Công văn 508/TCT/TNCN

OFFICIAL LETTER

ON THE SETTLEMENT OF PERSONAL INCOME TAX FOR 2004

To: Provincial/municipal Departments of Taxation

Ordinance No. 14/2004/PL-UBTVQH of March 24, 2004 Amending and Supplementing a Number of Articles of the Ordinance on Income Tax on High-Income Earners and the guiding documents in effect as of July 1, 2004. For a uniform application of the Ordinance on Income Tax on High-Income Earners, the General Department of Taxation hereby provides specific instructions on a number of issues concerning the settlement of income tax of high-income earners (personal income tax) for the year 2004 as follows:

1. Issuing personal tax identification numbers

Individuals, who have registered tax declaration with and been granted a tax identification number by a local tax Department (i.e. the Tax Department of Ho Chi Minh city ), make year-end tax settlements with another local Tax Department (the Tax Department of Hanoi city for instance), shall have to register additional declarations with form No. 08-MST under the Finance Ministry's Circular No. 80/2004/TT-BTC of August 13, 2004, guiding the implementation of the Prime Minister's Decision No. 75/1998/QD-TTg of April 4, 1998, on taxpayer identification numbers.

2. Taxable incomes

2.1. Determination of taxable incomes and application of progressive tax rates

Taxable regular incomes in 2004 shall be determined as follows: Firstly, monthly taxable income is equal to the total taxable income of the whole year divided by 12 months.

- Tax payable on incomes of the first six months is calculated with the application of progressive tax rates applicable to regular incomes under the Finance Ministry's Circular No. 05/2002/TT-BTC of January 17, 2002.

- Tax payable on incomes of the last six months is calculated with the application of progressive tax rates applicable to regular incomes under the Finance Ministry's Circular No. 81/2004/TT-BTC of August 13, 2004.

2.2. Taxable incomes from house rents as benefits in kind

House rent for the first six months is the rent amount actually paid on behalf of renters but not exceeding 15% of incomes as their salaries or wages; and house rents for the last six months is the rent amount actually paid on behalf of renters but not exceeding 15% of total taxable incomes. Then such rents shall be aggregated into taxable incomes of 2004 for determining monthly taxable incomes.

Example 1: Mrs. A, a Dutch national, works for electronics company D in Ho Chi Minh city. In 2004, she earned the following incomes:

- Monthly taxable income (exclusive of house rent) of VND 38 mil, in which her monthly salary or wage was VND 31.6 mil.

- Monthly rent of VND 5 mil for her dwelling house in Vietnam which was paid by electronics company D according to expenditure vouchers in 2004.

Taxable income from her house rents paid by electronics company D shall be determined as follows:

+ For the first six months of 2004, such income is calculated according to the provisions of Circular No. 05/2002/TT-BTC:

(VND 31.6 mil x 6 months) x 15% = VND 28.44 mil. As the house rent actually paid as benefits in kind for Mrs A by the company for the first six months of 2004 was VND 30 mil (larger than VND 28.44 mil), the maximum control level of 15% of the rent equal to VND 28.44 mil shall be accounted into her taxable income.

+ For the last six months of 2004, such income shall be calculated according to the provisions of Circular No. 81/2004/TT-BTC:

(VND 38 mil x 6 months) x 15% = VND 34.2 mil. As the house rent actually paid as benefits in kind for Mrs A by the company for the last six months of 2004 was VND 30 mil (smaller than VND 34.2 mil), the actually paid amount of VND 30 mil according to invoices shall be accounted into her taxable income.

So, Mrs. A's total taxable income (inclusive of dwelling house rent) in 2004 shall be:

(VND 38 mil x 12 months) + VND 28.44 mil + VND 30 mil = VND 514.44 mil.

- Monthly average taxable income shall be:

VND 514 mil : 12 months = VND 42.87 mil/month.

Mrs. A's payable personal income tax amounts for 2004 according to the tax rate table correspondingly applicable to the two periods shall be:

+ For the first six months of 2004: The partially progressive tax rate table specified in Circular No. 05/2002/TT-BTC is applied to tax calculation.

[VND 1.2 mil + (VND 42.87 mil – VND 20 mil) x 20%] x 6 months = VND 34.644 mil.

+ For the last six months of 2004: The partially progressive tax rate table specified in Circular No. 81/2004/TT-BTC is applied to tax calculation.

[VND 1.2 mil + (VND 42.87 mil – VND 20 mil) x 20%] x 6 months = VND 34.644 mil.

The total tax amount on regular incomes to be paid by Mrs. A for 2004 shall be:

VND 34.644 mil. + VND 34.644 mil. = VND 69.288 mil.

2.3. Regular incomes: Incomes from scientific and technical services, consultancy services, agency services, royalties for use of inventions or trademarks; incomes from emoluments, brokerage commissions, etc., which were received by individuals in the first six months and subject to tax credit under the irregular income tax rate table, shall neither be re-settled nor incorporated in the taxable income of the year. If such incomes were received by individuals in the last six months (and determined as regular incomes), they shall be incorporated in the last six month's income before being divided by 6 months to determine monthly average income, and the progressive tax rate table (specified in Clause 2.1, Point 2, Section II of Circular No. 81/2004/TT-BTC) shall apply to the last six months of 2004.

Example 2: Mr. B earned in 2004 the following incomes:

- Incomes from salary and wage: VND 4.5 mil/month;

- In February 2004, he earned an emolument income of VND 4 mil, and the income-paying agency withheld tax from such income according to the irregular income tariff specified in Circular No. 05/2002/TT-BTC as follows: VND 0.1 mil = [(VND 4 mil – VND 2 mil) x 5%].

- In August 2004, he earned an emolument income of VND 6 mil.

His taxable income shall be determined as follows:

Because such income paid in February 2004 and taxed under irregular taxable income scheme, such amount shall not be incorporated in his taxable income. However, as the income amount from emolument paid in August 2004 was considered a regular income under the amended Decree, it must be incorporated in his taxable income for calculating monthly average income in the last six months:

+ Monthly average taxable income of the first six months of 2004 shall be VND 4.5 mil.

+ Monthly average taxable income of the last six months of 2004 shall be:

[(VND 4.5 mil/month x 6 months) + 6 mil] / 6 months = VND 5.5 mil/month.

Mr. B's payable personal income tax amount for 2004 shall be calculated according to the tax rate table correspondingly applicable to the two periods of the year as follows:

+ For the first six months of 2004: [(VND 4.5 mil – VND 3 mil) x 10%] x 6 months = VND 0.9 mil.

+ For the last six months of 2004: [(VND 5.5 mil – VND 5 mil) x 10%] x 6 months = VND 0.3 mil.

So, the total tax amount to be paid by Mr. B for his regular incomes in 2004 shall be: VND 0.9 mil + VND 0.3 mil = VND 1.2 mil.

2.4. Regarding incomes eligible for 25% relief upon determination of taxable incomes:

Taxable incomes of singers and artists, i.e. performing artists, in such arts as: singing, opera, cai luong (reformed drame), tuong (classical drama), cheo (traditional operetta), dan ca (singing of folk songs), circus and dancing, as well as footballers and professional athletes, shall, in the tax finalization for 2004, enjoy 25% relief before determining monthly average income and be subject to different tax rate table corresponding to the two periods of the year.

Example 3: Singer X earned in 2004 the following incomes:

- Under a long-term labor contract signed with music company A, he/she earned a monthly taxable income of VND 8 mil (inclusive of wage, bonuses and other incomes for participation in shows of the company).

- Remunerations for participation in music shows organized by bar B, each of VND 4 mil.

- An income of VND 18 mil from an advertisement contract signed with cosmetics company D.

His/her taxable income shall be determined as follows:

- Income from singing activities:

+ Total income: (VND 8 mil x 12 months) + VND 4 mil = VND 100 mil.

+ 25% relief of income before tax calculation: 100 x 25% = VND 25 mil.

+ Taxable income: VND 100 mil - VND 25 mil = VND 75 mil.

- Income from advertising activities (ineligible for 25% relief): VND 18 mil.

His/her total taxable income in 2004: 75 mil + 18 mil = 93 mil.

His/her monthly average taxable income: 93 mil : 12 months = VND 7.75 mil.

Singer X's payable personal income tax amounts for 2004 shall be calculated under the tax rate tables correspondingly applicable to the two periods of the year as follows:

+ Payable income tax for the first six months: [VND 0.3 mil + (VND 7.75 mil – VND 6 mil) x 20%)] x 6 months = VND 3.9 mil.

+ Payable income tax for the last six months: (VND 7.75 mil – 5 mil) x 10% x 6 months = VND 1.65 mil.

So, the total tax amount to be paid by singer X for his/her regular incomes in 2004 shall be:

VND 3.9 mil + VND 1.65 mil = VND 5.55 mil.

2.5. Regarding incomes of foreigners staying in Vietnam for less than 30 days: For foreigners being non-residents in Vietnam who stay in Vietnam for less than 30 days and have incomes paid before July 1, 2004, such incomes shall be tax-free. If their incomes are paid on July 1, 2004 and afterward, such incomes shall be liable to income tax at the tax rate of 25% on total taxable income.

3. Personal income tax withholding of 10%

The personal income tax withholding of 10% made before each income of VND 500,000 or more is paid to individuals other than employees of income-paying agencies (current income earners), such as: incomes from scientific and technical services, consultancy services, agency services, royalties for use of patents and trademarks; emoluments or brokerage commissions, etc., shall comply with the provisions of Point 3.3, Section III of above-mentioned Circular No. 81/2004/TT-BTC Where income-paying agencies pay to their current labors incomes under short-term, seasonal, manual or unskilled labor contracts or providers of small and irregular services, whose taxable incomes are estimated at less than VND 60 million per year or less than VND 5 million per month each, such income-paying agencies shall not temporarily make the 10% withholding of tax for such subjects. Income-paying agencies l have to send to tax offices monthly detailed lists with full names, identity cards' numbers, tax identification numbers (if any), addresses and contact phone numbers of income beneficiaries and incomes already paid for tax management and inspection by tax offices.

4. Settling tax finalization

Settling tax finalization of personal income tax for 2004 shall comply with the provisions of Section III of the Finance Ministry's Circular No. 81/2004/TT-BTC of August 13, 2004. The General Department of Taxation hereby provides additional guidance on the following matters:

4.1. For individuals deriving incomes from either Vietnam or overseas sources:

a/ For foreigners:

- Where income tax for overseas incomes of foreigners being residents in Vietnam and working at Vietnam-based representative offices has been paid by employer, such foreigners shall, upon the tax finalization of the year 2004, have to declare their total incomes (both incomes earned in Vietnam and overseas) for tax credit against tax amount paid overseas under the guidance at Point 4.2.2.2, Section III of Circular No. 81/2004/TT-BTC.

For individuals being nationals of countries which have concluded with Vietnam an agreement on double taxation avoidance, the provisions of such agreement shall apply. For individuals being residents of both Vietnam and a foreign country, their taxable incomes earned in Vietnam shall be divided by the number of months they reside in Vietnam for determining their monthly average taxable income.

- For correct determination of overseas taxable incomes: To have basis for correct determination of their overseas taxable incomes, individuals must produce vouchers of overseas payment of incomes, enclosed with annual income certification letters. Where individuals being foreigners fail to fully supply documents as required, tax offices shall take their monthly average incomes earned in Vietnam as a basis for calculation of tax on their overseas incomes. Additionally, such individuals shall also be handled for their violations according to the provisions of Point 1, Section VI of Circular No. 81/2004/TT-BTC.

b/ For Vietnamese:

Vietnamese individuals who, in the fiscal year, were on working missions or labored overseas, shall, upon the annual tax finalization, use their labor contracts and passports to evidence their overseas work or labor periods before determining the number of months they were in Vietnam and months they worked overseas, calculating their monthly average incomes and payable tax amounts according to the tax rate table correspondingly applicable to domestic and overseas stay periods by either of the two methods specified at Point 4.2.1, Section III of Circular No. 81/2004/TT-BTC.

4.2. Handling of violations in submission of finalization:

Where individuals fail to submit tax finalization according to the provisions of Circular No. 81/2004/TT-BTC they shall, apart from being sanctioned with administrative taxation scheme under the provisions of the Finance Ministry's Circular No. 41/2004/TT-BTC of May 18, 2004, guiding the implementation of the Government's Decree No. 100/2004/ND-CP of February 25, 2004 on sanctioning of administrative violations in taxation, have to pay temporary tax amounts fixed up on the basis of tax amounts paid in the preceding year. At the same time, the list and dossiers of such individuals shall be transferred to audit units of tax offices for auditing and examination purposes according to current regulations.

Provincial/municipal Tax Departments are required to provide immediately instructions on the finalization of personal income tax for 2004 under the guidance in Section III of Circular No. 81/2004/TT-BTC and the foregoing guidance.

The new tax finalization forms amended under the Finance Ministry's Circular No. 12/2005/TT-BTC of February 4, 2005 shall apply to organizations and individuals that have not yet submitted their 2004 tax finalization.

Any problems arising in the course of implementation should be promptly reported by the Departments of Taxation to the General Department of Taxation for consideration and settlement.