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Comments on Letter 1305 of the GDT
9 April 2003
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BY EMAIL

PRIVATE & CONFIDENTIAL

9 April 2003

Re: Comments on Letter 1305/TCT/NV5 dated 10 June 1997 of the General

Department of Tax (“GDT”)

As requested, we are pleased to set out below our comments on the personal income tax
(PIT) and secondment fee issues in Official Letter 1305 TCT/NV5 dated 10 June 1997 of
the General Department of Tax (“Letter 1305”) responding to Official Letter 209/CTBN
dated 26 May 1997 of the Bac Ninh Tax Office (“BNTO”).

Letter 209/CTBN dated 26 May 1997 to the GDT specifically requested guidelines on the
PIT treatment of the expatriates and the tax treatment of the secondment contracts. The
questions from the BNTO and responses from the GDT relate to the following issues.

Personal Income Tax

Housing allowance for calculating personal income tax

 Letter 1305 refers to the provision of Circular 27/TC-TCT dated 30 March 1995 of
the Ministry of Finance (“MoF”) that if the company pays for staff’s
accommodation, this benefit will be taxed on the basis of the actual amount paid
but shall not exceed fifteen (15) per cent of the total salaries, wages and
remuneration. The housing benefits exceeding 15% of total salaries, wages and
remuneration are not included in the taxable income for calculating PIT. If housing
allowance is paid in cash, it is fully taxable.

 This provision was repeated in the subsequent Circular 39/TC-TCT dated 26 June
1997 and Circular 05/2002/TT-BTC dated 17 January 2002 of the Ministry of
Finance (“MoF”) providing detailed guidance on the implementation of the
Ordinance on Personal Income Tax. VFG has complied with this provision.

 Letter 1305 does not specifically stipulated whether taxable housing benefits are
calculated on the onshore salary or total salary from different sources. Because PIT
regulations are unclear on this issue, the practical implementation was subject to
interpretation of the local tax authorities. In the previous years, we reached an
agreement with Mr Phu that the taxable housing benefit was calculated on the
Vietnam salary only.

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 When Mr Tong took over VFG’s account, he did an unofficial survey with other
provincial tax authorities and noted that other provinces calculated taxable housing
benefits on both onshore and offshore salaries. Accordingly, he wanted to adopt
the same approach. In 2002, the GDT issued an internal guideline to the Hai Phong
Tax Office providing that taxable housing benefits should be calculated on both
onshore and offshore salary. This letter supported Mr Tong’s position. However,
he agreed not to go back to earlier years on the basis that this is a change in the
interpretation of the law. It is not that VFG made an incorrect calculation where
the tax authorities can go back for 5 years and reassess the tax liability.

Other PIT matters in Letter 1305

 Another question from the BNTO relates to what is the maximum ratio of overseas
allowances can be paid to the expatriates. According to the GDT, there is no
regulation on this. It is up to the company’s policy. We are not quite sure why
BNTO asked this question since overseas allowance is taxable under the law. The
only implication it may have on the tax liability is that taxable housing is currently
not calculated on the allowance.

 Letter 1305 also reconfirms that in respect of foreign employees residing in

Vietnam from 183 days onwards, the income subject to tax includes both income
derived in and outside Vietnam.

Tax treatment in case of hiring foreign experts from the parents company

 In Letter 209, the BNTO requested guideline on the tax treatment of the
secondment fee paid by VFG to the parent company. According to Letter 1305, the
parent company shall be subject to foreign contractor withholding tax (FCWT) at
10.3% (consisting of 4% turnover tax and 6.3% profits tax) on both the secondment
fee and the income paid by VFG directly to the expatriates. (The current FCWT
rate applicable to services is 5% VAT and 5% BIT). The expatriates are subject to
PIT under the PIT law.

 It appears from Letter 1305 that the GDT does not treat the expatriates as
employees of VFG. In their view, the parent company provides services to the JV
and the expatriates perform these services. Initially BNT was of the same view that
the secondment contract is a management contract and therefore should be
approved by the Ministry of Planning and Investment (they mixed it up with the
management contract of a hotel or apartment building).

 We explained to them that this is not a management contract or service contract in a

true sense. The secondees hold senior management position in the JV and are

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legally employees of the JV. There is no profit element in this arrangement from
the foreign partner’s point of view. The secondment fee is only to cover part of the
offshore income of the expatriates. The BNTO understood this issue. They also
fully understood that a similar agreement was signed with Viglacera and the
sensitivity behind these. On this basis they have agreed that only the difference
between the secondment fee and the offshore income of the expatriates is subject to
FCWT. At that time we were already aware that the agreement with the BNTO
was only a temporary. There is always a risk that the BNTO will come back and
changes their mind. We have made this clear to NSG and Tomen. We are not
aware of Letter 1305 even though the letter was issued before our meeting with
BNTO.

 Based on our discussion with Mr Tong, he seems to be aware of the whole issue.
However, he indicated that he is more interested in the legal documentation and not
on the substance. It seems to us that Mr Tong wants to use Letter 1305 to argue that
the previous agreement was a mistake and not in line with the regulations. Thus,
they have the right to review the tax calculation.

 The problem here is the BNTO focuses more on the form of documentation rather
then the substance of the issue. In substance, this arrangement is not different from
other foreign invested enterprises where a portion of the income is paid onshore and
the other portion is paid offshore by the parent company, who will then recharge
the full cost to the local affiliates in the form of a debit note. The tax authorities
accepted that practice but challenge the use of secondment contracts. We
understand that other companies in Hanoi also have the problems with secondment
contracts. In one particular case, we noted that the tax authorities treat the payment
of secondment fee as “remittance of profits”. They have to restructure the
arrangement. I understand that this is a sensitive issue and any change to the
arrangement would requires approval from the Board of Management and require
lengthy discussion.

 At the initial meeting with BNTO back in 1999, BNTO expressed the intention to
collect FCWT on the secondment fee. They never raised the intention to collect
FCWT on the income paid directly to the expatriates. Does BNTO now seek to
collect FCWT on the income paid directly to the expatriates? We are pleased to
discuss with you on alternatives to resolve this matter.

We trust that the above comments are useful. Please do not hesitate to contact us, should
you want to discuss this issue further.

Kind regards

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Dinh Thi Quynh Van

Senior Manager
Tax & Consulting

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