Circular No. 174/1998/TT-BTC guides the application of value-added tax and corporate income tax for insurance business activities.

CIRCULAR

GUIDELINES ON THE APPLICATION OF VALUE ADDED TAX AND ENTERPRISE INCOME TAX FOR INSURANCE BUSINESS ACTIVITIES PURSUANT TO CIRCULAR NO. 174/1998/TT-BTC OF THE MINISTRY OF FINANCE DATED DECEMBER 24, 1998

Pursuant to the Law on Value Added Tax No. 02/1997/QH9 dated May 10, 1997; the Government's Decree No. 28/1998/NĐ-CP dated May 11, 1998 detailing the implementation of the Law on Value Added Tax; the Government's Decree No. 102/1998/NĐ-CP dated December 21, 1998 supplementing and amending certain provisions of the Government's Decree No. 28/1998/NĐ-CP dated May 11, 1998 detailing the implementation of the Law on Value Added Tax; and Circular No. 89/1998/TT-BTC dated June 27, 1998 of the Ministry of Finance guiding its implementation;
Pursuant to the Law on Enterprise Income Tax No. 03/1997/QH9 dated May 10, 1997; the Government's Decree No. 30/1998/NĐ-CP dated May 13, 1998 detailing the implementation of the Law on Enterprise Income Tax; and Circular No. 99/1998/TT-BTC dated July 14, 1998 guiding its implementation;
To ensure that insurance businesses comply with the regulations of the Law on Value Added Tax and the Law on Enterprise Income Tax, the Ministry of Finance hereby provides specific guidelines for calculating, declaring, and paying value added tax (VAT) and enterprise income tax (EIT) for insurance business activities as follows:

I. VALUE ADDED TAX

1. Objects Subject to VAT:

The objects subject to VAT in insurance enterprises include insurance services and other goods and services used for production, business operations, and consumption in Vietnam (excluding services not subject to VAT as specified in Point 3 of this Section), including:

- Non-life insurance services.

- Services such as agency appraisal, agency claim assessment, agency third-party recovery...

- Other goods and service trading.

2. Taxpayers:

The taxpayers referred to in this Circular are insurance enterprises conducting insurance business activities in Vietnam that are subject to VAT, including: State-owned enterprises; Joint-stock companies; Mutual companies; Joint ventures; Foreign-owned insurance companies; Branches of foreign insurance organizations...

3. Objects Not Subject to VAT:

According to Clause 8, Article 4 of the Law on VAT, the following insurance services are not subject to VAT:

- Life insurance, student insurance, and other human insurance services such as: seafarer accident insurance, personal accident insurance (including combined life and hospitalization insurance), passenger accident insurance, tourist accident insurance, driver-passenger accident insurance, estate insurance, hospitalization surgery assistance insurance, individual life insurance, electricity user insurance...

- Animal and plant insurance, and other agricultural insurance services.

4. Tax Base:

The tax base for VAT on insurance services and other goods and services provided by insurance enterprises shall be determined as follows:

- For primary insurance, it is the primary insurance premium (including all additional charges and extra fees that the insurance enterprise receives, if any) without VAT recorded on the VAT invoice.

+ In cases where the insurance premium, as stipulated by the Ministry of Finance, already includes VAT (settlement price), the insurance premium without VAT shall be determined as follows:

+ In cases where insurance contracts, insurance applications, insurance certificates agree to collect premiums in installments, VAT shall be calculated based on the amount paid each period. If agreed to pay in advance once, then calculate based on the advance payment price without VAT.

Example: On January 10, 1999, the Vietnam Insurance Corporation signed an insurance contract for a fishing boat with the Dong Hai Seafood Company at a premium rate of 100 million VND (assuming this is the state-regulated rate which already includes VAT, i.e., settlement price), valid for five years, and the payment terms are as follows: in the first year, within 15 days from the date of signing the contract, the Dong Hai Seafood Company must pay 70% of the premium to the Vietnam Insurance Corporation, each subsequent year must pay 10%, and in the fourth year, the remaining balance must be paid according to the agreement.

Therefore, the tax base for VAT on the above boat insurance premium will be:

The VAT taxable revenue of the Vietnam Insurance Corporation for each year will be: first year: 90.9 x 70% = 63.63 million VND (which is also the VAT taxable revenue for January 1999), second, third, and fourth years each year will be: 90.9 million VND x 10% = 9.09 million VND (the total VAT taxable revenue over four years must be 90.9 million VND). In this case, although the insurance contract is valid for five years, the VAT taxable revenue (output) can only be recognized for the first four years.

- For agency appraisal, agency claim assessment, agency third-party recovery services earning commission or fee, the tax base for VAT is the commission or fee earned without deducting any expenses incurred by the insurance enterprise.

- For other goods and services, it is the selling price of goods and services without VAT recorded on the VAT invoice.

5. Tax Rate:

The VAT tax rate applicable to insurance business activities, including insurance services, agency appraisal, agency claim assessment, agency third-party recovery, and other services related to insurance business activities is 10%.

For other business activities outside the aforementioned insurance business activities, the tax rates prescribed for specific goods and services are detailed in Section II, Part B of Circular No. 89/1998/TT-BTC dated June 27, 1998 of the Ministry of Finance.

6. Method of Calculating Tax:

Insurance enterprises must pay VAT under the tax deduction method. The amount of VAT payable is determined as follows:

a) VAT output tax:

*/ VAT output tax is determined based on the following revenue from taxable goods and services sold:

- Revenue from insurance business activities, including:

+ Primary insurance premiums of taxable business activities.

+ Revenue from agency appraisal services (excluding appraisal fees among internal units within the same holding company or corporation), agency claim assessment, agency third-party recovery, agency full claim processing, full claim processing, and other revenues from insurance business activities.

- Revenue from other services and goods (outside insurance business activities) subject to VAT.

*/ Service revenue and sales revenue from goods subject to VAT, but already included in the original insurance calculation, thus not subject to VAT as stipulated in this Circular, include:

- Commissions from reinsurance cessions and other incomes from reinsurance cessions.

- Premiums for accepting reinsurance and other incomes from accepting reinsurance (including premiums for accepting reinsurance from insurance companies operating within Vietnam and outside Vietnam).

- Third-party recovery income.

c) Insurance companies may deduct VAT input on goods and services purchased for VAT-liable insurance business operations as shown on the VAT purchase invoices according to the guidance in Point 1, Section III, Part B, Circular No. 120/2003/TT-BTC.

b) Input VAT:

Additionally, according to Clause 3, Article 1 of Decree No. 102/1998/ND-CP dated December 21, 1998, amending and supplementing certain articles of Decree No. 28/1998/ND-CP dated May 11, 1998, issued by the Government detailing the implementation of the Law on Value Added Tax, insurance enterprises are also entitled to deduct input VAT on actual compensation payments made by the insurance enterprise for its share of responsibility for VAT-liable services as follows:

+ For actual compensation payments determined based on purchase invoices for goods and services presented by the entity receiving compensation to establish the compensation level, the insurance enterprise is entitled to deduct VAT at the percentage rate corresponding to the enterprise's compensation liability as stated in the compensation settlement record; the VAT amount recorded on purchase invoices for goods and services that do not fall under the enterprise's compensation liability shall not be deductible, but the entity receiving compensation will be entitled to deduct input VAT (if the entity uses the VAT deduction method).

In this case, insurance enterprises must maintain the following documentation:

* Purchase invoices for goods and services provided by the entity receiving compensation, either in original form or certified copies stamped by the entity receiving compensation.

* Compensation settlement records prepared by the insurance enterprise and signed off by the entity or individual receiving compensation. At least two copies of the record must be prepared, with one copy retained by the insurance enterprise and the other provided to the entity or individual receiving compensation as evidence for determining the deductible VAT amount for each party.

* Payment receipts for compensation claims bearing signatures of the recipient.

Example: Company A (which pays VAT using the deduction method) purchases automobile insurance from City Insurance Company (Bảo Minh). Now, the car has been involved in an accident, and Company A presents purchase invoices for replacement parts and repairs totaling 200 million VND, with VAT at 10% amounting to 20 million VND, making the total payment 220 million VND. According to the compensation settlement record prepared by Bảo Minh, Bảo Minh is only responsible for 80% of the loss costs, while the remaining 20% falls under Company A's responsibility. In this scenario, Bảo Minh can deduct 80% of the VAT recorded on the invoice, which is 20 million VND x 80% = 16 million VND, and Company A can deduct 20% of the VAT recorded on the invoice, which is 20 million VND x 20% = 4 million VND.

+ For other compensation amounts without purchase invoices for goods and services from the entity or individual receiving compensation, the insurance enterprise is entitled to deduct input VAT at a rate of 5% calculated on the actual compensation paid to customers without VAT invoices for VAT-liable transactions (compensation amounts for non-VAT-liable insurance services or those already deducted through purchase invoices for goods and services from the entity or individual receiving compensation are not eligible for deduction at the percentage rate specified here).

+ For input VAT calculated on the actual compensation paid to customers (based on invoices or percentage rates), the enterprise must account for a reduction in the actual compensation expense accordingly.

- For goods and services purchased simultaneously for both VAT-liable and non-VAT-liable service and goods operations, only the input VAT for goods and services used in VAT-liable service and goods operations may be deducted. In such cases, the insurance enterprise must separately account for deductible and non-deductible input VAT; if separate accounting is not possible, the enterprise may deduct input VAT based on the percentage of VAT-liable revenue compared to total revenue.

Example: Life insurance companies under Vietnam Insurance Corporation specializing in non-VAT-liable life insurance services cannot deduct VAT on purchased goods and services. If a life insurance company also provides some VAT-liable non-life insurance services, and these services account for 20% of the company's total revenue, but does not separately account for VAT on goods and services used for VAT-liable non-life insurance services, then the company will be entitled to deduct 20% of the total input VAT recorded on purchase invoices according to the prescribed regulations.

7) Invoices and purchase/sales documents:

Insurance enterprises paying VAT using the deduction method must use VAT invoices in accordance with the prescribed invoice and document system.

If an insurance enterprise wishes to use different invoices or documents from the general requirements or substitute insurance contracts, application forms, and insurance certificates for invoices, it must register with the Ministry of Finance (General Department of Taxation) and can only use them upon receiving written approval from the General Department of Taxation. When issuing invoices (including other types of documents approved by the Ministry of Finance to replace invoices), all required elements must be accurately recorded, including the pre-tax price (including surcharges and additional fees, if applicable), VAT, total payment amount (including pre-tax price plus VAT), and the amount due for each period (if applicable).

8) Registration, declaration, payment of VAT:

Insurance enterprises, including holding companies, companies, and their affiliated branches, shall register, declare, and pay VAT to the Provincial Tax Department where the main office of the holding company, company, or branch is located. In cases where a holding company or company has branches in other provinces or cities, these branches must register, declare, and pay VAT to the Provincial Tax Department where the branch's main office is located (insurance agents and cooperators are not required to declare and pay VAT on insurance commissions received, but they must pay income tax according to the law).

The declaration must be made using the prescribed form attached with the list as stipulated in Circular No. 89/1998/TT-BTC, in addition, the enterprise must also attach a list of compensation payments according to the form issued along with this Circular.

II/ ENTERPRISE INCOME TAX

1) Taxpayers:

According to Article 1, Article 3 of the Law on Corporate Income Tax and Article 1 of Decree No. 30/1998/NĐ-CP dated May 13, 1998 of the Government detailing the implementation of the Law on Corporate Income Tax, all insurance enterprises (including primary insurance, reinsurance, and insurance service consulting) engaged in insurance business and other goods and services generating taxable income must pay corporate income tax.

2/ Taxable Income:

Taxable income for corporate income tax includes: taxable income from insurance business activities, other business activities, including taxable income from production, business, and service activities abroad, and other taxable income.

a) Revenue for calculating taxable income:

Revenue for calculating taxable income is the total amount of money received from providing insurance services and other goods and services, including additional charges and fees without VAT, which includes:

- Revenue from insurance activities is the amount receivable according to invoices and documents for providing primary insurance services, receiving reinsurance (after deducting premium refunds, fee reductions, reinsurance commission fees, and other deductions), reinsurance cession, agency appraisal, agency claim review, agency third-party recovery, agency full compensation processing, full compensation processing, and other revenue related to insurance activities.

For insurance contracts that agree to pay premiums periodically, the revenue for calculating taxable income is the amount receivable in each period. If the policyholder pays premiums in advance for multiple years, the revenue for calculating taxable income is the total amount received (similar to the example of the taxable value for VAT mentioned above).

- Revenue from other activities outside insurance activities includes interest income from loans, bank deposits, treasury bills, rental income from assets, etc., which the insurance enterprise must collect during the tax period.

b) Reasonable deductible expenses for calculating taxable income:

Reasonable deductible expenses for calculating taxable income for insurance enterprises, in addition to the reasonable expenses specified in Section III, Part B, of Circular No. 99/1998/TT-BTC dated July 14, 1998 of the Ministry of Finance, also include the following items:

- Expenses related to insurance business activities, including:

+ Primary insurance compensation costs (after deducting reinsurance indemnity receipts, third-party recovery receipts).

+ Reinsurance indemnification costs.

+ Reinsurance commission payments, brokerage commissions, agent, and cooperator insurance commissions.

+ Provisions for business risk reserves as prescribed by the Ministry of Finance.

+ Provisions for inventory write-down reserves, doubtful debt provisions according to the regulations of the Ministry of Finance.

+ Loss prevention costs.

+ Appraisal and full compensation processing costs.

+ Interest payments to contract holders (if applicable).

+ Costs for agency appraisal, agency claim review, agency third-party recovery, and other costs related to insurance activities.

- Expenses related to other activities outside insurance business activities, including financial investment activity costs such as bank transaction fees, securities write-down reserve provisions in financial operations, commitment dividend provisions for life insurance contract holders, and other investment activity costs.

The reasonable deductible expenses for calculating taxable income mentioned above must be actual expenditures and provisions after deducting receipts that reduce expenses, such as reinsurance indemnity receipts, third-party recovery receipts, and other receipts that reduce expenses according to the prescribed regulations.

c) Other taxable income, including:

- Income received from production, business, and service activities of insurance enterprises abroad, not reduced by any income tax paid abroad. If an insurance enterprise receives income that has been taxed abroad, it must determine the pre-tax income to calculate the income tax when taxed in Vietnam.

- Refunds of provisions. Provisions for calculating taxable income can only be considered for the difference between the balance of each provision established in the previous year being larger than the amount to be established in the subsequent year according to the prescribed regulations (if applicable).

- Other taxable income.

- An insurance enterprise receiving income distributed by domestic enterprises from contributions to joint stock, joint ventures, or associations (after paying taxes) does not need to pay corporate income tax (at a rate of 32%), but must include it in post-tax income to determine additional income tax (if applicable).

3) Tax Rate:

The corporate income tax rate applicable to domestic insurance enterprises is 32% of total taxable income (including income from insurance activities, other business activities, and other income).

In cases where insurance enterprises have high income due to objective advantages or invest in projects in priority investment fields, industries, or areas, or participate in foreign-invested enterprises operating under the Law on Foreign Investment in Vietnam, etc., the corresponding tax rates shall be applied according to the guidelines set out in Section V, Part B of Circular No. 99/1998/TT-BTC dated July 14, 1998, issued by the Ministry of Finance.

4) Corporate Income Tax payable to the State budget shall be determined as follows:

The amount of Corporate Income Tax paid abroad shall not exceed the Corporate Income Tax calculated according to the Law on Corporate Income Tax of Vietnam for the income received from abroad.

5) Registration and declaration of Corporate Income Tax payment:

Insurance enterprises shall implement registration, declaration, and payment of Corporate Income Tax in accordance with specific provisions stipulated in Part C of Circular No. 99/1998/TT-BTC dated July 14, 1998, issued by the Ministry of Finance guiding the implementation of Decree No. 30/1998/NĐ-CP dated May 13, 1998, of the Government detailing the implementation of the Law on Corporate Income Tax. Additional attention should be given to the following:

- All insurance enterprises, regardless of whether they are independent accounting units, dependent accounting units, or reporting units, must carry out Corporate Income Tax registration, along with Value Added Tax registration at the local Tax Office where their business office is located.

- Independent accounting insurance enterprises (holding companies, companies) have the obligation to declare, pay, and settle Corporate Income Tax with the Provincial Tax Office or the Central City Tax Office where their main office is located (including the Corporate Income Tax of insurance operations, other activities, and taxable income both domestically and abroad of dependent accounting units or reporting units under the enterprise).

III/ IMPLEMENTATION:

1) This Circular takes effect from January 1, 1999. In addition to the guidance provided in this Circular, insurance enterprises must still comply with the provisions of Circular No. 89/1998/TT-BTC dated June 27, 1998, issued by the Ministry of Finance guiding the implementation of Decree No. 28/1998/NĐ-CP dated May 11, 1998, of the Government detailing the implementation of the Law on Value Added Tax, and Circular No. 99/1998/TT-BTC dated July 14, 1998, guiding the implementation of Decree No. 30/1998/NĐ-CP dated May 13, 1998, of the Government detailing the implementation of the Law on Corporate Income Tax.

Furthermore, if insurance enterprises enter into contracts with foreign economic organizations or individuals supplying goods or services subject to taxation in Vietnam, but these organizations or individuals do not have offices or management headquarters in Vietnam, then the insurance enterprises must declare and pay taxes (including Value Added Tax and Corporate Income Tax) on behalf of the foreign organizations or individuals before making payments to them, in accordance with the Circular guiding the tax regime applicable to foreign economic organizations and individuals conducting business in Vietnam that do not fall under the forms of investment under the Law on Foreign Investment in Vietnam.

2) From 1998 and earlier, insurance enterprises had implemented accounting and determination of business results based on actual revenue collected. Therefore, insurance enterprises must record in their 1998 revenue any revenue generated from 1998 and earlier that has not yet been collected, and must set aside reserves according to the prescribed regulations, while also calculating and paying taxes according to the current laws on Business Tax and Corporate Income Tax. If the enterprise has not yet collected the money by the end of 1998, it may record a debt to the State budget for the Business Tax and Corporate Income Tax payable, and when the money is collected, it must pay the State budget the corresponding tax on the revenue collected.

During the implementation process, if there are any difficulties, the units are requested to promptly report to the Ministry of Finance (General Department of Taxation) for research and resolution.