During the business operating cycle, besides investments that expand and enhance production capability (expansion investments), another prevalent investment activity of enterprises, to purchase and replace or supplement machinery and equipment frequently in order to increase their business efficiency (regular investments), is of strong interest among enterprises from a tax standpoint.
In Vietnam, from a tax regulations perspective, there are varied views on these two investment activities since over past years there have not been any particular criteria to determine what regular investments are, leading to conflicts arising between taxpayers and the tax authorities over the application of corporate income tax (CIT) incentives for regular investments.
In order to address this problem, the Ministry of Finance (MoF) has provided detailed guidance on CIT incentives for regular investments during the period from 2009 to 2013, in which certain criteria to define regular investments and specific implementing approaches are presented in Official Letter No. 4769/BTC-TCT dated April 7, 2016.
Some matters resolved
Prior to the issuance of OL No. 4769 there were numerous concerns regarding regular investments.
Firstly, there were several unambiguous regulations. Under Circular No. 151, regular investments were “defined” indirectly as investment activities “to supplement machinery and equipment regularly during business operations outside of new investment projects and expansion investment projects.”
Secondly, CIT incentives on regular investments still have drawbacks. Circular No. 151 and, later, Circular No. 96, merely state that enterprises having investment activities and supplementing machinery and equipment regularly during the period 2009-2013 outside of expansion investment projects are entitled to tax incentives for the remaining period starting from tax year 2014.
These two circulars present several major questions for tax authorities and enterprises upon implementation, for example:
- If investment activities to supplement machinery and equipment regularly are not within expansion investment projects, these activities must be entitled to incentives according to the projects being applied. As a result, logically speaking, should activities to increase the amount of machinery and equipment regularly be entitled to tax incentives for the entire 2009-2013 period, rather than being confined to tax incentives for the remaining period from tax year 2014?
- What are the criteria to differentiate investment activities to supplement machinery and equipment regularly outside expansion investment projects to apply incentives properly while the expansion investment projects before 2014 were defined as investment projects to develop the ongoing projects so as to expand scales, improve efficiency, business capability, innovate technology, increase product quality, and reduce environmental pollution?
To address these concerns, the newly issued OL No. 4769 firmly states that regular investment activities during the 2009-2013 period are not considered expansion investment activities and can enjoy CIT incentives according to the projects being applied. In addition, the OL also laid out the criteria to determine regular investments and the retrospective implementation method for the 2009-2013 period.
From October 10, 2014 (when Circular No. 151 was issued) to April 2016 (when OL No. 4769 was promulgated), as CIT incentives were the major focus of inspections and audits by tax authorities, many enterprises faced difficulties when determining CIT incentives for regular investment activities during the 2009-2013 period while tax authorities were of the opinion that these were expansion investments and treated them accordingly.
The suggestions about detailed guidance to distinguish between regular investments and expansion investments were also made by associations and the business community to the General Department of Taxation (GDT) and the MoF right after Circular No. 151 was issued, and the MoF collected opinions to amend and supplement the Law on Corporate Income Tax. But not until two years later were these points specified in OL No. 4769.
If OL No. 4769 had been issued earlier, a lot of cost, time, and human resources of taxpayers and tax authorities would have been saved.
Firstly, under the prevailing regulations and guidance of OL No. 4769, the criteria to determine regular investment activities are applied from 2009. Therefore, there is still a legal loophole for the period before 2009.
Tax policies prior to 2009 entitled expansion investment activities to CIT incentives (differing from CIT incentives in the original project) if the criteria for incentives were satisfied. As a result, incentives for regular investment activities of the original projects would be different from those of the expansion investment activities.
Hence, there is still a need to distinguish between regular investment activities and expansion investment activities to apply proper tax incentives to each type of activity in 2009 and prior.
Secondly, in terms of retrospective methods for the 2009-2013 period, OL No. 4769 provides guidance to enterprises that declared and paid CIT for regular investment activities during the 2009-2013 period but now are subject to CIT incentives, and the tax payable in the following period will be offset and the overpayment will be refunded as regulated.
The Official Letter does not mention cases in which enterprises received administrative and late tax payment penalties from tax authorities who deemed the enterprises’ regular investment activities as expansion investment activities.
In principle, in this case, the authorities need to adjust administrative and late tax payment penalties to ensure fairness and transparency for taxpayers.
Tax authorities are currently actively implementing solutions to revolutionize the tax regime, in which there are tax policies and administrative procedures to enhance tax administration efficiency. At conferences with enterprises and among the suggestions from a number of associations of enterprises, tax incentives for regular investment activities during the 2009-2013 period attract much attention. We would therefore like to propose the following to tax authorities.
First of all, MoF should continue to give detailed guidance in favor of permitting the application of criteria to determine regular investment before 2009.
Furthermore, MoF should allow offsetting the administrative and late tax payment penalties paid under decisions from tax authorities when determining that regular investment activities during the 2009-2013 period are not subject to tax incentives.
Secondly, regular investments should be codified soon. At the moment, the definition of new investment projects and expansion projects is specifically stated in the legal tax documents involved. Meanwhile, regular investments that are common among new enterprises are merely indirectly “defined” in Circular No. 151 and Circular No. 96 and only specifically in OL No. 4769.
Accordingly, there has not been any consistency in the definitions in these legal documents and guiding documents. “Criteria to determine regular investments” should be prescribed in legal documents in the same way as definitions of new investments and supplementary investments are in current legal documents.
Thirdly, the GDT and local tax offices should propagate and publicize the contents of OL No. 4769 more intensively to enterprises as Official Letters are normally not as widely disseminated to the public as stipulated legal documents.