||Grant Thornton (Vietnam) Ltd.|
28th Floor, Saigon Trade Center 37 Ton Duc Thang
Ben Nghe Ward, District 1 Ho Chi Minh City.
Tel: +84(8) 3910 9100
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|Personal income tax in Vietnam- a case of exemptions and deferments|
Eleanor Lucas Roque
Director, Tax Services
Of all the new tax laws that became effective this year, none has been as controversial and as widely discussed at business luncheons and coffee shops as the Personal Income Tax (PIT) Law.
The law distinguishes itself as the first personal income tax law in Vietnam. Prior to this law, individual income tax was imposed only on high income earners and governed primarily by an ordinance issued by the standing committee of the National Assembly.
The PIT Law, which became effective on the first day of January 2009, widened the income tax base by including items of income, which were previously exempt from taxation. The new law provides uniform tax rules for Vietnamese and expatriate employees. It also introduced the concept of personal and family deductions to the Vietnamese tax system. More importantly, the new law decreased the headline rate from 40% to 35% in an effort to make the country more competitive to its Asian neighbors. According to the International Business Report (IBR) released by Grant Thornton in 2008, employment tax is considered by businesses surveyed in 34 countries as one of the two most burdensome taxes, the other being profit tax.
Obviously, tax is one of the major considerations in transferring a business from one location to another. In fact, 97% of all businesses located in Vietnam which were covered by the IBR considered tax before they set up their businesses in the country.
In view of the importance of lower taxes in business migrations, governments in various countries are now in a position where they have to compete with each other if they are not to lose businesses to more favorable tax jurisdictions.
However, while moving in the right direction of lowering the headline tax rate, the PIT Law broadened the tax base and removed certain benefits to expatriates from the list of nontaxable items. Under the PIT Circular No. 84-2008/TT-BTC, home airfares and tuition fees of children are removed from the list of nontaxable items and are now considered taxable. In addition, the housing allowance which used to be partially exempt from PIT is now fully taxable. Thus, for most expatriate employees, the effect of the PIT Law is higher personal income tax liability.
Fortunately, on 27 March 2009, the Ministry of Finance issued Circular No 62 -2009/TTBTC. The new circular amends Circular 84 by providing additional guidelines on the implementation of the PIT Law. The more important sections of Circular 62 restore the tax exemptions and concessions on certain benefits and allowances of expatriate employees. Among the benefits which are again exempt for PIT are one-off relocation allowance, annual airfare of the expatriate for home visit (back to their country of origin) and tuition fees of expatriates’ children who are studying in Vietnam.
With regard to housing allowance, the new Circular adopts the old rule on housing allowance which limits the taxable component to the lower between actual rent and 15% of total taxable income.
The circular also introduces new nontaxable fringe benefits particularly those employee benefits which are not assigned to specific employees such as shuttle service; membership fees for golf, tennis, sports and cultural clubs; and expenses for healthcare, amusements, sports, and entertainment.
Training benefits shall not be considered as taxable income if the training is relevant to the job of the employee or in accordance with the training plan of the employer. In addition, mid-shift meal allowance, telephone and clothing allowances remain as nontaxable items of income
The tax exemptions of benefits and allowance could not have come at a more opportune time. Most expatriate employees in Vietnam have employment contracts on net basis which means that the tax burden is shouldered by the employers. Thus, as businesses are contracting due to the global financial crisis, the lower cost of personal income tax liabilities for expatriate is a welcome relief.
In addition to restoring the tax exemptions of benefits and allowances, the Vietnamese government has also approved measures to assist both employees and employers to cope with the global financial crisis.
Among the efforts of the Government to assist employees and businesses is the issuance of the circular deferring the payment of personal income tax for tax periods covering January to May 2009. The deferment is applicable to resident individual employees on their tax payments related to salaries and wages. This covers expatriates who are considered resident taxpayers. During the time of deferment, the personal income tax will not be paid to the tax office but retained by the individuals or in certain cases, by the employers.
As a result of the deferment, the tax is merely computed and the tax declaration is submitted to the tax office. No actual payment to the State Budget is required. In fact, PIT which were paid to the State Budget prior to the issuance of the Circular are available for refund subject to submissions of certain documents.
The circular deferring the payment of the PIT states that when the National Assembly convenes in May 2009, the said body shall decide on whether to grant PIT exemption for the covered period or start collecting the deferred PIT. According to newspaper accounts, the country is estimated to lose about 5 trillion dong if the PIT for five months is not collected. The debate in the National Assembly is expected to center on whether the Government can afford not to collect the tax as part of its efforts to stimulate the local economy.
Unfortunately, the deferment of PIT payment, while supposed to be good news to the employees and their employers, has brought uncertainties as to what would happen if the National Assembly decides to collect the deferred PIT. While the Government issued the circular to spur spending and stimulate the economy, the individuals are hesitant to spend their windfall for fear that they will nevertheless be made to pay the deferred PIT later this year.
More importantly, the employers who were required to return the tax to the employees are troubled by the possibility that if the National Assembly required the payment of the deferred PIT, the employers as withholding agent will be made liable to collect and remit tax. This apprehension was exacerbated when the MoF issued Official Letter No. 807/TCT – TNCN this March 2009 explaining that in case the National Assembly decides to collect the amount of deferred tax, both the tax office and the employer shall be responsible to collect such PIT.
Employers are understandably now in a predicament as to employees who are entitled to the deferment but leaving the company (not the country) during the deferment period. The issue is how the employers will be able to collect the deferred PIT from employees who are no longer employed by the Company after May 2009? In addition, even if the employees as still with the Company, will the employers be required to deduct the current PIT and previously unpaid PIT at the same time? This will substantially decrease the take home pay causing unnecessary grief and hardships to employees who are already having difficulties making both ends meet.
While the PIT rules are most times unclear and the implementation confusing, most expatriates are now optimistic with the move of the MoF to decrease the tax burden. As May is fast approaching, the issue on deferment or exemption will also finally be resolved. Hopefully, the exemption of the deferred PIT will be approved and the expatriates will once again be happily working and living in Vietnam. One thing is certain though, the business luncheons and coffee shops will remain buzzing with talks on PIT for the foreseeable future.