SBF Tax Compliance and Tax Planning Vietnam

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SBF Tax Compliance and Tax Planning Vietnam by Edwin Vanderbruggen

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Slide 1: 

Tax Compliance and Tax Planning in Vietnam

DFDL MEKONG : 

2 DFDL MEKONG Established in Laos in 1994 Offices in 9 cities in the Mekong Region Phnom Penh, Cambodia Vientiane, Laos Hanoi and Ho Chi Minh City, Vietnam Bangkok, Phuket and Koh Samui, Thailand Yangon, Myanmar (affiliated) Singapore (liaison) 90+ Legal Professionals 200 Total Staff 1 Regional Head Office

CORE SECTORS : 

CORE SECTORS ONE REGION  ONE FIRM Tax, Customs & International Trade Real Estate Corporate & Commercial Project Finance & Energy and Infrastructure 3

EDWIN A. VANDERBRUGGEN : 

EDWIN A. VANDERBRUGGEN Managing Director, Regional Tax Practice DFDL’s Regional Tax Practice Group is headed by Edwin, a tax lawyer, author and academic with 18 years experience in advising multinational enterprises on international tax , regional tax planning and tax disputes Former advisor to Tax Department (2006-07), current Co-Chair of Government-Private Sector Working Group on Taxation University lecturer at Leiden University ITC (The Netherlands), Handelshogeschool University (Belgium), Chulalongkorn University (Thailand), ABAC University (Thailand), National University of Economics (CFVG Vietnam) Hanoi and Ho Chi Minh City. Author of six textbooks and over 60 articles in professional journals, some of which won scientific awards Consultant to World Bank and Asian Development Bank “Excellent at what he does” (Chambers Asia) “First tier tax law firm in Vietnam” (Asia Pacific Legal 500) 4

A Few Key Tax AdviserS (I): : 

A Few Key Tax AdviserS (I): Nicolai Borge Director, Regional Tax Practice Nicolai Borge is an Attorney-at-law, specializing in international corporate tax and transfer pricing. He has over 17 years international experience from “big four” and global law firm DLA Piper where he has been serving clients from a wide range of industries, with special focus on the oil & energy industry and maritime industry. Nicolai is a frequent speaker for Norwegian and Nordic tax authorities and is licensed to practice law in Norway. 5 Laysym Sim Senior Tax Adviser, Head of the Cambodian Tax Practice Laysym is an experienced tax adviser with a degree in management. He has over 10 years work experience, most recently with a “big four” tax advisory firm where he was responsible for relations with the tax authorities. He has advised, just to name a few examples, on tax planning of large property projects, transport companies, employee benefits and conducted tax due diligence on several major acquisitions in Cambodia.

A Few Key Tax AdviserS (II): : 

A Few Key Tax AdviserS (II): Huy Cam Luu Senior Tax Adviser Huy is a career tax lawyer with a J.D. from Hofstra and an LLM in taxation from Georgetown University. He has over 7 years experience in top tier law and tax advisory firms in New York. Huy combines his international tax expertise with a detailed knowledge of Vietnam taxes. He has, among other things, much experience with employee remuneration plans, real estate development and designing international corporate tax strategies. Pham Ngoc Thuan Senior Tax Adviser Thuan is an experienced tax adviser with a degree in economics and accounting. He has over 10 years work experience, most recently with a “big four” tax advisory firm. He has advised, just to name a few examples, on tax implications of large construction and engineering projects, major acquisitions and on several highly publicized real estate developments. 6

A Few Key Tax AdviserS (III): : 

A Few Key Tax AdviserS (III): Sounthorn Chanthavong Tax Adviser Sounthorn has worked for Mekong Law Group since 1994. He has extensive experience in dealing with Lao tax authorities, tax disputes, tax compliance and corporate and individual tax advisory. He speaks Lao, Vietnamese, English and Thai. Nipaporn Supha-utchaichan Legal & Tax Adviser Nipaporn’s areas of practice include corporate taxation, real estate tax structuring and international tax issues. Nipaporn has an LL.B. from Assumption University and an LL.M. (International Program) from Chulalongkorn University. She has also obtained an LL.M. from University of London (Queen Mary). She speaks Thai and English. 7

EDWIN A. VANDERBRUGGEN : 

EDWIN A. VANDERBRUGGEN From Edwin’s Deal List: Lead co-counsel on US$425M Mobitel deal, lead tax counsel (“Asia Deal of the Year”) Tax structuring for 200 mio US$ power plant of listed power producer in Vietnam, Laos, Cambodia Tax efficient structuring of 150 mio US$ complex hotel/casino resort project for multinational gaming enterprise Regional tax planning structure for multinational bank Regional customs duty and tax structure for multinational in consumer products US$120M BOT bridge project Tax structuring of 300 mio US$ urban retail and residential projects for listed property fund Tax structuring advice for 75 km2 island project off Cambodian coast Tax structure for mutual fund in Thai resort property 8

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Tax Compliance and Tax Planning in Vietnam 9

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Key Rates and Exemptions Corporate Income Tax and Profit Extraction Construction & Engineering Projects Key Points of the Personal Income Tax and Taxation of Expatriate Employees Holding Structures and Taxation of Capital Gains on Shares Final Remarks and Key Benefits of the Vietnam-Singapore DTA 10 Contents

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Key Rates and Exemptions 11

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12 Snapshot Corporate Tax 25% Withholding to non-resident Dividend 0% - 5% (*individual shareholder) Interest 10% Royalty 10% Services 0% - 5% (+ up to 5% VAT) Purchase goods 1% (exempt if only delivered at border) Transfer pricing regulation and compliance Tax incentives (reduced rate, exemption period, geographical area) Capital gains on shares LLC and other Capital Interest: 25% on net gain Securities: 0.1% on price or 25% on net gain

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13 Tax & Dividend Withholding

Tax Holidays: Power Plant : 

Tax Holidays: Power Plant 14

Tax Holidays: Hotel Project(4 Star, 100 Rooms, US$20M) : 

Tax Holidays: Hotel Project(4 Star, 100 Rooms, US$20M) 15

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16 Foreign Contractor Tax

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17 Foreign Contractor TaX – DTA Implications Refer to UN Model “furnishing of services” provision. Singapore, France and Japan do not have this provision, so services over 6 months may be exempt provided that the service provider does not have a fixed place of business, an office or dependent agent in Vietnam. Hong Kong, on the other hand, has this “furnishing of services” provision. *** No FCT applies with respect to certain services performed outside of the territory of Vietnam and the product or outcome is consumed outside of Vietnam notably: repairing of means of transportations, machinery and equipment; advertising; sales promotion; investment and trade promotion overseas; broker commission for sales overseas; and training overseas.

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Corporate Income Tax and Profit Extraction 18

Compliance and deductibility : 

CIT returns and payment: Quarterly advance payment and declaration CIT finalization 3 months after end financial year VAT monthly, no annual finalization PIT monthly, annual finalization Deductibility issues in general: System of “red invoices” To be phased out Licensing restraints Compliance and deductibility 19

Applicable Rules on Advertising and Promotion : 

Key Elements: Circular130-2008 on CIT (Circular CIT C) A IV 2.19) Advertizing and Promotion expenses are not CIT deductible With some exceptions Which exceed 10%/15% of the amount of deductible expenses Issues: Which expenses are within the cap? Which expenses are excluded from the cap? How to calculate? Any optimization possible? Applicable Rules on Advertising and Promotion 20

Expenses Within the Cap? : 

Circular 130 Advertizing (“Quảng cáo”) Marketing (“Tiếp thị”) Promotion (“Khuyến mại”) Broker’s commissions (“Hoa hồng môi giới”) Expenses for receptions, formal occasions and conferences Marketing support payments, discounts Complementary newspapers for press agencies Expenses Within the Cap? 21

Expenses Within the Cap? : 

Not subject to cap Commissions for brokerage of insurance Commissions for selling goods Market research Exhibitions, openings, fairs Salaries of marketing staff Royalties on trade marks Expenses Within the Cap? 22

Expenses Within the Cap? : 

Planning Tips: Can you restructure local or international marketing expenses into tax deductible royalties? Can you restructure commissions or cash discounts to distributors into discounts on invoice? Can you move the deduction of certain expenses instead of recharging them? (e.g., payment to distributor for sales staff) Expenses Within the Cap? 23

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24 Profit Repatriation through dividends Limited to accounting profit for this and prior years No obligatory corporate reserves (exceptions in some sectors) No WHT to corporate shareholders, so in combination with tax holiday highly tax efficient. Dividend paid to individual shareholder is taxed at 5% WHT. Tax authorities must certify and allow the amount of profit that will be distributed. Need to submit financial statements and await decision (1-3 months) Practical recommendation: choose offshore holding in function of diverting or paying dividends. A few DTAs that provide in 5% WHT for dividends; including Luxembourg, Netherlands, Singapore (50% or US$10M shareholding)

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25 Profit Repatriation through Shareholder loans No thin capitalization rule, but exceptionally some projects may have debt/equity ratios determined by investment regulator Interest rate may not exceed 150% of state bank rate No interest deduction is allowed if capital was not paid up (schedule) Transfer pricing Circular 117 & Circular 66? In practice: Capital not paid up (schedule) SBV procedure not respected No FCT withholding Insufficient legal documentation Foreign exchange restriction: SBV registration (short term vs. long term)

France Finance SPV : 

France Finance SPV French Captive Finance SPV Borrows from foreign holding Extends loan to VNCO VN DTA with France: no withholding tax No WHT on interest paid by French company 26

Tax Planning for Finance : 

27 Tax Planning for Finance Dutch Version Deposit at Dutch public bank Dutch public bank lends to VNCO VN DTA with The Netherlands: no withholding tax No WHT on interest paid by Dutch bank

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28 Profit Repatriation through Shareholder loans Convertible loan Allowed by SBV? Conversion into capital tax implications: no tax triggered unless the conversion includes accumulated interest. For non-resident organization, 10% withholding tax applied. Profit sharing loan As a principle it is possible, but the interest rate may not exceed 150% of state bank rate Other conditions Under the DTA, profit sharing interest is still interest.

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29 Profit Repatriation through Management Fees WHT for general services: 5% VAT + 5% CIT Exemption under DTA hinges on interpretation of PE by GDT: (danger!) Offshore vs. onshore services VAT can be offset? Commission, marketing services, promotion are subject to deductibility “CAP” (10%/15% of total deductible expenses) Management fees, general administrative and executive expenses, general services are commonly rejected by GDT Foreign exchange control: no advance approval. Bank will require documents (agreement, invoice, FCT declaration, tax receipt) and will decide.

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30 Profit Repatriation through Management Fees Business Purpose & Reasonable Expense Is the fee linked to the business of the company? Was a real service provided? How to collect and keep evidence of this? Contracts: Were the provisions really applied? Cosmetic mistakes? Signed by whom, when and where? Is the service provider really capable of providing the service (e.g. “empty” tax haven company)

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Transfer Pricing Challenges: The Cost Plus method may be imposed upon you. Can you justify the price if the GDT is aware of the cost basis? Do you have TP documentation in place? Have you recorded all the necessary information for future audits? Be careful for internal comparables! (danger!) What if you start paying a fee which you did not pay last year? What is the tax position of the company? 31 Profit Repatriation through Management Fees

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32 Profit Repatriation through Royalties WHT for royalties 10% CIT (no VAT) Under a few DTAs there is a reduced rate of 5% for production intangibles (patent, formula, know how) including Singapore, Netherlands, Belgium. Transfer of technology must be registered and approved by Vietnam authorities. Foreign exchange control: no advance approval. Bank will require documents (agreement, invoice, FCT declaration, tax receipt) and will decide. Tip: Income paid under franchising contract only subject to 2% CIT withholding (!)

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Structure intangibles via favorable DTA states Netherlands 5% rate Register technology transfer Deductibility profile is generally stronger in Vietnam 33 Profit Repatriation through Royalties

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Construction & Engineering Projects 34

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VN SUB is under contract with Project Owner to construct a building. Some equipment will also be provided such as elevators and climate control. Income derived by VN SUB. Profit repatriation to Parent Co. VN SUB no tax holiday. 35 C&E Project in Vietnam

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Onshore Services: PE Issues: GDT usually assumes a PE exists for work done in Vietnam. Should you register for tax and apply VAS: pay tax on a net basis (at 25%)? No tax registration/VAS withholding: Construction services with equipment: 3%VAT + 2%CIT Construction services without equipment: 5%VAT + 2%CIT 36 C&E Project in Vietnam

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Onshore Services: General services with equipment: 3%VAT + 2%CIT General services without equipment: 5%VAT + 5%CIT Reimbursing expatriate salaries Hybrid method: offset VAT but apply CIT by withholding (condition: VAS + 6 months) Deductibility 37 C&E Project in Vietnam

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Offshore Services: Design, planning, quality check, project management, marketing, commissions, etc. Only a few are accepted by GDT as exempt from withholding (such as training offshore, brokerage, promotion) For most general services, withholding is 5%CIT + 5%VAT 38 C&E Project in Vietnam

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Offshore Services: DTA: services performed offshore do not trigger a PE. Canada, Malaysia, Germany, India, Italy: also withholding on offshore services! Deductibility Management fee (danger!) Marketing (cap!) Commissions Supervision, engineering, fees with profit mark-up Transfer pricing aspects (cost-plus for intra group services) 39 C&E Project in Vietnam

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Key Points of the Personal Income Tax and Taxation of Expatriate Employees 40

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41 Comparison: The Netherlands – Vietnam TOS

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The Netherlands continues to tax Vietnam exempts Less than 183 days Not a resident last year Paid by the Netherlands, not Vietnam No PE in Vietnam 42 Taxation: Short Term Assignments

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Paid from Vietnam Vietnam always taxes The Netherlands exempts or Presence over 183 days Vietnam always taxes The Netherlands exempts 43 Taxation: Short Term Assignments

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Danger! "Real Employer" Vietnam will not exempt if VN Co. is the "real employer" Example Risk of double tax 44 Taxation: Short Term Assignments

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No the Netherlands tax resident The Netherlands salary taxed in the Netherlands Vietnam and the Netherlands salary taxed in Vietnam with credit for the Netherlands tax 45 Taxation: Long Term Employment

Employee benefits : 

Typical disputes with the GDT: Invoice not issued to the proper entity Reimbursement of business expenses treated as personal benefits Lack of supporting documents for benefits in kind (e.g. relocation allowance) Additional costs relating to exempt PIT benefits (security guard, gardener, cleaner) in addition to housing cost for expatriates) Benefits not served directly for the employee himself (e.g. for his family members) 46 Employee benefits

Employee benefits : 

Planning Tips: Put a procedure in place to maximize compliance Maintain good record of supporting documents; Ensure self-assessed tax declaration is in compliance with regulations Classify the benefits under the exact category listed by the regulations for tax exemption. 47 Employee benefits

Slide 48: 

Holding Structures and Taxation of Capital Gains on Shares 48

Slide 49: 

Non-resident transferring shares in a Cambodia, Lao, Vietnam, or Thai company Vietnam tax law: either 25% CIT on Capital Assignment (net gain) or 0.1% on the transfer price on assignment of securities Taxing authority of Vietnam with respect to the sale of shares in a Vietnamese company varies under DTAs to which Vietnam is a signatory – for example: Canada: Vietnam is not prevented from taxing gains on shares of Vietnamese companies; Korea, The Netherlands: Vietnam may only tax the gain on a real estate company; Hong Kong: Vietnam may tax gains realized on shares in companies that principally own real estate in Vietnam, or shareholding in a company that does not exceed 15%; Singapore: Vietnam may not tax gains on shares of Vietnamese companies, only Singapore may tax 49 Capital Gains on Shares

Slide 50: 

with or without spv 50

TAX TREATMENT ON SALE OF SHARESIN AN OFFSHORE COMPANY : 

51 OL 3306/TCT-CS dated 3 Sept 2007 Facts: Taiwan Forest – Agriculture Ltd., Co - 100% foreign owned enterprise in Vietnam is a subsidiary of TTCV Investment (BVI) CO., Ltd. In 2003, the TTCV is transferred to San Miguel Foods and Beverage International Limited oversea. As a result, Taiwan Forest – Agriculture Ltd., Co was renamed as San Miguel Pure Food Ltd., Co. Reply: The capital assignment led to the change of the investor and change of name of the company without setting up a new legal entity; Income from this capital assignment is subject to CIT in Vietnam TAX TREATMENT ON SALE OF SHARESIN AN OFFSHORE COMPANY

TAX TREATMENT ON SALE OF SHARESIN AN OFFSHORE COMPANY : 

OL 1719/TCT-PCCS dated 7 May 2007 Facts: Asia Pacific Breweries (Australia) is the parent company of the FBG Vietnam Holdings Pty Ltd which own Foster Tien Giang and Foster Danang. The Vietnam Beer Manufacturer JVC has signed a contract to purchase Foster Tien Giang and Foster Danang. Reply: (1): If FBG VN Holding is the transferor, then it is responsible for declaring and paying income tax on the income from the transfer of capital; (2): If APB transfers FBG VN Holding (which holds Foster TG and DN), then Purchaser is responsible for declaring, withholding and paying tax for the income from transfer capital. 52 TAX TREATMENT ON SALE OF SHARESIN AN OFFSHORE COMPANY

REGIONAL HOLDING STRUCTURE : 

Singapore Vietnam: excellent, as there is no Vietnam taxing right on gains on shares. Make sure there is no PE in Vietnam of the holding. In case Vietnam would introduce WHT on dividend: Singapore 5% rate Myanmar: DTA not implemented Cambodia: will only tax capital gains for non-residents in exceptional circumstances. Laos: no DTA with Singapore, so 10% tax applies TOP HOLDING Dividend from Singapore CIT exempt based on DTA, e.g. Thailand. However, Ruling № Kor Khor 0706 (Kor Mor. 04)/883 53 REGIONAL HOLDING STRUCTURE Dividend: no WHT Dividend not subject to CIT?

REGIONAL HOLDING STRUCTURE : 

Hong Kong Vietnam: not ideal. Exempt for participations of 15% or less but not for higher shareholding. Not exempt in case subsidiary holds principally real estate. WHT on dividend: 10% rate Myanmar: No DTA Cambodia: will only tax capital gains for non-residents in exceptional circumstances. Laos: no DTA with Hong Kong, so 10% tax applies TOP HOLDING CIT exemption? 54 REGIONAL HOLDING STRUCTURE TOP HOLDING Dividend: no WHT Dividend not subject to CIT?

REGIONAL HOLDING STRUCTURE : 

Thai ROH Vietnam: Vietnam may tax gains on all shares. WHT on dividend is 15%, but Vietnam domestic rate is 0% at present Myanmar: Myanmar may tax gain if participation exceeds 35% or if holds immovable property. DTA not implemented? Cambodia: will only tax capital gains for non-residents in exceptional circumstances. Laos: Laos may not tax gain on shares. WHT on dividend capped at 15%, but Laos currently applies 10% TOP HOLDING In case of a Thai Top Holding: issue with non-taxable sub-holding is resolved? 55 REGIONAL HOLDING STRUCTURE TOP HOLDING Dividend: no WHT Dividend not subject to CIT?

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Final Remarks and Key Benefits of the Vietnam-Singapore DTA 56

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57 Recap of profit Extraction options

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58 Overview of Indirect Repatriation (Various exceptions apply)

Singapore : 

Withholding tax rates: Dividends: 5% if beneficial owner contributed more than 50% of capital or more than $10M; 7% if beneficial owner contributed between 25% and 50% of the capital; 12.5% in all other cases Interest: 10% Royalties 5% for use of (or right to use) any patent, design or model, plan, secret formula or process, or for the use of (or right to use) industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience 15% in all other cases 59 Singapore

Singapore : 

Capital gains on shares? Vietnam may not tax on capital gains on sale of shares; only Singapore may tax Other advantages? No “technical services” provision or “furnishing of services” provision Performance of services in Vietnam per se does not lead to having a PE. Services provided a short-term basis (for example, less than 6 months) will not likely constitute a PE under the DTA, and thus, will be exempt under the DTA 60 Singapore

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Edwin On Tax just went live… Unique blog with insights and expert analysis on tax in Cambodia, Laos, Myanmar, Thailand and Vietnam www.edwinontax.com 61

Slide 62: 

62 Edwin Vanderbruggen Managing Director, Regional Tax Practice Edwin.Vanderbruggen@dfdlmekong.com Thank You

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