TAX INCENTIVES IN VIET NAM
IMF Tax Policy Seminar for Asian and
Pacific Countries on Tax Incentives
Tokyo, June 9, 2009
Financed by JSA
by Nguyen Van Phung
Deputy Director General
Tax Policy Department, MOF
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IMF TAX SEMINAR 2009
Outline of the Presentation:
1. Overall of reform of the Vietnamese tax system
1.1. First phase of tax reform (1990)
1.2. Second phase of tax reform (1998)
1.3. Third phase of tax reform (2009)
2. Tax incentives in Vietnam
2.1. Period 1990 – 1998
2.2. Period 1999 – 2003
2.3. Period 2004 – 2008
2.4. Period from 2009
2.5. Experience of the CIT incentives
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1.1. First phase of tax reform (1990s)

Introducing nine important tax legislations
1.
Import and export duties: from 1988, 36 tax rates
2.
Turnover tax: Effective from October 1990; 11 tax rates,
ranging from 0.5% to 40%
3.
Special consumption tax : Effective from October 1990;
Tax rates of from 20% - 50%
4.
Profit tax: Effective from October 1990, Tax rate :

Domestic invested enterprises: 30%, 40%, 50%

Foreign invested enterprises paid at lower rates in
accordance with the Law on foreign direct investment
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1.1. First phase of tax reform (cont.,)
5.
6.
7.
8.
Agricultural land use tax, effective from 1993
Tax on the transfer of land use right, efNfective from 1993
Natural resource tax (ordinance), effective from 1990
Income tax on high income earners (ordinance), effective from
April 1991
9. Tax on land and housing (ordinance), Effective from October
1992, Imposed on land, not on house

Reform the system of tax administration
 Established General Department of Taxation
 Tax system is vertically organized from the central to the
local (province, district tax offices)
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1.2. Second phase of tax reform (1998)




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Introducing VAT and enterprise income tax
Amending the regulations on import and export
duties and on special consumption tax (excise tax) 
ensure consistency in the tax system
Amending the Ordinance on income tax on high
income earners: tax exemption threshold increased
(from 3 million VND to 5 million VND);
Reformed taxes related to land
Adopted the Ordinance on fees and charges
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1.2. Second phase of tax reform (VAT)


Three tax rates: 0%, 5% and 10% (1999 to 2003, there were
four rates: 0%, 5%, 10% and 20%)
 Zero rate: Applies to exported goods and services
 5% rate applies to essential goods and services,
 10% (standard tax rate): other goods and services which
are subject to the 0% or 5% rates
Issues:
 Too much VAT exempted goods and services (26 categories
of goods and services);
 Lack of adequate VAT threshold;
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1.2. Second phase of tax reform (EIT)

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Introduced in 1999 and amended in 2003
Scope of coverage:
 Enterprises, household/business individuals, partnerships
Tax rate:
 Standard tax rate: 28% (1999 to 2003, there were two
different tax rates applied separately to domestic enterprises
(32%) and foreign invested enterprises (25%)
 Preferential tax rates: 10%, 15%, 20% and 25%
Tax incentive (tax reduction & exemption, loss carry-forward):
 Investment encouragement areas (invested in remote and
mountainous areas) and sectors (e.g. high-tech sector)
 Investment in industrial zones, special economic zones
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1.2. Tax system of the 2 phases of the reform

Export and import duties

Value added tax (VAT)

Special consumption tax (SCT)

Enterprise income tax (EIT)

Agricultural land use tax

Tax on land use right transfer

Personal income tax on high income earners

Land & Housing tax

Natural resources tax

Fees and charges
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1.3. Third phase of tax reform


Amending VAT legislation (2008, effective from 2009);
 Reducing the number of goods and services which are VAT
exempted;
 Expansion the scope of 10% tax rate
Amending SCT (2008, effective from 2009 April)
 Reforming tax rates
 Reviewing SCT reductions and exemption
 Applying non-discrimination principle between domestic
produced goods and imported goods
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1.3. Third phase of tax reform


Reforming EIT (2008, effective from 2009):

Reducing tax rate

Narrowing the scope of tax exemptions and reductions

A single corporate income tax regime for all economic sectors
Reforming personal income tax: Introducing personal income tax
law (PIT) in 2007 with expansion of tax base and taxpayers

Abolishing the tax on land use right transfer

Introducing Law on natural resource tax (2009)

Introducing Law on land and housing tax (2010)

Introducing environment protection tax (2010 afterward)
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1.3. Third phase of tax reform
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Reforming tax administration
 Modernization tax administration system
 Organization
 Personnel
 Technology
Applying self-assessment mechanism
Tax education and dissemination of information
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2. Tax incentives in Vietnam
2.1. Period 1990 – 1998
2.2. Period 1999 – 2003
2.3. Period 2004 – 2008
2.4. Period from 2009
2.5. Experience of the CIT incentives
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2.1. Period 1990 – 1998 (Profit tax incentives)

Domestic invested enterprises:
 Tax exemption granted to newly established which are relocated from
delta areas to mountainous areas for some years;
 Tax reduction granted to extended or in-depth investments;
 Tax reduction applied to enterprises that manufacture import-
substitutes;
 Tax exemption granted to income portions earned from scientific
research and technological services contracts;
 Tax exemption & reduction granted to businesses facing difficulties due
to natural disasters; exemption granted to transport using rudimental
vehicles in mountainous areas and so on.
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2.1. Period 1990 – 1998 (Profit tax incentives)

Foreign direct invested enterprises:
 Preferential tax rates were applied to certain projects but not
higher than 25%; Preferential tax rates and their durations
depend on business areas, locations, labor size, high-tech levels,
export ratios, local contents.
 Tax exemption for a maximum period of 4 years from the first
year having profit & 50% reduction of profit tax payable for a
maximum period of 4 subsequent years.
 Since 1996, the tax incentives for FDI had been added as
follows: encouraged business areas were enlarged; tax rates
were 20%, 15% or 10%; high incentives for enterprises
engaging in infrastructure, export processing, high-tech
(maximum tax exemption duration was 8 years).
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2.2. Period 1998 – 2003 (CIT incentives)

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The corporate income tax law was promulgated in 1997 (came
into effect from Jan 1999).
The common CIT rate for domestic enterprises was 32%, while
the maximum rate imposed on FDI sector was 25%.
In the context of the Asian financial crisis, the Domestic
Investment Encouragement Law, including many tax incentives
was issued
The Law on Foreign Investment in Vietnam was amended
comprehensively
The tax incentives for the domestic sector were less favourable
than those for FDI.
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1998 – 2003: CIT incentives for Domestic enterprises


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Preferential tax rates: 25%, 20% and 15% were imposed on newly-established
businesses, depending on business areas and locations.
Domestic newly-established businesses were entitled to enjoy CIT exemption
for the first 2 years and a 50% reduction for the 2 following years. If operating
in encouraged areas or locations were granted maximum 4-year exemption,
and a 50% reduction for the 9 following years. In case of meeting both criteria
on business areas and locations were entitled to higher preferential tax than
those that meet one (lower tax rates, longer duration of tax exemption or
reduction).
Expanded investment projects of enterprises were entitled to CIT exemption on
the increased portion of income of the first year, and a 50% reduction in CIT
amount due for the next 2 years; If Expanded projects operating in the
encouraged business areas or locations were granted maximum 4-year
exemption, and a 50% reduction in the next 7 years.
BOT and BTO projects were entitled to CIT exemption for their first four years,
and a 50% reduction on the CIT next nine years.
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1998 – 2003: CIT incentives for FDI




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Preferential tax rates of 20%, 15% and 10% for periods of 10,
12 and 15 years, respectively;
FDI projects meeting one of the following conditions were
entitled to enjoy enjoy preferential CIT rates in their whole
operation:
Investment in business sectors and industries under the
specially-encouraged investment list;
Investment in location under the list of socio-economic speciallydifficult locations;
Investment projects building infrastructure of industrial, export
processing, and high-tech zones;
Investment projects on healthcare, education, scientific research
BOT, BTO, BT projects on infrastructure;
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1998 – 2003: CIT incentives for FDI (cont.,)

CIT exemption/reduction:
 Maximum 2-year CIT exemption, and a 50% reduction of tax for
the next two years.
 Projects that meet many criteria of encouraged-investment, they
were entitled to have 4-year CIT exemption and following 4-year
of 50% tax reduction.
 For specially-encouraged cases, the maximum duration of
exemption was 8 years.


CIT refund due to reinvestment: Foreign investors using
allocated income for reinvestment would be entitled to a refund
of the paid CIT amount of the reinvested income.
50% CIT reduction was granted to foreign investors transferring
their equities to local enterprises.
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2.3. Period 2004 - 2008

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The Law on CIT (2003) was to apply uniform provisions on CIT and CIT
incentives towards domestic and FDI enterprises:
The uniform rate of 28% replaced the rate of 32% for domestic
enterprises and rate of 25% for FDI.
New CIT incentives were applied to all forms of enterprises, in which
deductions for fixed asset depreciation were doubled compared to
those applied the straight line depreciation method.
The 2003 CIT Law had to inherit all previous provisions on CIT
incentives prescribed in the Law on Domestic Investment
Encouragement and the Law on Foreign Investment in Vietnam under
the principle of selecting the highest CIT incentives and the most
favorable conditions to be uniformly applied.
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2.4. Period from 2009


Vietnam has revised comprehensively a number of
important tax laws for their implementation since 2009.
With regards to the CIT Law, the most outstanding
revised contents include:
i.
Individuals and households conducting activities of production
and/or business in goods and services are PIT taxpayers instead
of CIT taxpayers as regulated in the 2003 CIT Law;
ii.
The CIT rate has been reduced from 28% to 25%;
iii.
Amending provisions on deductible expenses to create the most
favorable conditions for taxpayers;
iv.
Reforming tax incentives in a simple and transparent way.
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2.4. Period from 2009 – New CIT incentives
 Enterprises are allowed to establish Science and
Technology Development Fund from pre-tax income.
 CIT incentives have been reformed to:

Continue to encourage the establishment of new enterprises in
areas of specially-difficult socio-economic conditions and areas of
difficult socio-economic conditions;

Narrow tax incentives for business areas;

Removal of the preferential CIT rate of 15% to simplify the
incentive regime and

Create CIT incentive differential among geographical areas and
give higher CIT incentives for areas with specially-difficult socioeconomic conditions.
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2.4. Period from 2009 – New CIT incentives

Abolish all CIT incentives for expanded investments as these
incentives are not transparent and can be easily abused.

CIT incentives for enterprises established before 2009 are
reserved based on the principle that enterprises will decide the
most favorable conditions for them: either applying the new
regulations or the current incentives until expired.

The right to enjoy duration of tax exemption should be
transparent, minimizing abuse: if an enterprise does not earn
profit after 3 years of its operation, it is allowed to enjoy tax
exemption or reduction from the fourth year (instead of
duration of tax exemption/reduction was from the time when
an enterprise had taxable income).
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2.5. Experience of the CIT incentives

Tax incentives are an important element in the tax policy
system. It is one of the factors which enhances the
competitiveness of a country compared to others that
having similar conditions in a region. Tax incentives have
brought positive effects on attracting FDI and
encouraging domestic sources for investment and
development in Vietnam. Tax incentives, therefore, have
become a required factor for a country transforming
from a centrally-planned economy to a market-oriented
economy.
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2.5. Experience of the CIT incentives

Regulations on tax incentives need a transparent regime
right from the designing of policies with specific conditions
and clear procedures. Procedures for the implementation of
these regulations should be simple to help investors
minimize their expenses when enjoying tax incentives.
Several studies have shown that Vietnam’s tax incentives
seem “generous” but they are inefficient due to their
complicated implementation and inconvenient procedures,
leading to negative cases where both taxpayers and tax
authorities could take unfair advantage of. This waste of
social resources has undermined the role of tax incentives,
which could lead to “redundant” tax incentives.
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2.5. Experience of the CIT incentives

Tax incentives could directly affect the investment
attraction in the short term but could become a “burden”
in the medium and long term if there were lack of a
strategic vision and technical criteria in designing
policies. Vietnam will face an inequitable business
environment in the next few years. Enterprises
established from 2009 could be less competitive than
those established before as all the previous tax
incentives shall be reserved in the new CIT Law until
their expiration.
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Thank you!
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