The draft corporate income tax law in Vietnam aims to simplify the tax system and align with global standards. Key updates include new taxation methods for capital transfers, reduced rates for small and micro enterprises, revised CIT incentives and updated rules for deductible expenses and loss carryforwards. This article covers these changes and their implications for businesses.
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Overview of the Draft Corporate Income Tax Law
The primary objective of the new draft Corporate Income Tax law is to simplify Vietnam’s tax system and address the challenges faced by businesses. This ambitious draft aims to bring Vietnam’s tax practices in line with international standards, particularly in areas such as transfer pricing and tax avoidance. These regulation refinements aim to enhance transparency and consistency for both taxpayers and authorities.
One of the notable provisions in the draft is compliance with the Global Anti-Base Erosion Rules, set to take effect from January 1, 2024. These rules are designed to prevent tax base erosion and profit shifting (BEPS), which have been significant issues in international tax cooperation. The draft law addresses seven target areas, including refining definitions related to taxable individuals and income, improving regulations on deductions, and applying CIT under BEPS practices.
The draft CIT law was opened for public commentary on the government’s website following its announcement in June 2024. The Ministry of Finance has identified various shortcomings in the current CIT law that hinder effective international cooperation, particularly concerning anti-base erosion.
With Corporate Income Tax being the second-largest contributor to Vietnam’s budget, these reforms are crucial for supporting economic growth.
Read More: Setup and Plan Your Corporate Income Tax in Vietnam
New Taxation on Capital Transfers
A major highlight of the draft corporate income tax law in Vietnam is the introduction of a flat 2% CIT rate on gross proceeds from capital transfers. This new taxation method simplifies the tax obligations for foreign entities involved in capital transfers by applying a straightforward 2% tax on the gross sales proceeds, regardless of their acquisition costs.
This change is significant as it replaces the previous method, which taxed 20% of the gain from the sale. While this new system simplifies the tax calculation process, it may lead to increased tax obligations for foreign corporate sellers, especially in cases where assets are sold at a financial loss or during corporate restructuring.
This change aims to streamline tax compliance and ensure a consistent tax policy for capital transfers.
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Proposed CIT Rates for Small and Micro Enterprises
To support small and micro enterprises, the draft CIT law proposes significant reductions in corporate income tax rates for these businesses. This move is intended to stimulate growth and development among smaller enterprises, which form the backbone of Vietnam’s economy.
The proposed rates are detailed in the following subsections:
Reduced CIT Rate for Small Enterprises
Small enterprises with annual revenues not exceeding USD 1,18,965 are set to benefit from a reduced CIT rate of 15%. This significant reduction from the current standard rate of 20% aims to provide substantial tax relief to small businesses. Lowering the tax burden aims to foster a more favorable environment for these enterprises to thrive and contribute to the economy.
This proposed 15% corporate income tax rate is particularly beneficial for small enterprises, as it allows them to retain more of their earnings for reinvestment and growth. Reducing tax liability is expected to encourage entrepreneurship and support the expansion of small businesses across various sectors.
Reduced CIT Rate for Micro Enterprises
Micro enterprises, defined as those with total revenues between USD 1,18,717 and 19,78,630, are also set to benefit from a reduced CIT rate under the draft law. The proposed rate for these micro enterprises is 17%, providing a modest yet impactful reduction from the standard rate.
The 17% CIT rate is designed to support the growth and sustainability of micro-enterprises by reducing their overall tax burden. Offering a lower tax rate acknowledges the vital role micro-enterprises play in the economy and aims to foster their development.
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Changes to CIT Incentives
The draft corporate income tax law introduces several modifications to CIT incentives, aiming to better align them with Vietnam’s economic development goals. These changes include both the inclusion of new industries and the removal of existing incentives, which are outlined in the subsections below.
Inclusion of New Industries
The draft law expands the scope of CIT incentives to include new industries such as automobile manufacturing and assembly, as well as research and development centers. Extending incentives to these sectors aims to promote technological innovation and economic growth.
Additionally, the draft law includes incubation centers for SMEs, co-working spaces, and information technology sectors in the list of industries eligible for CIT incentives. This inclusion is expected to spur investment in these areas, fostering a more dynamic and competitive production and business activities environment.
Removal of Existing Incentives
The draft law also proposes the removal of CIT incentives for certain industries, particularly those with minimal technological advancement. Large investment projects with a minimum capital of USD 23.79 bn and non-high-tech projects located in high-tech parks will no longer qualify for CIT incentives.
This shift in policy is designed to focus CIT incentives on high-tech and innovative sectors, aligning with Vietnam’s broader economic development strategy. Phasing out incentives for less advanced industries encourages investment in more technologically advanced and impactful projects.
Tax Exemptions and Applicability
New tax exemptions in the draft corporate income tax law support emerging sectors and promote environmental sustainability. Eligible types of income for tax exemptions now include carbon credits and green bonds, which align with global trends towards environmentally friendly practices and tax-exempt income.
The maximum tax exemption period for income derived from new technology products is set at three years. However, the law removes eligibility for tax incentives for large production projects, projects in industrial parks, and non-high-tech projects in high-tech parks. These changes reflect a strategic shift towards sectors that contribute to sustainable development and technological innovation.
Deductible Expenses
The draft CIT law introduces significant changes to the treatment of deductible expenses, offering more clarity and consistency for businesses. A major update is the new threshold for excluding interest on loans from deductible expenses, set at exceeding 20% per year of the loan amount.
Additionally, the deductibility of interest is limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for related-party transactions. This change prevents excessive interest deductions and ensures that businesses maintain a balanced financial structure.
A notable inclusion in the draft law is the allowance for undeducted input VAT to be included in deductible expenses. This provision allows businesses to account for input VAT that has not been fully deducted and is not eligible for a tax refund, providing additional relief and simplifying tax compliance.
Offsetting and Carrying Forward Losses
The draft CIT law outlines specific rules for offsetting and carrying forward losses, providing more clarity and fairness for businesses. One significant change is that losses from non-incentive activities cannot offset income generated from tax-incentivized business activities. This ensures that tax benefits are accurately targeted and not diluted by unrelated losses.
Furthermore, losses from mineral resource activities can be carried forward according to standard regulations. Generally, losses can be carried forward for up to five years, but carrybacks are not permitted. These provisions help businesses manage financial losses more effectively while maintaining compliance with tax regulations.
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Additional Corporate Income Tax
The draft CIT law introduces an additional corporate income tax to align with international standards and prevent global minimum tax base erosion. This move reflects Vietnam’s commitment to the Global Anti-Base Erosion Rules, which aim to curb tax avoidance and ensure fair taxation across jurisdictions.
However, it’s important to note that the provisions related to the additional CIT are not currently included in the draft law. The law is expected to evolve as further discussions and public consultations take place, ensuring it meets international norms while addressing the needs of local businesses.
Read Related: The Most Common Tax Infringements in Vietnam and How to Avoid Them
Effective Date and Implementation Timeline
The draft corporate income tax law is expected to undergo further discussion and public consultation before its adoption. The National Assembly is anticipated to consider the draft law in October 2024, with a potential ratification in May 2025.
If approved, the new Corporate Income Tax law is expected to take effect on January 1, 2026. This timeline allows businesses sufficient time to prepare for the changes and ensures a smooth transition to the new tax regulations.
Frequently Asked Questions
What is the proposed treatment for profits from qualified business expansions?
Profits from qualified business expansions are proposed to be eligible for the same corporate income tax (CIT) incentives as existing investment projects. This approach aims to encourage growth and investment in expanding businesses.
When could the new CIT law potentially come into force?
The new CIT law could potentially come into force on January 1, 2026, contingent upon its submission to the National Assembly in October 2024 and subsequent approval in May 2025.
When was the new draft of the Corporate Income Tax law unveiled in Vietnam?
The new draft of the Corporate Income Tax law in Vietnam was unveiled on June 11, 2024.
How InCorp Can Help?
Incorp Vietnam helps businesses navigate upcoming CIT law changes. We provide guidance on understanding the new regulations, assessing their impact on your business, and ensuring you’re prepared for the transition. We keep you informed about the latest updates and help you adjust your strategies to remain compliant and competitive. With Incorp Vietnam, you can confidently adapt to the evolving tax landscape and optimize your tax planning. Reach out to Incorp Vietnam to discuss how we can assist with your CIT compliance.
