Circular No. 7711/TC/TCT on strengthening tax management and financial management for ODA-funded projects

LETTER

OF THE MINISTRY OF FINANCE NO. 7711 TC/TCT ON JULY 13, 2004
REGARDING STRENGTHENING TAX MANAGEMENT AND FINANCIAL MANAGEMENT
FOR ODA PROJECTS

Dear: - Ministries, ministerial-level agencies, government agencies

- People's Committees of provinces and centrally governed cities

- Provincial Tax Departments under the Central Government

Implementing the guidance of the Prime Minister in Directive No. 17/2004/CT-TTg dated May 24, 2004 on accelerating disbursement of Official Development Assistance (ODA) funds; to implement well the regulations on managing ODA funds, tax policies, and Value Added Tax (VAT) refunds for ODA projects, the Ministry of Finance guides the implementation of the following contents:

1. On financial planning:

1.1. When preparing financial plans in accordance with Circular Joint No. 02/2003/TTLT-BKH-BTC dated March 17, 2003 of the Ministry of Finance and the Ministry of Planning and Investment, project sponsors must include all taxes arising from imported goods and domestic purchases for the project. The types of taxes to be noted when preparing financial plans include:

- Import duties, VAT, and special consumption taxes on imported goods (including cases where the project sponsor directly imports or the contractor imports but the project sponsor commits to paying import taxes).

- VAT on goods and services purchased domestically. .

- Specifically, direct taxes such as corporate income tax (CIT) of contractors and individual income tax (IIT) of individuals working for contractors are taxes levied on entities with income. Therefore, in principle, these taxes will be included in the bid prices of contractors or wages paid to individuals.

1.2. When approving ODA projects or tender results, competent authorities require project sponsors to include all taxes arising during the entire project execution period according to current tax laws in the project's financial plan and counterpart fund plan. Annually, project sponsors must calculate the taxes arising in that year to prepare the counterpart fund plan.

For ODA projects funded by the State Budget (including projects fully funded by the State Budget; projects partially funded by the State Budget, partially loaned back but approved before May 29, 2001 - the date when Decree No. 17/2001/NĐ-CP of the Government on management and use of ODA funds came into effect), based on the guidance in this letter, project sponsors shall enter into contracts including VAT and proactively prepare the counterpart fund plan to have funds to pay VAT, thereby reducing procedures such as VAT refunds, increasing State Budget funds for VAT refunds (including VAT refunds for the main contractor), avoiding inaccurate reflection of project capital values, and preventing loss of State Budget funds.

2. VAT Refunds:

The process of refunding VAT for non-reimbursable ODA projects and preferential ODA projects funded by the State Budget shall be implemented in accordance with the guidance at Point 3, Section IV, Circular No. 41/2002/TT-BTC dated May 3, 2002 of the Ministry of Finance guiding tax policies for ODA programs and projects, Circular No. 120/2003/TT-BTC dated December 12, 2003 of the Ministry of Finance guiding the implementation of Decree No. 158/2003/TT-BTC dated December 10, 2003 of the Government detailing the implementation of the Law on VAT and the Law Amending and Supplementing Certain Provisions of the Law on VAT, and the additional guidance below:

2.1. For non-reimbursable ODA projects and preferential ODA projects funded by the State Budget, project sponsors must accurately determine the entities eligible for VAT refunds and those required to pay VAT based on approved contracts: if the signed and approved contract includes VAT and the project sponsor does not receive funds to pay VAT, then the project sponsor is eligible for VAT refunds, and the main contractor pays VAT according to current regulations; if the signed and approved contract does not include VAT, then the project sponsor does not need to pay VAT, and the main contractor is eligible for VAT refunds.

2.2. Procedures and documentation for registering tax identification numbers for VAT refunds shall be carried out in accordance with the documents issued by the Ministry of Finance guiding the implementation of Decision No. 75/1998/QĐ-TTg dated of the Prime Minister on tax identification numbers.

In the initial stages of implementing the project, due to some objective reasons, the project sponsor has not registered with the tax authority to obtain a tax identification number but has purchased certain goods and services for the project. The VAT on goods and services recorded on invoices without the project sponsor's tax identification number but with the buyer's name being the project or the project sponsor and complete invoice details will be refunded if the project sponsor commits to using the purchased goods and services for the project and the tax authority verifies that the supplier has declared and paid taxes on the mentioned invoices. From the next refund onwards, the project sponsor must comply with the provisions of Circular No. 41/2002/TT-BTC dated and Circular No. 120/2003/TT-BTC dated issued by the Ministry of Finance.

2.3. Procedures and documentation for VAT refunds shall be carried out in accordance with the guidance at Point 4, Section II, Part D of Circular No. 120/2003/TT-BTC dated December 12, 2003 of the Ministry of Finance detailing the implementation of the Law on VAT and the Law Amending and Supplementing Certain Provisions of the Law on VAT.

- When submitting refund applications to the tax authority, project sponsors must attach confirmation from the State Treasury that they have not received State Budget funds to pay VAT.

- For preferential ODA projects funded by the State Budget, the VAT refund application for the main contractor must include the project sponsor's confirmation of VAT refunds as guided in Circular No. 06 TC/TCT dated January 2, 2004 of the Ministry of Finance.

2.4. The deadline for declaring VAT refunds: Monthly, the project owner or the main contractor who is eligible for VAT refunds must declare the VAT amount of goods and services purchased for implementing ODA projects or for fulfilling contracts signed between the project owner and the main contractor. In cases where VAT invoices or tax payment receipts for goods and services purchased in the month but not declared in that month can be declared in subsequent months, with a maximum period of three months from the declaration date of the month when the invoices were issued. VAT invoices and tax payment receipts declared late (over three months) will not be refunded and will be included in the project investment costs or the contractor's business expenses.

2.5. If the project owner has been granted counterpart funds to pay VAT, the project owner shall not be entitled to a VAT refund. If the project owner has already received counterpart funds to pay VAT but has processed the refund procedures and obtained a VAT refund, the project owner must return the refunded VAT to the State Budget according to Circular No. 42/2001/TT-BTC dated June 12, 2001, issued by the Ministry of Finance. Tax authorities, when verifying the VAT refund amount for the project owner, must check whether the State Budget has provided counterpart funds based on the confirmation of the State Treasury.

Local Tax Bureaus shall send lists of project owners and main contractors who have received VAT refunds according to the attached model letter to the local State Treasury and the central State Treasury. Based on the list of entities eligible for VAT refunds, the State Treasury shall review, compare, and determine the amount of VAT that the project owner must return to the State Budget, and coordinate with relevant agencies to require the project owner to return the VAT to the State Budget as guided by Circular No. 42/2001/TT-BTC.

2.6. For ODA projects funded by State Budget allocations, the accounting of project capital shall be determined as follows:

- For projects that have been granted counterpart funds to pay VAT, the value of the project capital includes VAT.

- For projects that have not been granted counterpart funds to pay VAT, the value of the project capital excludes VAT and the refunded VAT amount (including the VAT refunded to the main contractor).

For projects that have received VAT refunds but the project owner has not yet processed the increase in State Budget allocations as guided by Circular No. 42/2001/TT-BTC, the project owner must prepare a summary table of the total VAT refunds, copies of refund decisions, and submit them to the Ministry of Finance (Investment Department) to process the increase in State Budget allocations. If the project owner increases the state budget capital allocation according to the guidance of Circular No. 42/2001/TT-BTC, they must prepare a summary table listing all VAT refunds received, along with copies of refund decisions to be submitted to the Ministry of Finance (Investment Department) for the procedure to increase the state budget capital allocation.

2.7. The decision on VAT refunds shall be implemented according to Model No. 13/GTGT issued together with Circular No. 120/2003/TT-BTC dated December 12, 2003. issued by the Ministry of Finance.

For ODA projects funded by State Budget allocations, when issuing the Decision on VAT Refunds, the Tax Bureau must also send an additional copy of the Decision on VAT Refunds for the project (including cases where VAT refunds are made to the main contractor) to the project owner and the Ministry of Finance (Investment Department) to record the increased investment capital for the project according to Circular No. 42/2001/TT-BTC.

2.8. Projects using ODA loans provided by the State Budget, including projects partially funded and partially loaned back approved since May 29, 2001 (the effective date of Decree No. 17/2001/NĐ-CP), shall deduct or refund input VAT arising during project implementation according to Circulars No. 122/2000/TT-BTC dated December 29, 2000, and No. 120/2003/TT-BTC dated December 12, 2003, issued by the Ministry of Finance.

3. Taxes on foreign contractors implementing ODA projects:

3.1 When signing contracts with contractors, the project owner must include all types of taxes payable to accurately determine the value of goods and services provided by the contractors to avoid disputes over tax obligations during contract execution.

3.2 The project owner is responsible for informing and guiding foreign contractors on their tax obligations in Vietnam. .

- Foreign contractors implementing Vietnamese accounting systems: : The contractor directly fulfills tax obligations with the tax authority. The project owner does not withhold and pay taxes on behalf of the foreign contractor.

- Foreign contractors not implementing Vietnamese accounting systems: : The project owner is responsible for withholding VAT and corporate income tax (CIT) from foreign contractors (especially consulting contractors) before making payments to the foreign contractors. If the contract price between the contractor and the project owner does not include VAT and the main contractor is eligible for VAT refunds, the project owner must withhold and pay CIT on behalf of the foreign contractor. 3.3. Where international agreements signed or acceded to by the Vietnamese Government provide for exemption from CIT for contractors from the funding country participating in a specific ODA project, such foreign contractors shall be exempt from CIT.

To qualify for CIT exemption, the foreign contractor (directly paying taxes) or the project owner (in cases where taxes are paid on behalf of the foreign contractor) must provide the tax authority with the agreement on ODA funding which includes provisions on CIT exemption (a certified copy with the signature and stamp of an authorized representative). Example: In the exchange of letters between representatives of the Government of the Socialist Republic of Vietnam and the Government of Japan regarding the implementation of an ODA-funded project, it is stipulated:

(The Government of the Socialist Republic of Vietnam will exempt Japanese companies operating as suppliers, contractors, and/or consultants from all fiscal levies or taxes imposed in the Socialist Republic of Vietnam on the income accruing from the supply of products and/or services to be provided under the Loan.")

"The Government of the Socialist Republic of Vietnam will exempt Japanese companies operating as suppliers, contractors, and/or consultants from all taxes and financial levies in Vietnam on income arising from the provision of goods and services under the loan." and the Government of Japan concerning the implementation of a project using ODA funds provided by the Government of Japan, it is stipulated that:

"(The Government of the Socialist Republic of Vietnam will exempt Japanese companies operating as suppliers, contractors, and/or consultants from all fiscal levies or taxes imposed in the Socialist Republic of Vietnam on the income accruing from the supply of products and/or services to be provided under the loan.)"

"The Government of the Socialist Republic of Vietnam shall exempt Japanese companies operating as suppliers, contractors, and/or consultants from all taxes and financial charges in Vietnam on income arising from the provision of goods and/or services as specified in the loan agreement."

Accordingly, with the provisions set forth in the exchanged diplomatic notes above, Japanese companies will be exempted from corporate income tax on income from providing goods and services for the project funded by ODA. However, companies from other countries such as the Netherlands, Switzerland, or Japanese companies investing 100% under the Law on Foreign Investment in Vietnam... signing contracts to provide goods and services for the project using ODA funds mentioned above will not be exempted from corporate income tax.

4. Personal Income Tax (PIT):

4.1. The project owner shall be responsible for withholding and paying PIT on behalf of Vietnamese individuals and foreign individuals working for the project management board. Additionally, the project owner shall be responsible for informing and guiding Vietnamese individuals and foreign individuals working for foreign contractors about their obligation to pay PIT in Vietnam, and at the same time, notifying the tax authority where these contractors have their operational offices or construction sites for coordinated management and collection of PIT. foreign individuals working for the Project Management Board. Additionally, the project owner is responsible for informing and guiding Vietnamese individuals and foreign individuals working for foreign contractors about their obligation to pay personal income tax in Vietnam, and simultaneously notifying the tax authority where these contractors have their management offices or construction sites for coordinated management and collection of personal income tax.

4.2 In cases where international treaties signed or acceded to by the Government of Vietnam stipulate exemption from PIT for foreign individuals working for contractors participating in implementing an ODA project, these foreign individuals shall be exempted from PIT.

To be exempted from PIT, foreign individuals or the entity paying their income must provide the tax authority with a copy of the agreement on ODA funding that includes provisions for PIT exemption (a copy bearing the signature and stamp of an authorized representative).

For example, the exchanged diplomatic note signed between the Government of Vietnam and the Government of Japan provides:

"The Government of the Socialist Republic of Vietnam will exempt: Japanese employees engaged in the implementation of the projects enumerated in the List or engaged in the supply of services mentioned in sub-paragraph (1)(b) of paragraph 3 of Part II from all fiscal levies or taxes imposed in the Socialist Republic of Vietnam on their personal income derived from Japanese companies operating as suppliers, contractors and/or consultants."

"The Government of the Socialist Republic of Vietnam will exempt Japanese employees participating in the implementation of the projects listed in the attached exchange note from all financial fees or taxes in Vietnam on personal income arising from Japanese companies operating as suppliers, contractors, and/or consultants."

Therefore, Japanese individuals working for Japanese contractors participating in the implementation of one of the projects listed in the attached exchange note will be exempted from PIT on income arising from participation in the implementation of that project. If these individuals have other income subject to PIT, apart from income from the project, or if other foreign individuals not holding Japanese nationality have income from implementing these projects, they must pay PIT according to current laws on PIT.

4.3 Foreign experts who are issued a confirmation certificate by the Ministry of Planning and Investment as foreign experts participating in implementing ODA programs and projects will be exempted from PIT on income from implementing programs and projects funded by ODA in Vietnam. The procedures and documents required for PIT exemption shall be carried out as guided by Circular No. 52/2000/TT-BTC dated of the Ministry of Finance. Foreign experts with income other than from participating in ODA programs and projects must pay income tax according to the Law on Income Tax for High-Income Earners and current guiding documents.

5. Financial Management and Tax Administration for Projects Funded by ODA:

To strengthen financial management and tax administration for projects funded by ODA, it is recommended that ministries, ministerial-level agencies, government agencies, provincial people's committees, and centrally-administered municipal people's committees with ODA projects base their guidance on existing directives and this circular to instruct project management boards to coordinate with local tax bureaus and local finance departments to effectively implement tax policies and financial policies for ODA projects as follows:

- Local tax bureaus shall be responsible for guiding tax regulations applicable to ODA-funded projects for project owners and contractors participating in implementing projects in various localities (according to the list of ODA projects attached). They should proactively organize training sessions for project owners, contractors, and tax officials to guide the application of tax policies and VAT refunds for ODA-funded projects.

- Strengthen inspection and settlement of taxes for foreign contractors participating in ODA projects. For entities eligible for VAT refunds, tax bureaus shall conduct post-refund audits or pre-refund inspections when foreign contractors complete their contracts with ODA project owners to promptly address any violations (if any). time for handling any violations (if any).

Departments of Planning and Investment, Departments of Finance, and Treasury agencies shall cooperate with tax authorities in managing and accounting for state budget capital regarding VAT refunds (including VAT refunds for project owners and main contractors).

ODA project owners must submit periodic reports (monthly, quarterly, annual, and final reports) to the tax authority as directed by Circular No. 41/2002/TT-BTC to coordinate the management of ODA projects.

- Tax bureaus shall compile issues encountered during tax administration and VAT refunds for ODA-funded projects and send them along with a report on the implementation of VAT refunds (annually since the start of VAT refunds) to the Ministry of Finance (General Department of Taxation) before July 30, 2004.

To accelerate the disbursement of ODA, improve the management and utilization of ODA funds, it is requested that ministries, sectors, People's Committees of localities direct relevant agencies to review and take management measures to strengthen the management of state budget capital allocated to projects, and direct project management units to fully perform their tax obligations arising during the implementation of the projects. In the course of implementation, if difficulties arise regarding the provision of counterpart funding, procedures for disbursing state budget capital, VAT refunds..., it is requested to report to the Ministry of Finance for timely coordination and resolution.

REPORT ON THE SITUATION OF COMPLETING VALUE ADDED TAX REFUNDS FOR THE YEAR...

Unit: VND