Công văn 18115/BTC-TCT

The Ministry of Finance has received the Official Dispatch No. 6450/UBND-TM of Ho Chi Minh city dated December 5, 2013 on proposing the mechanism and policy for management of collection of tax levied on capital transfer and franchising operations on which the Ministry of Finance has offered the following opinions:

I. Applicable tax policies concerning capital transfer operations.

1. Value-added tax (VAT):

Article 5 of the combined Law on Value-added Tax that provides provisions on untaxed entities shall include:

- Point d Clause 8:

“d) Capital transfer includes the partial or complete transfer of a full amount of capital already used for investment, including the circumstance under which an enterprise is sold to others for production, trading and securities transfer purposes; other forms of capital transfer in accordance with legal regulations;

- Clause 21: “21. Technology transfer in accordance with regulations laid down in the Law on Technology Transfer; assignment of intellectual property rights in accordance with the Law on Intellectual Property; computer software.

Pursuant to the regulations laid down in Article 15 of the Government’s Decree No. 51/2010/NĐ-CP dated May 14, 2010 on providing regulations on sales and service invoices, and Article 14 of the Circular No. 64/2013/TT-BTC of the Ministry of Finance dated May 15, 2013 on providing guidance on the Decree No. 51/2010/NĐ-CP the seller must issue invoices after selling their products or rendering their services, including commodities or services used as promotional, advertising gifts or sample goods; commodities or services used as gifts, presents, donations, swaps or substitutes for salary of employees and internal consumption (except for commodities which are internally circulated to maintain normal manufacturing operations); Information provided in invoices must be identical to the economic event that may arise.

As stipulated above,

- Transfer of capital or intellectual property rights in accordance with the Law on Intellectual Property belongs to the entities which are not liable for VAT.

- Franchising, if involving the transfer of intellectual property rights, will belong to the entities which are not liable for VAT.

- If the franchising is the transfer of the enjoyment of intellectual property rights, it will belong to the entities subject to the VAT rate of 10%.

- An enterprise operating transfer of capital or franchising (known as the transferer – seller) must issue VAT invoices to transferees and submit their VAT declarations in accordance with regulations. As for an invoice worth more than VND 20 million, related parties must make payments via banks.

- If an enterprise operating capital transfer or franchising (known as the transferer) does not issue an invoice in accordance with regulations, this act is considered a violation and the tax authority shall exercise the right to fix an amount of revenues to demand and collect VAT payments (when appropriate).

2. Corporate income tax:

- Clause 2a Article 14 Chapter IV in the Circular No. 123/2012/TT-BTC of the Ministry of Finance dated July 27, 2012 on corporate income tax stipulates:

“Where the transfer contract does not specify the payment price or the tax authority establishes that this payment price is not conformable to the market price, the tax authority shall exercise its right to examine and fix the transfer price. If the enterprise transfers or owns a portion of contributed capital of which the transfer price is not appropriate to the market price, the tax authority shall be entitled to conduct the entire corporate revaluation at the transferring time to redefine the transfer price in proportion to the percentage of transferable portion of contributed capital.

Fixation of the transfer price is based on the inspection documents kept by the tax authority, or the capital transfer price under other circumstances at the same time, economic organization or as agreed upon in similar transfer contracts at the transferring time. If the tax authority’s fixation of the transfer price is not appropriate, the basis for fixation of the transfer price is the price assessed by the professional valuation organization with delegated authority to determine the transfer price at the transferring time in accordance with regulations”

- Clause 2c Article 14 Chapter IV laid down in the Circular No. 123/2012/TT-BTC as mentioned above also stipulates:

“If a foreign organization doing business in Vietnam or generating incomes in Vietnam but failing to operate in accordance with the Investment Law or Corporate Law (hereinafter referred to as foreign contractor) is carrying out capital transfer operations, their tax declaration and payment shall follow the instructions hereunder:

The capital transferee shall be responsible for determining, specifying, withholding and acting on behalf of that foreign organization to pay an amount of corporate income tax payable. If the capital transferee is also a foreign organization that does not operate in accordance with the Investment Law, Corporate Law, the enterprise established under Vietnam’s laws in which that foreign organization invests their capital shall be responsible for making declaration and payment of an amount of enterprise income tax incurred from capital transfer operations carried out by the foreign organization.

Tax declaration and payment shall be governed by regulations laid down in legislative documents on tax administration”.

Currently, the corporate income tax policy in relation to the capital transfer include specific regulations and sanctions which state that, where the transfer contract does not specify the payment price or the tax authority establishes that this payment price is not conformable to the market price, the tax authority shall exercise its right to examine and fix the transfer price. If the tax authority’s fixation of the transfer price is not appropriate, the basis for fixation of the transfer price is the price assessed by the professional valuation organization with delegated authority to determine the transfer price at the transferring time in accordance with regulations. If the capital transferee is also a foreign contractor, the enterprise established under Vietnam’s laws in which foreign organizations invest their capital shall be responsible for making declaration and acting on their behalf to pay an amount of corporate income tax incurred from capital transfer operations carried out by these foreign organizations.

The People’s Committee of Ho Chi Minh city reported that enterprises carrying out capital transfer operations have made their tax declarations in which the selling price is equal to the cost price, and performed their capital transfer in a roundabout manner. This leads to none of revenues recorded and causes tax loss. To deal with this matter, the tax authority should focus more on tax administration, and intensify inspection and examination to punctually detect any fraud committed by enterprises. In case the capital transfer is carried out by enterprises committing misrepresentation and having signs of tax evasion, the tax authority must take appropriate measures to manage, inspect and examine (re-fix the transfer price), or collaborate with the licensing agency or professional valuation organization with delegated authority to re-fix the transfer price at the transferring time in accordance with regulations for the purpose of calculating and re-identify the amount of tax payable as agreed upon in this capital transfer contract.

In order to strictly manage capital transfer operations in the upcoming time, after considering opinions from the People’s Committee of Ho Chi Minh city, the Ministry of Finance shall study any supplementation to regulations laid down in the draft Circular on corporate income tax that may come into force from the fiscal year 2014, including the following information: If an enterprise transfers capital to other organization or individual, the portion of transferable capital value as agreed upon in the transfer contract which is worth twenty million Vietnamese dong or more must be supported by documents indicating non-cash payments. In case the capital transfer is not supported by documents indicating non-cash payments, the tax authority shall have the right to fix the transfer price and cost price.

3. Personal income tax:

- Clause 4 Article 26 laid down in the Circular No. 111/2013HT-BTC of the Ministry of Finance dated August 15, 2013 stipulates (that):

“4. Declaring tax levied on incomes earned from the capital transfer operations (except for securities transfer)

a) Residents transferring contributed capital shall make tax declarations for each of capital transfer irrespective of incomes that may arise.

b) Non-residents earning incomes from transferring contributed capital in Vietnam are not required to directly make tax declarations with the tax authority but organizations or individuals receiving transferred capital must complete the tax withholding process in accordance with guidance provided in Point e, Clause 1, Article 25 of this Circular and declare tax levied on each income that may arise.

c) With regard to capital transfer supported by none of documents stating that capital transferers have fulfilled their tax obligations, if enterprises follow procedures for change made to the list of capital-contributing members, the enterprise where an individual transfers capital shall take responsibility to declare and pay tax on behalf of that individual.”

- Point a, Clause 4, Article 16 laid down in the Circular No. 156/2013/TT-BTC of the Ministry of Finance dated November 6, 2013 stipulates (that):

“a) Tax declaration principles

a.1) Residents transferring contributed capital shall make tax declarations for each of their capital transfer irrespective of incomes that may arise.

a.2) Non-residents earning incomes from transferring contributed capital in Vietnam are not required to directly make tax declarations with the tax authority but organizations or individuals receiving transferred capital must complete the tax withholding process and make tax declarations in accordance with Clause 1 of this Article. If the capital transferee is an individual, tax declaration shall be made for each of income that may arise without final tax declarations applied to the tax withholding obligations.

a.3) With regard to capital transfer supported by none of documents stating that capital transferers have fulfilled their tax obligations, if enterprises follow procedures for change made to the list of capital-contributing members, the enterprise where an individual transfers capital shall take responsibility to declare and pay tax on behalf of that individual.”

- Clause 1 Article 75 laid down in the Circular No. 156/2013/TT-BTC of the Ministry of Finance dated November 6, 2013 provides guidance on the effect as follows:

“Contents of tax administration specified in regulations laid down in the Law on the amendments to the Law on Tax Administration and the Decree No. 83/2013/NĐ-CP on which guidance is provided shall come into force from July 1, 2013.

Tax declaration documentation stipulated in this Circular shall begin applying to all of fiscal periods from January 1, 2014.”

Based on the abovementioned guidance,

- Individuals transferring capital shall make tax declarations for each of their capital transfer irrespective of incomes that may arise.

- With regard to capital transfer supported by none of documents stating that capital transferers have fulfilled their tax obligations, if enterprises follow procedures for change made to the list of capital-contributing members, the enterprises where an individual transfers capital shall take responsibility to declare and pay tax on behalf of that individual.

- Principles of declaration of tax levied on the capital transfer shall be applied from July 1, 2013. In particular, tax declaration documentation in accordance with the Circular No. 156/2013/TT-BTC shall be in effect from January 1, 2014.

II. In addition, in the official dispatch, the People’s Committee of Ho Chi Minh city lists out several suspected tax avoidance or evasion cases that may occur during the capital transferring process.

In the case of Intel Product Vietnam company, they are one of the largest technological companies in Vietnam with all of their products manufactured for export. Over the establishment and development period, Intel Product Vietnam company always adheres to their commitment on long-term investment in Vietnam and has shown their considerable social responsibility. Continual growth in revenues earned from the company’s business operations have been recorded over years (VND 2,292.5 billion in 2010, VND 2,875.1 billion in 2011, VND 5.612,9 billion in 2012 and VND 3,601 billion in 9 first months of 2013). The company employs a total of nearly 1,000 persons with average monthly income of VND 18.3 million paid to Vietnamese employees.

In the afternoon of December 18, 2013, the Ministry of Finance held a meeting with the representative of the Intel Product Vietnam company. The Tax Department of Ho Chi Minh city (directly supervisory tax authority) reported that the Company has fully adhered to the principles of tax self assessment, self declaration for their business operations in general and capital transfer transactions in particular. In terms of the contributed capital transfer transactions that take place at the Intel Product Vietnam company so as to serve the purpose of restructuring and satisfying the managerial requirements of the Intel company, the Ministry of Finance will consider documentation and confer with competent authorities to verify the compliance of their tax assessment with Vietnamese laws. At first sight, the Ministry of Finance has not found any signs of tax evasion or avoidance for contributed capital transfer transactions that take place at the Intel Product Vietnam company.

With regard to the misleading information about the Intel Product Vietnam company, the Ministry of Finance has worked with the press and they have already made their rectification up till now.

- Concerning other cases mentioned in the official dispatch of the People’s Committee of Ho Chi Minh city, it is advised that the Tax Department of Ho Chi Minh city shall perform their assigned functions and duties to review, examine and inspect capital transfer operations in order to ensure that tax is sufficiently and appropriately collected in accordance with regulations laid down in legislative documents about taxation.

The Ministry of Finance hereby notifies and looks forward to any feedbacks or responses from the People's Committee of Ho Chi Minh city./.