Circular No. 43/1998/TT-BTC guides the implementation of tax exemptions and reductions as stipulated in Decree No. 07/1998/NĐ-CP dated January 15, 1998, detailing the enforcement of the Law on Encouraging Domestic Investment.

CIRCULAR

OF THE MINISTRY OF FINANCE NUMBER 43/1998/TT-BTC DATED APRIL 4, 1998 GUIDING THE IMPLEMENTATION OF TAX EXEMPTIONS AND REDUCTIONS AS PROVIDED FOR IN DECREE NO. 07/1998/NĐ-CP DATED JANUARY 15, 1998 OF THE GOVERNMENT PROVIDING DETAILS ON THE ENFORCEMENT OF THE LAW ON ENCOURAGING DOMESTIC INVESTMENT (AMENDED)

Pursuant to current tax laws and tax ordinances;
Implementing Article 42 of Decree No. 07/1998/NĐ-CP dated January 15, 1998 of the Government providing details on the enforcement of the Law on Encouraging Domestic Investment (amended), the Ministry of Finance guides the implementation of tax exemptions and reductions as provided for in this Decree as follows:

A. APPLICABLE OBJECTS:

This Circular applies to the subjects specified in Article 3 of Decree No. 07/1998/NĐ-CP dated January 15, 1998 of the Government providing details on the enforcement of the Law on Encouraging Domestic Investment (amended), including:

I. Enterprises belonging to various economic sectors:

- State-owned enterprises;

- Enterprises of political organizations, political-social organizations, and trade unions;

- Individuals, household business owners, independent business groups, and other business entities;

- Limited liability companies and joint stock companies;

- Private enterprises;

- Individuals or business groups operating under Decree No. 66-HĐBT dated March 2, 1992 of the Council of Ministers (now the Government).

II. Enterprises directly invested in Vietnam by overseas Vietnamese.

III. Enterprises directly invested in Vietnam by foreigners residing long-term in Vietnam.

IV. Enterprises jointly established by Vietnamese citizens with overseas Vietnamese or with foreigners residing long-term in Vietnam.

V. Organizations, Vietnamese citizens, overseas Vietnamese, and foreigners residing long-term in Vietnam purchasing shares or contributing capital to domestic enterprises, including state-owned enterprises with diversified ownership or self-financing investment funds.

The subjects mentioned in Sections I, II, III, and IV of Part A of this Circular shall only be entitled to tax benefits as prescribed in Decree No. 07/1998/NĐ-CP and guided in Part B of this Circular when:

- They operate in the registered business fields.

- They have registered for tax payment.

I. TAX EXEMPTIONS, REDUCTIONS, AND TAX RATE BENEFITS ON ENTERPRISE INCOME TAX

I. Tax exemption and reduction for income and profit taxes for investment projects establishing and developing production and business bases:

Production, transportation, trading, and service establishments with investment projects establishing and developing production and business bases as stipulated in Clause 1, Article 2 of Decree No. 07/1998/NĐ-CP shall enjoy tax exemptions and reductions for income and profit taxes according to Articles 31, 32, 33, and 34 of Decree No. 07/1998/NĐ-CP. Within ten days from the date of issuance of the investment incentive certificate, the production and business establishment must complete tax registration and simultaneously submit the application file to the direct tax management agency requesting the tax incentives recorded in the Investment Incentive Certificate.

1. The application file includes:

- Decision on establishment (if applicable) and Business Registration Certificate (certified copy or copy signed and stamped by the enterprise).

- Investment Incentive Certificate issued by the Ministry of Planning and Investment or People's Committee of provinces/cities directly under the Central Government (certified copy or copy signed and stamped by the enterprise).

- The tax registration form.

- Application for tax incentives recorded in the Investment Incentive Certificate, fully signed by the authorized representative and stamped by the unit (if applicable).

Within a maximum period of ten days from the receipt of the application file, the direct tax management agency must issue a notice regarding the implementation of tax exemptions and reductions and the duration of such exemptions and reductions as recorded in the Investment Incentive Certificate. If the agency finds that the application file does not meet the requirements or does not fall within the scope of Decree No. 07/1998/NĐ-CP and the guidance in Part A of this Circular, it must notify the unit of this finding within seven days from the receipt of the application file.

2. Annual Implementation of Tax Exemptions and Reductions: The reduction of income tax; tax exemption and reduction of profit tax for investment projects establishing and developing production and business bases shall be implemented annually by the direct tax management agency managing the base. During the year, the production and business establishment temporarily declares and pays taxes at the preferential tax rate recorded in the Investment Incentive Certificate. At the end of the year, upon finalizing the tax settlement, the tax agency officially notifies the amount of tax payable, the amount exempted or reduced according to the Investment Incentive Certificate. If the tax paid during the year is less than the amount stated in the notification, the establishment must pay the remaining tax within the deadline specified in the tax notification. If the establishment has overpaid compared to the amount stated in the notification, the excess can be offset against the tax payable in the following period. During the tax settlement review process, if fraudulent declaration or tax evasion is discovered, in addition to the legal penalties and tax recovery, the tax due from the recovery will not be eligible for tax exemption or reduction according to the Investment Incentive Certificate.

For investment projects currently enjoying tax exemptions and reductions for income and profit taxes as stipulated in Articles 16, 17, 18, and 19 of Decree No. 29/CP dated May 12, 1995 of the Government, they will continue to enjoy tax benefits until the remaining time recorded in the previously issued Investment Incentive Certificate, and the implementation of tax exemptions and reductions will follow the guidance in Section I, Part B of this Circular.

For investment projects establishing and developing production and business bases but not meeting the conditions for tax exemptions and reductions for income and profit taxes as prescribed in the amended Law on Encouraging Domestic Investment and Decree No. 07/1998/NĐ-CP dated January 15, 1998, they are not covered by this Circular. The tax exemptions and reductions for these entities will still be carried out according to the current Income Tax Law and Profit Tax Law.

II. Exemption from corporate income tax for expansion projects aimed at increasing scale, enhancing production capacity, research and development, and technological innovation of existing production and business establishments. Article 35 of Decree No. 07/1998/NĐ-CP stipulates: "Production establishments, transportation, trade, and service enterprises with investment projects as prescribed in Clause 2, Article 2 of this Decree shall be exempted from corporate income tax for one year on the additional profits generated from the year they start to pay taxes. Profits reinvested shall not be included in the taxable profit." To qualify for such exemption, production and business establishments must meet the following conditions:

- They must have actual expenditures on investment, excluding expenditures from state budget funds, self-supplemented funds: basic construction investment capital, development fund, and basic depreciation.

- The investment must yield economic efficiency reflected in higher profits in the subsequent year compared to the year of investment.

For profits earned in a given year, if the enterprise has actually spent them on reinvestment according to the approved investment project, such profits shall not be counted as taxable profits for that year.

During the tax exemption period, production and business establishments mentioned in Section II.B of this Circular may temporarily retain a portion of the corporate income tax payable, but not exceeding 50% of the corporate income tax on the additional profits generated from the investment project, nor more than 30% of the corporate income tax payable under the annual plan of the establishment. At the end of the year, upon finalizing the tax settlement, the tax authority will check against the above conditions to issue a notice regarding the tax exemption or the reasons for denying the tax exemption to the establishment. If the establishment qualifies for tax exemption, the excess tax paid during the year will be deducted from the tax payable in the subsequent period.

Example:

Company A raised funds in 1997 to expand its production. The total taxable profit realized in 1997 was 500 million VND, and the total taxable profit realized in 1998 was 600 million VND. Therefore, the additional profit exempted from tax is 100 million VND.

- In the same example, if Company A used 50 million VND from the realized profit in 1998 to reinvest according to the approved investment project, this part of the profit would not be counted as taxable profit. Thus, the total taxable profit in 1998 would be 550 million VND, and the additional profit exempted from tax would be 50 million VND.

III. Exemption from corporate income tax or personal income tax on the profits received by organizations and individuals directly purchasing shares or contributing capital to domestic enterprises, including state-owned enterprises undergoing diversified ownership or self-financing investment funds.

According to Article 39 of Decree No. 07/1998/NĐ-CP, Vietnamese organizations, Vietnamese citizens residing in Vietnam, overseas Vietnamese, and foreigners residing long-term in Vietnam who purchase shares or contribute capital to domestic enterprises, including state-owned enterprises undergoing diversified ownership or self-financing investment funds, shall be exempted from corporate income tax or personal income tax, including additional income tax (if applicable), on the profits received for a continuous three-year period starting from the first receipt. The tax exemption period is determined based on the financial year of the enterprises or self-financing investment funds mentioned above. To implement the tax exemption as prescribed, enterprises or self-financing investment funds must issue a dividend distribution decision specifying the following contents:

- The time of share purchase or capital contribution.

- The amount of share purchase or capital contribution.

- The number of times dividends were distributed and the amount of each dividend distributed to each organization or individual purchasing shares or contributing capital.

The dividend distribution decision must bear the signature of the authorized representative and the stamp of the enterprise or self-financing investment fund, serving as the basis for the tax authority to grant tax exemptions to organizations and individuals purchasing shares or contributing capital.

The tax authority will only grant tax exemptions to organizations and individuals presenting the dividend distribution decision of the enterprise or investment fund (a certified copy or a copy signed and stamped by the enterprise) and will exempt tax separately for each shareholding or capital contribution of the organization or individual.

The tax authority directly managing the payment of corporate income tax or personal income tax of organizations and individuals purchasing shares or contributing capital shall implement the tax exemption on the distributed profits and must issue a formal notice of the tax exemption when settling the annual tax.

Example:

Company A has two shareholdings in Company B and Company C. The shareholding in Company B was purchased in February 1998 and dividends were distributed in the same year. The shareholding in Company C was purchased in June 1998, but there were no dividends in 1998; dividends were distributed for the first time in 1999. The tax exemption for these shareholdings is implemented as follows: - Exemption from corporate income tax for a continuous three-year period of 1998, 1999, and 2000 on the profits received from the shareholding in Company B.

- Exemption from corporate income tax for a continuous three-year period of 1999, 2000, and 2001 on the profits received from the shareholding in Company C.

IV. Reduction of resource tax as provided for in Article 38 of Decree No. 07/1998/NĐ-CP.

According to Article 38 of Decree No. 07/1998/NĐ-CP, entities mentioned in Sections I, II, III, and IV of Part A of this Circular with investment projects listed in Category A implemented in areas listed in Category B or Category C issued together with Decree No. 07/1998/NĐ-CP, if they exploit mineral resources (excluding oil and gas), shall be entitled to a 50% reduction in the resource tax payable for the first three years from the commencement of exploitation.

Based on the Investment Incentive Certificate, the tax authority directly managing the exploiting entity shall reduce the resource tax for the entity when settling the annual tax. During the tax reduction period, the exploiting entity must still pay the full amount of the resource tax due. At the end of the year, upon finalizing the tax settlement, the tax authority will issue a formal notice of the tax reduction. The officially reduced resource tax will be deducted from the resource tax payable in the subsequent tax period of the entity.

For investment projects granted Investment Incentive Certificates before the effective date of Decree No. 07/1998/NĐ-CP, if the period from the start of mineral resource exploitation to the effective date of Decree No. 07/1998/NĐ-CP is less than three years, they shall be entitled to a reduction in resource tax for the remaining incentive period.

Example:

Company X was granted an Investment Incentive Certificate in February 1996 for a road construction project (Category A) in Bac Ché District, Quảng Ninh Province (Category B), and began exploiting stone for this project in April 1997 (the first time exploiting mineral resources). Therefore, it shall be entitled to a reduction in resource tax for the remaining period as follows:

A 50% reduction in the amount of resource tax payable from February 1998 to April 30, 2000 (Decree No. 07/1998/NĐ-CP took effect on February 1, 1998).

During the same period, if an enterprise has an investment project that is subject to both a reduction in resource tax under Article 38 of Decree No. 07/1998/NĐ-CP and exemption or reduction in resource tax under the Mineral Resource Tax Law, it can only benefit from one of these two provisions.

V. Exemption and Reduction of Land Rent.

The exemption and reduction of land rent for enterprises as stipulated in Articles 27 and 28 of Decree No. 07/1998/NĐ-CP shall be implemented by the tax authority directly managing the enterprise when settling taxes annually. Each year, during the period of exemption and reduction of land rent, the tax authority must notify the enterprise of the amount of land rent exempted or reduced. For enterprises with investment projects in production and business activities in industries listed in Category A within industrial zones, export processing zones, and high-tech parks, the tax authority shall notify a 50% reduction in land rent based on the original price set by the State, excluding the value of infrastructure works developed by infrastructure companies. The notification of the tax authority is a legally binding document for the enterprise to deduct from the land rent payable to domestic infrastructure development companies according to the lease contracts signed between the two parties.

Enterprises that were granted Investment Incentive Certificates before February 1, 1998 (the effective date of Decree No. 07/1998/NĐ-CP) shall be entitled to the exemption and reduction of land rent as stipulated in Articles 27 and 28 of Decree No. 07/1998/NĐ-CP for the remaining incentive period starting from February 1, 1998.

During the same period, if an enterprise is eligible for exemption and reduction of land rent under Articles 27 and 28 of Decree No. 07/1998/NĐ-CP and also under Decree No. 85/CP dated December 17, 1996 of the Government detailing the implementation of the Ordinance on the rights and obligations of domestic organizations granted land use rights and land leases by the State, it can only benefit from one of these two provisions.

VI. Exemption from Import Duties.

1. The one-time exemption from import duties for equipment, machinery, and transportation vehicles for investment projects specified in Clause 1, Article 37 of Decree No. 07/1998/NĐ-CP shall be carried out as follows:

Based on the Investment Incentive Certificate, production and business establishments that have been granted establishment licenses or expanded production and business scales, or replaced and modernized technology, must provide an economic and technical justification specifying the quantity and list of imported machinery, equipment, and transportation vehicles according to the purposes stated in Clause 1, Article 37 of Decree No. 07/1998/NĐ-CP, and submit it to the Ministry of Trade for approval of the specific exemption list.

Based on the list of machinery, equipment, and transportation vehicles imported duty-free according to Clause 1, Article 37 of Decree No. 07/1998/NĐ-CP issued by the Ministry of Trade for each establishment, the Customs Departments of provinces and centrally-administered cities shall implement the exemption of import duties for the establishments upon actual importation (in cases of agency imports, customs authorities require the importing agency to present the agency contract clearly stating the list of machinery, equipment, and transportation vehicles consistent with the exemption list issued by the Ministry of Trade).

2. Exemption from import duties for raw materials and supplies imported to form fixed assets of enterprises as stipulated in Clause 2, Article 37 of Decree No. 07/1998/NĐ-CP:

Based on the Investment Incentive Certificate, enterprises with investment projects for establishing and developing production and business establishments that have been granted establishment licenses or registered additional business operations, when there is a need to import raw materials and supplies to form fixed assets, must prepare an import plan specifying the list of raw materials and supplies to be imported according to the purposes stated in Clause 2, Article 37 of Decree No. 07/1998/NĐ-CP, and submit it to the Ministry of Trade for review of the specific exemption list according to each purpose. (For raw materials and supplies imported under Clause 2.b of the aforementioned Article 37, enterprises must obtain confirmation from the Ministry of Science and Technology and Environment).

Based on the enterprise's import plan and the list of raw materials and supplies imported duty-free issued by the Ministry of Trade, the Customs Departments of provinces and centrally-administered cities shall implement the exemption of import duties for enterprises upon actual importation. Quarterly, the Customs Departments must compile the import turnover and quantity of goods imported duty-free for enterprises according to Clauses 1 and 2 of Article 37 of Decree No. 07/1998/NĐ-CP and report to the Ministry of Finance and the General Department of Customs.

Goods imported duty-free under the above cases, if used for other purposes or permitted to be resold, shall pay back the import duties that were exempted to the State Budget. The amount of import duties to be paid back shall be determined based on the tariff rate, taxable value, and exchange rate as prescribed by the Law on Export Duties and Import Duties at the time of resale or use for other purposes. Within two days from the date of resale or use of imported goods for other purposes, the enterprise must declare to the customs authority where the import declaration was registered or the customs authority where the enterprise's main office is located, or the customs authority where the goods were resold. If the enterprise fails to declare within the above period and is discovered, in addition to paying back the exempted import duties, it will also be subject to penalties as prescribed by the Law on Export Duties and Import Duties.

The tax authority directly managing the enterprise is responsible for supervising the use of imported goods that were exempted from import duties under the above cases. If misuse of imported goods for purposes other than those intended is detected, in addition to collecting turnover tax and profit tax (if applicable) as prescribed by the Law on Turnover Tax and the Law on Profit Tax, the tax authority has the right to issue a decision to recover import duties and impose penalties as prescribed by the Law on Export Duties and Import Duties. In cases where recovering import duties is beyond its jurisdiction, the tax authority must transfer the file to a higher-level tax authority for resolution.

3. The refund of import duties for raw materials, unassembled parts, spare parts, and materials imported for the production of export goods as stipulated in Article 37 of Decree No. 07/1998/ND-CP shall be implemented according to the guidance provided in point 1.1 of Circular No. 84/1997/TT-BTC dated November 13, 1997, which supplements and amends certain points in Circulars No. 72A/TC-TCT dated August 30, 1993, No. 107 TC/TCT dated December 30, 1993, and No. 53 TC/TCT dated July 13, 1995, issued by the Ministry of Finance regarding export duties and import duties.

4. Patents, technical secrets, technological processes, and technical services used for capital contribution shall be exempt from related taxes on technology transfer.

For projects that have been granted Investment Incentive Certificates before February 1, 1998 (the effective date of Decree No. 07/1998/ND-CP), they shall continue to apply the exemption from import duties as prescribed in Article 37 of Decree No. 07/1998/ND-CP and the guidance in Section VI, Part B of this Circular for the remaining incentive period, starting from February 1, 1998.

VII. Tax on Repatriation of Profits.

Vietnamese individuals residing abroad who invest according to the provisions of Article 2 of Decree No. 07/1998/ND-CP, and foreigners residing long-term in Vietnam who purchase shares, raise capital, increase capital, or contribute capital to enterprises according to Clause 3 of Article 2 of Decree No. 07/1998/ND-CP, when repatriating profits obtained out of the country only need to pay a tax of five percent of the amount repatriated.

The method of determining the amount of tax payable and procedures for payment of tax shall be carried out according to point 2 and point 3 of Section II, Part II of Circular No. 74TC/TCT dated October 20, 1997, guiding the implementation of regulations on taxation for foreign investment forms under the Law on Foreign Investment in Vietnam.

C. IMPLEMENTATION.

After enjoying tax incentives as prescribed in Decree No. 07/1998/ND-CP and guided by this Circular, if there is a change in the investor, the new investor shall continue to enjoy the tax exemption and reduction benefits recorded in the Investment Incentive Certificate for the remaining period and shall be responsible for fulfilling all obligations of the previous investor to enjoy tax exemption and reduction benefits.

In cases where tax incentives have already been enjoyed according to the conditions registered for the project, but during implementation, the investor changes the registered conditions leading to a change in tax incentives under Decree No. 07/1998/ND-CP, the investor must declare to the competent authority within the latest five days to adjust the Investment Incentive Certificate accordingly.

An investor who engages in fraud to obtain tax incentives or intentionally fails to declare changes in investment conditions to obtain higher tax incentives shall, in addition to returning the tax benefits received, be subject to administrative fines or criminal prosecution depending on the severity of the violation as prescribed by law.

Tax officials and other individuals who abuse their positions and powers to deliberately misinterpret this Circular causing damage to the State Budget shall be disciplined, administratively fined, or criminally prosecuted depending on the severity of the violation as prescribed by law. Tax authorities at all levels are responsible for strictly managing domestic investment projects under the Law on Encouragement of Domestic Investment, the conditions registered by investors for each project within their jurisdiction related to tax exemption and reduction benefits. On one hand, they should create favorable conditions for investors during project implementation; on the other hand, they should promptly detect and prevent fraudulent activities to evade taxes. Tax authorities must maintain records and retain all relevant documents concerning tax exemptions and reductions for each investment project and report quarterly and annually to the General Department of Taxation on the temporary tax exemptions and reductions, actual tax exemptions and reductions for entities benefiting from investment incentives as prescribed in Decree No. 07/1998/ND-CP of the Government.

This Circular takes effect from March 1, 1998, and replaces Circular No. 94 TC/TCT dated December 22, 1995, issued by the Ministry of Finance, guiding procedures, processes, and authorities for considering tax exemptions and reductions under the Law on Encouragement of Domestic Investment and Decree No. 29/CP dated May 12, 1995, of the Government detailing the implementation of the Law on Encouragement of Domestic Investment.

During the implementation process, if any issues arise, organizations, sectors, and localities should promptly reflect them to the Ministry of Finance for research and supplementary guidance.