PIT changes to hit the back pocket

Some taxpayers will be in for some savings if they play their cards rightPhoto: Le Toan

The amended Law on Personal Income Tax (PIT), which raises the taxable income threshold to VND9 million ($432) per month and boosts deductions from taxable income to VND3.6 million ($173) for each dependant, will take effect from July 1, 2013.

The Ministry of Finance (MoF) estimated that the new rules mean that there will be mere one million taxpayers instead of nearly four million as currently. Budget collection will be reduced around VND15 trillion ($750 million) per year.

Under the old PIT Law, the taxable income threshold was VND4 million ($193) per month for both local and foreign workers in Vietnam. It allows taxpayers to deduct VND1.6 million ($77) for each dependant, defined as those who earn less than VND500,000 ($24) a month.

The new PIT Law has introduced some changes which will affect foreigners. The most significant of which is in relation to the taxation of non-cash benefits. The tax will increase as non-cash benefits will need to be grossed up with the exception of housing. While this change does make sense in terms of putting cash and non-cash benefits on a more equal footing, it is also motivated by a desire to increase the tax take. This will also affect Vietnamese who receive non-cash benefits. 

Along with Vietnamese, foreigners will derive a tax saving from the increase in the individual and dependent deductions.

“The principal issue which always causes the most difficulty at the time of tax finalisation for foreign employees has not however been addressed,” said Thomas McClelland, tax partner of Deloitte Vietnam.

If an individual arrives in Vietnam during the year and becomes resident in that year, they are taxed in Vietnam on income derived in that year prior to arrival, on income which has no connection to Vietnam. “The ability to claim a tax credit for foreign tax is difficult in practical terms, and even if it can be claimed, in many cases it will not cover the Vietnam tax which is higher. For example, if the individual is from Singapore or Hong Kong, there will be significant additional tax to pay,” he added.

A new measure on residency tests slightly helps with respect to this issue in specific cases. Under the old law, having leased accommodation for 90 days in the calendar year meant that a person was resident in Vietnam. This has been increased to 183 days under the new law.

With respect to Vietnamese employees  they will now be entitled to the same tax concessions overseas, that foreigners enjoy when they come to Vietnam. These include tax exempt relocation allowances, home leave airfares and school fees. For foreign expats, the tax exemption now covers kindergarten fees, whereas it was previously only viable from primary school to high school.

“The deduction of voluntary pension fund contributions is welcome in encouraging private provisions for retirement although it is capped at VND1 million per month,” said McClelland.