|Tax implications on Vietnam’s bond market |
Currently, there are four types of bonds issued and traded on the Vietnamese bond market, including:
- Government bonds issued by the Ministry of Finance to raise funds for the state budget or specific investment projects and programmes within the scope of the state’s investment;
- Government guaranteed bonds issued by enterprises, financial and credit institutions, and social policy banks prescribed by the Law on Public Debt Management;
- Municipal bonds issued by the people's committees of cities and provinces to raise funds for the local projects; and
- Corporate bonds issued by businesses in all economic sectors.
Generally, a bond is an instrument of indebtedness of the bond issuer to the holder in which the issuer owes the holders a debt and has an obligation to pay the holder interest depending on the terms of the bond. During the tenor of the bond, the holder may transfer its ownership of the bond to another investor, or the issuer may redeem the bonds either under, at or above the principal value of the bond.
Recently, Vietnam has become an attractive market for foreign organisations choosing indirect investment through bonds, rather than becoming shareholders to ensure their benefit (i.e. fixed interest payment regardless of the financial status of the investee entities).
In this context the foreign organisations as bond holders shall receive two main sources of income from their investment in bonds, including interest payments and redemption payments. Consequently, the foreign organisation shall be subject to Foreign Contractor Tax (FCT), which consist of Corporate Income Tax (CIT) and Value Added Tax (VAT) on income derived in Vietnam.
Interest from bond investment shall be regarded as “income from loan interest” and is subject to FCT of 5 per cent CIT and exemption from VAT. Meanwhile, the redemption of bonds at the principal value shall not attract any tax in Vietnam, as there is no gain.
However, current FCT regulations do not provide clear guidance on the applicable withholding tax rate in case bonds are redeemed at a profit (i.e. over the principle value). Therefore, the tax authorities may treat income from the redemption of bonds over the principal value as either “income from securities transfers” or “income from loan interest.”
Defining securities transfer under CIT regulations includes income derived from the transfer of stocks, bonds, fund certificates, and securities of other kinds. Consequently, the redemption of bonds can be regarded as transfer of bonds from the bond holder to the issuer and subject to FCT, inclusive of 0.1 per cent CIT of the transacted price and exemption from VAT.
On the other hand, as it has a close similarity to the nature of loan interest, any redemption premium (i.e. the difference between the redemption price and the cost of the bond redeemed) may be treated as income from loan interest rather than income from securities transfer.
Income from loan interest includes the income of the lender from loans in any form, income from deposit interest, income from contractual deferred payment interest, income from bond interest, bond discount, and income from deposit certificates. Income from bond discount means bonds are issued below par and redeemed at par. Then, such income shall be subject to FCT as income from loan interest with a CIT rate of 5 per cent on the difference between the bond discount and the par value and exemption from VAT.
Accordingly, unclear regulations may also lead to the possibility of imposing the same treatment to the redemption of bonds above par as to income from bond discounts.
Therefore, there is no definite conclusion as to which of the above-mentioned scenarios would prevail since the benchmark for the decision also depends on the amount of interest received and gross proceeds per transaction.
Below is an estimation of the tax liability imposed on redemption of bonds over par in comparison using the above two tax treatments. Based on the following example, it appears that tax treatment on the redemption of bonds over par under the tax treatment of securities transfer it more beneficial for foreign organíations in particular:
Principal value of the bonds: VND600 billion
Total redemption amount: VND700 billion
Income from loan interest
(5 per cent on the interest received)
Income from securities transfer
(0.1 per cent on the transacted price)
Interest received amounting to VND100 billion, therefore, the estimated tax liability is VND5 billion
The transacted price means total redemption amount of 700 billion dongs; therefore, the estimated tax liability is 700 million dongs
In Vietnam, people declare their own tax obligations by themselves, including determining their taxable income and the applicable tax rate, after which they pay the taxes directly to the state budget. T
he tax authorities only carry out inspections in accordance with their schedule and collect additional tax liabilities where they find issues. The administrative penalty is 20 per cent on the under-declared tax liability; or 1-3 times for tax evasion; and late payment interest is 0.03 per cent per day.
Accordingly, in order to avoid the wrongful declaration of taxes due to unclear regulations on the redemption of bonds over par value, it is highly recommended to seek out specific guidance from the local tax authorities.
Although the scale of the Vietnamese market is smaller than regional countries, the speed of development implies a promising future for the Vietnamese bond market. Therefore, examining the tax implications on major categories of bonds and analysing some of the tax consequences may mitigate potential risks when redeeming bonds in Vietnam.