Circular No. 18-TC/TQD explaining and providing additional guidance on the implementation of corporate income tax

CIRCULAR

Explanation and guidance on the implementation of corporate income tax
_______________________

To implement the commercial and industrial tax regulations issued at the beginning of 1966, the Ministry of Finance issued Circulars No. 74-TC/TQD dated May 5, 1966, and No. 02 dated February 17, 1967, guiding the implementation of corporate income tax, aiming to encourage the proper development of handicraft industries, promote equipment and technological improvements, assist handicraft cooperatives in strengthening labor, material, and financial management, thereby consolidating cooperatives step by step, and mobilizing fair and reasonable contributions among different trade cooperatives.

Currently, there have been new developments: with the leadership and concern of Party committees and local authorities, under the guidance of the cooperative union and the assistance of relevant state sectors, handicraft production is developing, the redirection of production towards consumer goods has many advantages, difficulties in supplying raw materials, signing economic contracts, etc., are being gradually overcome, initial progress has been made in labor, material, and capital management.

The labor production movement, market management at the grassroots level, and the implementation of other policies of the Party and State in recent times have initially shown their effectiveness, promoting handicraft cooperatives to strengthen economic and financial management, while also mobilizing more social labor into the production of material wealth.

To adapt to the new situation, further enhance the effectiveness of tax policy, contribute to promoting production development, and strengthen economic and financial management, the Ministry of Finance deems it necessary to provide additional explanations and guidance on the implementation of corporate income tax as follows:

1. Regarding the calculation of material losses: still following the spirit of Circulars No. 74 and No. 02 mentioned above.

As for the prices of raw materials purchased from outside, to encourage cooperatives to strictly adhere to the principles and systems of material management and price control by the state to combat speculation and collusion, while still appropriately considering the current situation where some cooperatives have not been fully supplied with necessary materials to fulfill production contracts, the Ministry now specifies as follows:

In cases where materials under state unified management are purchased from outside, Circular No. 02 stipulates that "if it is determined that the cooperative was struggling with difficulties and thus acted improperly, the collection agency may consider and allow the cooperative to calculate based on actual expenditures..."

From now on, when deducting material losses, the following distinctions should be made: in cases of production for state agencies:

a) If there is certification from the processing or purchasing agency stating that they could not supply the materials, and the cooperative had to purchase them externally to ensure production, then the deduction can be made at a reasonable price;

b) If there is no such certification, only the state-directed price shall be deducted.

Additionally, the collection agency should pay attention to encouraging the processing and purchasing agencies to strictly comply with the material supply regulations stipulated in Directive No. 21-TTg/TN issued by the Prime Minister in 1968.

For cooperatives producing for the free market with raw materials under state unified management but not supplied by the state, this usually indicates illegal actions by the production base such as: producing without registration; embezzling raw materials from the state for processing, colluding, stealing state raw materials... Therefore, the collection agency must detect and report to responsible agencies for investigation and handling. In terms of taxation, specific consideration should be given, and the cost of external purchases may not be deductible. If it is deemed necessary to consider (for example: the production base genuinely purchased raw materials externally but the proportion of external raw materials is small compared to total consumption; the cooperative's income is low, etc.), the opinion of the municipal or district administrative committee should be sought to allow deduction at the state-directed price. It is necessary to educate and remind cooperatives to strictly respect state regulations; if they continue to purchase externally, raw materials under state unified management, they will not be allowed to deduct the purchase cost from production expenses in the future.

2. Regarding the deduction of exempted income allowances: still following the provisions in Circular No. 02.

Specifically regarding apprentice workers, previously it was stipulated that half of the exempted income allowance could be deducted, but currently, in some cooperatives, some apprentice workers, after a period of training, have become relatively proficient and are paid higher wages (or apprenticeship allowances) than the exempted income allowance; in such cases, a full exempted income allowance can be deducted, while simultaneously proposing that the cooperative consider and admit them as members.

If the wage (or apprenticeship allowance) is not equal to or higher than the exempted income allowance, then half of the exempted income allowance can still be deducted.

3. Deduction of corporate income tax:

Regarding the deduction of tax when cooperatives have excess corporate income:

The purpose of tax deductions is to support cooperatives operating according to state policies; the collection of excess corporate income tax aims to regulate the income of cooperatives that, through legitimate business practices, earn excess income. Therefore, for cooperatives and individual war veterans who are exempted from tax due to excess corporate income (unjustifiable reasons), the deduction of corporate income tax should only be carried out within the scope of the regular tax rate, not on the entire amount (including both the regular tax rate and the excess corporate income tax) as done in many places (see examples in the attached annex).

Regarding the deduction of tax for technical equipment: Circular No. 02 stipulates that "the deduction of tax for cooperatives purchasing machinery and constructing factories for production (Article 17 of the tax regulation) should be implemented immediately after the cooperative purchases machinery or starts construction of the factory, without waiting until the cooperative puts the machinery into production."

At present, there are some places that have deducted the entire amount of construction materials purchased, even though construction has not yet commenced; subsequently, the cooperative suffers losses or sells or uses these materials for non-productive purposes (such as building houses...), but the collection agency does not recalculate to recover the excess tax already deducted.

To address this situation, the following additions are necessary:

- If the cooperative purchases machinery and tools, it may temporarily deduct immediately without waiting until they are put into production.

- If the cooperative purchases construction materials, temporary deductions shall only be made when construction begins, based on the planned quantity for construction. Upon completion of the project, the actual expenditure will be recalculated to accurately reflect the amount used for productive purposes.

4. Regarding supplementary income:

Circular No. 74 stipulates that when calculating supplementary income, the surplus from selling fixed assets (after depreciation) and from selling low-value items that were damaged (after allocating their full value to production costs) must be added; however, it does not address the case of selling fixed assets at a loss.

Now, it is supplemented that if fixed assets in use are sold at a loss (after accounting for all depreciation), such losses can be deducted from taxable income after verification by the collection agency. If there are instances of collusion or abuse to purchase fixed assets of cooperatives at a low price, causing damage to the cooperative's capital, these must be promptly identified and measures taken to recover the losses for the cooperative.

The above points provide additional guidance and explanations to ensure that the calculation of income tax aligns with the spirit of the business and trade tax regulations and adapts to new circumstances.

During implementation, if localities find any unsuitable aspects, they should report them to the Ministry of Finance for further study.