Time to map out land tax impacts

Effective from January 1, 2012,  Law 48 on Non-Agricultural Land Use Tax (“Land Tax”) and its implementing Decree No. 53/2011/ND-CP and Circular 153/2011/TT-BTC will supersede prior ordinances on house and land tax to impose tax on non-agricultural land used for residential and business purposes.

Land not subject to Land Tax now includes land used for public benefit, land used by religious institutions and land for the construction of state organisations and non-business activities. This new Land Tax on non-agricultural land is  part of a rigorous attempt by the government to reform and improve the effectiveness and efficiency of its property taxation framework, strengthen state management on land and housing as well as provide more transparent guidance to tax payers.  This is an important step in the development of taxation of property and may have a far reaching impact on projects in Vietnam in the future.

Who will be affected?

With the introduction of this new Land Tax, the land use right (“LUR”) holders (or those using the land in situations with no LUR) are responsible for paying this new Land Tax. As a result, certain LUR holders who did not have to pay land tax previously may be subject to this new tax from 2012.

One obvious example is foreign-invested enterprises (“FIEs”) that lease land from the government. The current situation would seem even more complicated as these FIEs have customarily settled their land lease obligations in advance and do not expect any additional tax liabilities from such land leases. The same problem may arise for joint ventures that received LURs as capital contributions from their Vietnamese counter parties.

Like most of the newly introduced laws and regulations, Law 48 and its implementing decree and circular have not anticipated and covered all the practical situations currently existing in the real business world. For example, the tax implications for enterprises located in industrial parks, economic zones and export processing zones are often confusing for the parties involved.

As regulated in Law 48 and its implementing decree and circular, Land Tax payers will generally be the LUR holders.  Based on more detailed guidance, Land Tax obligations on the leased land will fall on the lessors (i.e. the LUR holders) if there is no specific provision in the land lease contract. However, this guidance cannot be applied in the case of enterprises leasing land in industrial parks, economic zones and export processing zones because these enterprises, as the lessees, may have obtained LUR certificates for their long-term lease.

A similarly tricky situation arises for investors in the hospitality/holiday home sector. Due to the difficult-to-meet requirements for foreign individuals who wish to buy houses or properties in Vietnam, investors may try to “sell” property to foreign individuals in the form of a long-term lease of up to 50 years. With this arrangement, the investors still legally hold the LUR of the land and may have to pay annual Land Tax from now on for the land “commercially sold” to foreign individuals.  

While waiting for further guidance from relevant authorities, enterprises should protect themselves with clear tax provisions in land lease contracts.  

To what extent could you be affected?

The Land Tax payable by the tax payers is generally the taxable land area in square metres, multiplied by the land price per square meter, multiplied by the applicable rate, unless any exemptions or reductions apply. Enterprises unexpectedly affected by this new Land Tax may feel relieved to know that the government does not mean to put a significant burden on their shoulders. Indeed, the very low applicable tax rates, ranging from 0.03 to 0.2 per cent, may not lead to material tax implications. However, once such a tax is introduced it is unclear how it may develop and to what level rates may increase in the future.

The progressive tax rate from 0.03 to 0.15 per cent will be imposed on residential land in an attempt to reduce land speculation on residential land. Encroached land will be subject to the highest tax rate of 0.2 per cent whilst non-agricultural production and business land will be entitled to the lowest rate of 0.03 per cent.

It is worth noting that the government seems to be stricter on “paper” investment projects: projects that have been approved for a long time but the investors delay execution and leave the land unused or sub-lease to other enterprises. In this case, such land will be subject to a tax rate of 0.15 per cent, five times higher than the normal tax rate for business land.  

When may you be affected?

For the first effective year of the new Land Tax (i.e. 2012), tax payers are responsible for completing the declaration form and returning it to the tax offices before June 30, 2012. For the following years, if there is no change in tax liabilities, generally no declaration is required. Land Tax payment will be due on December 31, every year. Land Tax declarations may be onerous to individuals/households that have land lots exceeding the quota as collective declaration is required in addition to separate declaration for each land lot.

Any violation of statutory deadlines for tax declaration and tax payment shall be subject to penalties stipulated at Decree 98/2007/ND-CP on handling tax violations. Specifically, the penalties range from VND100,000 to VND5,000,000 if the late submission is within 90 days of the regulated deadline. If the tax declaration returns are submitted later than 90 days, this could be deemed as an act of tax evasion and thus, subject to penalties ranging from one to three times the original tax bill. Moreover, a penalty of 0.05 per cent on the non-paid tax amount for each day of late tax payment could be applied.

In this regard, as land users, enterprises will have to self-assess their tax position and liability, i.e. whether they are subject to this kind of tax, whether Land Tax is exempted or reduced, how much the enterprises will have to pay and what are their additional compliance requirements under this new law. In addition, potential investors in Vietnam should also take this new Land Tax into consideration in their investment strategies in order to achieve the optimal tax position and to maximise profits during the current tough economic conditions.

The authors can be reached at:  ninhvanhien@kpmg.com.vn and ronald.parks@kpmg.com.vn. The views expressed by the authors here do not necessarily represent the views and opinions of KPMG.