Circular No. 11684/BTC-TCT regarding guidance on corporate income tax

LETTER

OF THE MINISTRY OF FINANCE NO. 11684/BTC-TCT SEPTEMBER 16, 2005
GUIDING REGULATIONS ON ENTERPRISE INCOME TAX

Respectfully submitted to: - Ministries, agencies equivalent to ministries, and government agencies;

||| Provincial People's Committees, centrally governed cities.

Based on difficulties arising from localities and enterprises during the implementation of Circular No. 128/2003/TT-BTC dated December 22, 2003; Circular No. 88/2004/TT-BTC dated September 1, 2004 of the Ministry of Finance guiding the implementation of enterprise income tax, the Ministry of Finance provides specific guidance on certain aspects of enterprise income tax as follows:

1. Determination of costs for transferring land use rights and land lease rights

Costs for transferring land use rights and land lease rights are determined according to the guidelines at point 2.1, section IV, part C of Circular No. 128/2003/TT-BTC mentioned above. Now, specific guidance on allocating costs for transferring land use rights and land lease rights is provided as follows:² For projects that are completed in phases, the allocation of costs for transferring land use rights and land lease rights is based on the area of transferred land as follows:

Common expenses for the entire project of business establishments engaged in real estate trading and infrastructure trading shall be allocated according to the area of transferred land to determine taxable income from the transfer of land use rights and land lease rights; including: road construction costs; green space costs; water supply and drainage system construction costs; substation costs; compensation costs for land damage. The allocation of these costs is calculated using the following formula:² Cost allocated to the area of transferred land

2. Declaration and payment of tax on transfer of land use rights before the year-end tax settlement deadline:

Declaration and payment of taxes for the transfer of land use rights before the annual tax settlement deadline:

Enterprises specializing in real estate trading, land trading, infrastructure, and architectural structures on land shall declare, pay, and settle taxes on income from the transfer of land use rights and land lease rights according to the guidelines at point 2.2, section VII, part C of Circular No. 128/2003/TT-BTC mentioned above. Additional specific guidance is provided as follows:

a. In cases where enterprises transfer land use rights and land lease rights before the annual tax settlement deadline, and the buyer requests procedures for issuing a certificate of land use rights, the tax authority will process notification, inspection, and confirmation of the tax payable on the tax declaration form number 02C/TNDN according to the guidelines at point 2.1, section VII, part C of Circular No. 128/2003/TT-BTC mentioned above. The enterprise must pay the tax confirmed on the tax declaration form and provide proof of payment to the Land Registration Office to process issuance of the Certificate of Land Use Rights.

The tax paid by the enterprise for transferred land can be deducted from the provisional enterprise income tax paid quarterly on the Enterprise Income Tax Declaration Form (model 02A/TNDN) or according to the fixed rate set by the tax authority. At the end of the tax year, the enterprise must complete the final settlement of enterprise income tax according to regulations.

b. In cases where enterprises transfer land use rights and land lease rights in a different locality (province or centrally governed city) from their main office (including enterprises that do not regularly engage in land transfer activities), they must declare and pay taxes on income from the transfer of land use rights and land lease rights. If the enterprise does not establish a management unit in the locality where the land is transferred, the enterprise must declare and pay taxes to the tax authority in the locality where the land is transferred.

The declaration, payment, and tax receipt documents for income from the transfer of land use rights and land lease rights issued in the locality where the land is transferred serve as the basis for settling taxes at the main office location.

Regarding the procedure for declaring and withholding enterprise income tax that businesses entrust individual traders to pay on their behalf:

Point 3 of Circular No. 88/2004/TT-BTC and Circular No. 13692/TC/TCT dated November 23, 2004 on the taxation of individuals acting as agents have provided guidance: Businesses entrusting individual traders who have registered for business but do not fully comply with accounting, invoices, and receipts to sell goods and provide services at the agreed price must pay enterprise income tax at a fixed rate of 5% of the commission received (including all support payments from the entrusting party). The business entrusting the agent has the responsibility to declare and withhold enterprise income tax from the individual traders acting as agents, and pay it into the state budget together with the monthly value-added tax declaration of the business. They are entitled to a handling fee of 0.8% of the actual tax collected from the agent to be paid into the state budget. This handling fee is deductible from the enterprise income tax payable by the agent before payment into the state budget.

To unify the criteria when declaring and paying withheld enterprise income tax according to the above guidance, the Ministry of Finance issues a model declaration form (Form No. 02/TNDN-KT) attached to this document to facilitate tax declarations, monitoring of tax payments, and accounting and statistics of taxes.

Regarding loss carryforward:

Business establishments, after tax settlement, if they incur losses, may deduct such losses from taxable income in subsequent years according to the guidelines at point 8, section III, part C of Circular No. 128/2003/TT-BTC mentioned above. Additional specific guidance is provided as follows:

a. The amount of loss deductible from taxable income in the year of tax settlement is determined by the negative difference between revenue calculated for enterprise income tax minus reasonable expenses plus losses due to external factors during the tax period.

b. A business entity that incurs losses must immediately prepare a loss carryforward plan after the year in which the losses occur and record it in Part I of Appendix 1 attached to the Corporate Income Tax Self-Assessment Form to register the loss carryforward plan with the tax authority for any fiscal year within the allowable carryforward period as prescribed. In cases where the business entity incurs losses from land use rights transfer activities or land lease activities, it must register a separate loss carryforward plan.

A business entity shall not be allowed to carry forward losses unless it registers with the tax authority or carries forward losses outside the registered loss carryforward plan with the tax authority.

c. Annually, when settling corporate income tax, the business entity bases on the registered loss carryforward plans with the tax authority from previous tax periods to determine the amount of losses to be carried forward against taxable income of the settlement tax period and records it in Part II of Appendix 1 attached to the Corporate Income Tax Self-Assessment Form. If the taxable income of the settlement tax period is lower than the registered loss carryforward amount, the remaining uncarried forward losses will be added to the registered loss carryforward amount for the following year and recorded in Part I of Appendix 1 attached to the Corporate Income Tax Self-Assessment Form without having to re-register the loss carryforward plan; the cumulative carryforward period of uncarried forward losses to the following year shall not exceed the prescribed loss carryforward period.

d. For loss carryforwards before the year 2003 but not exceeding the five-year processing period, the business entity continues to carry forward losses in the remaining years of the loss carryforward period without having to register a loss carryforward plan with the tax authority. If a loss carryforward plan has been registered, it shall implement the registered loss carryforward plan and the guidance provided above.

- Business entities with foreign investment capital that have registered a loss carryforward plan with the tax authority according to Circular No. 13/2001/TT-BTC dated March 8, 2001 of the Ministry of Finance continue to carry forward losses according to the registered plan; if there are unregistered losses still within the loss carryforward period, the business entity may register a loss carryforward plan for the remaining years according to the guidance provided herein.

- Business entities with foreign investment capital that have registered a loss carryforward plan with the tax authority according to the guidance at Point 3, Part I of Circular No. 128/TT-BTC (amended at Point 8 of Circular No. 88/2004/TT-BTC) now provide specific additional guidance as follows:

5. Regarding corporate income tax incentives:

Point 3, Part I of Circular No. 128/TT-BTC (amended at Point 8 of Circular No. 88/2004/TT-BTC) has provided tax incentives for cases that were granted Investment Licenses or Investment Incentive Certificates before February 1, 2004, and are now provided with specific additional guidance as follows:

5.1. Domestic business entities that were granted Investment Incentive Certificates before January 1, 2004, can convert corporate income tax rates as follows:

a. Domestic business entities currently applying corporate income tax rates based on Investment Incentive Certificates issued before January 1, 2004, and still meet the investment incentive conditions stated in the Investment Incentive Certificate, shall continue to apply the preferential corporate income tax rate for the remaining incentive period as follows:

- The tax rate according to the Investment Incentive Certificate is 25% from January 1, 2004, converted to apply a tax rate of 20% until the end of the remaining incentive period.

- The tax rate according to the Investment Incentive Certificate is 20%, from January 1, 2004, converted to apply a tax rate of 15% until the end of the remaining incentive period.

- The tax rate according to the Investment Incentive Certificate is 15%, from January 1, 2004, converted to apply a tax rate of 10% until the end of the remaining incentive period.

b. Domestic business entities currently enjoying preferential corporate income tax rates based on Investment Incentive Certificates issued before January 1, 2004, and now meet additional investment incentive conditions as guided in Point I, Part E of Circular No. 128/2003/TT-BTC compared to the Investment Incentive Certificate already issued, shall, starting from January 1, 2004, enjoy preferential corporate income tax rates according to the guidance in Point II, Part E of Circular No. 128/2003/TT-BTC for the remaining incentive period, depending on the degree of compliance with investment incentive conditions.

c. Domestic business entities currently enjoying preferential corporate income tax rates based on Investment Incentive Certificates issued before January 1, 2004, and now do not fully meet the conditions to enjoy preferential corporate income tax rates as guided in Point II, Part E of Circular No. 128/2003/TT-BTC, shall continue to enjoy the preferential tax rate according to the Investment Incentive Certificate already issued for the remaining incentive period.

The remaining incentive period mentioned in sub-clause a and b of this point is determined by subtracting the time from when the business entity began operating to January 1, 2004, from the time it was entitled to enjoy the preferential tax rate according to the guidance in Point 2, Part II, Section E of Circular No. 128/2003/TT-BTC.

5.2. Foreign-invested enterprises and foreign parties participating in joint venture contracts that were granted Investment Licenses before January 1, 2004, and meet the conditions stated in the Investment License, continue to enjoy preferential corporate income tax rates until the end of the tax incentive period specified in the Investment License; after the expiration of the tax incentive period according to the Investment License, they shall switch to applying a corporate income tax rate of 25%. If they are currently paying corporate income tax at a rate of 25%, they will continue to apply a rate of 25% until the expiration date of the Investment License. For foreign-invested enterprises and foreign parties participating in joint venture contracts requesting an extension of their Investment License on or after January 1, 2004, the preferential corporate income tax rate shall be applied according to the guidance in Point I, Point II, Section E of Circular No. 128/2003/TT-BTC.

5.3. The corporate income tax rate applicable to income from the transfer of equity contributions or shares is as follows:

a. For business establishments generating income from transferring equity contributions or shares invested in other business establishments (income equals the amount received from transferring equity contributions or shares minus the amount of equity contributions or shares), such business establishments must pay corporate income tax on the income derived from the transfer of equity contributions or shares at the applicable tax rate for their main business activities.

b. For foreign investors or foreign parties participating in joint venture contracts who transfer their equity contributions or shares in foreign-invested enterprises or joint venture contracts, the income from the transfer of equity contributions or shares must be subject to corporate income tax at a rate of 28%.

5.4 Regarding the period of exemption and reduction of corporate income tax.

5.4.1 In cases where the preferential tax rates for corporate income tax recorded in the Investment License or Investment Incentive Certificate issued to business establishments before January 1, 2004 are lower than those specified in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC (with the same conditions for tax exemptions and reductions recorded in the Investment License or Investment Incentive Certificate), the business establishment shall enjoy the preferential tax rates for corporate income tax according to the guidance provided in the aforementioned Circulars for the remaining period of tax exemption and reduction starting from the 2004 tax year.

The level of tax preference for comparison in this case is determined based on the tax exemption ratio (exemption; reduction of 50% of the tax payable) and the tax exemption period (number of years exempted or reduced according to the prescribed regulations).

The remaining period of tax preference is calculated as the number of years the business establishment is still entitled to tax exemption or reduction under Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC minus the number of years the business establishment has already enjoyed tax exemption or reduction under the Investment License or Investment Incentive Certificate issued up to the end of 2003. Determining the remaining period of tax preference must ensure the following principles:

- By the end of the 2003 tax year, if the business establishment is still within the tax exemption period under the Investment License or Investment Incentive Certificate issued, it will continue to enjoy the remaining years of tax exemption or reduction according to the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC.

- By the end of the 2003 tax year, if the business establishment has just completed the tax exemption period under the Investment License or Investment Incentive Certificate issued, it will only enjoy the full period of tax reduction according to the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC.

- By the end of the 2003 tax year, if the business establishment is still within the tax reduction period under the Investment License or Investment Incentive Certificate issued, the remaining period of tax reduction will be the number of years of tax reduction according to the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC minus the number of years the business establishment has already enjoyed tax reduction up to the end of the 2003 tax year.

- By the end of the 2003 tax year, if the business establishment has just completed both the tax exemption and tax reduction periods under the Investment License or Investment Incentive Certificate issued, it does not qualify for tax exemption or reduction according to the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC.

5.4.2 For certain specific cases, the remaining period of tax preference is determined as follows:

a. In cases where the tax exemption period and the tax reduction period recorded in the Investment License or Investment Incentive Certificate issued before January 1, 2004 are both shorter than those specified in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC, the business establishment will enjoy the tax exemption and reduction period for the remaining period of tax preference as follows:

Example 1: According to the investment license issued before January 1, 2004, a production enterprise established from an investment project in an industrial park is exempted from corporate income tax for 2 years and enjoys a 50% reduction in corporate income tax for the next 3 years from the date of taxable income. By the end of 2003, the enterprise had been exempted from tax for 1 year. According to the guidance in Circular No. 88/2004/TT-BTC, a production enterprise established from an investment project in an industrial park is exempted from corporate income tax for 3 years and enjoys a 50% reduction in corporate income tax for the next 7 years. Comparing with the above guidance, from the 2004 tax year onwards, the enterprise will be exempted from tax for 2 more years and will enjoy a 50% reduction in corporate income tax for the next 7 years.

Example 2: According to the example above, if by the end of the 2003 tax year, the enterprise had been exempted from tax for 2 years under the issued license, then from the 2004 tax year onwards, the enterprise will enjoy a 7-year reduction in tax.

Example 3: According to the example above, if by the end of the 2003 tax year, the enterprise had completed the tax exemption period and had enjoyed a 1-year reduction in tax under the issued license, then from the 2004 tax year onwards, the enterprise will continue to enjoy a 6-year reduction in tax.

Example 4: According to the example above, if by the end of the 2003 tax year, the enterprise had fully enjoyed the tax exemption and reduction periods under the issued license, then from the 2004 tax year onwards, the enterprise will not qualify for tax reduction according to the guidance in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC.

b. In cases where the tax exemption period recorded in the Investment License or Investment Incentive Certificate issued before January 1, 2004 is longer than that specified in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC, but the tax reduction period is shorter, the determination of the tax exemption and reduction period for the remaining period of tax preference is as follows:

Example 1: According to the investment license issued before January 1, 2004, a special investment project enterprise is exempted from corporate income tax for 4 years and enjoys a 50% reduction in corporate income tax for the next 4 years from the date of taxable income. According to the guidance in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC, the enterprise is entitled to 3 years of tax exemption and a 50% reduction in corporate income tax for the next 7 years.

If by the end of 2003, the enterprise has been exempted from corporate income tax for two years, then starting from the tax period of 2004, the enterprise may choose to continue being exempted from tax or have tax reduced according to the investment license granted or in accordance with Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC:

- According to the issued license: exempted from tax for two years and reduced by 50% of the tax payable for the next four years.

- In accordance with the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC: exempted from tax for one year and reduced by 50% of the tax payable for the next seven years.

Example 2: In the same case as Example 1 mentioned above, but by the end of the 2003 tax period, the enterprise has been exempted from tax for four years, then the enterprise continues to be eligible for tax reduction according to the investment license issued specifically: starting from the tax period of 2004, the enterprise will still be eligible for a 50% reduction in the tax payable for the next four years.

Example 3: In the same case as Example 1 mentioned above, by the end of the 2003 tax period, the enterprise has fully enjoyed the four-year tax exemption and four-year tax reduction period according to the issued license, then starting from the tax period of 2004, the enterprise does not qualify for tax reduction according to the guidance provided in Circular No. 128/2003/TT-BTC and Circular No. 88/2004/TT-BTC.

This circular is applied to determine the corporate income tax for the tax periods from 2005 onwards. During the implementation of the guidance provided in this circular, if any issues arise, please report them to the Ministry of Finance via the provincial tax bureaus for research and resolution.

Form No. 01/TNDN-KT

CORPORATE INCOME TAX RETURN FORM

For businesses that entrust agents to pay on behalf of individual traders who have registered for business but do not fully comply with accounting records, invoices, and receipts

(Attached to Circular No. 11684/BTC-TCT dated September 16, 2005 of the Ministry of Finance)

Month..... Year.....

Tax code:

Name of Business:

Fax:

District/County: Province/City:

Email/Website: 2. Intellectual Property Rights Owner: Email:

Main Business Activity:

Unit of Measure: Vietnamese Dong

Total Corporate Income Tax

Percentage of commission received by the authorized collection organization (if applicable)

Amount of commission received (if applicable)

Total Corporate Income Tax payable for this period:

(In Words:.....)

I hereby certify that the information declared above is true.

Date..... Month..... Year.....

Credit organization branch in province/city and basic credit cooperative…

(Signature and Seal)

Place to submit the return:

Tax Authority:

Fax:

Tax Authority receiving the return:

Date Received:

Receiver (Sign and Print Full Name)