Dec 25, 2012

Vietnam - Getting straight to the heart of some taxing matters

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Vietnam’s tax policies and customs regulations are currently being positively improved to meet changes in the socio-economy, and to support businesses during the implementation.

Bui Ngoc Tuan, tax partner of Deloitte Vietnam, shared with VIR some tax updates and matters enterprises would encounter in coming times.
In the draft law on Corporate Income Tax (CIT), the Ministry of Finance reduces the common tax rate to 23 per cent from the current level of 25 per cent. How do you assess this reduction?

The tax rate reduction would help business to retain more profit to rotate capital to earn more in the process of business and production.
It could make the state budget decrease in the short term. But in the long term, the tax contributions will be raised because thanks to tax reductions, enterprises would have more finances to expand business to generate more revenue and eventually derive more taxable income. Vietnam’s CIT rate is flat and somehow higher than some other countries in the region.

However, it is noticed that in developed countries with lower tax rate, the compliance of legal regulations by tax payers is really good and the tax system is very transparent; therefore, despite the low tax collection, they still ensure adequate collection for the budget with fairly estimation.

Meanwhile in Vietnam, lower corporate profits and fiscal stimulus measures made budget collection lower than it was expected. Therefore, in recent years, to strengthen compliance status, the tax authorities had tended to apply a stronger enforcement to encourage taxpayer compliance and thus collect more tax arrears.

The draft law also raised the cap on Advertising and Promotion expense from 10 per cent to 15 per cent. Do you think it is reasonable or not, because previously many foreign invested enterprises proposed to remove this cap?

This positively shows the responsiveness of the Government and authorities upon hearing and observing the obstacles from applying tight tax policies in business community. We see this as a positive step towards the eventual full removal of the cap.

However, in the aspect of state management, the cap is necessary to ensure the budget collection and will restrict enterprises to take advantages of open policies to raise deductible costs to avoid tax obligation.

Recently, many big foreign invested enterprises are under tax scrutiny due to some signs of transfer pricing. What is your viewpoint about this matter?

In fact, transfer pricing is one of the most significant tax issues faced by taxpayers worldwide especially for multi-national companies. The matter is that whether or not transfer pricing structure is considered reasonable and acceptable in accordance with arms’ length basis, which would not cause any issue if the enterprises distribute/allocate profit fairly in each stage of their supply chain in comparison with other transactions in the market.

In some sectors with monopoly characteristics, the tax agency faced with more difficulties to inspect transfer pricing. Due to inadequate information and data system, and restricted connection with regional tax agencies, the tax agency had not had enough basis to prove the signs of transfer pricing.

The Law on Tax Administration will apply Advanced Pricing Agreement (APA) as a measure to restrict transfer pricing situation. Do you think this measure will be really effective?

I think in general, the application of APA is a good trend in anti- transfer pricing in Vietnam. However, an important point of APA is that it must be accepted by the tax authorities prior for the parties to implement the transactions, while it is very difficult to define whether APA is reasonable or not. Therefore, for APA to work efficiently in Vietnam, it requires much time and the synchronization of related legal regulations and frameworks.

What do you think about accounting firms’ responsibility in anti-transfer pricing?

Actually the accounting firms do not help enterprises to dodge tax. If we see in the positive aspect, developing a good transfer pricing structure would help optimizing profit generated in each stage of supply and value chain. Specifically, for enterprises working with foreign related parties, accounting firms will support them to structure operating/business model to determine appropriate profit level in each stage, each country, or each sector to support them making right decision.

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