PIT a bright new dawn

Human resource departments will have a busy few months getting up to speed with the PIT

Late last year, Vietnam’s National Assembly passed what is the nation’s first ever Personal Income Tax Law.
The new law aims to address certain of the perceived shortcomings of the existing Personal Income Tax Law (PIT) ordinance, notably the dual rate system for Vietnamese and expats, the high marginal rates and the relatively narrow PIT base.

The new law will become effective January 1, 2009 less than four months away. The law itself is quite brief, and details of how its new provisions will be implemented will be set out in the law’s implementing decree and circular. The PIT decree was issued last week and clarifies a number of issues in the law. The implementing PIT circular is, however, still being worked on by the Ministry of Finance. We present below an overview of some of the key changes to the PIT regime made in the PIT Law and its decree.

As before, tax payers are classified into residents and non residents, with a wider scope of tax and higher marginal rates applying to the former. Residents are those in Vietnam for 183 days or more in a 12-month period. This is the same definition as previously, in respect of expatriates. However, previously all Vietnamese nationals were resident, regardless of the number of days spent in Vietnam. This provision has been removed, so that Vietnamese nationals working abroad will, it appears, no longer necessarily be taxed as residents.

The definition of residents is also extended to include those having a “permanent residence” in Vietnam. This includes a rented house, where the lease duration is 90 days or more. Accordingly, expatriates who spend less than 183 days a year in Vietnam, but who have a rented house available, will be treated as tax residents from 2009, as could Vietnamese working abroad who have a permanent residence in Vietnam.

Some details remain to be clarified in this regard, for example whether a permanent residence will include houses leased by an employer, and available to an employee, or a group of employees, or whether tax residence will only be triggered where the residence is owned or leased directly by the individual.

However, this new definition could affect a wide range of individuals, especially regionally based expatriates who perform duties in Vietnam on a fly-in basis. Fortunately, in some cases applicable double tax treaties will override this definition and provide protection from Vietnam’s PIT.

Employment income
As before, employment income in any form is taxable. However, the language is now drafted in a more “catch all” style, and many benefits in kind, which hitherto have not been taxable in practice, will be taxed from next January.

The new PIT decree’s failure to mention the previous exemptions from PIT for certain benefits in kind (eg: airfares, children’s education, one-off relocation allowances) suggests that these will be eliminated. In addition, the current concessional taxation of employer provided housing (the “15 per cent rule”) is not mentioned in the PIT decree, so that the full rental paid by the employer will likely now be a taxable net benefit.

This widening of the scope of PIT on employment income will increase the cost of some expatriate income packages substantially and this will of course be exacerbated by the generally high level of costs faced by expatriates here such as school fees and housing.

Non-employment income
For the first time, various types of investment and other income are brought into the tax net. These include interest except on bank deposits and life insurance policies, dividends, gains on sales of shares and other securities, gains on sales of real estate except single holdings of a house/land and inheritances in excess of VND10 million.

The existing dual rate system for Vietnamese and expats whereby Vietnamese are subject to much higher effective PIT rates, is abolished and replaced by a single tariff, principally applicable to employment income.

These new rates and bands are broadly in line with the existing rates applicable to expats, although the top 40 per cent rate is reduced to 35 per cent. Various annual personal allowances will be granted such as single personal allowance VND48 million per annum, additional allowance per dependent at VND1.6 million per month if the required supporting documents are available. Required supporting documents will be set out in the forthcoming PIT circular.

Is this good or bad news for me…?
So will these new rates, in conjunction with the wider scope of taxable income, reduce an individual’s overall PIT liability from 2009? This will depend on how much they earn, whether they are Vietnamese nationals or expatriates and whether their income and benefits are agreed on a net or gross basis, such that PIT thereon is borne by the employer or employee.

Certainly, both human resources and finance departments are going to be busy in the run-up to 2009, as they assess the net income and cost implications of these changes, as well as putting in place the necessary amended administrative procedures to cater for the changes.

Non residents are taxable on employment income at a flat rate of 20 per cent, compared with the current rate of 25 per cent. Similar to the current regime, non-residents will be taxed on income earned from the performance of Vietnam related duties.

It’s essential that companies start preparing for the impact of this new law. Some things that should be focussed on include various reliefs and personal allowances are introduced for individuals and their dependents. These will need to be taken into account when calculating the PIT due, and human resources/finance teams within organisations will need to develop systems for capturing necessary information and calculating PIT liabilities accordingly.

Various benefits in kind which have hitherto been non-taxable will become taxable. This will require the employer to amend systems to ensure PIT is correctly withheld there from and human resources departments will need to consider the impact on their workforces.

There is a general shift in the compliance burden from the employer to the employee. The employer must deal with PIT on employment income, but the employee must finalise PIT and include non-employment income. But for many expatriate employees, the employer will still in practice have to support/assist its expatriates in such matters if that is the position under their international assignment and human resource policies.

New tax declaration forms will be issued. Employer IT systems need to be amended to incorporate these new return formats. PIT codes will need to be obtained for all employees. The tax authorities have indicated that this should be completed prior to the introduction of the new PIT Law.

It can be expected that the individual tax code will form an integral part of PIT filings and recording of tax payments in 2009. Finally, given the wider scope of PIT, individuals will become more actively involved in administering their own PIT affairs.

For those companies which still employ their staff on a net of tax basis, their human resources departments should review whether this will still be appropriate into 2009, or whether a switch to the more commonly used gross basis is now in order.