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Last updated: Friday, June 22, 2018


Tax Incentive for Supporting Industry: Clearer Policy Needed

Posted: Monday, June 05, 2017

Mr Bui Tuan Minh, Tax Partner, Deloitte Vietnam
Mr Bui Tuan Minh, Tax Partner, Deloitte Vietnam

Vietnam has introduced a series of directions and incentive policies in recent years to boost the support industry (SI), but improvements are yet to be fully seen. One of the main reasons is the ambiguity in the corporate income tax (CIT) incentive policy for SI. Vietnam Business Forum would like to introduce the article by Bui Tuan Minh, Tax Partner, Deloitte Vietnam.

Policy to promote SI
The role of SI is to produce and supply materials, components, and spare parts for finished products, which have been recognized as a prerequisite for the sustainable development of manufacturing and assembly industries.

In recognition of the importance of SI, Vietnam has operated a wide range of preferential policies for enterprises in the SI field, such as credit access and import-export tax incentives. More specifically, the government has approved the Program for Support Industry Development from 2016 to 2025 and issued a list of prioritized SI products.
In 2014, the National Assembly issued a Law on Amendments to Tax Laws (Law No.71) for the first time, introducing the highest CIT incentive scheme (i.e. a tax rate of 10 per cent applicable for 15 years for SI projects, a four-year tax exemption, and a nine-year tax reduction from the time taxable income is earned).

Most recent, the Government has issued the Resolution No.35/NQ-CP dated May 16, 2016 on supporting and developing enterprises by 2020 providing the direction of a constructive Government, taking enterprises as targets to provide supports, create favorable conditions and guarantee equal rights for enterprises in making investment and doing business.

It can be said that the policy of support and development of enterprises in general and that of SI in particular of Vietnam are quite adequate.

Under expectations
According to the SI development program in the period from 2016 to 2025, SI products will account for 45 per cent and 65 per cent of domestic demand by 2020 and 2025, respectively. In 2020, the proportion of raw materials and auxiliary materials supplied to the textiles industry is expected to exceed 65 per cent, and in the footwear industry 75-80 per cent. By 2020, 35 per cent of demand for components serving priority industries will be met and will increase to 55 per cent by 2025.

Metal components and spare parts can only meet 15-25 per cent of demand for automobile components and approximately 20 per cent of complete equipment manufacturing demand, and the new electronic components sector has satisfied only 30-35 per cent of demand for consumer electronic components. The localization ratio for nine-seat motor cars is only 7-10 per cent on average, while the value-added ratio of garment products is 50 per cent, due to materials mostly being imported, while nearly 80 per cent of materials for the footwear industry must be imported.

As a trusted tax advisor in Vietnam with rich experience in assisting numerous enterprises, the author’s viewpoint is that the main reason behind the issues is unclear CIT incentive policies. Although the policy is regulated in Law No.71/2014/QH13, it has experienced difficulties in practice.

It will no longer be a matter of capital, human resources, technology, and management if the Government can encourage SI companies, especially FDI enterprises, to re-invest and expand from increased after-tax profit thanks to tax incentives.

Unclear policy: Two critical points
There are two unclear points including tax incentive transition, and the criteria for the determination of incentive beneficiaries.

Firstly, as for tax incentive transition, according to Law No.71, enterprises have the right to make a “tax incentive transition”: choose between CIT incentives prescribed by the old regulations at the time when the license/investment certificate was granted or under the new regulations (if more favorable) for the remaining period.

Thus, operating SI projects granted licenses before January 1, 2015 that were initially not eligible for incentives can now be treated as subject to incentives for the period since January 1, 2015 (the effective date of Law No.71).

Decree No.12/2015/ND-CP providing guidance on Law No.71 already regulates in detail the application of tax incentive transition for investment projects locating in areas being not eligible for incentive areas prior to January 1, 2015 but becoming incentive areas from January 1, 2015. However, Decree No.12 does not regulate tax incentive transition for investment projects in fields and industries being not entitle for incentive fields and industries prior to January 1, 2015 but turning into incentive fields and industries from January 1, 2015 according to Law No.71. This does not promote equality in enjoyment of CIT incentive between enterprises.

To implement the Resolution No.35/NQ-CP dated 16 May 2016 of the Government and upon reviewing inadequate tax regulations, the Ministry of Finance had prepared a draft Decree amending and supplementing some articles of the Decrees regulating CIT, PIT and VAT to amend the above – mentioned regulation of CIT incentive transition principle in Decree No.12/2015/ND-CP to align with Law No.71/2014/QH13’s policy. The draft Decree was sent to Ministries, VCCI and other bodies for comments in September 2016. However, until now, the draft Decree has not been approved and issued.

Secondly, regarding the criteria for the determination of incentive beneficiaries, many enterprises have also been confused in applying the criteria to identify whether they are subject to incentives regulated in Decree No.111/2015/ND-CP on SI development and Circular No.55/2015/TT-BCT on procedures for incentive certification and the post-audit of SI projects.

As a result, projects eligible for CIT incentives are new SI investment projects and ongoing projects that expanded in scope, enhanced capacity, and introduced technological innovation in manufacturing using new equipment and manufacturing processes with an increase in productivity of at least 20 per cent. In fact, enterprises do not know whether increased fixed assets, increased capacity, increased investment capital, or increased revenue should be the approved criteria in determining if they are subject to preferences in terms of an increase in productivity of at least 20 per cent. 

Following the spirit of the Resolution No.35/NQ-CP, the supplementation and amendment of inadequate policies for SI is urgent. In this article, the author would like to propose some solutions as follows:

As for tax incentive transition, the government should consider to issue a Decree amending and supplementing incentive transition for investment projects in fields and industries being not entitle for incentive fields and industries prior to January 1, 2015 (including SI project) but turning into incentive fields and industries from January 1, 2015 according to Law No.71 as the above - mentioned draft Decree of MOF. This supplement shall guarantee unity between tax regulation and prevailing regulation of Law on Investment No.67/2014/QH13, specially the regulation on protecting investor’s right in case of changing policy.

As for the criteria for determining incentive beneficiaries, the Government and Ministry of Industry and Trade should consider to provide more detail guidance Decree No.111/2015/ND-CP on criteria for determining incentive beneficiaries in term of expanded project with an increase in productivity of at least 20 per cent, of which consider to use one out of three criteria determining expanded project pursuant to prevailing CIT regulation (e.g. increase of the historical cost of fixed assets, increase of ratio of historical cost of fixed assets or increase of capacity) for agreed understanding.

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