Circular No. 789-TC/TCT on the calculation of reasonable and legitimate expenses for taxable income

LETTER

OF THE MINISTRY OF FINANCE NO. 789-TC/TCT ON JUNE 14, 1991 REGARDING THE CALCULATION
OF REASONABLE AND LEGAL EXPENSES FOR DETERMINING TAXABLE INCOME

Following Circular No. 47-TC/TCT dated October 4, 1990 of the Ministry of Finance, which guides the implementation of the income tax law, the Ministry of Finance provides additional guidance on certain points regarding the calculation of reasonable and legal expenses when determining taxable income as follows:

1. Depreciation expenses for fixed assets:

The depreciation system for fixed assets shall continue to be implemented according to Circular No. 33-TC/CN dated July 31, 1990 of the Ministry of Finance.

a) For purchased fixed assets and completed construction projects put into use after January 1, 1990, the cost shall be calculated based on the actual reasonable price.

Specifically, self-made fixed assets shall not include bonuses and interest in their value. The original cost of self-built fixed assets must be lower than or equal to market prices.

b) For enterprises wishing to increase the depreciation rate higher than that prescribed in Decision No. 507-TC/ĐTXD dated June 22, 1987 of the Ministry of Finance, they must follow the procedures specified below:

+ The enterprise shall submit a written request to the direct tax collection authority. In the request, it shall provide economic and technical grounds for increasing the depreciation rate and a detailed explanation of the business's production and operation efficiency.

+ The tax authority shall examine and analyze the impact of the proposed basic depreciation expense on the business's production and operation efficiency (remaining profit, product prices... ) after accounting for all indirect taxes, costs, and increased depreciation rates. If there remains a reasonable profit, it may be accepted.

+ Authority to decide:

- For centrally-managed state enterprises, the provincial or municipal Tax Bureau shall review and propose recommendations to the General Tax Department for decision.

- For locally-managed state enterprises, the decision shall be made jointly by the Tax Bureau and the Provincial Department of Finance.

- For other cases (cooperatives, production groups, private enterprises...), the decision shall be made by the Tax Office.

When determining taxable income, only the un-depreciated portion of fixed assets actually used in production and business operations can be included in expenses. 2. Expenses for raw materials, fuels, and supplies...

(collectively referred to as material expenses)

a) Material prices:

- For materials under unified state management, the state-prescribed price shall be applied.

- Materials purchased from the free market shall be based on the purchase price recorded on invoices, but shall not exceed the average market price at the same time.

b) Consumption levels of materials:

The principle is to calculate actual consumption compared to standards, with reference to previous periods' actual expenses:

- For products and services with national or industry standards, actual consumption shall be compared to the national or industry-prescribed standards.

- For products and services without national or industry standards, the enterprise shall establish its own standards, subject to approval by the tax authority.

Self-established material consumption standards by enterprises must be based on comparable standards and actual consumption levels from previous periods.

- For enterprises outsourcing work, material expenses may be based on the processing formula in the contract or standard.

The tax authority must clearly analyze subjective and objective reasons to accept reasonable material consumption levels for deduction when determining taxable income.

Managing material expenses accurately when calculating taxable income is very complex. During management, the tax authority must thoroughly understand this.

+ Types of materials necessary for production and business operations, excluding those unrelated to production and product consumption.

+ Origin of each type of material to verify and accurately calculate material prices.

+ Consumption standards: continuous monitoring of actual material consumption from previous periods is required to ensure accurate comparison and verification when calculating actual reasonable expenses for taxation purposes.

3. Wages:

On September 1, 1990, the Council of Ministers issued Decision No. 317-CT to regulate wage and bonus management in state-owned enterprises, and the Ministry of Finance and Labor - War Invalids and Social Affairs issued Circular No. 16-TTLB dated November 5, 1990 to guide implementation.

+ When calculating deductible wage expenses, the tax authority must base on the following principles:

- For products with state-set prices, the state-prescribed wage rate applies.

- For other products approved by local departments or established by the enterprise itself but must be approved in writing by the tax authority.

+ Whenever there is inflation, the Council of Ministers or the Ministry of Finance and Labor - War Invalids and Social Affairs will announce the inflation adjustment factor for wage supplements. Therefore, inflation factors set by industries or localities are incorrect and unacceptable.

In 1991, according to Joint Decision No. 110-QĐ/LB dated April 3, 1991 of the Ministry of Finance and Labor - War Invalids and Social Affairs, the inflation adjustment factor for state-owned enterprises in 1991 is 100%.

+ Enterprises can only pay wages within the prescribed limits and inflation adjustment factors.

During management, the tax authority should proactively urge enterprises to establish wage standards, coordinate with relevant sectors to review these standards as a basis for calculating expenses. When reviewing wage standards, it is important to note that wage increases must be lower than productivity increases of the enterprise.

+ Wages paid to workers must come from the prescribed standard (including both direct and indirect labor). Any wage payments exceeding the standard and inflation adjustment factors or sourced from other funds are not considered reasonable and legitimate expenses and cannot be deducted when determining taxable income.

+ For state-owned enterprises and joint-stock companies, shareholders directly involved in production and business operations are also eligible for wage deductions like other employees.

For state-owned enterprises and joint-stock companies, shareholders who directly participate in production and business activities shall also be entitled to have their salaries deducted like other workers.

With respect to non-state economic entities (cooperatives, production groups, private enterprises, individual households...), the wages of laborers shall not be governed by the regulations applicable to state-owned enterprises but shall be determined by the members' congress or through negotiation between the workers and the employer.

To ensure fair and reasonable contributions, the Provincial Tax Bureau may base its calculations on the wage system applied to state-owned enterprises, taking into account market prices, to determine a percentage ratio of revenue or an absolute amount for each type of revenue and each industry, and submit this to the Provincial People's Committee for specific time period decisions.

4. Reasonable and legitimate expenses shall be deducted when determining taxable income.

In addition to the expenses mentioned in Point 4, Part B of Circular No. 47-TC/TCT, the Ministry of Finance further specifies the following items which shall also be deductible when determining taxable income.

- Business income taxes, special consumption taxes, resource taxes, and fees from the use of capital, capital, various fees: transportation, registration...

- Expenses paid by the unit to higher levels (Enterprise Associations, Companies) according to regulations, if the unit has been assigned a plan and approved by the financial authority, including:

+ Training costs: If Enterprise Associations or Companies organize new worker training classes, skill enhancement programs for production units... in accordance with approved plans.

+ Medical costs: If Enterprise Associations or Companies have affiliated hospitals or health centers providing medical services to employees of production and business units under their management...

+ Other expenses serving the management and direction of joint production and business activities of Enterprise Associations or Companies;

- Expenses for employees temporarily on leave to settle retirement, disability, transfer, or resignation procedures.

Annually, production and business units shall base their administrative expense standards on production and business tasks, commodity prices, and the previous year's general management costs. They must establish administrative expense standards for the implementation year for review and approval by the financial authority and tax authority. Increases in administrative expenses must be consistent with price increases and production and business tasks. The tax authority, in coordination with the financial authority and the supervising department, will review and approve these standards as the basis for calculating expenses when determining taxable income. During the management process, the tax authority must continuously monitor administrative expenses

to analyze and provide feedback to the unit whenever unreasonable expenditures or excesses over the standard are observed, while also serving as the basis for approving administrative expense standards.

Production and business units can only incur administrative and general management expenses within the approved standard. If expenses exceed the standard, the excess cannot be included in cost of goods sold, cannot be deducted when determining taxable income, and must be covered from retained earnings (after full payment of corporate income tax). B. Drafting Projects

5. Expenses that cannot be included in cost of goods sold and cannot be deducted when determining taxable income: In addition to those specified in Point 5, Part B of Circular No. 47-TC/TCT, the following items also cannot be deducted:

- Corporate income tax payments;

- Penalties for underreported taxes due to violations of declaration rules (underreporting, tax evasion), violations of invoice and transport document regulations discovered by the tax authority;

- Training expenses not included in approved plans. In cases where production and business units expand or modernize, training costs for employees accompanying construction projects also cannot be deducted.

- Medical expenses funded from welfare funds;

- Expenses for employee recreational trips and vacations;

- Expenses for employee military training;

- Expenses for reserve military personnel who are employees of the unit during concentrated training periods as planned by the Ministry of Defense;

- Expenses for collective dining halls funded from welfare funds;

- Regular and emergency hardship assistance expenses;

- Construction expenses for facilities serving production and business operations, material costs for manufacturing fixed assets for self-provision, and expert fees for basic construction projects. These expenses are included in the value of fixed assets for depreciation calculations.

- Losses due to natural disasters, enemy actions, and unexpected accidents handled according to current regulations, which can only be included in regular maintenance and major repair costs.

- Expenses unrelated to production and business activities such as support for local areas, donations to organizations, and expenses for weddings and funerals...

During implementation, if there are difficulties or obstacles, they should be reported to the Ministry of Finance for further study and guidance.

- Expenses unrelated to the production and business process, such as support for local areas, support for associations, expenses for funerals and celebrations,...

During implementation, if there are difficulties or obstacles, they shall report to the Ministry of Finance for further study and guidance.