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, of the Government detailing the enforcement of the Law on Encouraging Domestic Investment.

 

CIRCULAR

Guidelines for implementing tax exemptions and reductions as stipulated in Decree No. 07/1998/NĐ-CP dated January 15, 1998 of the Government detailing the implementation of the Law on Encouraging Domestic Investment (amended).

Based on current tax laws and tax ordinances;

Pursuant to Article 42 of Decree No. 07/1998/NĐ-CP dated January 15, 1998 of the Government detailing the implementation of the Law on Encouraging Domestic Investment (amended), the Ministry of Finance provides guidelines for implementing tax exemptions and reductions as stipulated 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 detailing the implementation 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 occupational associations;

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

- Limited liability companies and joint stock companies;

- Private enterprises;

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

II. Enterprises established directly in Vietnam by overseas Vietnamese.

III. Enterprises established directly 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 Section 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 Exemptions and Reductions for Business Income and Profit Tax for Investment Projects Establishing and Developing Business Production and Operation Bases:

Production, transportation, trade, and service establishments with investment projects establishing and developing production and operation bases as stipulated in Clause 1, Article 2 of Decree No. 07/1998/NĐ-CP shall enjoy tax exemption and reduction benefits for business income and profit tax as prescribed in 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 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. Documents include:

- Establishment decision (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 the People's Committee of provinces and centrally-administered cities (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 guidelines in Part A of this Circular, the agency must notify the applicant within seven days from the receipt of the file.

2. Annual Implementation of Tax Exemptions and Reductions: The reduction of business income tax and the exemption and reduction of profit tax for investment projects establishing and developing production and operation bases shall be implemented annually by the direct tax management agency. During the year, the establishment temporarily declares and pays taxes at the preferential tax rate recorded in the Investment Incentive Certificate. At the end of the year, the tax authority will officially notify 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 tax paid exceeds the amount stated in the notification, the excess can be deducted from the tax payable in the following period. During the tax settlement process, if fraudulent declaration or tax evasion is discovered, in addition to the legal penalties, the tax due from the fraudulent declaration will not be exempted or reduced according to the Investment Incentive Certificate.

For investment projects currently enjoying tax exemptions and reductions for business income and profit tax 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 tax exemptions and reductions will be implemented according to the guidelines in Section I, Part B of this Circular.

For investment projects establishing and developing production and operation bases but not meeting the conditions for tax exemptions and reductions for business income and profit tax as stipulated 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. Tax exemptions and reductions for these entities will still be implemented according to the current Business Income Tax Law and Profit Tax Law.

II. Income tax exemption for expansion projects that increase scale, enhance 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 income tax for one year on additional profits starting from the year they begin to pay taxes. Profits reinvested shall not be included in taxable profits." To qualify for such tax 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, development funds, and basic depreciation.

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

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

During the tax-exempt year, the production and business establishment mentioned in Section II.B of this Circular may temporarily retain a portion of the income tax payable, but not exceeding 50% of the additional income tax on increased profits under the investment project and not more than 30% of the income tax payable according to the annual plan of the establishment. At the end of the year, upon finalizing the tax return, the tax authority will check against the above conditions to issue a notice regarding the tax exemption or the reasons for denying it. If the establishment qualifies for tax exemption, the excess tax paid during the year will be deducted from the tax payable in the next period.

Example:

Company A raised capital in 1997 to expand 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 realized profits for reinvestment according to the approved investment project in 1998, this profit would not be included in taxable profits. 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 income tax or personal income tax on profits received by organizations and individuals directly purchasing shares or contributing capital to domestic enterprises, including state-owned enterprises with diversified ownership or independently financed investment funds.

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

- The start date 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 independently financed 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 taxes separately for each shareholding or capital contribution of the organizations and individuals.

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

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 exemptions for these shareholdings are as follows: - Exemption from income tax for three consecutive years 1998, 1999, 2000 on profits received from the shareholding in Company B.

- Exemption from income tax for three consecutive years 1999, 2000, 2001 on 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 listed in Sections I, II, III, and IV of Part A of this Circular with projects 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 resource tax payable for the first three years 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 finalizing the annual tax return. During the tax reduction period, the exploiting entity must still pay the full amount of resource tax due. At the end of the year, upon finalizing the tax return, 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 from the start date of mineral resource exploitation to the effective date of Decree No. 07/1998/NĐ-CP is less than three years, then they shall be entitled to a reduction in mineral 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 from April 1997 (the first time exploiting mineral resources). Therefore, it shall be entitled to a reduction in mineral resource tax for the remaining period as follows:

A 50% reduction in the mineral 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 a reduction in mineral resource tax under Article 38 of Decree No. 07/1998/NĐ-CP and also exempted or reduced from mineral resource tax under the Mineral Resource Tax Law, it may 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 the tax. Annually, 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 production and business projects 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 lease fees based on the original price set by the State, excluding the value of infrastructure works by infrastructure development companies. The notification of the tax authority is a legally binding document for enterprises to deduct from the land lease payments due to domestic infrastructure development companies according to the lease contracts signed between both 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 or 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 as 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, replaced or modernized technology must provide an economic and technical justification stating the quantity and list of machinery, equipment, and transportation vehicles imported according to the purposes specified 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 for one-time exemption from import duties as specified in 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 from import duties for the establishments upon actual importation (in cases of agency imports, customs authorities require the importing agency to present the agency contract specifying 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 specified in Clause 2, Article 37 of Decree No. 07/1998/NĐ-CP:

Based on the Investment Incentive Certificate, enterprises with investment projects establishing and developing production and business establishments that have been granted establishment licenses or registered additional business activities, 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 imported according to the purposes specified in Clause 2, Article 37 of Decree No. 07/1998/NĐ-CP, and submit it to the Ministry of Trade for review and approval 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 for exemption from import duties issued by the Ministry of Trade, the Customs Departments of provinces and centrally-administered cities shall implement the exemption from import duties for the enterprises upon actual importation. Quarterly, the Customs Departments must compile the import turnover and quantity of goods imported for exemption under 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 into 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 for other purposes, the enterprise must declare to the customs office where it registered the import declaration or the customs office where its main office is located, or the customs office 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 duties under the above cases. If it discovers improper use of imported goods, 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, it 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, it 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.

Patents, technical secrets, technological processes, and technical services used for capital contribution shall be exempt from related taxes associated with 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.

Overseas Vietnamese individuals investing according to the provisions of Article 2 of Decree No. 07/1998/ND-CP, and foreign individuals residing long-term in Vietnam purchasing shares, raising capital, increasing capital, or contributing capital to enterprises according to Clause 3 of Article 2 of Decree No. 07/1998/ND-CP, when repatriating profits earned abroad only need to pay a tax of five percent of the amount repatriated.

The method of determining the tax payable and procedures for payment of tax shall be implemented 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 forms of investment under the Law on Foreign Investment in Vietnam.

C. IMPLEMENTATION.

After enjoying tax incentives as prescribed in Decree No. 07/1998/ND-CP and the guidance in 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 exemptions and reductions.

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.

Investors who engage in fraudulent activities to enjoy tax incentives, or intentionally fail to declare changes in investment conditions to enjoy higher tax incentives, in addition to returning the tax benefits received, may be subject to administrative penalties 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 losses to the State Budget shall be subject to disciplinary action, administrative penalties, or criminal prosecution 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 regimes. On one hand, they should create favorable conditions for investors during project implementation; on the other hand, they should promptly detect and prevent actions exploiting loopholes 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 exemptions and reductions, actual 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, jurisdiction, and approval of tax exemptions and reductions under the Law on Encouragement of Domestic Investment and Decree No. 29/CP dated May 12, 1995, 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./.