Circular No. 31/2001/TT-BTC guides the implementation of tax incentives as stipulated in Decision No. 128/2000/QD-TTg dated November 20, 2000 of the Prime Minister on certain policies and measures to encourage investment and develop the software industry.

CIRCULAR

Guidelines for implementing tax incentives as stipulated in Decision No. 128/2000/QĐ-TTg

dated November 20, 2000, of the Prime Minister on certain policies

and measures to encourage investment and develop the software industry

Based on the relevant tax laws;

Based on Decision No. 128/2000/QĐ-TTg dated November 20, 2000, of the Prime Minister on certain policies and measures to encourage investment and develop the software industry;

The Ministry of Finance hereby provides guidance as follows:

A - APPLICABLE SUBJECTS:

Domestic organizations and individuals belonging to various economic sectors, overseas Vietnamese, and foreign organizations and individuals investing in software production and services in Vietnam (referred to collectively as software enterprises) shall be entitled to tax incentives as provided for in this circular.

In cases where software enterprises engage in other goods and service production and business activities, they shall only be eligible for tax incentives under this circular for their software product and service production and business activities.

B - TAX INCENTIVES FOR SOFTWARE ENTERPRISES:

I. Corporate Income Tax:

1. Vietnamese software enterprises and foreign software enterprises operating in Vietnam that are not subject to the Law on Investment in Vietnam shall enjoy corporate income tax rates as follows:

a. Rate of 25%.

b. Rate of 20% for enterprises investing in areas with difficult socio-economic conditions.

c. Rate of 15% for enterprises investing in areas with particularly difficult socio-economic conditions.

Areas with difficult socio-economic conditions and areas with particularly difficult socio-economic conditions are defined in Appendix B and C issued together with Decree No. 51/1999/NĐ-CP dated July 8, 1999, of the Government detailing the implementation of the Law on Encouraging Domestic Investment (amended).

2. Foreign-invested software enterprises operating under the Law on Investment in Vietnam shall apply a rate of 10%.

3. Exemption from Corporate Income Tax:

Software enterprises shall be exempt from corporate income tax on income derived from software product and service production and business activities for a period of four years starting from when taxable income is generated. For software enterprises already in operation and generating income from software product and service production and business activities, the exemption period for such income shall be four consecutive years starting from January 1, 2001.

Software enterprises shall not have to pay additional corporate income tax on income generated from software product and service production and business activities.

For software enterprises engaged in other goods and service production and business activities such as computer assembly, electronic equipment manufacturing, machinery and equipment sales, etc., the enterprise must separately account for revenue, costs, and income from software product and service production and business activities to determine the preferential tax rate applicable and the amount of tax exempted or reduced. If the enterprise cannot separately account for income from software product and service production and business activities and other business income, then the income from software product and service production and business activities shall be determined based on the ratio of revenue from software product and service production and business activities to the total revenue of the enterprise.

II. Withholding Tax on Transfer of Profits Out of Vietnam:

Overseas Vietnamese investing in Vietnam in the software industry according to the Law on Foreign Investment, and foreign investors in the software industry, shall enjoy a withholding tax rate of 3% on income from software production and service activities.

III. Value Added Tax:

The application of value added tax on software products and services shall be carried out in accordance with Circular No. 122/2000/TT-BTC dated December 29, 2000, of the Ministry of Finance guiding the implementation of Decree No. 79/2000/NĐ-CP dated December 29, 2000, of the Government detailing the implementation of the Law on Value Added Tax.

Specifically, it shall be applied as follows:

Software products and services supplied by software enterprises to domestic consumers in Vietnam shall not be subject to VAT; the enterprise does not need to calculate or pay VAT on these products and services, but cannot deduct or refund input VAT on goods and services used in the production of software products and services not subject to VAT.

Exported software products and services shall be subject to a zero percent VAT rate.

In cases where software enterprises produce and sell software products and services domestically while also exporting software products and services, the enterprise can only deduct or refund input VAT on goods and services used in the production of exported software products and services.

The enterprise must separately account for VAT on goods and services used for the production of exported software products and services to determine the deductible or refundable input VAT according to regulations. For input VAT on goods and services shared between the production of exported software products and services and non-VAT subject software products and services sold domestically, the deductible or refundable input VAT shall be calculated based on the ratio of revenue from exported software products and services to total revenue.

IV. Income Tax on High-Income Individuals:

Article 5 of Decision No. 128.2000.QĐ-TTg dated November 20, 2000 of the Prime Minister on certain policies and measures to encourage investment and develop the software industry stipulates: "Professional workers are Vietnamese individuals directly participating in software production and service activities shall be subject to tax at the initial rate and progressive rates as prescribed for foreign individuals."

Based on the above provision, enterprises shall establish a list to identify professional workers who are Vietnamese individuals directly involved in software product manufacturing and service activities, which shall be taxed under the high-income tax regime with the initial tax rate and progressive rates as prescribed for foreign individuals, and register with the direct tax management authority. In addition to the aforementioned category, other employees engaged in specialized work such as producing and trading goods and services, selling computer equipment, administrative tasks, security, driving, etc., if they have high income, shall still declare and pay high-income tax according to the progressive tax rate table prescribed for Vietnamese citizens and other high-income individuals residing in Vietnam.

The enterprise director shall be responsible for the accuracy and honesty of the declaration regarding the number of individuals subject to high-income tax under the tax rate prescribed for foreign individuals and the tax rate prescribed for Vietnamese individuals.

V. On export and import taxes:

1. Exemption from import duties and value-added tax at the import stage for raw materials imported directly for software production that cannot be produced domestically.

To qualify for exemption from import duties on raw materials for producing software products that cannot be produced domestically, software enterprises must provide the customs authority, in addition to the import declaration forms as required, with:

A production plan for software products specifying the quantity and types of raw materials that cannot be produced domestically and need to be imported for software production. The enterprise director signs and takes responsibility for this list of imported raw materials.

The customs authority will base its determination of exempted raw materials for software production that cannot be produced domestically on the list issued by the Ministry of Science, Technology, and Environment. If the Ministry of Science, Technology, and Environment has not issued a general list but provides specific confirmation on the enterprise's declaration of raw materials that cannot be produced domestically, the customs authority will rely on this confirmation to implement the import duty exemption.

Raw materials imported for software production that are exempt from import duties are also exempt from value-added tax at the import stage.        

2. Exemption from export duties on exported software products.

VI. Land use and land lease incentives:

Vietnamese software enterprises are exempted or reduced from land use fees, land lease fees, and real estate taxes as stipulated in Decree No. 51/NĐ-CP dated July 8, 1999 of the Government.

Software enterprises falling within the scope regulated by the Law on Foreign Investment in Vietnam shall enjoy land lease fee incentives as prescribed by current regulations.

C - IMPLEMENTATION:

1. Software enterprises, based on the tax exemptions and reductions they are entitled to, shall declare the amount of tax generated, the amount of tax exempted or reduced, and the amount of tax still due; and submit annual tax declarations and settlements to the tax authority in accordance with established procedures.

For software enterprises that simultaneously fall under the scope of benefits provided by Decision No. 128/2000/QĐ-TTg and other incentive policies under the Law on Encouraging Domestic Investment, the Law on Corporate Income Tax, the Law on Foreign Investment, etc., the enterprise may choose to benefit from only one of these incentive policies.

2. The tax authority, based on the tax exemptions and reductions granted to enterprises, shall guide enterprises in calculating, declaring, and paying taxes. Annually, based on the tax settlement of enterprises, the tax revenue management authority shall verify the specific amounts of tax exemptions and reductions, amounts due, and notify the enterprise accordingly.

3. Organizations and individuals engaging in false declarations to obtain tax incentives under this Circular, in addition to being required to repay improperly received tax benefits, may face administrative penalties for tax violations or criminal liability as prescribed by law depending on the nature and severity of the violation.

4. This Circular shall take effect fifteen days from the date of signature. Any tax incentives and budget revenues previously granted to software enterprises that contradict government regulations and guidance in this Circular shall no longer be valid. For taxes and other revenues declared and paid to the State Budget under current regulations prior to the effective date of this Circular, if different from the incentives specified herein, no retroactive collection or refund shall apply. Specifically, corporate income tax and high-income tax, revenues from land use and land lease, shall be recalculated from January 1, 2001, as prescribed in this Circular./.