PREFACE

Tax administration has been taught in the Academy of Finance of Vietnam for many
years. However, this subject has only been taught in Vietnamese so far. In order to
improve the English ability of the Academy’s students, series of solutions have been
suggested and/or applied of which using English in teaching at the Academy is one
of the key solutions.

There is a lot of work to do for teaching a new subject of which preparing learning
materials is very important. Among other learning materials, a textbook on taxation
is a must-do thing. That is the reason for the birth of this book for the first time of
publication in 2013. After 5 years of having been used for teaching and studying,
the book need to be modified because some of its parts have become out of date
resulting from many changes in the Vietnam’s tax laws as well as some newly
emerged international tax issues in the context of the digital economy and the fourth
industrial revolution. For the second edition in 2019, we try to update all the key
changes in the Vietnam’s tax laws and the modern uses in tax administration. We
also make some changes to the exercises and supplement some more exercises.

The aims of this book are to provide systematic understanding of tax theory, crucial
contents and issues of tax laws, and tax administration in Vietnam. This book is
designed for students who learn English in economics as their first university degree
or students majoring in economics with upper-intermediate level English, and also
for those who want to read about tax in English for their study, research or work.

To make a textbook is always a dull work. Moreover, tax is a very complicated

subject. Therefore, it is inevitable to avoid errors in this book. We highly appreciate
suggestions from scientists, colleagues and readers to perfect this work.
 ACKNOWLEGEMENTS

We at first wish to thank Associate Prof. PhD. Nguyen Trong Co, Chairman of the
Academy of Finance and Prof. PhD. Ngo The Chi, Ex-Chairman of the Academy of
Finance for their encouragement and special help.

We owe a special thanks to the following colleagues for their valuable comments
and suggestions:

Pham Van Lien, Associate Prof, PhD, Ex-Vice Chairman of the Academy of Finance;
Dang Duc Son, Associate Prof, PhD, Head of Department of Accounting, School of
Economics, National University of Vietnam in Hanoi; Do Van Anh, MBA, Head of
Department of Auditing, Hanoi University; Vuong Thi Thu Hien, Prof, PhD, Vice
head of Department of Taxation, Faculty of Taxation and Customs, Academy of
Finance; Mai Ngoc Anh, Prof, PhD, Dean of Faculty of Accounting, Academy of
Finance.
Special thanks also to our colleagues in the Department of Scientific Management
for their efficient coordination and their help in editing and publishing this book.

Many thanks also to our colleagues in the Faculty of Taxation and Customs,
Academy of Finance for their encouragement and good advice.
 THE AUTHORS

Le Xuan Truong, Associate Professor, Doctor of Philosophy in Economics, BA in

English, Dean of Faculty of Taxation and Customs, Academy of Finance of
Vietnam: Co-chief Author, writer of chapter 3 and 5, co-writer of chapter 1 and 7

Nguyen Thi Thanh Hoai, Doctor of Philosophy in Economics, Vice Dean of

Faculty of Taxation and Customs, Head of Department of Taxation, Academy of
Finance of Vietnam: Co-chief Author, writer of chapter 2 and 8, co-writer of chapter
9

Nguyen Van Hieu, Associate Professor, Doctor of Philosophy in Economics, MBA

(Aus), Head of Department of Finance, School of Economics, National University
in Hanoi: Writer of chapter 4

Ly Phuong Duyen, Associate Professor, Doctor of Philosophy in Economics,

Lecturer of Faculty of Taxation and Customs, Academy of Finance of Vietnam:
Writer of chapter 6

Truong Thi Minh Hanh, MA (Aus), Vice Head of Department of Financial

English, Faculty of Foreign languages, Academy of Finance of Vietnam, co-writer
of chapter 1 and 9

Truong Ba Tuan, MBA (Aus), Vice Director of National Institute for Finance: Co
writer of chapter 7
 CHAPTER 1
AN OVERVIEW OF TAXATION

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

1. Define terms related to taxes and tax policy.

2. Distinguish tax revenues from other revenues of the government.

3. Give reasons why we have taxes.

4. Explain the principles of taxation.

5. Describe the major types of taxes.

6. Describe the standards of a modern tax system.

7. Describe the basic elements of a tax law.

1.1. CONCEPTS AND CHARACTERISTICS OF TAX

To many people, tax is considered to be something they have to pay to the

government but for which they receive nothing directly in return. So tax is just
understood as whatever (money or assets) a person or an entity has to pay
compulsorily to the government in order to finance the government’s activities. This
perception derives from the fact that people only see the act of tax payment from the
citizens to the government both in cash and by other assets such as rice or wheat etc.

According to the Mc Milan Dictionary of Accounting, “Taxes are compulsory levies

made by public authorities for which nothing is received directly in return. They are
used in part to provide public goods”.1

The Longman Dictionary of Business English defines tax as “A payment of money

legally demanded by a government authority to meet public expenses”.2

In our opinion, tax is a part of income which is legally stipulated and compulsorily
paid by citizens to the government in order to finance the public expenditures.

From the concepts of tax mentioned above, the following characteristics can be seen:

Firstly, tax is a compulsory payment. This compulsory nature is attached to the

power of the government. The way to tax is very different from the way to get many
other revenues of the government which can be got voluntarily such as the sale of
government’s properties, loans, grants or donations, etc. If taxes were paid
voluntarily, very few people would pay because they would get no direct benefits in
exchange for paying taxes.

But unlike fines, taxes are not paid as punishment for breaking a law or rule. The
payment of taxes is not accompanied with the law violations but the apparent
responsibility of the citizens to the state.

Secondly, tax is an indirect compensation payment. Taxpayers get nothing directly

in exchange for paying taxes. Although taxpayers can eventually benefit from the
public goods and services provided by the government such as security, national
defense and roads. They get no immediate benefits in return for their tax payment.

1
R.H. Parker (2002): Mc Milan Dictionary of Accounting, second edition, page 279.
2
J. H. Adam: Longman Dictionary of Business English, page 433
They cannot demand the government to provide public services before they pay
taxes or right after they pay taxes. Also, the public services and the amount of taxes
are not positively related.

1.2. THE ROLES OF TAX

1.2.1. MAIN REVENUES OF THE GOVERNMENT’S BUDGET

This is the primary role of tax. In order to get the money for public expenditures as
well as to finance for the governments’ activities, the governments look for many
revenue sources such as the sale of the state’s property (natural resources, for
example), fees, voluntary donations, loans, etc., among which tax is the most
important source. Tax revenue is the core part of the government’s budget because
tax is compulsory and made by a wide range of payers whose incomes are produced
by their economic activities. Human beings cannot exist without economic activities
which people do to earn a living such as farming, fishing, mining, tourism and
manufacturing. Thus, as long as men exist, the sources of tax are available.

Tax has an important advantage concerning to its compulsoriness. With voluntary

donation, governments cannot be sure of how much they can get. Loans are not only
dependent on the willingness of the lender but also must be repaid at maturity date.
With its compulsoriness, tax revenue will be firmly paid to the government’s budget.

The wide range of payers makes tax superior to some other budget’s sources. While
natural resources and some other budget’s sources are limited, tax is endless. Even
though in some Gulf countries where crude oil, but not tax, is the main part of the
budget of the governments, these governments cannot rely forever on crude oil since
it may be abundant but not unlimited. Crude oil one day will become exhausted.
Fees can only apply to non-pure public goods and services such as roads and bridges.

In order to bring into full play of this tax’s role, the government has to deliberately
consider the elements of each tax among which tax base and rate count most. If the
base is not clear and sufficient, it can be eroded, and of course, the tax amount paid
to the budget reduces. Some may think that the higher the tax rate is, the higher the
tax revenue will flow into the state budget. Unfortunately, this is not always true. To
some extent, as the tax rate increases (up to a certain level), the tax revenue brought
in goes up. When the tax rate continues to rise, the tax amount brought in falls. This
law is known as Laffer curve which was named after an American economist who
drew the curve to illustrate his concept while he argued against President Gerald
Ford’s tax increase in 1974 although Laffer has never claimed to have invented the
concept, explaining that he has learned it from Ibn Khaldun and John Maynard
Keynes. Laffer curve can be seen as follows:

Tax revenue

0 100%
Tax rate

The importance of tax to the state budget can be seen in the following example:

EXAMPLE 1.1: State budget revenue structures of EU and OECD (1998)

Group of Tax Revenues from compulsory

Others Total
countries revenue social contributions

OECD 70.6% 28.2% 1.2% 100%

EU 65.2% 32.7% 2.1% 100%

[Source: Herve Dutel, The socio-economic context of public finance, Lecture

of FSP, Hanoi 2003]

The above example shows that in 1998 tax revenue percentage is the largest part of
the total budget revenue of OECD and EU countries, reaching nearly three quarter
of the total state budget.
1.2.2. MACRO ECONOMIC ACTIVITIES ADJUSTMENT

As tax affects the income of enterprises and citizens, it can impact the motive of
labor and investment; therefore, it can adjust some major factors of the economy
such as the supply of labor, the demand of labor and capital, and the aggregate
demand and supply of the economy as a whole.

We will discuss how tax can help adjust the economic activities in the following
section.

Firstly, tax helps to regulate the economic cycle. As many economists have proven,
the global economy as well as each economy all over the world goes up and down
cyclically through four stages including recession, crisis, recovery, and prosperity.
Crisis, of course, does harm to the development of the economy but too fast
economic growth is also harmful to the development of the economy. Too fast
economic growth may cause some unbalances to the normal trend. For example, too
fast economic growth may cause lack of the labor supply or the exhaust of the natural
resources and so on. Therefore, to maintain an appropriate economic growth is of
great significance to every economy.

One of the functions of the government is to make the economy develop stably. In
order to fulfill this function, the government uses some tools such as public
expenditure policy, monetary policy, and tax policy.

How can tax help to regulate economic cycle? This is a very complicated issue but
here in this basic chapter of a textbook on taxation, we introduce two of the simplest
ways as below:

(i) If the economy shows a sign of too fast growing, the government can
increase the corporate income tax. An increase in the corporate income tax
can force firms to charge a higher price in order to shift tax burden to
consumers if possible or bear the tax themselves. Thus the rise in the income
tax may cause the rise in commodities’ price, which may discourage
consumer spending and firm’s production. As a result, businesses will see
their profit shrink and investment reduce.
 (ii) If there are signs of economic recession, tax cuts would be the government’s
choice. The effect of this choice may be to create a reversal of the economic
situation. This means tax reduction may stimulate firms to invest more or
encourage consumers to spend as firms have more disposal income to invest
and to raise their workers’ income. Another way to spur the economy is to
refund taxes, may have similar impact as tax reduction on the development
of the economy.

EXAMPLE 1.2:
In 2007, when the US economy had some signs of recession, President Bush decided
to apply an income tax refund program to all income taxpayers. The aim of this
program is to leave the people with more income to spend which is believed to
stimulate the growth of the economy. This program helped Bush’s Administration
refunded over 370 billion US dollars. In accompany with other solutions such as the
rediscount rate reduction made by the Federal Reserve; this measure to some extent
did spur the US economy to recover in the following years.

Secondly, tax helps to balance the labor market and control inflation. Similar to the
way it regulates the economic cycle, an increase or decrease in taxes can help to
control inflation and to lower the unemployment. However, the use of tax to achieve
this target is similar to the use of a two edge sword. Misusage of tax could even
make inflation and unemployment worse.

EXAMPLE 1.3:
In the 1960s, the US economy was in recession with high inflation. In 1963 and
1964, all consultants of President Kennedy advised him to take many solutions
including income tax and corporate tax cut. But regrettably, no reduction in taxes
was done. Some years later, this advice was applied but it was too late and inflation
continued to rise.
Source: Paul A. Samuelson and William D. Nordhaus: Economics.

Thirdly, tax helps to stimulate the economy to develop in accordance with

government’s directions. By the use of tax rates and tax incentives, the government
stimulates businesses to invest in certain areas of the country or in some fields of the
industry or to constrain investment in certain fields. All of these help to efficiently
use the limited resources of a country and achieve the government’s set aims.

EXAMPLE 1.4:
In the 1950’s in order to spur the development of the industries, Japanese
government applied an accelerated depreciation rate to companies whose machinery
was newly invested or using new technology. The accelerated rate was up to 50
percent in the first year of usage of the machines. This solution strongly affected the
investment in new machine and technology of many firms in Japan and it was one
of the reasons explaining why the industry of Japan could sharply develop in the
following two decades after that.

Fourthly, tax protects the domestic production. The protection is done by imposing
high import duty. High import duty pushes the price of imported goods higher.
Because of the high price, the imported goods are in difficulty in competition with
the similar domestic goods.

However, in the context of the global integration where the import duty rate is
reduced considerably even to zero, the domestic production protection role of tax is
apparently lessened.

Fifthly, tax corrects problems caused by negative externalities. Market system does
not always work as well as we might hope. One of the weaknesses of the market
economy is that it causes negative externalities such as water and air pollution. This
is called market failure. By applying environmental tax on the pollutants a firms puts
into the air and water, the government can correct this market failure.

“Pollution problem arise because producers have to pay only part of the real costs of
making their products. Producers must pay for their raw materials. They must also
pay for labor, the machines they use in production and energy. However, producers
may put tons of waste into the air, or into rivers, lakes, or oceans at little cost to
themselves. In doing so, they pollute our water and air, making both less valuable to
society.
 In these cases, taxes can correct this market failure. The government can collect taxes
on the pollutants a business puts into the air and water. The money from that tax can
be used to clean up the pollution. The tax may also make production more expensive;
thus, the firm’s cost will more closely represent the true cost of making the goods.
This is just one way that a tax helps to correct a market failure.”3

1.2.3. REDUCTION OF UNFAIRNESS IN INCOME DISTRIBUTION

Inequity in income distribution is regarded as an inevitable consequence of market
economy and it is a great challenge of every nation nowadays. This is also a market
failure. To cope with this challenge and to make the benefits of economic
development come to every man in society is an important responsibility of the
government.

Tax can be used to achieve this aim. By imposing high excise duty on luxurious
goods, the government can take much income of the rich as only the rich people are
able to buy these goods. By applying a progressive income tax, the government can
partly reduce the gap between the rich and the poor. Some tax incentives applicable
to the poor such as VAT exemption of necessities may help to achieve this goal.

1.3. TAX SYSTEM

1.3.1. CONCEPTS
There are two viewpoints on tax system. The classical point of view holds that tax
system is a complex of all taxes of a state which have interactive relations. The
modern view states that tax system is a complex of all taxes and the system of tax
administration of a state which have interactive relations. Thus, the modern
viewpoint is wider than the classical one.

1.3.2. TAX CLASSIFICATION

Based on ways to levy, taxes include direct tax and indirect tax.

Direct tax is a tax that is directly imposed on income and property and therefore it
is paid by the taxpayer direct to the government. Corporate income tax, capital gains
tax, land tax are examples of direct taxes.

3
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 423
 “A direct tax is a tax paid by the person against whom the tax is levied. The tax is
levied against the individual taxpayer, and that taxpayer must pay the tax. A personal
income tax is levied against the individual taxpayer who, in turn, pays the tax. Thus,
the personal income tax is a direct tax. The individual who earns the income must pay
tax on that income. Shifting the incidence of a personal income tax to another
individual is difficult, if not impossible.”4

Indirect tax is a tax that is not directly imposed on income and property and it is not
paid by the taxpayer direct to the government but is collected by suppliers,
shopkeepers, stores, etc. Value added tax, excise duty, export duty are examples of
indirect taxes.

“Taxes on business can often be shifted to the person who uses the company’s
products. For example, businesses must pay taxes on the sale of certain items, such
as cigarettes, liquor, and gasoline. Excise taxes function this way. These taxes are
indirect taxes because although they are levied on the business, the consumer actually
pays part of the tax. Other taxes on business, including property taxes, can be shifted
in part to consumers. Many times companies raise prices in order to cover the cost of
new taxes”5

Based on bases of taxes, taxes include income tax, property tax and consumption
tax

Income tax is a tax the base of which is income. Corporate income tax and personal
income tax are apparently income taxes.

Property tax is a tax the base of which is property’s value. Land tax, house tax,
register tax, inheritance tax are property taxes.

Consumption tax is a tax the base of which is the value of the commodities sold
from sellers, shopkeepers to the consumer. This kind of tax is also called sales tax
for it is charged as a percentage of the price of goods or services. Examples of this
tax are value added tax, turnover tax, and excise tax.

45
‘ J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 430
Based on the proportion of tax to income, taxes include progressive tax, regressive
tax and proportional tax.

Progressive tax is a tax that takes a larger percentage from the income of high-
income earners than it does from low-income individuals. Individuals who earn
more pay higher taxes. Progressive tax means that the burden of tax is put more on
the rich than the poor. Personal income tax is often a progressive tax.

“Closely connected to the ability-to-pay principle is the concept of how the tax
burden is distributed among people in relation to their level of income. A progressive
tax is a tax that takes a larger percentage of higher incomes and a smaller percentage
of lower incomes. For example, if a person earning $100,000 a year paid $25,000 for
a particular tax, the tax is 25 percent of the person’s income. If a person earning
$1,000 a year paid $100 for that same tax, the tax is 10 percent of that person’s
income. This tax is a progressive tax because it takes a larger percentage of the richer
person’s income and a smaller percentage of the poorer person’s income”.6

Regressive tax is a tax that takes a larger percentage from low-income people than
from high-income people. A regressive tax is generally a tax that is applied
uniformly. This means that it hits lower-income individuals harder. Regressive tax
means that the burden of taxes is put more on the poor than the rich. Examples
include sales taxes such as value added tax, excise duty, etc.

“A regressive tax is a tax that takes a larger percentage of lower incomes and a
smaller percentage of higher incomes. Assume that a tax took $10,000 from a person
earning $100,000 per year and $2,500 from a person earning $10,000 a year. The tax
rate is 10 percent for the richer person and 25 percent for the poorer person. This tax
is regressive since the richer person pays a smaller percentage of income than the
poorer person. Regressive taxes go against the ability-to-pay principle of taxation.
They take greater percentages of the incomes of those who can least afford to pay”.7

Proportional tax (also called a flat tax) is a tax system that requires the same
percentage of income from all taxpayers, regardless of their earnings. A proportional

6
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
7
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
tax applies the same tax rate across low-, middle- and high-income taxpayers.
Corporate income tax is often a proportional tax

“Taxes can also be proportional. A proportional tax is a tax that takes the same
percentage of income from all taxpayers. For example, consider a tax that takes
$10,000 from a person earning $100,000 a year and $100 from a person earning 1,000
a year. Both taxpayers must give up 10 percent of their incomes for that tax. The tax
is proportional because it taxes all taxpayers at the same percentage rate.

Proportional taxes are based less on the ability-to-pay principle than the progressive
taxes. They take proportional amounts of income at all levels. The proportional
amounts taken at lower income levels may have much more value to the individual
than the proportional amounts taken from those with higher incomes. So, a
proportional tax may take more dollars necessary for survival from lower income
families than it takes from higher income families”.8

Based on the power to levy, taxes include federal taxes and local taxes.

Federal Taxes

A federal tax is a tax that is levied by the federal government and is paid to the
budget of the federal government. In some countries, federal tax is called state tax
or central tax but the meaning doesn’t change much.

Local Taxes

A local tax is a tax that is paid to the budget of the local authority. The list of local
taxes and the ceiling tax rates are stipulated by the federal government. The local
authority has the right to choose a range of taxes among the list of the local taxes
and to define the rate provided it is not higher than the ceiling rate. Property taxes
such as land tax, house tax, severance tax, etc., are often local taxes.

Federal taxes and local taxes only exist in a country where tax autonomy is given to
the local authority.

8
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 430
1.3.3. STANDARDS OF A MODERN TAX SYSTEM
1.3.3.1. Equity

Equity is the utmost desire of human being. One of the functions of the state is to
help the society to achieve equity. Therefore, the state itself when imposing taxes
has to make tax equitable. The equity in tax is known as horizontal equity and
vertical equity.

The horizontal equity holds that tax treatment between those who are on every
aspect the same must be the same.

The problem with the horizontal equity is that in reality how we can find two persons
who are the same in every aspect. To solve this problem, in practice, persons in a
similar circumstance or basically the same are treated the same in terms of taxation.

The vertical equity insists that those who have more ability have to pay more taxes.

The following difficulties immediately appear:

(i) How much more tax should a person with better ability to pay be taxed than
the less ability person?

(ii) How to measure the ability to pay?

The answer to the first question depends on the political tax views of the government
in power. The ability-to-pay often shown through income earned, property value and
value of goods and services consumed is the answer to the second question.
1.3.3.2. Efficiency

The efficiency of a tax system has two aspects which are efficiency in tax
administration and efficiency in socio-economic impact.

The efficiency in tax administration is shown by two indicators: (i) the low expense
of the tax office in carrying out the responsibility; and (ii) the efficiency in
preventing tax evasion and tax shelter.

The socio-economic efficiency includes three aspects: (i) the impact of tax system
on the economy means that tax system can help best to regulate the economic cycle,
control inflation, lower unemployment, and regulate the development of the
economy to the government’s directions; (ii) the deadweight loss caused by tax is
the least; and (iii) the tax compliance cost is minimized by simple and transparent
tax procedures, by reducing time of and money for declaration and by reducing
corruption in tax officials.

The efficiency doesn’t normally go with the equity standard. A tax cannot often meet
these two criteria at the same time. Sometimes, in order to achieve the standard of
efficiency, the equity must be sacrificed and vice versa. Thus, the efficiency and
equity standards should not be considered as a mutually-exclusive of requirement
to a tax system.
1.3.3.3. Stability

As tax policy is closely related to the business environment, it is required to be

stable. The stability of a tax system is a base to make long-term investments. If the
tax system is frequently and unexpectedly changed, it will put investors at risk
because tax is one of the factors influencing their expenses and turnover which, in
turn, affect their profit.

This standard requires the tax system to be relatively stable for a period of time. In
order to meet this requirement, tax policy must be carefully prepared on the basis of
full and truthful statistics on socio-economic situation of the country. Besides, the
government has to inform the public in advance of any changes in the tax policy.
The government has to make sure that firms have enough time to prepare themselves
for the amendments and supplements of the tax policy.
1.3.3.4. Adaptability

The adaptability requires that a tax system has to be constructed so as to be

automatically adaptable to the changes in socio-economic situation of a country.
This means that there is no need to revise tax laws in case there are considerable
changes in the socio-economic situation due to the good automatic adaptability of
the tax system.

1.3.3.5. Transparency

Transparency is an essential requirement of a modern tax system since this standard

has a strong impact on the business climate and the efficiency of tax system. A
transparent tax system prevents tax avoidance and reduces tax evasion.
Transparency also helps to create a good investment environment because it reduces
corruption in tax officials.

Transparency is shown through three aspects: (i) clarity – meaning only one way to
understand a regulation, (ii) every rule is made publicly, and (iii) no exception exists.

1.4. BASIC ELEMENTS OF A TAX LAW

1.4.1. NAME OF A TAX

Each tax has its own name to distinguish one tax from the others. Names of taxes
often show their contents, purposes or characteristics. For example, value added tax
implies that this tax is charged only on the value added of goods; excise duty implies
that this tax is only levied on certain special commodities.

1.4.2. TAXPAYER
This element states in a certain circumstance stipulated in a tax law who has to pay
that tax. Taxpayer is the one who legally has to declare and pay taxes. In other words,
a taxpayer is any person or organization liable by law to pay a tax or taxes. Taxpayer
can also mean the person on whom tax burden falls.

1.4.3. TAX BASE

Tax base is the amount of income or property or goods, or the amount of value of
property or goods on which a tax is imposed. Thus, this element shows on what a
taxpayer is liable to pay tax.

1.4.4. TAX RATE

Tax rate shows how much a tax is paid on a certain amount of tax base.

In terms of the form, tax rates include specific rate and ad valorem rate.

Specific rate is the one shown in the form of a specific amount (normally of money)
liable to be paid on a physical unit of a tax base. For example, the agricultural land
use tax in Vietnam is charged based on the amount of rice per hectare of land; the
excise duty in Malaysia is charged as RMB per liter of alcohol (However, Malaysia
also uses ad valorem rate to charge excise duty on alcohol).
Ad valorem rate is the rate shown in the form of a percentage on a monetary unit of
a tax base. For instance, the value added tax in Vietnam is charged at three rates (0
percent, 5 percent and 10 percent) on the added value of goods and services.

Considering the ways of taxation, tax rates include single specific rate, proportional
rate and progressive rate.

Single specific rate is a rate that remains unchanged regardless of the amount of tax
base. For example, the poll tax in Vietnam in the 1930s which was charged as
Dongduong dong per capital.

Proportional rate is the one that is charged at a fixed percentage on any variable
amount of a tax base. In the other words, proportional rate is an ad valorem rate that
remains unchanged as the amount of income or value of property or goods increases.
For instance, the corporate income tax in Thailand (2007) is charged at a standard
rate of 30 percent. This rate applies to any amount of the taxable income of a
company.

Progressive rate is the one that is charged at an increasing percentage as the amount
of tax base increases. In order to show this kind of tax rate, a table including brackets
of taxable amount and their respective tax rates is used. It is called progressive tax
table. Example 1.5 below will illustrate clearly this type of tax rate.
 EXAMPLE 1.5: The personal income tax in Vietnam which applies to income
derived from business and employment (Effective from 1 Jan 2009) is charged as in
the following table:
Taxable income per year (million Vietnam Tax rates
dongs) (%)
Up to 60 5
Above 60 to 120 10
Above 120 to 216 15
Above 216 to 384 20
Above 384 to 624 25
Above 624 to 960 30
Above 960 35
Applying the above progressive table, given a resident taxpayer without any
dependants whose assessable income in a tax year is VND308 million, his/her
income tax is calculated as follows:
The first VND108 million is free from tax because it is his/her self deduction.
Therefore, his/her taxable income is VND200 million.
So the income tax he/she has to pay is: 60 x 5% + (120 – 60) x 10% + (200 – 120) x
15% = VND21 million.

1.4.5. INCENTIVES
This is an extra element of a tax. Some taxes may not have this element. Incentives
are used to achieve government’s social or economic targets. Normally, in order to
enjoy an incentive, a taxpayer has to meet one or some conditions stated by the law.
There are some types of incentives as follows:

(1) Exemption: This is one of the common examples of tax incentives. If the
taxpayer is exempt from a tax, he/she is free from having to pay that tax. There is no
time limit to this incentive.

(2) Tax holiday: This type of incentive is similar to the 1 st type above but there are
two differences: (i) in some cases, the tax amounts are only reduced partly, normally
50 percent; and/or (ii) the reductions or exemptions are applicable only for a period
of time.
(3) Preferential rates: With this type of incentive, the taxpayer enjoys a lower rate
than the common rate applied to others. The low rate can be applied in a period of
years or in the lifetime of the project.

(4) Tax credit: This incentive is so-called because, in terms of economics, it is

similar to a credit from the government to the taxpayer. In some ways stipulated by
law, the taxpayer does not have to pay a tax amount for the current year but that
amount of tax will be paid in the following years. Accelerated depreciation and tax
refund for reinvested income are two typical examples of this kind of incentive.

(5) Double deduction: With this type of incentive, the taxpayer enjoys a double
deduction for an expense, for example, in some countries research expense is
accepted to deduct twice. As a result, the taxpayer enjoys a reduction in income tax.

1.4.6. PROCEDURE
This element includes some issues such as forms of tax returns, procedures and due
time for declaration and payment, taxpayer’s obligations and rights, and the
obligations and rights of tax office and other relevant persons and organizations.

There are two ways to present this element. In some countries it is stated separately
in each tax law. In other countries, all procedures and tax punishments are included
in a law called act of tax administration or law on tax administration.

1.4.7. PUNISHMENT

In a tax law or in a tax administration law, fines – a sum of money paid as a

punishment – are applied to those who are found guilty of breaking the tax laws
including the following actions: late payments, late declaration, under declaration,
tax evasion, etc.

Where the tax evasion is regarded as criminal, the evader is not punished by the tax
law but by the criminal code.

1.5. THE PRINCIPLES OF TAXATION

(1) Benefit-received principle

The root of this principle is the benefit received by the taxpayer as a result of the
investment of the government. Each citizen benefits differently from the investment
by the government, so in order to achieve equity, the weight of taxes should be
related to the benefit enjoyed by each taxpayer. For instance, the value of a land near
a newly-built road by the government may increase sharply as compared to that of
the time before the investment was made. This principle requires that the more the
taxpayer benefits from the government-supplied goods or services, the more the tax
is paid to finance for them.

However, difficulties in applying this principle at once arise. Those are:

(i) How does the government determine the benefits individual households and
businesses receive from national defense, education, and police and fire
protection? Even in the seemingly tangible case of highway finance we find it
difficult to measure the benefits;

(ii) Government efforts to redistribute income would be self-defeating if financed

on the basis of benefit principle; it would be absurd and self-defeating to ask the
poor to pay taxes needed to finance their welfare payments!

“The benefit principle of taxation is the concept that those whose benefit from the
spending of tax dollars should pay the taxes to provide the benefits. This means that
the people who benefit should pay. The gasoline taxes in America follow the benefit
principle. The amount of gasoline bought is a good measure of the amount of highway
service used. So, a tax on gasoline makes users of the highways pay for their use. The
money collected from gasoline taxes is used to repair and improve highways.

But often the benefit principle of taxation does not apply. Most public goods such as
national defense and social welfare programs cannot use this principle. All people
benefit from national defense spending, but all people cannot be charged directly for
the benefit. People who benefit from social welfare payments cannot afford to pay for
those benefits. If they could afford to pay for them, they would not need them.

The very nature of public goods often makes it hard to apply the benefit principle of
taxation. It is often impossible to separate those who benefit from those who don’t.
Even when this is possible, it is difficult to find ways of charging only those who
benefit. So, two conditions are necessary to use the benefit principle of taxation: (1)
Those that benefit from a particular good must be easily identified; (2) ways to charge
 only those who benefit must be found. However, when these conditions exist, it is
usually more efficient to have the private sector produce that particular good”.9

(2) Ability-to-pay principle

The ability-to-pay principle contrasts sharply with the benefit principle. The ability-
to-pay taxation rests on the idea that the tax burden should be geared directly to a
taxpayer’s income and wealth. This principle requires that the weight of taxes should
be related to the ability-to-pay of the taxpayer in order to bring about equity of
sacrifice. The ability-to-pay is often regarded as the taxpayer’s income and property
or the value of goods consumed. According to this view point, the more the income
the taxpayer earns, the more the tax is paid; the larger the value of the taxpayer’s
property is, the more the tax is charged; the higher the value of the goods the taxpayer
consumes, the more the tax is levied.

According to Campbell R. Mc Connell and Stanley L. Brue in the book named

Economics Principles, Problems, and Policies, the root of the ability-to-pay is
explained as follows:

“What is the rationale of ability-to-pay taxation? Proponents argue that each

additional dollar of income received by a household will yield smaller and smaller
increments of satisfaction or marginal utility. Because consumers act rationally, the
first dollars of income received in any period of time will be spent on high-urgency
goods which yield the greatest marginal utility. Successive dollars of income will go
for less urgently needed goods and finally for trivial goods and services. This means
a dollar taken through taxes from a poor person who has few dollars is a greater utility
sacrifice than is a dollar taken by taxes from the rich who has much money. To
balance the sacrifice which taxes levy on income receivers, taxes should be
apportioned according to the amount of income a taxpayer receives.

This argument sounds reasonable, but problems of application exist here too.
Although we might agree that the household earning $100,000 per year has a greater
ability to pay taxes than a household receiving $10,000, exactly how much more
ability to pay does the first family have compared with the second? Should the rich

9
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, 428
 person pay the same percentage of his or her larger income – and hence a larger
absolute amount – as taxes? Or should the rich be made to pay a larger fraction of this
income as taxes? And how much larger should that fraction should be?

The problem is there is no scientific way of measuring someone’s ability to pay taxes.
In practice, the answer hinges on guesswork, the tax views of the political party in
power; expediency, and how urgently the government needs revenue”.10

Similar to the above explanation but with better illustration is the viewpoint of J.
Holton Wilson and J. R. Clark in the book named Economics.

“The ability-to-pay principle of taxation is the concept that those who can best afford
to pay taxes should pay most of the taxes. Generally the rich or the economically
better off can best afford to pay. Most economists believe that every extra dollar
earned has value. For a person earning only $1,000 a year, extra dollars of income
mean more food, or badly needed clothing, or medical care. On the other hand, a
person earning $1,000,000 a year does not need the extra dollars to meet basic needs.
This person would hardly notice an extra dollar of income. Therefore, the extra dollars
may not have nearly the value to that person as to the person earning $1,000 a year.
The ability-to-pay principle of taxation would tax the person earning $100,000 a year
more heavily than the person earning $1,000 a year”.11

Thus, regarding the question of how the economy’s tax burden should be
apportioned, there are two basic philosophies mentioned above. The following parts
will discuss some other principles concerning certain types of taxes.

(3) Origin principle

This principle only applies to consumption taxation and implies the power of a
country’s authority to impose consumption taxes. According to this principle, a
government has power to levy on goods and services produced in its country despite
where they are sold and consumed. The reason for this principle is that the goods

10
Campbell R. Mc Connell and Stanley L. Brue (1996): Economics Principles, Problems, and Policies, McGraw-
Hill, page 626
11
J. Holton Wilson and J. R. Clark (1993): Economics, South-Western Publishing Co. Ohio, page 429
and services are produced by using the country’s resources and the
producer/taxpayer benefits from the government’s supply of public services.

(4) Destination Principle

Similar to the origin principle, the destination principle concerns the power of a
government to levy taxes on goods and services. Contrary to the origin principle,
this principle states that a government has power to levy on goods and services sold
and consumed in its country despite where they are produced. The rationale of this
principle is that in a market economy, where to produce and by what to produce is
not as important as where to consume. Moreover, the aim of consumption taxes is to
take away part of the consumer’s income and therefore the consumers who benefits
from the public services provided by their governments have to pay taxes to their
governments. In order to practice this principle, the government where the goods
and services are produced has to “concede” the power to tax to the government
where the goods and services are consumed. This process is often done by law to
refund taxes to exported goods and services or to stipulate that exported goods are
free from a certain sales tax.

Both origin and destination principles deal with the power over consumption
taxation but destination principle is often the choice because it is reasonable in the
context of market economy. However, the origin principle, sometimes is chosen,
especially where the government wants to impose export duty.

(5) Source Principle

The source principle and residence principle deal with the power of a government
over income and property taxes. According to the source principle, an income or a
property earned by a person or company is taxed by the government of the country
where it is earned despite the residence state or the nationality of a taxpayer.

(6) Residence Principle

This principle requires that any person or company who is regarded by law to be a
resident of a country is taxed on worldwide incomes including both incomes earned
in the country where the taxpayer is liable to pay and incomes earned overseas. Non-
resident is only charged on incomes earned in the country where the tax payer works
and receives these incomes.

Of course when applying source and residence principles, disputes appear and the
double taxation emerges as an inevitable incident. That is why double taxation
avoidance and tax treaties need to be discussed. This issue will be dealt later in
chapter 10.

1.6. THE VIETNAM’S TAX SYSTEM

Vietnam began to significantly reform its tax system in the late of the 1980s
following the launch of its economic reform in 1986. Since that time, Vietnam’s tax
system has undergone three major reform stages. The general features of current tax
system in Vietnam have been the results of three phases of tax reform, which have
been driven mainly by nature of the transition process.

The first state of the reform took place during early 1990s, which was focused on
the establishment of a foundation for a tax system in line with the process of
transition from a Soviet-state tax system to a tax system that could be facilitate for
the functioning of a multi-sectoral economy. In this stage, tax reform in Vietnam
could be characterized by the formalization of tax laws. A number of tax laws were
enacted to replace the old taxes, which were based on administrative decrees under
the centrally planned economy. The second stage was carried out in the late 1990s
and early 2000s. More significant reform took place during this phase, including the
promulgation of the Law on value added tax (VAT), the Law on Corporate Income
Tax (CIT) as well as the amendment of the Law excise duty (In other words, it is
special consumption tax - SCT) and the Law on export and import duty. The third
stage of tax reform has been carried out since the mid of the 2000s, focusing on
reform of compressively all tax instruments and a modernization of tax procedure.
Vietnam's tax system has continued to change in various aspects. In particular,
Vietnam has undertaken a tax overhaul to meet the requirements of acceding into
the World Trade Organization (WTO). Currently, Vietnam is undertaking its 4 th
phase of tax reform in line with the objectives and direction set in the Tax reform
Strategy for the 2011-2020, which has been recently approved by the Prime Minister.
To various extents, Vietnam's tax reform has been carried out in line with
international accepted guidance and principles, such as broadening the tax bases,
reducing tax rates and simplifying methods of tax calculation and declaration and
payments. Vietnam's achievements in tax reform have been quite impressive. The
country has recorded itself as one of strong performers in tax reform (IMF, 2011).
By the end of the 2018, Vietnam’s tax system has had the presence of major types
of taxes, which are considered as necessary for the performance of a market-oriented
economy, such as CIT, PIT, CIT and excise duty.

The Vietnam’s tax system now includes:

- Value added tax;

- Excise duty;
- Customs duty;
- Environmental protection tax;
- Corporate income tax;
- Personal income tax;
- Agricultural land use tax;

- Non-agricultural land use tax;

- Severance tax.

CHAPTER REVIEW

SUMMARY

1) Tax is a part of income which is legally stipulated and compulsorily paid by

citizens to the government in order to finance the public expenditures. Its
prominent characteristics are compulsory and indirectly compensational.

2) Tax plays three important roles: (i) Crucial state budget revenue; (ii) Help to
regulate the economic activities, the economic cycle, control inflation, and
protect domestic production, etc., and (iii) Help to reduce inequity in economic
 distribution by applying progressive tax rate and charging high excise duty on
luxury goods and services.

3) There are many ways to classify taxes. Depending on each criterion, taxes can
be classified differently. The most frequently used taxes are: direct and indirect
taxes, income, property and consumption taxes, progressive, regressive and
proportional taxes, and federal and local taxes.

4) There are five main standards of a modern tax system. They are equity,
efficiency, stability, adaptability and transparency. It is ideal for a tax system to
achieve all these standards but normally in order to meet a certain standard; one
of the rest has to be sacrificed.

5) Normally, there are seven elements to constitute a tax law including name,
taxpayer, tax base, tax rate, incentives, procedures and punishment of which tax
rate is the most important one. To decide on the tax rate is a difficult issue of any
government because high rate are not always accompanied with high revenue
from taxes and tax rate is also a key tool to redistribute income as well as to
regulate economic activities. In tax laws of countries all over the world, we can
see many kinds of tax rates such as specific rate, ad valorem rate, proportional
rate and progressive rate.

6) Some principles are used to impose taxes among which two principles (the
ability-to-pay and benefit principles) are used to construct almost all taxes and
the others are used to levy certain types of taxes (e.g. the origin and destination
principles are used for consumption taxes while the source and residence
principles are used for property and income taxes).

7) Vietnam’s tax system has undergone three major reform stages. The general
features of current tax system in Vietnam have been the results of three phases
of tax reform, which have been driven mainly by nature of the transition process.
By the end of the 2018, Vietnam’s tax system has had the presence of 9 taxes,
among which some taxes are considered as necessary for the performance of a
market-oriented economy, such as CIT, PIT, CIT and excise duty.

KEY TERMS
Supply definitions for the following terms:

Ability-to-pay Fee Specific rate

Accelerated depreciation Levy Stability
Adaptability Local tax Tax base
Ad- valorem rate Indirect tax Tax credit
Agricultural land use tax Income tax Tax evasion
Benefit Personal income tax Tax incentive
Compliance cost Procedure Taxpayer
Consumption tax Property tax Tax exemption
Corporate income tax Progressive rate/tax Tax holiday
Declare Proportional rate/tax Tax punishment
Destination Public goods Tax reduction
Direct tax Regressive rate/tax Tax refund
Efficiency Residence Value added tax
Equity Sales tax
Excise duty Severance tax
Federal tax Source
ECONOMIC CONCEPTS

1. What is tax?

2. What is the protection role of tax?

3. List the 5 standards that a modern tax system should follow.

4. How can taxes be classified?

5. List the principles of taxation.

DISCUSSION QUESTIONS

1. Point out the similarities and differences between tax and fee.

2. Why do we have taxes?

3. In countries such as Gulf countries where natural resources are abundant, does
tax act as the most important source of the state budget?
4. Why, in the context of integration, the role of tax as a tool to protect domestic
production become lessened?
5. Give examples of tax types. Discuss the significance of tax classification.
6. What are the standards of a modern tax system? Why sometimes in order to
achieve the equity we have to sacrifice the efficiency?
7. What is the most important element of a tax law?
8. Give examples of each type of tax rate.

9. State the types of tax incentives and discuss the advantages and disadvantages
of each type.
10. Discuss the taxation principles and give examples.
EXERCISE

Given a country’s personal income tax table as follows:

Taxable income per year (USD) Tax rates (%)

Up to 100,000 10

Above 100,000 to 200,000 20

Above 200,000 to 400,000 30

Above 400.000 40

Suppose Mr. John’s taxable income is USD 500,000 in the tax year.

Required: Define the amount of income tax paid by John for that tax year in case the
above tax table is a progressive rate.
 CHAPTER 2
VALUE ADDED TAX

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define value added tax (VAT) its characteristics.

- Define who is liable to pay VAT in Vietnam.
- Define characteristics of non-taxable goods and services
- Distinguish taxable, non-taxable and exemption from declaring and paying
VAT
- Determine base price in Vietnam.
- Know VAT rates in Vietnam.
- Calculate the amount of VAT payable by a taxpayer.
- Complete a VAT return.
- Identify when to file VAT returns and to pay VAT.
- Define who and in what case is entitled to tax refund as well as the
responsibilities of parties involved in VAT refund performance.
2.1. CONCEPTS AND CHARACTERISTICS OF VAT

VAT known as Value Added Tax is derived from turnover tax. The concept was
proposed in 1917 by Carl Friedrich von Siemens, a German business man. France
was the first country to launch VAT pilot program in 1954 and VAT has been
officially applied since 1968. Since its application, VAT has helped to achieved two
objectives: timely increase in revenue and prevention of double taxation by turnover
tax. Up to now, more than 130 countries have introduced the VAT, which accounts
for a quarter of the total government’s revenues on average.

VAT is a form of sales tax, charged as a percentage of the added value of a

commodity as it changes hands from manufacturer to wholesaler, from wholesaler
to retailer and from retailer to consumer.

We can distinguish VAT from other taxes by the following characteristics:

Firstly, VAT is a multi-phased consumption tax. VAT is imposed on all phases of

production, distribution, but it is only charged on added value of each phase. It is a
consumption tax because it is borne ultimately by the end consumer. It is not a charge
on the supplier. The supplier must add the VAT to the price of commodities and the
buyer pays the total.

Added value is the new value generated in the process production and business
activities. It may be calculated by addition or deduction method. Under the addition
method, added value is determined by summing the profit and wages. According to
the deduction method, added value can be defined as the difference between the
selling price and the purchase price of goods and services.

Total added value of all phases is equal to the final price at the last phase. Therefore,
the total amount of VAT collected from all phases is equal to the amount of VAT
which is computed on the selling price to the end consumer.

Secondly, VAT is a neutral tax. VAT is not a cost to a seller. It is only a charge
counted on the price of commodity and is paid by the buyer. VAT is charged as a
percentage of the selling price, which means that the actual tax burden visible at each
stage of production and distribution chain is born by the buyer and of course falls on
the end consumer. It is collected via a deduction system where a taxable person (i.e.
VAT-registered business) must calculate the output tax at each stage of production
and distribution but he is allowed to offset against the input tax, i.e. tax charged to
him by his supplier. This mechanism ensures that the tax is neutral regardless of how
many transactions are involved.

Thirdly, VAT is an indirect tax. Legally, VAT payers are those who supply products
or provide services, but tax burden is born by consumers, because VAT is shifted
onto buyers via the price of goods and services.

Fourthly, VAT is regressive in relation to income. VAT is charged on the selling

price of goods and services. At each price of goods and services, the same VAT
amount is paid but the buyers’ income level is not the same. Therefore, VAT has
less effect on the rich/high income group than on the poor/low income group.

2.2. BASIC CONTENTS OF VAT IN VIETNAM

In 1997, the Assembly of Vietnam enacted the Act of VAT (also called Law on
VAT) that was effective from 1 January 1999. VAT is rather new in Vietnam, so
since its introduction many changes and amendments have been made. This law was
then revised in 2003, 2005, 2008, 2013, 2014 and in 2016.

2.2.1. TAXPAYERS
Taxpayers of VAT are organizations and individuals who are engaged in producing
and/or trading goods and rendering services subject to VAT in Vietnam, regardless
of their business forms. Other organizations and individuals that import goods or
purchase services oversea subject to VAT (In general, it is referred as importers)
are also taxpayers of VAT.

2.2.2. TAXABLE GOODS AND SERVICES

Subject to VAT are goods and services used for production, business and
consumption in Vietnam (including imported goods and services), except for those
listed as non-taxable items (mentioned below).
2.2.3. NON – TAXABLE GOODS AND SERVICES (EXEMPTIONS)

Under the Act of VAT of Vietnam, 25 groups of items are exempt from tax. In other
words, these items are called non-taxable goods and services. These include the
following:

- Necessities such as education and health service.

- Goods and services for social and charity objectives, such as goods imported in
the following cases: humanitarian aid or non-refundable aid goods; gifts for
state agencies, political organizations, socio-political organizations, social
organizations, socio-professional organizations and/or people’s armed forces
units; presents and gifts for individuals in Vietnam; personal effects of foreign
organizations and individuals within diplomatic immunity limits; and personal
effects in duty-free luggage limits; personal effects brought along by overseas
Vietnamese upon their return to the country.

- Products of preferential fields such as unprocessed or preliminarily processed

agricultural products at the stage of producing and importation, crop seeds,
animal breeds etc.

- Imported goods, but not really used for production, distribution and
consumption in Vietnam, such as goods transferred from border gate to border
gate, goods in transit or transported by land through the Vietnamese territory;
goods temporarily imported for re-export, goods temporarily exported for re-
import, raw materials and materials imported for the production or processing
of goods for export under export production or processing contracts signed with
foreign parties.

- Products and services considered to be used for non-profit aim such as public
transportation by bus, some cultural services etc.

- Goods and services paid for by the government such as imported weapons, state
broadcast and telecast.
2.2.4. EXEMPTION FROM DECLARING AND PAYING VAT

In some cases, taxpayers do not have to declare and pay VAT. These include the
following:
- An organization or individual receives a monetary compensation, bonus,
allowance, or payment for transfer of emission permit, or other revenues; The
delegated payments that are not related to the sale of goods/services of the taxpayer.
- Goods internally circulated as supplies or semi-finished products serving the
operation of a manufacturing or business establishment.
- Transfer of depreciated in-use assets between a business establishment and its
wholly-owned subsidiaries or among these subsidiaries to serve the manufacturing
or trade of goods/services subject to VAT.
- A business organization or businessperson in Vietnam purchases services from
a foreign organization that does not have a permanent establishment in Vietnam, or
from am overseas individual that is not a resident in Vietnam. These services include:
repair of vehicles, machinery, equipment (including supplies and parts); advertising,
marketing; trade promotion; brokering sale of goods and services to abroad; training,
international postal and telecommunications services that are provided outside
Vietnam, lease on foreign satellite transmission lines and frequency bands.
- The non-business organizations and individuals shall not pay VAT on the sale
of their assets.
- Company or cooperative that pays VAT using credit method and sells
unprocessed or preprocessed farming, breeding, aquaculture products to another
company or cooperative.
- The entities that transfer project of investment in manufacturing or trade of
goods/services subject to VAT to other companies or cooperatives; The revenue
from goods/services sold by agents, commissions paid to agents, including: postal
and telecommunications services, lottery, air tickets, bus tickets, train tickets, ship
tickets, international transport agents; air and maritime service agents entitled to 0%
VAT; insurance agents; revenue and commissions on selling goods/services that are
not subject to VAT.

2.2.5. TAX BASE

VAT base is the base price. The base price for sale of goods or provision of services
is the total revenue (turnover) received or receivable by a supplier from the sale of
goods or the provision of service exclusive of VAT.

In some cases the base price is specifically determined as follows:

- For imported goods, the base price is the base price for import duty plus import
duty (if any) plus excise duty (if any) and plus environmental protection tax (if
any). The base price for import duty is determined under the Act of customs duty.
Where imported goods eligible for import duty exemption or reduction, the base
price is the base price for import duty plus (+) the import tax payable after the
exemption or reduction.

- For services supplied by foreign parties to consumers in Vietnam, the base price
is the service price payable by Vietnamese parties to foreign parties.

- For goods and services subject to excise duty, the base price is the price inclusive
of excise duty but exclusive of VAT.

- For goods and services subject to environmental protection tax, the base price is
the price inclusive of environmental protection tax but exclusive of VAT.

- For goods and services subject to environmental protection tax and excise duty,
the base price is the price inclusive of environmental protection tax and excise
duty but exclusive of VAT.

- For goods and services used for barter or as presents, gifts or salary payments, the
base price is determined as equal to the base price of goods or services of the same
or equivalent types at the time such activities are carried out.

- For goods and services used for sales promotion in accordance with trade laws,
the base price is zero (0).
- For goods or services delivered by businesses for internal consumption rather than
for production, the base price is the selling price of the goods or services of the
same or equivalent types at the time of consumption..

- For leasing services such as leasing of houses, offices, workshops, warehouses,

wharves, yards, means of transport, machinery, equipment, etc., the base price is
the rent exclusive of VAT. If rent is paid in installments or prepaid for a leasing
term, the base price is determined on the basis of each installment or the prepaid
rent, including the amounts collected for renovation, repair and upgrading of
leased houses at the lessees’ requests. The rent agreed upon by the involved
parties is shown in the contract. If the rent bracket is prescribed by the law, the
rent is determined to be within the prescribed bracket.

- For goods sold in installments or deferred payment, the base price is the lump-
sum price exclusive of VAT (excluding interests on installment or deferred
payments), regardless of the amount of each installment or deferred payment.

- For goods for processing, the base price is the total expenses for processing those
goods including employees’ expense, costs of fuel, power, materials and other
processing expenses incurred by the processing parties exclusive of VAT.

- For ocean shipping agency services, brokerage services, export and import
entrustment as well as other services entitled to remuneration or commissions, the
base price is the earned remuneration or commission exclusive of VAT.

- For transportation, loading and unloading services, the base price is the freight or
loading and unloading charges exclusive of VAT, regardless of whether the
establishment directly undertakes the transportation, loading and unloading or
hires such services.

- For goods and services of specific nature for which documents such as freight
tickets, lottery tickets etc. are used and recorded with the payment price inclusive
of output tax, the base price is determined as follows:

The payment price (Proceeds from the sale of tickets, stamps…)

The base price =
1 + the tax rate (%) applicable to such goods or service
The base price of goods or services covers additional fees and surcharges collected
in addition to the goods or service prices which are paid to businesses, excluding
those which businesses remit into the state budget. When businesses apply
discounted sale prices, the base price are discounted sale prices indicated on the
invoices.

The base price is determined at the time when a business completely transfers the
ownership of or the right to use the goods or services (for cases of construction and
installation, it is at the time of testing and takeover of completed works, work items,
construction or installation volumes), regardless of the time of payment.

2.2.6. TAX RATES

The VAT rates are applicable uniformly to each type of goods or services at the
importation, production, processing or trading stage. There are 3 rates of VAT
including 0%, 5% and 10%.

The 0% rate is applicable to exported goods and services; construction and

installation overseas and in free trade zones; international transport; exported goods
and services that are not subject to VAT, except for the cases, in which 0% rate is
not applied.

Exported goods include goods exported overseas, including those exported under
entrustment, goods sold to non-tariff zones, goods that are delivered to the recipients
outside Vietnam, parts and supplies for repairing, maintaining vehicles, machinery,
and equipment of foreign entities, and those that are used outside Vietnam and goods
regarded as exports prescribed by the Government, such as transitionally processed
goods as prescribed in the Commercial Law regarding activities of international
goods purchase and sale and activities of goods purchase, sale and processing agency
with foreign countries; processed goods for on-spot export as prescribed in the
Commercial Law regarding activities of international goods purchase and sale and
activities of goods purchase, sale and processing agency with foreign countries;
goods exported for sale at overseas fairs and exhibitions. Some conditions must be
met for exported goods to apply 0%. These are: (i) Bank receipts for payment for
exported goods and other documents prescribed by law; (ii) exported goods must be
supported with legitimate economic contract as prescribed by laws; and (iii) there is
an export declaration form certified by a customs office that customs procedure has
been made for those goods. Exported services are services provided directly to
organizations or individuals overseas and are consumed overseas; the services
provided for the entities in non-tariff zones and consumed within, which have to
fully meet the following conditions: service -providing businesses have contracts
signed with overseas purchasers in accordance with the Commercial Law; and bank
receipts for payment for exported services and other documents prescribed by law.

There are some exceptions where 0% of VAT is not applicable to an exported item
or an item sold to non-tariff zone. These include:

- Exported credit and derivatives, financial investment and securities investment

services;

- Overseas reinsurance;

- Royalty and copyright transfer overseas;

- Sale of out coming telecommunication and post service overseas;

- Exploited mineral resources not yet processed into other products;

- Goods and services sold to non-business households in non-tariff zones;

- Tobacco and alcoholic beverages imported then re-export shall not incur VAT
output upon re - exportation though on which VAT input must not be deducted.

- Automobile sold to entities or individuals in non-tariff zones;

- Gasoline sold in domestic market to automobile of entities in non-tariff zones;

- Services provided for the entities in non-tariff zones include: leases on houses,
meeting halls, offices, hotels, warehouses; employee transport; food and drink
services (except for catering, food and drink services provided in non-tariff
zones).

The rate of 5% is applicable to goods and services basically used for production and
consumption; for example, clean water for production and daily life; curative and
preventive medicines for human and animal use (including vaccines, distilled water
for preparation of injections); teaching and learning aids etc.
The 10% rate applies to goods and services not listed in 5% and 0% rate category.

2.2.7. VAT METHODS

VAT payable by businesses is calculated by either of the two methods: the credit
method and the direct method. If a business liable to pay VAT under the tax credit
method also trades in gold, silver or gems, it must separately report these business
activities for calculation of tax under the direct method.
2.2.7.1. The credit method

a) Who apply this method?

The credit method of VAT payment is applied to business establishments which fully
observe regulations on accounting, invoices and documents as prescribed by the law
on accounting, invoices and documents, include:

- Business establishments who have at least 1 billion VND in annual revenue from
selling goods and services, except for business households and business people pay
VAT under the direct method;

- Business establishments that voluntarily apply credit method, except for the
business households and individuals pay VAT under the direct method;

- Foreign entity and individual that provides goods and services serving petroleum
exploration and extraction pay VAT under credit method and authorizes a
Vietnamese party to deduct tax and pay VAT.

b) Determination of VAT amount payable:

The VAT amount The output The deductible input

= -
payable VAT VAT

Of which:

The output VAT (output tax) amount is equal to the base price of the taxable goods
sold or service provided multiplied by the rate applicable to these goods or service.

Under this method, when selling goods and providing services, the supplier includes
the output tax on the before-VAT price (price exclusive of VAT) and this is shown
on the invoice. When making invoices for goods sold or services provided, the
business must enter the before-VAT price, the output VAT and the total payment. If
on an invoice only the payment is stated but not the before-VAT price and the output
VAT, the output VAT on the goods sold or the services provided shall be calculated
based on the total payment inclusive of the before-VAT price and the VAT, not the
before-VAT price.

EXAMPLE 2.1:
The data on the sales during the month of an enterprise who sells product A are as
follows:
- Sale of 100 units at the before-VAT price of VND 4,600,000/unit.
- Sale of 200 units at the total sale price of VND 960,000,000. On added value
invoice, the VAT amount is not written.
- VAT rate 5%
Required: Define the output tax amount
SOLUTION
The output tax amount is
- Sale of 100 units: 100 x 4,600,000 x 5% = VND 23,000,000
- Sale of 200 units 960,000,000 x 5% = VND 48,000,000
- Total VAT output VND 71,000,000

Businesses have to comply with the concerning accounting rules as prescribed by

law. Wrong VAT rates stated on invoices which are not adjusted yet by businesses
themselves but are detected through auditing by tax offices can put the violators at
a disadvantage. If the VAT rate stated on the invoice is higher than that prescribed
in the Law on VAT, VAT must be declared and paid at the VAT rate stated on the
invoice. If the VAT rate stated on the invoice is lower than that prescribed in legal
documents on VAT, VAT must be declared and paid at the VAT rate prescribed in
legal documents on VAT.

The deductible input VAT (input tax) amount is equal to the total VAT amount stated
on the value added invoice for purchased goods or services used for production and
trading in goods and services subject to VAT or the VAT amount stated on vouchers
on import tax payment for imported goods or VAT payment made on behalf of
foreign parties under the guidance of the Ministry of Finance applied to foreign
organizations and individuals doing business in Vietnam without establishing legal
entities in Vietnam.

If purchased goods and services are of the kinds for which special-type invoices
written with VAT-inclusive payment prices are used, businesses may base
themselves on these VAT-inclusive prices to determine the before-VAT prices and
the deductible input tax amount.

EXAMPLE 2.2:

In a tax period, JP Co. Ltd. made payment for input services of special type invoice
eligible for tax credit.

The total payment price is VND 110 million (inclusive of VAT). This service is
subject to the 10% tax rate.

Required: Define the deductible input tax amount for the tax month.

SOLUTION

The deductible input tax amount is

VND 110 million

x 10% = VND 10 million
1 + 10%

Wrong VAT rates indicated on the invoice which are not adjusted yet by businesses
themselves but are detected through auditing by tax offices, can put the purchasers
at a disadvantage. If the VAT rate stated on the invoice is higher than that prescribed
in legal documents on VAT, input tax shall be deducted at the VAT rate prescribed
in legal documents on VAT. If the VAT rate stated on the invoice is lower than that
prescribed in legal documents on VAT, input tax shall be deducted at the VAT rate
indicated on the invoice. The purchasers can avoid the above disadvantages if they
have a letter of certification issued by tax offices who are in charge of the sellers to
prove that the sellers have declared VAT at the rates as prescribed by laws.

When determining input tax, businesses have to comply with the following
principles:

Principle 1: Only input VAT of goods and services used for the production of and
trading in goods and services subject to VAT is deductible. Input VAT of goods or
services used for the production of and trading in goods and services not subject to
VAT (exempt items) is not deductible.Businesses have to book separately the input
tax amount of the goods or services used for the production of taxable items and
exempt items.

If input tax amount of purchased goods and services cannot be separated from being
used for taxable items, for not to declare and pay VAT items or exempt items,
deductible input tax is determined by allocating the input VAT based on the ratio
between turnover of taxable items plus turnover of transactions exempt from
declaring and paying VAT and total turnover of goods and services.

Some special cases relating deductible input tax:

- For purchased goods or fixed assets which are lost, damaged due to natural
disasters, fires or unexpected incidents, or stolen, and if organizations and
individuals responsible for paying compensations therefore are identified and/or the
loss value has been compensated by insurance companies, the input tax of these
goods is not deductible.

- The input VAT of fixed assets, machinery, equipment, including the input VAT of
operation of hiring these assets, machinery, equipment, in the following cases, shall
be not credited but included in historical cost of fixed assets or the deducted costs as
prescribed by Law on enterprise income tax and other guidelines: special-purpose
fixed assets used for the manufacture of weapons and military equipment for security
and defense purposes, fixed assets, machinery, equipment of credit institutions, re-
insurance businesses, life insurance enterprises, securities trading enterprises,
hospitals or training institutions; civil aircraft and yachts not for commercial
transportation of cargo or passengers, or for tourist or hotel business.
- For fixed assets being passenger of 9 seater car or less (Except cars for commercial
transportation of cargo or passengers, or for tourist or hotel business; cars used for
trial driving for business) which are valued at over VND 1.6 billion, the input VAT
amount corresponding to the amount in excess of VND 1.6 billion will not be
credited.

- Input VAT on goods and services forming fixed assets such as canteen, recreation
room, locker room, parking lot, restroom, water tank serving workers at the
workplace, housing and medical facility for workers in industrial parks shall be fully
deducted.

- VAT on purchased goods and services serving the provision of goods and services
for the foreign entities that use them as humanitarian aid or non-refundable aid shall
be deducted in full.

- Input VAT of goods and services serving provision of goods and services that are
exempt from declaring and paying VAT shall be fully deducted.

For corporation offices that are not directly engaged in business operations and
subsidiary administrative and non-business units such as hospitals, clinics,
sanatoriums, institutes, training schools, etc., not liable to pay VAT, they are not
entitled to credit input tax or to refund for goods and services purchased in service
of their activities.

EXAMPLE 2.3:
In the tax period, BD Co. ltd. purchased goods and services for production product
X, which is taxable and product B, which is an exempt item. Total VAT input written
on added value invoices legible VND15,000,000. The company cannot separate the
input tax for each item. Turnover of selling product X in the period is VND
100,000,000, product B is VND 50,000,000.
Required: Define the deductible input tax amount
SOLUTION
The deductible input VAT amount is
15,000,000 x 100,000,000/(100,000,000 + 50,000,000) = VND 10,000,000
+ Principle 2: The deductible input VAT arising in the period is declared for credit
immediately when the VAT amount payable in that period is determined, regardless
of whether these goods or services have been delivered for use or still remain in
stock.

When value added invoices of purchased goods and services are made but not yet
declared in the tax period, they are accepted for deduction in the following period
except for the case where the tax authority or a competent authority has announced
their decisions on tax audit at taxpayers’ premises.

In order to be deductible, 3 conditions below must be met at the same time:

+ Condition 1: The establishment must have registered to pay VAT under credit
method.

+ Condition 2: The purchase must be supported with legitimate invoices and/or

vouchers.

Input VAT is not deductible if the invoice is considered to be illegal including the
following cases:

- Value added invoices are used at variance with law provisions, i.e., they are
written with the total payment prices without VAT amount stated (except for
special cases permitted by the Ministry of Finance);

- The seller’s name, address or tax identification number is not written or written
incorrectly so that the seller is unidentifiable;

- VAT payment invoices and vouchers are fake;

- Invoices are erased or improperly modified, false invoices (invoiced goods or

services are not actually sold);

- Invoices are written with a value not true to the real value of goods or services
purchased, sold or exchanged.

+ Condition 3: Non-cash payment must be done to the purchase with total payment
of VND20, 000,000 and more.
Where businesses having customs office’s certification for exported goods but lack
of proof of bank payment, they are not required to calculate the output tax but are
not entitled to claim for deduction of input VAT.

For businesses providing export services, if they do not satisfy the condition of bank
payment or the condition for being regarded as bank payment, they are not required
to calculate output tax but are not entitled to claim for deduction of input VAT.

For the cases of transitionally processed goods and on-spot exported goods, if the
businesses lack one of the documents as prescribed, they shall have to calculate and
pay VAT as if these goods were sold in domestic market.
2.2.7.2. Direct method
a) For trading of gold, silver, and gemstones:

VAT payable = Value added x 10%

Value added of gold, silver, and gemstones = Selling price - Cost of the gold, silver,
and gemstones sold.

Selling prices of gold, silver, or gemstones are the actual selling prices written on
the sale invoices, inclusive of VAT, and other surcharges to which the seller is
entitled.

Cost of gold, silver, or gemstones sold are their VAT-inclusive values when they are
purchased or imported.

b. Cases in which VAT is calculated by directly multiplying a rate (%) by the

revenue (direct VAT):
VAT payable = Taxable revenue x Direct VAT rates

- This method may be applied by the following entities: companies and cooperatives
that earn less than 1 billion VND in annual revenues, except for those that voluntarily
apply credit method; Business households and businesspeople; foreign entities doing
business in Vietnam without following the Law on Investment; the organizations
that fail to adhere to accounting and invoicing practice, except for those that provide
goods and services serving petroleum exploration and extraction.
-The taxable revenue is the total revenue from selling goods and services, which is
written on the sale invoice for taxable goods and services, inclusive of the surcharges
to which the seller is entitled.

- Direct VAT rates applied to various business lines:

+ From goods distribution or goods supply: 1%;

+ From services or construction exclusive of building materials: 5%;

+Manufacturing, transport, services associated with goods, construction inclusive of

building materials: 3%;

+ Other lines of business: 2%.

If the taxpayer engages in various lines of business to which different rates are
applied, they must be sorted by VAT rate. Otherwise, the highest rate among which
shall apply.

The direct VAT payable by a business household or businessperson that pays VAT
at a flat rate depends on the declaration made by the taxpayer, the data of the tax
authority, the result of the investigation into the taxpayer’s actual revenue, and
opinions of the local Tax Advisory Council.

If the taxpayer that pays tax at a flat rate engages in multiple lines of business, the
rate on the primary business line shall be applied.
 EXAMPLE 2.4:
We have data in the month of a company, who declares and pays VAT using direct
method in the tax month as follows:
- Revenue from selling computer software: VND 300,000,000
- Revenue from consultancy on company establishment: VND 200,000,000
- Direct VAT rates from service is 5%.
Required: Define the VAT amount payable by this company
SOLUTION
- Revenue from selling computer software: non- taxable
- Revenue from consultancy on company establishment: taxable with Direct VAT
rates: 5%
The VAT amount payable:
VND 200,000,000 x 5% = VND 10,000,000

2.2.8. INVOICES
Businesses, when purchasing or selling goods and services, have to comply with the
regime on invoices and vouchers as prescribed by law.

Businesses applying credit method, when selling goods or providing services subject
to VAT have to use value added invoices (except where they are permitted to use
special-type invoices and vouchers written with total payment prices). Businesses
applying direct method, when selling goods or services, have to use normal invoices.
Businesses have to use export invoice when they export goods or render services
overseas.

When making invoices, businesses have to fully and correctly fill in all items on the
invoices. For value added invoices, they have to clearly write the before-VAT price,
surcharge and charge collected in addition to the payment price (if any), the VAT,
and the total payment price.

In some special cases, the use and writing of invoices and vouchers are as follows:

 Production and businesses applying credit method, when selling exempt items or
selling taxable items to VAT-exempt entities or selling gold, silver, and gems
shall use value added invoices. On these values added invoices only the line for
 writing the sale price is written with the before -VAT price while the lines for
writing the tax rate and VAT amount are left blank and crossed out. In case of
selling exempt items or selling taxable items to VAT- exempt entities, the invoices
must clearly state that the goods are exempt or are sold to a VAT- exempt entity.

 For export and import businesses applying credit method which undertake to
import goods under entrustment for other establishments, when delivering the
goods, they shall make invoices as follows:

- If the import entrustee has paid VAT at the importation stage when delivering
goods imported under entrustment, it shall make an value added invoice for use
by the import consignor as a basis for declaration and credit of input tax on
goods imported under entrustment.

- If the import entrustee has not yet paid VAT at the importation stage when
delivering the imported goods, it shall fill in the ex-warehousing-cum-internal
transport bill and make the internal transfer order for use as a voucher for
circulation of the goods on the market. Only after paying VAT at the
importation stage for goods imported under entrustment can the establishment
makes the invoice according to the above regulations.

- An value added invoice on the delivery of goods imported under entrustment

is written as follows:

(i) The before-VAT price covering the value of goods actually imported at
CIF price, the import tax, the excise duty and other amounts payable
according to regulations at the importation stage (if any).

(ii) The VAT rate and VAT amount as indicated in the tax payment notice of
the customs office.

(iii) The total payment amount is equal to (i) plus (ii).

 The import entrustee has to make a separate value added invoice for the
commission paid for the entrusted import.

 For production and businesses which deliver and transfer goods to their dependent
cost-accounting establishments such as branches, shops… in other localities
 (provinces or centrally run cities) for sale or transfer among branches and
dependent units; which receive goods back from dependent cost-accounting units;
or which deliver goods to commission agents for sale at fixed prices, basing
themselves on the mode of business organization and cost-accounting, they may
opt for either of the two following ways of using invoices and vouchers:

(i) Using value added invoices as a basis for VAT declaration and payment in
each unit and at each independent stage;

(ii) Using ex-warehousing-cum-internal transport bills issued by the Finance

Ministry (the General Department of Taxation), together with the internal
transfer orders for goods internally transferred; using the delivery bills for
goods for agency sale, issued by the Finance Ministry (the General
Department of Taxation) for goods delivered to agents, together with the
internal transfer orders.

 Dependent cost-accounting units and units acting as agents in various forms, when
selling goods, have to make invoices as prescribed by law, and at the same time,
to make lists of sold goods, and send them to the establishments which have
delivered the goods to them or delivered goods for agency sale so that these
establishments can make value added invoices for goods actually consumed.
Businesses which directly retail goods or provide services of a value below the
prescribed level are not required making invoices. However, if a purchaser
requests an invoice, they have to make an invoice as prescribed by law. In case
they do not make any invoices, they have to make retail lists for tax purpose.

 For organizations, individuals and administrative non-business units producing or

trading in goods or services subject to VAT on an irregular basis and without
invoices, they shall be given separate invoices by the tax office for use in each
specific case.

2.2.9. DECLARATION AND PAYMENT OF VAT

2.2.8.1. Declaration

a. Tax declaration for production and business activities

Taxpayers have to file VAT declarations and submit to tax offices in charge of them.
Businesses have to make and file declarations and submit to tax offices even when
no goods or service sale turnover or input tax and output tax arises.

For taxpayers that have dependent units conducting business in the province or city
where taxpayers’ head offices is located: If these dependent units conduct
independent accounting, they have to file VAT declarations and submit to tax offices
in charge of them. If these dependent units conduct dependent accounting, taxpayers
have to make a VAT declaration for both themselves and their dependent units.

For taxpayers that have dependent units conducting business outside province or city
where taxpayers’ head offices are located, these dependent units have to file VAT
declarations and submit to tax offices in charge of them. If these dependent units do
not directly sell goods and have no sale turnover, they shall all make tax declaration
at taxpayers’ head offices.

If taxpayers conduct business activities of construction, installation or itinerary

goods sale without establishing dependent units outside the province or city where
their head offices are located (below referred to as extra-provincial mobile
construction, installation or goods sale business), they have to file tax declarations
and submit to district-level tax departments of the localities where such construction,
installation or goods sale activities are conducted.

If a taxpayer applying credit method have an input tax amount left after deduction
against the output tax of the tax month, he is entitled to deduct this input tax amount
in the following tax period regardless of the calendar year or the fiscal year.

Tax period:

- Value-added tax declaration is made on a monthly basis, except cases of

declaration on quarterly or upon incurrence of tax.

- Case of declaration on quarterly basis: The taxpayer earns a total revenue of 50

billion VND or less from the sale of goods and/or services in the preceding.

- Case of declaration upon incurrence of tax: VAT on revenues from extra

provincial business; VAT on revenues of casual businesspeople.
The deadlines for submitting of tax return are as follows:

The deadline for submitting a monthly tax declaration is the 20 th of the month
succeeding the month in which tax is incurred.

The deadline for submitting a quarterly tax declaration is the 30th of the quarter
succeeding the quarter in which tax is incurred.

For tax declaration upon incurrence of tax must be submitted within 10 days from
the day on which tax is incurred.

If taxpayers detect errors in their tax declarations already filed to tax offices which
affect their tax amounts payable, they can make additional declaration in these tax
declarations. Tax declaration with additional declarations may be filed and submit
to tax offices on any working day.

The declaration of tax payable in some specific cases is as follows:

 Those taxpayers engages in an extraprovincial construction, installation, or sale

with a value of VND 1 billion or higher inclusive of VAT, or extraprovincial real
estate transfer have to declare temporarily and pay VAT at the rate of 2% (for
goods and services subject to the VAT rate of 10%) or at the rate of 1% (for goods
and services subject to the VAT rate of 5%) of before-VAT turnover to district-
level tax departments of localities where the construction is done, the goods are
sold.

 Dossiers of VAT declaration for this case shall be filed for each time of arising of
turnover. If tax declarations need to be filed many times in a month, taxpayers
may register monthly filing of VAT declarations to district-level tax departments
where tax declarations are filed. When declaring tax to tax offices in charge of
them, taxpayers reflect all turnover amounts arising from extra-provincial mobile
construction, installation or mobile selling of goods and VAT amounts paid for
these turnover amounts in tax declarations of their head offices. Tax amounts
(according to tax receipts) paid for turnover from extra-provincial mobile
construction, installation or mobile selling of goods will be subtracted from VAT
amounts payable stated in taxpayers’ VAT returns of their head offices.
 Tax payers that have production units located in provinces other than the province
where the head office of the tax payers locate have to declare VAT as follows:

- If the production unit conducts accounting, the production unit has to declare
and pay VAT to tax office where it locates.

- If the production unit doesn’t conduct accounting, the production unit doesn’t
have to declare VAT. The tax payer has declare VAT for the sale of the tax
payer and its production unit. The tax payer has to pay VAT to tax office where
the production unit locates at the rate of 2% (for goods and services subject to
the VAT rate of 10%) or at the rate of 1% (for goods and services subject to the
VAT rate of 5%) of before-VAT turnover. The VAT paid to tax office where
the production unit locates shall be subtracted from the VAT amount payable
at head office. Where the VAT amount paid as percentage of 2% or 1% as
mentioned above is greater than the amount of VAT payable by the tax payer
in the tax month, the VAT amount payable to each locality is allocated based
on turnover.

- Declaration of value-added tax for agency activities:Taxpayers that are sale

agents for goods or services liable to VAT have to declare tax on turnover from
entrusted goods sale and their agent commissions. If establishments acting as
agents selling goods at prices fixed by the goods owners for commission
(except transactions which are exempt from declaring and paying VAT), they
have to declare and pay tax only on their agent commissions.

 Tax declaration by import or export businesses undertaking entrusted import of

goods subject to VAT: When delivering the goods, establishments that undertake
entrusted import of goods subject to VAT are not required to declare VAT on
goods they have imported under entrustment but have to separately declare
invoices made for these goods which have been delivered to import-entrusting
parties in the list of value added invoices for goods sold and file them to tax offices
in charge of them.

 Where businesses that produce or trade in both taxable items and exempt items
but fail to separately account the creditable input VAT, the creditable input VAT
shall be calculated according to the proportion (%) of the turnover from the
 taxable items to total turnover from the sale of goods and services in the period.
This proportion is defined temporarily every month and officially defined at the
end of the tax year.

 For businesses that sell taxable items at prices prescribed by the government and
enjoy price and freight subsidies provided by the government, when selling such
goods, they have to calculate the output tax so as to declare and pay VAT on goods
at the government-prescribed prices. Price and freight subsidies provided from the
state budget are not subject to VAT and are included in their incomes for corporate
income tax liability.

 Businesses dealing in assorted goods and services liable to different VAT rates
have to declare separately each tax rate prescribed for each kind of goods or
service. If they fail to determine tax separately for each tax rate, they have to
calculate and pay tax at the highest tax rate applicable to the goods or services
which they deal in.

 Where businesses trading in gold, silver and gems and businesses applying direct
method and the added value is negative, the negative added value shall be carried
forward and cleared against the arising added value of the following month for
calculating VAT amounts payable but the negative added value of the tax
finalization year must not be carried forward to the subsequent year.

b. Declaration for imported goods

Businesses and importers that import goods subject to VAT have to make and file
VAT declarations upon each importation at the time of import tax declaration to the
customs offices.
2.2.8.2. Tax payment

a. For production and trade establishments

- Tax payment deadlines

Taxpayers are obliged to pay taxes fully and on time into the state budget. If
taxpayers conduct tax calculation, the tax must be paid by the last day of the deadline
for submitting of tax returns. If tax offices conduct tax calculation or tax
assessment, the tax payment deadline is stated in notices of tax offices.

- Tax payment places and procedures

Taxpayers pay taxes into the state budget by the following ways: directly at the State
Treasury office or at tax offices that receive tax declarations or through organizations
authorized by tax administration agencies to collect taxes or through commercial
banks or other credit institutions and service organizations defined by law.

Taxpayers may pay taxes in cash or by account transfer. If taxpayers directly come
to the State Treasury office to pay taxes in cash, the State Treasury shall give
certification of paid tax amounts in tax receipts. If taxpayers pay taxes in cash at tax
offices, banks, credit institutions or to organizations or individuals authorized by tax
offices to collect taxes, upon receiving tax amounts, organizations or individuals
shall issue to taxpayers tax receipts. For taxpayers paying taxes by account transfer,
banks or credit institutions that deduct and transfer money from taxpayers' accounts
into the State Treasury's account shall give certification in taxpayers' tax receipts.
Banks or credit institutions shall reflect all contents of tax receipts on recourse
receipts to be sent to the State Treasury that collects state budget revenues.

Within eight working hours after receiving tax amounts from taxpayers, tax-
receiving agencies or organizations have to remit those tax amounts into the state
budget. If tax amounts are collected in cash in mountainous, deep-lying or remote
areas, islands or areas difficult to access, the time deadline for remittance of
collected tax amounts into the state budget is five working days from the date of tax
collection.

- Handling of overpaid tax amounts

In a tax period, if businesses have the overpaid tax amounts of the previous period,
these tax amounts may be cleared against the tax amounts payable of the subsequent
period.

Taxpayers may deal with overpaid tax amounts by one of the following ways:
 (i) Offsetting overpaid tax amounts against tax or fine arrears, or clearing overpaid
amounts of a tax against amounts payable of another tax.

(ii) Offsetting overpaid tax amounts against tax amounts payable of the subsequent
payment time.

(iii) Getting overpaid tax amounts refunded if they have no tax or fine arrears.

- Currency for tax payment

Currency for tax payment is Vietnam dong, except cases in which they are permitted
by law to pay tax in foreign currencies.

b. For imported goods

Businesses and persons that import goods have to pay VAT on imported goods upon
each importation. The deadline for payment of VAT on imported goods coincides
with the deadline for import tax payment.

2.2.10. VAT REFUND

2.2.10.1. Cases of VAT refund

(1) The monthly or quarterly amount of input VAT which has not been fully
deducted from the VAT paid by a business taxpayer adopting the credit method in
the period shall be deducted from the VAT incurred in the subsequent period.

(2) The refunding of VAT on annual goods and services used for investment
activities (except circumstances not be eligible for a refund), shall be applicable to a
registered business which has recently been incorporated under an investment
project and registered to pay VAT by credit method, or an oil well exploration and
development project undergoing the investment phase in at least 1 year and has yet
progressed to operation. If the accumulated value added tax (VAT) on services and
goods purchased for investment activities is VND 300 million or higher, the VAT
shall be refundable.

(3) Refund of VAT for investment projects

(a) An active business taxpayer which pays VAT by the credit method shall
separately declare input VAT on its investment projects currently under the
investment phase in the same province where it is based (except for the
circumstances not be eligible for a refund and except investment projects that
construct houses for sale or rent but without constituting any fixed assets) from the
VAT on its ongoing business activities. The maximum deductible VAT from the
investment projects is equal to the VAT payable on business activities in the period.

If the remaining deductible VAT is VND 300 million or higher, it shall be refunded.

If the remaining deductible VAT is smaller than VND 300 million, it shall be carried
forward to the next tax period of the project.

(b) An active business taxpayer which pays VAT by the credit method shall declare,
by separate documentation, and offset input VAT on its new investment projects
which are under investment and have not applied for neither business nor tax
registration in a province different from the location of its head office (except for
the circumstances not be eligible for a refund and except investment projects that
construct houses for sale or rent without constitution of fixed assets) against the
declared VAT on its ongoing business activities. The maximum VAT deductible
from the investment projects is equal to the VAT payable on business activities in
the period.

VAT on a new investment project shall be refunded if the remaining deductible input
VAT on such project is VND 300 million or higher.

If the remaining deductible input VAT is less than VND 300 million, it shall be
carried forward to the next period.

If the business taxpayer decides to establish project management boards or branches

in provinces other than the province where its headquarter bases in to manage one
or more projects on its behalf, such project management boards or branches shall
submit their own tax declarations and refund claims to local tax authorities with
which tax registration is applied provided they have their own legitimate official
seals, maintain their own records according to accounting regulations, have bank
accounts, have registered for tax and have obtained their own taxpayer identification
numbers. When an investment project for the incorporation of an enterprise
completes the formalities of registration for business and tax, the business that is the
main investor of such project shall inform the new enterprise of the amounts of the
project’s VAT incurred, VAT refunded and pending VAT refund. The new
enterprise shall declare and pay tax accordingly.

(c) In the following cases, a business shall not be eligible for a refund but can carry
forward remaining deductible VAT on its investment project to the subsequent
period:

- The charter capital of the investment project of the business has not been fully
contributed as registered as per the laws.

- An investment project is carried out by a business that undertakes conditional

trade(s) though not satisfying business conditions as per the Investment Law; in
other words, such investment project is run by a business that engages in though not
licensed to perform conditional trade(s); by a business that engages in though not
certified qualified to perform conditional trade(s); by a business that engages in
though not permitted by a competent authority to perform conditional trade(s); or by
a business that engages in but does not meet conditions to perform conditional
trade(s) though not required by the laws on investment to be permitted or certified
thereof in writing.

- An investment project is carried out by a business that undertake conditional

trade(s) but fails to sustain business conditions during its operations; in other words,
such investment projects are run by a business that engages in conditional trade(s)
but has its relevant license(s) revoked during its operations; by a business whose
certificate(s) of eligibility for conditional trade(s) is (are) revoked; by a business that
has the written permission revoked by a competent authority for conditional trade(s);
or by a business that fails conditions to undertake conditional trade(s) as per the laws
on investment. In this case, the business shall be ineligible for the refund of VAT
upon the revocation of one of the said documents or upon being exposed by
competent government authorities as having failed conditions for conditional trades.

- The value of natural resources and/or minerals plus the energy cost of an
investment project for extraction of natural resources and minerals which has been
licensed since July 01, 2016 or an investment project for production of goods makes
up 51% of its prime cost or above.
(4) Refund of tax on exported goods and services

A business that has an amount of remaining deductible input VAT of at least VND
300 million on its exported goods and services in a month (if declaring the tax every
month) or in a quarter (if declaring the tax every quarter) shall be given a refund of
monthly or quarterly VAT; however, the remaining deductible input VAT of less
than VND 300 million in a month or quarter shall be carried forward to the
subsequent month or quarter.

(5) A business that pays the value added tax by the credit method shall receive a
refund of overpaid VAT or of remaining deductible input VAT upon its transfer,
conversion, merger, consolidation, division, dissolution, bankruptcy or shutdown.

(6) Projects and programs financed by grant ODA, grant aids or humanitarian aids
shall be eligible for VAT refund.

(a) For the projects financed by grant ODA: Project owners or main contractors or
organizations that foreign sponsors designate to manage the projects shall receive a
refund of VAT paid on goods and services acquired in Vietnam to serve the projects.

(b) VAT paid on goods and services shall be refunded to Vietnam-based

organizations spending foreign entities’ humanitarian aids on such goods and
services for projects and programs that utilize grant aids and humanitarian aids.

(7) Entities granted diplomatic immunities and privileges as per relevant laws shall
receive a refund of VAT paid, according to the VAT invoice or the receipt stating
the VAT- included price, on the goods and services that they purchase in Vietnam
for consumption.

(8) Foreigners and Vietnamese expatriates holding passports or immigration papers

issued by competent foreign authorities shall be receive refunds of tax on the goods
that they purchase in Vietnam and carry upon departure.

(9) Tax refund for the businesses shall be at the discretion of competent authorities
as per the laws and according to the cases of value added tax refund as defined in
international treaties that the Socialist Republic of Vietnam engages in.
2.2.10.2. Responsibilities of parties relating to VAT refund

a. Responsibilities of VAT refund beneficiary

- To make tax refund dossiers and send them to tax offices. To make accurate and
truthful declaration in tax refund dossiers and to take responsibility under law for
the declared figures.

- Where their dossiers are unclear or incomplete, to supply supplementary

documents or give explanations as requested by tax offices.

- To fully keep at the establishments other documents related to tax refund and tax
credit; to fully supply invoices, vouchers and related documents used as a basis
for the determination of the refunded VAT amounts when tax offices carry out
tax refund inspections at the establishments.

b. Tax offices’ responsibilities in tax refund

- To collect tax refund dossiers from taxpayers.

- To examine tax refund dossiers at the tax offices, classify the subjects eligible for
tax refund so as to apply appropriate tax refund procedures and ensure strict
management of tax refund.

- To notify in writing and return the dossiers to the businesses not eligible for tax
refund.

- To check the figures and determine the refundable tax amounts of taxpayers
eligible for tax refund.

- To issue decisions to refund tax to taxpayers eligible for tax refund.

- To examine and audit the tax refund at the establishments when detecting
doubtful signs in the dossiers or taxpayers’ violations of the tax law.

c. Responsibilities of State Treasuries

State treasuries of provinces and centrally run cities have to refund VAT to various
taxpayers within three days after receiving according the tax refund decisions.
CHAPTER REVIEW

SUMMARY

1) VAT is a sale tax, charged as a percentage of the added value of a commodity

as it changes hands from manufacturer to wholesaler, retailer and consumer.

2) Under Vietnam law, VAT is levied on goods and services used for production,
business and consumption in Vietnam (including goods and services
purchased from organizations and individuals abroad), except for some
transactions which are exempt from declaring and paying VAT and several
exempt items prescribed by law.

3) The base of VAT is called base price. In principle, the base price is price
exclusive of VAT or in other words before-VAT price.

4) VAT rates currently in Vietnam are 0%, 5% and 10%. The rate 0% is
applicable to exported goods and services. The standard rate is 10%.

5) There are two methods of calculation VAT payable: credit method and direct
method. Under the credit method, in order to determine VAT payable, we need
to ascertain deductible input tax and output tax. Under the direct method, in
order to determine VAT payable, we need to define added value of goods and
services. In turn, added value can be determined by turnover of sold goods or
provided services and cost of sold goods or provided services. In some special
cases, added value is ascertained by an added value rate stipulated by Ministry
of Finance.

6) In principle, VAT declaration in Vietnam is a self-assessment system. The

taxpayers calculates themselves the tax amount payable, files tax returns and
pay tax at the due time stated by law.

7) There are some cases of VAT refund. Most of these cases are related to
businesses applying credit method. Some special cases are applicable to ODA
projects and humanitarian aid.

KEY TERMS
Agency activities Internal transfer orders
Annual finalization declaration Non- taxable goods and services
Before-VAT price Output tax
Credit method Outstanding tax amounts
Creditable input tax Overpaid tax amounts
Deductible input tax State-prescribed prices
Dependent cost-accounting establishments Direct method
Discounted sale prices Taxable goods and services
Dossier Underpaid tax amounts
Ex-warehousing-cum-internal transport bills Value added invoice
Normal invoice VAT refund

ECONOMIC CONCEPTS

1) Point out characteristics of VAT.

2) State goods and services subject to VAT in Vietnam.

3) Who is liable to pay VAT in Vietnam?

4) What is the base of VAT in Vietnam?
5) How is the base price defined in principle,?

6) How is the base price of imported goods determined?

7) State tax rates of VAT currently in Vietnam.
8) What is the main content of credit method? Is all input tax amounts creditable?

9) What is the main content of direct method?

10) State procedures for VAT declaration and payment in Vietnam.
11) What is the deadline for VAT declaration and payment in Vietnam?
12) State cases of VAT refund in Vietnam.
DISCUSSION QUESTIONS

1) Discuss the reasons for VAT-exempt goods and services.

2) Why doesn’t VAT undertake social fair?

3) Why do we impose VAT on imported goods?

4) What are the similarities and differences between 0% rate and non-taxable
goods and services (exemption)? Point out the significance of 0% rate?

5) What are the similarities and differences between taxable, non-taxable goods
and services (exemption) and exemption from declaring and paying VAT
transaction?

6) What are the strong points of credit method?

7) What are strong points and weaknesses of direct method?

8) Point out the significance of VAT refund.

EXERCISES

Exercise 1

We have data of a trade establishment in a month as follows:

 At the beginning of the month, 10,000 units of product X are left in stock. The
before-VAT price of these products is VND50,000 per unit.

 Purchase in the month:

- Purchase from SA Co. 5,000 units with before-VAT price written on value
added invoice VND55,000 per unit.

- Purchase from a business household 3,000 units with price written on goods
sale invoice VND56,000 per unit.

- Purchase from AS Co. 2,000 units with before-VAT price VND55,000 per unit.
The value added invoice is not written the seller’s name.

 Sale in the month: 15,000 units of product X with before-VAT price

VND60,000 per unit.
 The creditable input tax of other purchased goods and services is VND3,000,000

Required: Calculate VAT payable for the month. Given that:

- VAT rate: 10%;

- The establishment applies credit method;

- Bank payments are used to the above purchase.

Exercise 2

You are provided with the following information relating to ABC company, for the
quarter ended 30 April year N:

1. Sales:

- 10% supplies (excluding VAT) VND 200,000,000

- Zero - rated supplies VND 150,000,000

- Exempt supplies VND 50,000,000

2. Input VAT had been paid

- For production 10% supplies VND 7,000,000

- For production Zero - rated supplies VND 4,000,000

- For production Exempt supplies VND3,000,000

- General overhead VND4,000,000

Required: Compute the VAT payable for the quarter ended 30 April year N. Given
that:

- ABC applies credit method;

- Zero - rated supplies are supported with sufficient documents as prescribed by law;

- All purchases were supported with legitimate invoices;

- Bank payments are used to the above purchase;

- The general overhead cannot be directly attributed to any of the listed supplies.
 Exercise 3

A Vietnamese join stock company, which engages in garment production. This

company applies credit method, had the following transactions during the tax period
for which creditable input VAT is questioned. All amounts are stated exclusive of
VAT at 10%.

1. Purchased goods with invoiced value of VND 200 million. During transportation
to the company warehouse, due to an accident, one third inventory was damaged.
The good were not insured, no one compensated for the damage. The purchased
goods were supported with legitimate invoice and with Bank payment.

2. Purchased a 5-seater car at a value of VND 2,000 million. The purchase car was
supported with legitimate invoice and with Bank payment.

3. Purchased goods with invoiced value of VND 30 million. The purchase goods
were supported with VAT invoice, but the seller’s address was not written and with
Bank payment.

4. Received an invoice for 2,000 million for the construction of a canteen for
employees working in the company’s factory in the industrial park. The invoice is
legitimate and with Bank payment.

5. Purchased goods with invoiced value of VND 50 million. The purchase goods
were supported with VAT legitimate invoice, and with cash payment.

6. Purchased goods with invoiced value of VND 15 million. The purchase goods
were supported with VAT legitimate invoice, and with cash payment.

Required: For each of the above items, calculate the creditable and/or uncreditable
input VAT and explain the reason for your treatment.

Exercise 4

We have data in the month of a company as follows:

- Sell 12,000 units of product A in domestic market with before-VAT price of

VND30,000 per unit.
 - Sell 10,000 units of product B in a domestic market with before-VAT price of
VND20,000 per unit.

- Export 2,000 units B with before-VAT price of VND30,000 per unit. Exported
goods are eligible for creditable input tax.

- Deliver to a sale agent selling goods at prices fixed by the goods owner for
commission 2,000 units of product B with before-VAT price of VND30,000
per unit, using the delivery bills for goods to sale agency together with the
internal transfer orders. The sale agent make list of sold goods and send to the
company report that they have sold 1,000 units of product B.

- The input VAT from purchased goods and services in the month is
VND20,000,000. The company cannot separately account the input tax for
every activity.

Required 1: Compute VAT payable for the month and fill in VAT declaration form.
Given that, product A is exempt from VAT, product B is a taxable item with VAT
rate of 10%. The company applies credit method. Exported goods are supported with
sufficient documents as prescribed by law. All purchases in the month were
supported with legitimate invoices.

Required 2: Calculate VAT payable for the month, suppose that 12,000 units of
product A are exported instead of selling in domestic, other data remains unchanged.

Exercise 5

We have data in a month of a company in Hanoi:

 Purchase in the month:

- 3,000 units with before-VAT price of VND260,000 per unit.

- 100 units with price written on normal invoice of VND27,500,000

 Selling in the month:

- 10,000 units with before-VAT price of VND300,000 per unit

 - Using ex-warehousing-cum-internal transport bills together with the internal
transfer orders to deliver 500 units to a dependent cost-accounting
establishment based in Hanoi. The dependent cost-accounting establishment
reports that the sold quantity is 400 units with before-VAT price of
VND310,000 per unit

- Sale of mobile selling in Haiphong is as follows: 3,500 units with before-VAT

price of VND310,000 per unit. The company has declared and paid VAT in
Haiphong.

- The creditable input VAT of other purchased goods and services is

VND5,000,000

Required: Calculate VAT payable for the month in Hanoi and in Haiphong, given
that:

- The establishment applies credit method;

- Tax rates: 10%;

- Bank payments are used to the above purchase.

Exercise 6

A corporation engaging in wooden furniture production has the following data for a
tax month:

- Export sales: 100 sets of table and chairs with FOB price of VND400 million.

- Sales to companies in EPZs: 50 sets of table and chairs with price at the border
gate of EPZs of VND250 million.

- Domestic sales (at before VAT price): VND600 million.

- Total input VAT shown on value added invoices: VND80 million of which
VND10 million belonged to a damaged load of wood caused by fire.

- Bank payment was applicable to all transactions of this corporation. Exported

sets of table and chairs and tables and chairs sold to companies in EPZs were
qualified for tax credit. VAT rate applicable to wooden furniture is 10%.
Required: Calculate the VAT amount payable by this corporation for the tax month.
Given that, the damaged load of wood has been compensated by an insurance
company.
 CHAPTER 3
EXCISE DUTY

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

- Define excise duty and explain its characteristics.

- Define who is liable to pay excise duty in Vietnam.

- Identify what kind of goods and services are subject to excise duty in
Vietnam.

- Define which transactions are not subject to excise duty in Vietnam.

- Determine base price, tax rate and ways to calculate excise duty payable by
a taxpayer in Vietnam.

- Know how to complete excise duty declaration and when to file and pay tax.

- Know who and in what case is exempt from excise duty in Vietnam.
3.1. CONCEPTS AND CHARACTERISTICS OF EXCISE DUTY

Excise duty is used worldwide as one of the most popular type of consumption taxes.
Although excise duty does not contribute the largest part of tax revenue, it
contributes a significant proportion to government budgets, especially in developing
countries.

Excise duty is applied not only for the sake of revenue, though apparently this is one
of the main rationale behind excise duty, but to promote efficiency in resource
allocation by internalizing the social costs (not included in price) of the (excessive)
consumption or production of excisable goods, and to achieve equity in distribution
in taxation (This is done by applying the higher-than-average tax of goods
disproportionately consumed by the rich, such as cosmetics, air-conditioners,
passenger cars, etc.).

Excise duty (sometimes called excise tax or special consumption tax, or even in
some countries called special tax) is a tax that is imposed on certain special goods
and services imported or produced within a country.

Thus, beside the characteristics of a sales tax, excise duty has the following
prominent features:

Firstly, excise duty is a one-stage consumption tax. This contrasts sharply to other
taxes such as VAT or turnover tax which are multi-stage taxes. Most countries only
charge excise duty on goods and services at one stage, either at production or
importation of goods and supply of services. Excise duty is only placed on excisable
goods and paid by producers or importers, not by distributors or retailers.

Secondly, the scope of excise duty is relatively narrow with a small numbers of
excisable goods and services. Excise duty is imposed on only a few selected goods
and services which are normally luxurious goods and services or which are regarded
as doing harm to environment or human’s health. The most popular excisable goods
and services are cosmetics, air-conditioners, passenger vehicles, liquors, cigarettes,
perfume, electrical appliances, photographic equipments, restaurant meals, karaoke,
massage and casino business. However, categories of excisable goods and services
are different from countries to countries depending on the viewpoint of the
government in power.

Thirdly, the rates of excise duty are often higher than those of other sales taxes. The
justification for higher-than-normal rate of excise duty is that higher rate can best
help to achieve the aims of excise duty. First, large revenue from excise duty can be
collected. Second, high rate on luxury goods and services can both help to bring
more revenue to the budget and to get distributional equity. Third, higher rate
charged on goods which are harmful to environment, helps to reduce the production
and consumption of these goods.

3.2. BASIC CONTENTS OF EXCISE DUTY IN VIETNAM

Excise duty has been put into effect in Vietnam for over 30 years. At first it was
called Goods tax which was levied on certain goods such as cigarettes and alcohol.
In 1993, the first Act of Special consumption tax was enacted with more specific
regulations and wider range of taxable goods. In 1998, a new Act of Special
consumption tax was enacted to replace the 1993 Act. This act was then revised
twice in 2003 and 2005. Most of the amendments were to meet the requirements of
WTO negotiation.

In November 2008, the National Assembly of Vietnam passed a new law on excise
duty which is effective from April 2009 to replace the Act of Special consumption
tax 1998. Now we examine the basic contents of this act.

3.2.1. TAXPAYERS
Excise taxpayer include organizations and individuals (For abbreviation, it is called
establishments) that produce and/or import goods and provide services, which are
subject to excise duty, or in other words, we call excisable goods and services.

Thus, In principle, excise taxpayer is the producer and/or importer of excisable

goods and the provider of excisable services.

3.2.2. EXCISABLE GOODS AND SERVICES

There are 11 items or group of items of goods and 6 items of services that are subject
to excise duty in Vietnam including:
♦ Goods:

- Cigarettes, cigars, and processed products made from tobacco;

- Liquors;

- Beers;

- Under-24-Seat passenger vehicles (automobiles), semi passenger automobiles ;

- Airplanes;Yachts;

- Gasoline of various kinds,;

- Air conditioners of a capacity of 90,000 BTU or less;

- Playing cards;

- Votive gilt paper, votive objects;

- Motors with cylinder capacity of over 125 cm3.

Note: Whether a producer sells separately indoor parts and outdoor parts of air
conditioners of a capacity of 90,000 BTU or less and an importer imports separately
indoor parts and outdoor parts of air conditioners of a capacity of 90,000 BTU or
less, these parts of air conditioners are still subject to excise duty.

♦ Services:

- Dancing halls (Discotheques);

- Massage parlors, karaoke bars;

- Casinos, electronic games with prizes;

- Betting tickets business;

- Golf business: sale of golf club membership cards, golf playing tickets;

- Lottery business.

Thus, most of the excisable goods and services are luxurious goods and services or
goods which are considered harmful to environment.
3.2.3. NON – TAXABLE TRANSACTIONS

Apparently, transactions of goods and services other than excisable goods and
services are not subject to excise duty. Besides, the following transactions of
excisable goods are also not subject to excise duty:

1. Exported goods or exported goods under an entrustment contract or goods sold

to a trading company who then exports them under a contract sign with a foreign
party.

2. Importation of goods in the following cases:

- Humanitarian aid or non-refundable aid goods; gifts for State agencies, political
organizations, socio-political organizations, social organizations, socio-
professional organizations, people's armed forces units; belongings of foreign
organizations and/or individuals that enjoy diplomatic immunities; personal
effects within the duty-free luggage quotas;

- Goods transshipped, transited or transported through Vietnam's border;

- Goods temporarily imported for re-export, or temporarily exported for re-import

during the import or export duty-free period;

- Goods imported for duty-free sale under the prescribed regulations.

3. Transactions of specialized passenger vehicles including ambulance cars,

criminal carrying cars, funeral cars, mobile television cars, cars used for radio
signals test, armored cars used to repair public lights, under-24-seat passenger
vehicles with standing places to carry more than 24 persons, and other
specialized cars under the guidance of the Ministry of Finance.

4. Aircrafts and passenger boats sold to those establishments who use them for
goods and passengers carrying, and tourist business.

5. Aircrafts used for the following purposes: fighting fires, spraying pesticide,
measuring maps, filming, taking photos, security and defense.
6. Air conditioners with a capacity of 90,000 BTU or less designed by the
producers for parts of transport vehicles such as coaches, buses, cars, aircrafts,
train carriages, boats, and ships.

7. Reformade components, condensate and naphtha directly imported by the

producers in order to produce products other than gasoline.

8. Importation of goods from foreign countries into non-tariff zones, sale of goods
from domestic market into non-tariff zones for use in non-tariff zones only
except for under-24-seat passenger vehicles, and transportation of goods from
one non-tariff zone to another.

Thus, most of the non-taxable transactions are applicable to goods which are not
actually consumed in Vietnam. In some cases the non-taxable transactions are
applicable for other socio-economic reasons or following international common
practices. Other transactions are to adjust the scope of excisable items.

3.2.4. BASE PRICE

In principle, the base price of excise duty is selling price exclusive of excise duty,
exclusive of VAT and exclusive of environmental protection tax (if any) . The base
prices for some cases are as follows:

1. For imported goods sold domestically by the importer and on domestically made
goods, the base price is calculated as follows:

The base Price exclusive of VAT – Environmental tax (if any)

=
price of goods 1 + Excise duty rate of goods

For example, a wine production company sells its products in the domestic market.
The price exclusive of VAT of a bottle of wine is VND125,000. Excise duty rate of
wine is 25%. The excise base price of this bottle of wine is:

VND125,000
= VND100,000
1 + 25%

2. For imported goods at importation:

The base price is the import tax base price plus (+) the import tax. For example, an
air-conditioner with import base price of VND10,000,000. Import tax payable is
VND1,000,000. The excise base price of this air-conditioner at importation is
VND10,000,000 + VND1,000,000 = VND11,000,000.

3. For services: The base price is the before VAT service provision price exclusive
of excise duty. The base price is calculate as follows:

The base price of Before VAT price of service

=
service 1 + Excise duty rate of service

For example, the before VAT price for one hour of massage is VND104,000. Excise
duty rate of massage is 30%. The base price of one hour of massage is:

VND104,000
= VND80,000
1 + 30%

For some special services, the base prices are determined as follows:

- For dancing halls: The base price is the before-VAT price exclusive of excise
duty, including sale of tickets and sale of all goods sold in dancing halls such as
beers, alcohol, cigarettes, fruit juice and other goods.

- For entertainment with bet tickets: The base price is the difference between the
sales from the bet tickets minus (-) the prize paid to the winners of betting.

- For goods or services used for purposes of exchange or internal consumption, gift
or donation: The base price is the base prices of goods and services of the same
or equivalent type at the time such activities are conducted.

The base prices of goods and/or services also include surcharges received by the
businesses.

The base price is in Vietnam dong. If the businesses purchase and sell goods and/or
services in foreign currencies, they must convert the foreign currencies into Vietnam
dong at the real exchange rate at the time their turnover is generated to determine
the base prices.
3.2.5. TAX RATES

Excise duty rates are shown in the following table:

Tax rate
No. Goods and services
(%)

I Goods

1 Cigarettes, cigars and processed products made from tobacco 75

2 Liquors

- 20 degrees proof or more

65

- Under 20 degrees proof 35

3 Beers

65

4 Autormobiles fewer than 24 seats

a/ Up to 9 seats

- With cylinder capacity 1,500 cm3 and less 35

- With cylinder capacity more than 1,500 cm3 and up to 2,000 40

3
cm

- With cylinder capacity of more than 2,000 cm3 and up to 2,500

50
cm3

- With cylinder capacity of more than 2,500 cm3 and up to 3,000 60

cm3
- With cylinder capacity of more than 3,000 cm3 and up to 4,000 90
cm3

- With cylinder capacity of more than 4,000 cm3 and up to 5,000

110
cm3

- With cylinder capacity of more than 5,000 cm3 and up to 6,000 130
3
cm

- With cylinder capacity of more than 6,500 cm3 150

b/ From 10 to 15 seats 15

c/ From 16 to 23 seats 10

d/ Semi-passenger automobiles

- With cylinder capacity 2,500 cm3 and less 15

- With cylinder capacity of more than 2,500 cm3 and up to 3,000 20

cm3
-
- With cylinder capacity of more than 3,000 cm3
25

e/ Electric or biological and gasoline mixed powered automobiles 70% of the

of which the percentage of gasoline used is 70 percent or less rate of the
same
category
ranging from
a to d above

f/ Biologically powered automobiles 50% of the

rate of the
same
category
ranging from
a to d above
 g/Electric automobiles

- Up to 9 seats 15

- From 10 to 15 seat 10

- From 16 to 23 seat 5

- Semi-passenger automobiles 10

h/ Motorhome 75

5 Motorbikes with cylinder capacity of over 125 cm3 20

6 Airplanes 30

7 Yachts 30

8 Gasoline

a) Gasoline 10

b) E5 gasoline 8

c) E10 gasoline 7

9 Air conditioners of a capacity of 90,000 BTU or less 10

10 Playing cards 40

11 Votive gilt paper, votive objects 70

II Services

1 Dancing halls 40

2 Massage parlors, karaoke bars 30

3 Casino, electronic games 30

4 Bet tickets business 30

5 Golf business: sale of membership cards and golf playing tickets 20

6 Lottery business 15
It can be seen that the rates of excise duty in Vietnam vary from items to items. They
range from the highest rate of 150 percent to the lowest rate of 5 percent. The more
luxurious the item is, the higher the rate is. The more harmful to the environment the
item is, the higher the rate is.

3.2.6. TAX DEDUCTION

3.2.6.1. Subject for excise tax deduction

- Taxpayers that produce exisable goods from exisable raw materials.

- Importers when sell exisable imported goods domestically is entitled to deduction

of the excise tax amount paid at importation.
3.2.6.2 Conditions for excise tax deduction

- For importation materials subject to excise tax to manufacture goods subject to

excise tax, and for importation goods subject to excise tax, the receipt of excise tax
payment at importation is the basis for excise tax deduction.

- For cases of purchasing raw materials directly from domestic producers:

+ Goods sale and purchase contract, clearly indicating that the goods are
produced directly by the seller, copy of the seller’s business registration
certificate (containing the seller’s signature and seal);

+ Via-bank payment documents;

+ Documents as a basis for excise tax deduction are value-added invoices

issued upon goods purchase.
3.2.6.3. Determination excise tax deduction amount

For purchasing raw materials directly from domestic producers: The amount of
excise tax paid by the buyer when buying materials equals (=) taxable price
multiplied by (x) excise tax rate, in which:

Taxable price = [VAT- exclusive buying price minus (-) Environmental protection
tax (if any)] /(1 + Excise tax rate)
The deductible excise tax amount equals payable excise tax or paid excise tax on
the quantity of materials used for manufacturing goods sold in the period.

3.2.7. TAX CALCULATION

The amount of excise duty is determined by the following formulas:
3.2.7.1. For importation goods at importation

Excise duty payable = Base price of goods imported x Tax rate

3.2.7.2. For goods/service sold in the domestic market

- If there is no tax deduction

Excise duty payable = Base price of goods/service x Tax rate

EXAMPLE 3.1:
We have data of a company engaged in trading in a tax month as follows:

Importation of wine with alcoholic content of 120: 100,000 bottles with CIF price of
VND120,000 per bottle. CIF price was accepted as import duty base price. Import
duty rate applicable to this product is 40%.

Required: Calculate the excise duty amount payable by that company upon
importation. Given that the excise duty rate applicable to wine is 35%.

SOLUTION

- Import duty payable on importation of wine is

100,000 bottles x VND 120,000 x 40% = VND 4,800,000,000

- Excise duty payable on importation of wine is: (100,000 bottles x VND120,000

+ VND4,800,000,000) x 35% = VND 5,880,000,000
 EXAMPLE 3.2:
We have data of a company engaged in beer production in a tax month as follows:

- Exported beer: 200,000 cans with FOB price of VND8,000 per can.

- Sale of beer in domestic market: 500,000 cans at price exclusive of VAT of VND
9,900

Required: Calculate the amount of excise duty payable by that company. Given that,
the excise duty rate applicable to beer is 65%.

SOLUTION

Exportation of beer is a non-excisable transaction.

- Excise duty payable on the sale of beer in domestic market is

VND 9,900
500,000 cans x x 65% = VND1,950,000,000
1 + 65

- If there is tax deduction:

Excise tax amount payable = Excise tax amount for excisable goods sold in the
period minus (-) The excise tax paid at importation or excise tax paid for excisable
material used to produce excisable items.

The deductible excise tax is corresponding to excisable items amount sold during
the tax period. For example, in September 2019, company A imported 100 five-seat
cars. Total excise tax paid at importation is VND 50 billion. In September 2019, 90
cars were sold in domestic market. The deductible excise tax amount is 50 x 90/100
= VND 45 billion.
EXAMPLE 3.3:

We have data of a company engaged in beer production in a tax month as follows:

- Exported beer: 500,000 cans at FOB price of VND8,000 per can.

- Sales of beer in domestic market: 1,000,000 cans at before VAT price of

VND9,900

- In order to produce canned beer, the company bought draft beer from another
beer producer. The amount of draft beer bought in the tax month was 800,000
liters at before VAT price of VND10,500 and all of which were used for canned
beer production.

Required: Calculate the excise duty payable by that company. Given that:

- There was no material in inventory at the beginning of the tax month;

- 0.5 liter of draft beer is used to produce a can of beer;

- The excise duty rate applicable to beer is 65%.

SOLUTION

- Exportation of beer is a non-excisable transaction.

- Excise duty on the sale of canned beer is

VND9,900
1,000,000 cans x x 65% = VND3,900,000,000
1 + 65%

- Amount of draft beer corresponding to the amount of excisable cans of beer is

1,000,000 cans x 0.5 liter = 500,000 liters.

- Credited excise duty for draft beer used to produce canned beer is

VND10,72
500,000 liters x x 65% = VND2,112,000,000
1 + 65%

- Excise duty payable for the tax month is

VND3,900,000,000 - VND2,112,000,000 = VND1,787,500,000

3.2.8. TAX DECLARATION AND PAYMENT
3.2.8.1. Tax declaration

In principle, a self-assessment system is applicable to excise duty declaration and

payment. The taxpayers calculate by themselves tax amounts payable. Excise tax
payers have to file excise duty returns to the tax offices in charge of them.

Declaration of excise duty is done on monthly basis. The deadline for filing tax
declaration form and dossiers is on the twentieth day of the month following the
month in which the tax liability arises.

For imported goods, the deadline for filing tax return is the same as the deadline for
filing import duty declaration.

Tax payers who have their dependent units (branches, shops, etc.) operating in the
same province or city file excise duty declaration forms of these units to the tax
authorities in charge of them. If taxpayers have dependent units located outside the
province or city where their head offices are located, these dependent units file their
excise duty declaration forms to the tax authorities in charge of them.

Tax payers that conduct business activities without fixed places of business or
households engaged in construction, transportation or other self-employed activities,
file their excise declaration forms and dossiers to their district-level tax departments
where their business activities are conducted or where they reside.

For tax payers or their dependent units with start-up business operation, the deadline
for filing of excise duty declaration forms is the last day of the month of business
operation commencement.

If an establishment buys excisable goods from a manufacturer for exportation but

fails to export and decides to sell these goods into domestic market, the
establishment has to declare and pay excise duty on these goods.
3.2.8.2. Tax payment

In principle, the tax payment deadline is the due date of filing of tax declaration
form. Thus, the monthly excise duty must be paid by the twentieth day of the month
following the month in which the tax liability arises.

The deadline for payment of excise duty on imported goods is the same as import
duty.

Currency for tax payment is Vietnam dong. If a taxpayer wants to pay in foreign
currency, it must be in convertible currencies.

3.2.9. TAX REDUCTION AND EXEMPTION

Excisable goods producers facing difficulties caused by natural disasters, enemy
sabotage or accidents may be allowed tax reduction or exemption.

The amount of reduction of excise duty is corresponding to the loss caused by natural
disasters, enemy sabotage or accidents but should not be more than 30 percent of the
excise duty payable for the tax year.

If the loss is so severe that the establishment is not able to continue its operation and
cannot afford to pay tax, the producers could be exempt from excise duty.

CHAPTER REVIEW

SUMMARY

1) Excise duty is a tax levied on certain special goods and services imported or
produced within a country. It is a one-stage consumption tax with relatively
narrow scope and higher-than-normal rates.

2) In Vietnam, taxpayers of excise duty include organizations and individuals that

produce and/or import goods and provide services, which are subject to excise
duty.

3) There are 11 items or group of items of goods and 6 items of services that are
subject to excise duty in Vietnam. Most of them are luxurious goods and services
or goods which are considered harmful to the environment.
4) 7 types of transactions are free from excise duty. Most of the non-taxable
transactions are applicable to goods which are not actually consumed in
Vietnam. In some cases the non-taxable transactions are applicable for other
socio-economic reasons or following international best practices.

5) In principle, the base price of excise is selling price exclusive of excise duty. The
base price for domestic goods/services and imported goods sold in the domestic
market is the price exclusive of VAT, environmental tax and excise duty. The
base price for imported excisable goods upon importation is the import tax base
price plus (+) import tax.

6) In Vietnam excise duty rates vary from item to item, ranging from the highest
rate of 150% to the lowest rate of 5%. The more luxurious the item is, the higher
the rate will be applied. The more harmful to the environment the item is, the
higher the rate will be applied.

7) In principle, a self-assessment system is applicable to excise duty declaration and

payment. Declaration of excise duty is based on monthly basis. The deadline for
filing tax declaration forms is the twentieth day of the month following the
month in which the tax liability arises. Tax must be paid at the date when the
filing of tax declaration forms is due.

KEY TERMS

Supply definitions for the following terms

Base price Excisable person Transited goods

Duty-free goods Non-taxable transaction Transshipped goods

Excisable goods Self-assessment system

ECONOMIC CONCEPTS

1) Point out characteristics of excise duty.

2) Who is liable to pay excise duty in Vietnam?

3) Explain how to determine base price of excise duty.

4) List the excisable goods and services in Vietnam.

5) List non-excisable transactions stipulated by law.

6) Explain how to determine excise duty payable.

7) Explain who and under what conditions a reduction or exemption of excise duty
is applicable.

8) Clearly explain procedures for excise duty declaration.

DISCUSSION QUESTIONS

1) Discuss the rationale of excise taxation.

2) Clearly explain the differences and similarities between excise duty and VAT.

3) Discuss the characteristics of excisable goods and services in Vietnam.

4) Discuss the characteristics of non-excisable transactions in Vietnam.

5) Why does not the base price of excise duty include excise duty?

6) Why do excise duty rates apply to passenger cars vary, depending on the
engine’s cylinder capacity?

7) Discuss the rationale of the excise duty rates in Vietnam.

EXERCISES

Exercise 1

We have the data of the tax month N in John Co. engaged in golf as follows:

- Sales of membership cards: the turnover exclusive of VAT is VND520,000,000.

- Turnover of golf playing service: the turnover exclusive of VAT is

VND320,000,000.

- Sales of site-seeing tickets: the turnover exclusive of VAT is VND55,000,000.

- Total deductible input VAT is VND10,000,000.

Required: Determine the amount of VAT and excise duty payable by this company
for the tax month. Given that:

- VAT rate applicable to the above items is 10%.

- Excise duty rate applicable to golf service is 20%.

Exercise 2

We have the data of the tax month N in Dobson Inc. engaged in liquor production
as follows:

- Sales of wine with 12 o alcohol in domestic market: 5,000 bottles at before VAT
price of VND101,250 per bottle.

- Sales of wine with 43 o alcohol in domestic market: 2,000 bottles at before VAT
price of VND 330,000 per bottle.

- 100 bottles of wine with 43 o alcohol used for the company’s conferences and
reception.

- Exportation of wine of 12 o alcohol: 10,000 bottles at FOB price of VND90,000

per bottle.

- Deductible input VAT is VND60,000,000

Required: Determine the amount of VAT and excise duty payable by this company
for the tax month. Given that:

- VAT rate applicable to the above items is 10%.

- Excise duty rates applicable to wine with 12 o alcohol is 35%, to wine with 43 o
alcohol is 65%.

- Exported wine was supported with sufficient documents as prescribed by law.

Exercise 3

We have the data of the tax month N in Moore Co. engaged in car production and
trading as follows:

- Exportation: 100 16-seat cars at FOB price of VND460,000,000 per unit.

- The number of cars sold to a company in an export processing zone: 6 five-seat
cars with cylinder capacity of 3,000 cubic cm. The per-unit price at the gate of the
EPZ is VND 640,000,000.

- Domestic sales: 20 cars of five seats with cylinder capacity of 3,000 cubic cm at
the before VAT price of VND 672,000,000 per unit.

- Total deductible input VAT is VND250,000,000.

Required: Determine the amount of VAT and excise duty payable by this company
for the tax month. Given that:

- VAT rate applicable to the above items is 10%.

- Excise duty rate of 10% applicable to 16-seat cars; 60% applicable to five-seat
cars with cylinder capacity of 3,000 cubic cm.

- Exported cars were supported with sufficient documents as prescribed by law.

Exercise 4

We have the data of the tax month N in Moore Co. engaged in beer production and
trading as follows:

- Purchase of draft beer: 500,000 liters at before VAT price of VND8,250 per liter.
The company used the draft beer to produce 1,000,000 bottles of beer.

- Exportation of bottled beer: 350,000 bottles at FOB of VND10,000 per bottle.

- Selling 50,000 bottles at a price of VND9,500 to a company in an export

processing zone.

- Selling 250,000 bottles at a before VAT price of VND9,500 to a trade company

which then exports according to a trade contract signed with a foreign company.

- Domestic sales are 200,000 bottles at before VAT price of VND14,850 per bottle.

- Deductible input VAT of other goods and services than draft beer purchased
above is VND10,000,000.
Required: Determine the amount of VAT and excise duty payable by this company
for the tax month. Given that:

- VAT rate applicable to the above items is 10%.

- Excise duty rate applicable to beer is 65%.

- Exported beers were supported with sufficient documents as prescribed by law.

There was no material in inventory at the beginning of the tax month.