Tax Rates

The standard Corporate Income Tax (CIT) rate in Vietnam is generally fixed at 20%, which applies to most businesses operating within the country. This rate is reflective of the government's efforts to create a balanced and competitive taxation environment for the majority of entities conducting their business activities within Vietnam's borders. 

Nevertheless, it is important to note that specific industries and particular forms of enterprises, such as those engaged in the extraction and exploitation activities within the oil and gas sector, are subject to significantly elevated tax rates. These higher rates are structured within a range that spans from 32% to as high as 50%, and this variation is influenced by various factors including the geographical location of the operations and the specific scope of business activities being undertaken by the enterprise. For instance, projects located in economically significant or environmentally sensitive areas, or those involving more technically challenging extraction processes, may witness taxation at the higher end of this range. Such a framework is a clear representation of the Vietnamese government's strategic approach to taxation, as it aims to simultaneously stimulate broader economic development, secure fair economic returns from finite natural resources, and address the unique economic and ecological considerations associated with these specialized sectors. In this regard, taxation policies for these industries are meticulously designed to harmonize domestic fiscal priorities with sustainable practices and long-term economic planning. 

By adopting a differentiated tax regime, Vietnam seeks to foster responsible corporate behaviors while optimizing the utilization of its natural resources for the benefit of its citizens and the economy at large.

Taxable Income

Taxable income forms the foundation of Vietnam’s Corporate Income Tax (CIT) system, functioning as the base upon which businesses’ tax liabilities are calculated. It represents the total income earned by an enterprise from its various activities, adjusted by deducting eligible expenses as defined by Vietnam's tax regulations. The accurate calculation of taxable income is not only essential for compliance but also crucial for businesses to ensure proper fiscal planning.

At its core, taxable income encompasses diverse streams of revenue generated by companies. This includes income from their main business operations, such as the sale of goods, provision of services, manufacturing, or trading activities. These earnings reflect the financial outcomes of a business’s core activities and are computed based on standard accounting practices to ensure transparency and accuracy.

In addition to operating income, businesses also derive taxable income from financial and investment activities. For instance, interest gained from deposits and loans, as well as dividends received from investments in other entities, all contribute to taxable earnings. Furthermore, capital gains—profits realized from the sale or transfer of assets, securities, or investments—also form a significant component of taxable income. These income streams expand the tax base, ensuring that both operational and non-operational gains contribute fairly to a company’s overall tax obligations.

Another important category included in taxable income is other income, which originates from various peripheral business activities. This may encompass earnings from property rentals, leasing of equipment or assets, and revenue from the sale or liquidation of fixed assets like machinery and infrastructure. These additional streams can significantly contribute to a company’s overall profitability, though they may not arise regularly or directly from a business’s core operations.

Moreover, for Vietnamese enterprises operating internationally, income derived from foreign operations is also included under Vietnam’s tax regulations. This ensures that businesses conducting activities overseas report their consolidated earnings, maintaining compliance with Vietnam’s comprehensive taxation framework. Such provisions highlight the country’s efforts in maintaining a robust and inclusive tax structure that prevents revenue leakage.

Lastly, taxable income includes exceptional gains such as compensation received from contract breaches, penalties, insurance claims, and other irregular earnings. While these forms of income may not be part of a company’s strategic operations, they nonetheless serve as financial gains that are liable for taxation.

To arrive at the final taxable income figure, businesses are entitled to deduct certain allowable expenses from their total revenue. These deductible expenses include operational costs, employee salaries, depreciation of fixed assets, and other legitimate costs incurred in running the business. However, for these deductions to be valid, they must strictly comply with the stipulations set by Vietnam’s tax authorities. Proper documentation and adherence to procedural requirements are vital in ensuring that such expenses are recognized for tax purposes.

Understanding the sources of taxable income is crucial for businesses operating in Vietnam as it forms the basis upon which CIT is calculated. Taxable income includes all revenue streams generated by enterprises, encompassing both primary business activities and other secondary or exceptional earnings. Each source contributes to the overall tax obligation and reflects the diverse ways businesses generate income within Vietnam's dynamic economic landscape.

Revenue from Core Business Operations

The most significant source of taxable income stems from a company’s core business operations. This includes revenue generated from the sale of goods, provision of services, manufacturing, and trading activities. For example, a manufacturing company’s primary income might arise from the production and sale of industrial goods, while a retailer’s revenue would come from the direct sale of products to consumers. These earnings represent the financial outcomes of the company's main activities and are fundamental in determining the scale of its contribution to the country’s taxation framework. Such core revenue forms the backbone of the tax calculation process.

Income from Financial and Investment Activities

Businesses frequently earn income from activities outside their primary operations, particularly in financial markets and investments. Interest income derived from deposits and loans is a prominent example. Additionally, dividends earned from investments in other businesses or joint ventures are considered taxable income. Another common form of financial income comes from capital gains, which are profits realized through the sale or transfer of fixed assets, equity securities, or other investments. These financial streams diversify a company’s income profile and play a significant role in its overall profitability.

Other Peripheral Income

Many businesses in Vietnam also accumulate income from supplementary activities that are not directly part of their primary operations. Such income streams may include rental payments from leasing out properties, equipment, or other business assets. For instance, a company that owns office spaces or real estate may earn a consistent income from renting out these properties, which becomes subject to CIT. Similarly, revenue derived from the sale or liquidation of redundant fixed assets, such as old machinery or infrastructure, contributes to taxable income.

Earnings from Foreign Operations

For Vietnamese enterprises operating internationally, income earned from their foreign ventures is also considered taxable under CIT regulations. This might include profits made from overseas branches, subsidiaries, or investments. The inclusion of foreign income within Vietnam’s taxation framework ensures that enterprises comply with consolidated reporting requirements, promoting fairness and transparency across different income sources, irrespective of geographical origin.

Exceptional or Irregular Gains

Another notable category of taxable income is derived from exceptional or irregular gains. These can include compensation payments received from legal disputes, penalties, or contract breaches. Insurance settlements received for events such as damages or business disruptions also contribute to taxable income. Beyond these, businesses may occasionally engage in miscellaneous activities such as temporary warehousing or short-term undertakings that yield sporadic income, which is also included under taxable income. 

Deductible Expenses

In Vietnam, the determination of taxable income under the CIT framework involves subtracting certain allowable expenses from total revenue. These deductible expenses are specific costs incurred during business operations, which are legally permitted to reduce the taxable income of enterprises. Vietnam’s tax authorities, however, strictly regulate what qualifies as a deductible expense, ensuring that the deductions align with the principles of fairness, transparency, and accountability in the country’s taxation system.

Definition of Deductible Expenses

Deductible expenses refer to the legitimate financial costs that businesses incur during their operations, which are necessary for generating revenue. These expenses, as governed by Vietnamese tax regulations, include a wide range of expenditures, such as salaries, raw material costs, depreciation of assets, and various operational charges. These deductions allow enterprises to account for their operating costs fairly, ensuring that only the net profit is subject to CIT.

Common Categories of Deductible Expenses

• Employee Salaries and Benefits

Wages, salaries, bonuses, and other benefits paid to employees are among the most common deductible expenses in Vietnam. This includes mandatory payments such as contributions to social insurance, health insurance, and unemployment insurance under Vietnamese law. However, these payments must be documented properly with sufficient evidence to qualify for deductions.

• Depreciation of Fixed Assets
  
  

Businesses are entitled to deduct depreciation expenses for fixed assets that are used directly in production and operations. Depreciation is calculated based on the original cost of the asset and its useful life, in accordance with accounting rules. Assets that are not properly registered or accounted for may not qualify for deductions.

• Raw Material and Inventory Costs
  
  

Expenses for raw materials, inventory, and goods used in the production of products or provision of services are deductible. These costs must be directly related to the company’s main operations and documented with invoices or receipts per Vietnamese accounting standards.

• Operational Expenses
  
  

Operational expenses such as office rental, utility bills, repair costs, telecommunication charges, and advertising expenses are considered deductible if they meet the "reasonableness" criteria defined by tax authorities. These costs should serve the business purpose and relate directly to generating revenue.

• Loan Interest Payments
  
  

Interest paid on loans taken for business activities is eligible for deduction, provided the loan agreements comply with Vietnamese regulations, and the interest rates are not excessive or above the stipulated cap set by tax guidelines.

• Training Costs
  
  

Expenses related to employee training and human resource development may also be deducted, as long as they serve business purposes and are aligned with company policies.

Regulatory Stipulations for Deductible Expenses

Vietnam’s tax laws place strict stipulations on the eligibility of deductible expenses. These rules are meant to ensure that only legitimate and well-documented expenses are considered, preventing any misuse or overstatement by enterprises.

• Proof of Expense
  
  

All deductible expenses must be supported by legitimate and verifiable documentation, such as invoices, receipts, or contracts. Failure to provide proper records could result in the disqualification of such expenses.

• Related to Business Purpose
  
  

Expenses must be directly connected to the company’s business operations. Costs that are deemed unrelated to income-generating activities, like personal expenses, will not qualify as deductible.

• Compliance with Tax Law
  
  

Deductible expenses must comply with Vietnam's general tax and accounting principles. For example, expenses associated with unlawful activities, excessive entertainment costs, or capital expenditures not approved by tax authorities are strictly prohibited.

• Limits on Certain Deductions
  
  

Certain categories of expenses, such as welfare-related costs, interest expenses are subject to specific caps. For instance, for enterprises with related-party transactions, interest expenses are capped at 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). In addition, staff welfare expenses are deductible, but there is a cap equivalent to one month's average salary per employee and any amount exceeding this limit is non-deductible.

Deductions and Incentives

Vietnam provides a diverse range of CIT incentives aimed at fostering investment in targeted industries, regions, and activities. These incentives are carefully designed to create an appealing environment for investors, thereby contributing to the country’s economic development goals. They encompass a variety of tax benefits, such as tax holidays, where companies are exempt from paying corporate income tax for a specified period that allows businesses to stabilize their operations and improve cash flow during the initial phases. Reduced tax rates are also a key feature, offering long-term financial relief and enhancing companies' competitive edge. Additionally, exemptions are available for income derived from specific qualifying activities or investments. This is particularly relevant for enterprises operating in economically underdeveloped regions or geographically disadvantaged areas. These include remote and rural regions with limited infrastructure, where economic activity is relatively minimal. 

By providing such incentives, Vietnam is not only addressing regional disparities but also encouraging diversification of investment into non-urban areas. Enterprises in high-tech industries such as information technology, biotechnology, or other innovative fields are often privileged with significant tax benefits. These sectors are prioritized due to their potential for high-value contribution to the economy and their alignment with Vietnam’s goal of accelerating technological advancement. Similarly, companies investing in environmentally sustainable projects, renewable energy, and eco-friendly activities are frequently granted preferential tax treatment, reinforcing the country's commitment to sustainable development and green growth.The government also tailors certain tax incentives to specific industries that align with its long-term vision of economic transformation and international competitiveness. For instance, strategic sectors such as advanced manufacturing, research and development, and modern agricultural practices often qualify for specialized tax schemes. These initiatives highlight Vietnam’s broader strategy to attract foreign direct investment, enhance industrial modernization, and innovate across various domains. By doing so, the country not only stimulates economic growth but also fosters consistent development across different regions, bridging the gap between urban hubs and disadvantaged areas while building a robust, inclusive economy for the future.

Tax Filing and Payment

Enterprises are required to meticulously adhere to the regulation of filing CIT declarations on an annual basis. This critical responsibility encompasses the preparation and submission of detailed tax documentation that accurately reflects the company’s financial status over the preceding year. The submission deadline is traditionally established as the end of the third month following the conclusion of the fiscal year, a regulation that underscores its importance in aligning corporate financial disclosures with statutory mandates. 

By adhering to this timeline, companies are afforded adequate time to meticulously review their financial activities, detect and rectify discrepancies, and compile comprehensive and precise reports that adhere to statutory compliance requirements. This not only ensures accuracy but also streamlines the evaluation process and strengthens internal audit mechanisms, which are instrumental to enhancing governance practices. 

Moreover, this process fosters a greater degree of transparency and accountability in financial reporting, acting as a critical safeguard for corporate integrity while facilitating stringent regulatory oversight that underpins the equitable functioning of the business ecosystem. Beyond the obligations of annual tax declarations, enterprises are also mandated to fulfill the responsibility of remitting quarterly provisional tax payments. These periodic tax contributions are integral to creating a sustainable and dynamic tax framework that promotes fiscal responsibility and operational efficiency. By distributing their tax liabilities into manageable intervals, businesses mitigate the fiscal burdens often associated with lump-sum annual payments. This strategy not only alleviates the financial pressure on organizations but also augments their capability to implement effective tax planning and manage cash flows efficiently. 

Furthermore, quarterly tax remittances provide governments with a steady influx of revenue, thereby enabling more predictable and effective management of public finances. This collaborative fiscal mechanism, which aligns the financial structures of enterprises with overarching national economic goals, fosters economic stability and ensures long-term solvency. Additionally, the progressive and timely settlement of tax obligations throughout the year helps minimize risks associated with delayed payments or underpayment penalties, thereby enhancing compliance rates and fostering a culture of fiscal accountability among enterprises. 

Through these mechanisms, a balanced and harmonized fiscal ecosystem is nurtured, addressing the dual objectives of enterprise viability and national economic resilience while reinforcing trust and equity in the broader economic framework.

Common Challenges and Best Practices 

Navigating CIT in Vietnam can be both a challenging and rewarding experience for businesses operating in this dynamic market. The landscape of tax regulations in Vietnam is characterized by its complexity, rigorous compliance requirements, and the need for strategic planning. However, with the right approach and understanding, companies can efficiently manage their tax obligations while capitalizing on available incentives.

One of the foremost challenges businesses face is the intricate nature of Vietnam's tax regulations. The tax system comprises various rates and exemptions that can be particularly challenging for foreign enterprises to grasp. The evolving regulatory environment necessitates continuous monitoring and updating, making it imperative for businesses to stay informed about the latest changes in tax laws.

Compliance with tax regulations in Vietnam demands meticulous attention to detail. Companies are required to adhere to stringent filing requirements, including quarterly provisional payments and the submission of annual tax returns. Any delays or inaccuracies in these filings can lead to significant fines and interest penalties. Ensuring timely and accurate compliance is essential to avoid these punitive measures.

Another area of complexity lies in the tax incentives and exemptions offered by the Vietnamese government. While these incentives can provide substantial benefits, understanding and qualifying for them can be a daunting task. Businesses must navigate through the criteria and documentation required to avail themselves of these incentives, often necessitating expert guidance.

In addition to domestic challenges, the global tax landscape introduces its own set of complexities. With the implementation of a global minimum corporate tax rate, Vietnam must align its tax policies with international standards. This alignment can be challenging, requiring businesses to keep abreast of international tax developments and their implications on domestic operations.

To effectively manage these challenges, businesses can adopt several best practices. Staying informed about changes in tax laws and regulations is paramount. Regular updates and professional development can help businesses ensure compliance and leverage any new opportunities that arise.

Engaging tax professionals, such as local tax advisors or consultants, can provide invaluable support in navigating the complexities of Vietnam's tax system. These experts possess in-depth knowledge of the local tax landscape and can offer tailored advice to optimize tax strategies.

Proactive tax planning is another essential practice. By engaging in forward-looking tax planning, businesses can identify and take advantage of available tax incentives and exemptions. This strategic approach allows companies to minimize their tax liabilities while remaining compliant with the law.

Maintaining accurate and detailed financial records is crucial for facilitating smooth tax filings and audits. Accurate record-keeping ensures that businesses have the necessary documentation to support their tax positions and can readily address any inquiries from tax authorities.

Lastly, leveraging technology can streamline tax compliance and reporting processes. Tax software and technology solutions can automate and simplify various aspects of tax management, reducing the risk of errors and enhancing efficiency.

In conclusion, while the corporate income tax landscape in Vietnam presents several challenges, businesses can navigate these effectively with the right strategies and practices. By staying informed, engaging tax professionals, proactively planning, maintaining accurate records, and leveraging technology, companies can not only ensure compliance but also optimize their tax positions, ultimately contributing to their long-term success in the Vietnamese market.

General notes:

• The above is summarised from the current legislations and practices for internal reference only.

• This document cannot be relied upon by any other parties nor included in any submissions, reports, documents or letters required by the relevant regulatory bodies without our prior written consent and/or subject to our approval on the appropriate form and contents; and

• Please kindly noted that SP&A is not a legal firm, our comments provided under this document may include reviewing regulatory documents to be identified as general management consultancy, therefore, should not be considered, nor intended to be, a legal advice.