Circular No. 63/1998/TT-BTC guides the implementation of certain tax regulations aimed at encouraging and ensuring foreign direct investment activities in Vietnam as stipulated in Decree No. 10/1998/NĐ-CP.

CIRCULAR

Guidelines for implementing certain tax regulations to encourage and ensure foreign direct investment activities in Vietnam as stipulated in Decree No. 10/1998-NĐ-CP

Decree No. 10/1998-NĐ-CP dated January 23, 1998 of the Government on certain measures to encourage and ensure foreign direct investment activities in Vietnam;

Pursuant to the Law on Foreign Investment in Vietnam dated November 12, 1996;

Based on Decree No. 10/1998-NĐ-CP dated January 23, 1998 of the Government on certain measures to encourage and ensure foreign direct investment activities in Vietnam;

The Ministry of Finance issues guidelines for implementing certain tax regulations to encourage and ensure foreign direct investment activities in Vietnam as follows:

A. APPLICABLE OBJECTS

The subjects to which the tax regulations provided for in this Circular apply include:

Joint ventures and wholly foreign-owned enterprises established under the Law on Foreign Investment in Vietnam.

Foreign parties participating in business cooperation contracts based on contracts under the Law on Foreign Investment in Vietnam.

Other foreign-invested enterprises established on the basis of agreements signed between the Government of the Socialist Republic of Vietnam and the Government of a foreign country. In cases where the agreement contains different provisions regarding taxes, such provisions shall be implemented according to the provisions of that agreement.

The above-mentioned subjects are referred to as Foreign-Invested Enterprises.

B. MEASURES TO ENSURE RIGHTS AND BENEFITS OF INVESTORS

I. INCOME TAX

1. Income Tax Rate:

Foreign-invested enterprises granted an Investment License before November 23, 1996 shall pay income tax according to the provisions of the Investment License. In cases where the income tax rate prescribed in newly issued government documents of Vietnam is lower than the income tax rate prescribed in the Investment License, the implementation of ensuring investors' rights regarding the income tax rate shall be carried out as follows:

The authority issuing the investment license shall adjust the income tax rate for enterprises according to new regulations in the following cases:

Enterprises belonging to projects meeting both conditions: the project falls within the list of specially encouraged investment projects and the list of encouraged investment areas as stipulated in Appendix 1 of Decree No. 10/1998/NĐ-CP dated January 23, 1998 of the Government shall be subject to preferential income tax rates throughout the remaining operational period of the project.

Enterprises investing in areas that later become industrial zones, export processing zones, or high-tech zones shall enjoy preferential income tax benefits as prescribed in Decree No. 36/CP dated April 24, 1997 of the Government.

Enterprises currently enjoying preferential income tax rates according to their Investment Licenses but whose application periods under new regulations are longer than those specified in the Investment Licenses.

Enterprises not eligible for preferential income tax rates according to their Investment Licenses but actually meeting the conditions for preferential income tax rates under new regulations.

The above enterprises may only have their income tax rates adjusted by the authority issuing the investment license if they meet the following two conditions:

The enterprise is currently enjoying preferential income tax rates according to new regulations.

The enterprise meets the conditions for preferential income tax rates according to new regulations.

1.3. The preferential income tax rate under new regulations shall be implemented from the fiscal year when the adjustment permit becomes effective.

1.4. In cases where enterprises are adjusted to preferential income tax rates under new regulations due to meeting conditions such as labor utilization or export product ratio, but fail to meet these conditions after the adjustment of the preferential income tax rate, the preferential income tax rate shall only be applied to fiscal years during which the enterprise meets the conditions for preferential income tax rates. Annually, the enterprise must report to the authority issuing the investment license and the tax administration agency managing the enterprise on the implementation of these indicators and declare payment of income tax at the appropriate rate based on the conditions met. The tax administration agency will verify the degree of compliance with these indicators and determine the annual income tax payable for each enterprise.

Example: Enterprise A was granted an Investment License in 1994 and began operations in 1996. According to the Investment License, the enterprise enjoys an income tax rate of 20% for five years starting from the year following the issuance of the Investment License.

Assuming in 1998, the enterprise exports 80% of its products, according to Article 54 of Decree No. 12/CP, the enterprise can pay income tax at a rate of 15%. In 1998, the authority issuing the investment license adjusts the income tax rate to 15%. The application period for the 15% income tax rate is 12 years from the start of the enterprise's production and business operations. If from 1998 onwards, the enterprise achieves an export ratio of 80% every year, it will continue to pay income tax at a rate of 15% until 2007 (12 years from 1996). In cases where from 1998 to 2007, there are years in which the enterprise only reaches an export ratio of 50% to less than 80%, the enterprise will declare and pay income tax at a rate of 20% for those years; or in years where the export ratio is only 30%, not meeting the conditions for preferential income tax rates, the enterprise will declare and pay income tax at a rate of 25%.

In cases where the income tax rates prescribed in new regulations are less favorable to enterprises, the enterprises may continue to apply the income tax rates prescribed in their Investment Licenses.

2. Exemption and reduction of income tax.

Enterprises enjoy exemptions and reductions of income tax as stipulated in their Investment Licenses. In cases where the exemptions and reductions of income tax prescribed in new regulations are more favorable than those already stipulated in the Investment Licenses, enterprises may enjoy the benefits under new regulations if:

The enterprise is still within the exemption and reduction period stipulated in the previously issued Investment License. For enterprises whose Investment Licenses did not grant exemptions or reductions, they may only benefit from exemptions and reductions under new regulations if they had not generated profits prior to the issuance of the Investment License.

At the time of requesting adjustments to the tax exemption and reduction periods for corporate income tax, enterprises must meet all conditions to be eligible for tax incentives under the new regulations.

Tax exemptions and reductions for corporate income tax under the new regulations shall commence from the fiscal year in which the amended investment permit becomes effective.

3. Procedures for adjusting the corporate income tax rate and tax exemption/reduction incentives:

Enterprises subject to adjustment of the corporate income tax rate and those entitled to tax exemption/reduction incentives as stipulated above must submit a letter to the authority issuing the Investment License, clearly stating the reasons for requesting the tax rate adjustment and tax exemption/reduction incentives, the proposed tax rate, and the implementation status of the criteria for enjoying incentives according to the new regulations for the previous year and the reporting year up to the time of the request for adjustment. The authority issuing the Investment License will issue an Amended Investment Permit to the enterprise.

In case an enterprise fails to meet the conditions for enjoying corporate income tax incentives and tax exemption/reduction periods specified in the Investment License (including the Amended Investment Permit) for three consecutive years, the enterprise must report to the authority issuing the Amended Investment Permit to adjust the Investment License accordingly.

II. WITHHOLDING TAX ON PROFIT REMITTANCE ABROAD

Foreign-invested enterprises are entitled to more favorable provisions on withholding tax on profit remittance abroad for profits remitted abroad starting from the date of the decision to amend the Investment License issued by the authority issuing the Investment License.

III. IMPORT DUTY:

1. Procedures for Import Duty Exemption:

1.1. For cases exempted from import duty as provided in Point 1, Article 10 of Decree No. 10/1998/NĐ-CP dated January 23, 1998, the procedures for import duty exemption shall be carried out in accordance with Circular No. 74 TC/TCT dated October 20, 1997, issued by the Ministry of Finance.

In cases where foreign-invested enterprises do not directly import materials and components for manufacturing machinery and equipment but instead enter into processing contracts with domestic enterprises, the domestic enterprises are exempted from import duty on materials and components imported for processing and manufacturing machinery and equipment according to the provisions of Government Circular No. 4417/KTTH dated September 5, 1997. The procedures for import duty exemption are as follows:

A letter from the domestic enterprise to the Ministry of Trade requesting permission to import duty-free goods for manufacturing machinery and equipment under a contract with a foreign-invested enterprise.

Processing contract for manufacturing machinery and equipment, spare parts, accessories, etc., signed between the domestic enterprise and the foreign-invested enterprise.

List and quantity of materials and components to be imported for manufacturing and processing machinery and equipment for the foreign-invested enterprise.

Copy of the Investment License or Amended Investment License issued to the foreign-invested enterprise for establishment or expansion, replacement, or technological renewal.

Based on the above documents, the Ministry of Trade or the agency authorized by the Ministry of Trade will review and approve the list of goods to be imported duty-free after obtaining the Prime Minister's consent. On the basis of the approved list of duty-free imports, the Customs Departments of provinces and centrally-administered cities will monitor the import activities of the enterprises.

1.2. For cases exempted from import duty once for equipment as provided in Point 2, Article 10 of Decree No. 10/1998/NĐ-CP dated January 23, 1998, the procedures for import duty exemption shall be carried out in accordance with Joint Circular No. 11/TT-LB dated July 21, 1997, issued by the Ministry of Planning and Investment, Ministry of Trade, Ministry of Finance, and General Department of Tourism.

1.3. For cases exempted from import duty on production materials as provided in Point 3, Article 10 of Decree No. 10/1998/NĐ-CP:

Foreign-invested enterprises investing in special encouragement projects and projects in mountainous, remote, and border areas as specified in Appendix 1 of Decree No. 10/CP are exempted from import duty on production materials for five years from the start of production. For operating enterprises, import duty exemption applies to batches of production materials imported through customs declarations opened from February 7, 1998, and is limited to five years from the start of production. The procedures for import duty exemption for these enterprises are as follows:

A letter to the Ministry of Trade requesting importation of production materials duty-free.

Annual production plan and estimated quantity of production materials to be imported for production.

Based on the annual production plan of the enterprise, the Ministry of Trade issues a list of production materials to be imported duty-free for the enterprise. For operating enterprises, the list of duty-free imports for 1998 does not include quantities of materials imported before February 7, 1998.

Based on the list of duty-free imports issued by the Ministry of Trade, the Customs Departments of provinces and centrally-administered cities will monitor the import activities of the enterprises.

1.4. For cases exempted from import duty on production materials sold to other enterprises for direct export production as provided in Point 2, Article 13 of Decree No. 10/1998/NĐ-CP dated January 23, 1998:

When importing materials and components for producing products to sell to other enterprises for export production, enterprises must pay the import duty as prescribed. After the exporting enterprise has exported the product, the enterprise importing the production materials must apply to the Ministry of Finance for a refund of the import duty paid on the production materials used to produce products sold to other enterprises for export production. The procedures for applying for a refund include:

A letter from the enterprise requesting a refund of import duty, including detailed calculations and requests for the amount of import duty to be refunded.

Consumption standards for materials and components used in production.

Customs declaration for import and receipt of payment for import duty on materials and components used to produce goods sold to other enterprises for export production.

A sales contract for goods sold to another enterprise clearly stating that such goods are used for producing export products.

Sales invoice issued by an enterprise to an enterprise producing export products.

Export declaration form of the customs authority confirming the actual export of goods produced by an enterprise for export (certified copy).

Declaration by an enterprise producing export products regarding the quantity and value of semi-finished products used in the production of exported products. The director of the exporting product manufacturing enterprise shall be responsible for this declaration.

Based on the above documents, the Ministry of Finance will issue a decision to refund import tax for the enterprise importing raw materials.

2. Recovery of Import Tax:

Imported goods of foreign-invested enterprises exempted from import tax under Article 10 of Decree No. 10/1998/NĐ-CP dated January 23, 1998, if misused or resold in the domestic market, shall be required to pay back the exempted import tax. Procedures for declaring and recovering import tax shall be carried out according to the guidance provided in Circular No. 74 TC/TCT dated October 20, 1997, issued by the Ministry of Finance.

For enterprises exempted from import tax on raw materials for five years under Point 3 of Article 10 of Decree No. 10/1998/NĐ-CP, they must report annually no later than the first quarter to the Ministry of Trade and the direct tax management agency about the situation of importing and using raw materials exempted from tax. For unused imported raw materials within five years from the date the enterprise starts production or those used for purposes other than intended, import tax recovery and penalties will be imposed according to the Law.

For domestic enterprises importing raw materials and supplies for the production and processing of machinery and equipment for foreign-invested enterprises, they must report every six months and upon completion of the processing contract to the Ministry of Finance, the Ministry of Trade, and the direct tax management agency about the situation of importing and using tax-exempt supplies. Unused imported supplies, if permitted to be consumed in Vietnam, enterprises must declare and pay import tax according to regulations.

Provincial and municipal tax bureaus are responsible for inspecting and settling the situation of importing and using tax-exempt raw materials and supplies of enterprises.

3. Time limit for paying import tax on imported raw materials for producing export products will be separately guided by the Ministry of Finance.

4. Price for calculating import tax:

Foreign-invested enterprises when importing goods will calculate import tax based on the price stated on the import goods invoice if they meet the conditions stipulated in Circular No. 82/1997/TT-BTC dated November 11, 1997, issued by the Ministry of Finance.

For enterprises taking advantage of the price for tax calculation to evade taxes, they will be dealt with according to the provisions in Section D of Circular No. 82/1997/TT-BTC mentioned above.

IV. OTHER PROVISIONS

Foreign-invested enterprises may deduct from taxable income the amounts spent on charitable and humanitarian activities for Vietnamese organizations and individuals. This expense is determined to fall under Point b15 of Section I Part II of Circular No. 74 TC/TCT dated October 20, 1997, issued by the Ministry of Finance.

Joint ventures and wholly foreign-owned enterprises may carry forward losses from any tax year to subsequent years and use profits from subsequent years to offset such losses, but not exceeding five years from five days after the loss occurred. Enterprises must register the loss carryforward with the provincial or municipal tax bureau directly managing their tax affairs according to the provisions in Circular No. 74 TC/TCT dated October 20, 1997, issued by the Ministry of Finance.

C. IMPLEMENTATION PROVISIONS

This circular takes effect from the date of signature. Previous guidance differing from the content of this circular ceases to be effective./.