT would be reduced,” he said.

Under the credit method, the draft circular provides that ‘in case the credit institutions have internal revenues when the transaction posts, loans between head offices and branches in the same accounting units located in the provinces and centrally-run cities, the business revenues allocated to the rate of input VAT deductible does not include revenue received from internal interests".  This provision raises a question of whether branches located in cities other than centrally-run cities would be able to apply this rule, McClelland highlighted.

Under the direct method, the value added is the difference between the “sale” and “cost of sale”.  However there is no further provision on how to determine the cost of sale in the tax period. “ If ‘sale’ and ‘cost of sale’ are calculated by methods as applied for trading of common goods, the trading result may be miss-stated,” noted McClelland.

VAT is not imposed in case credit institutions conduct foreign currency internal rotations between head offices and branches or between branches.

VAT for trading gold and foreign currency must be separately declared. No offsetting between the two activities is allowed.