TAX NEWS - 2010

Vietnam Corporate Tax: Additional guidance issued on finalization of 2009 corporate income tax liability

Vietnam's Ministry of Finance (MOF) issued guidance on 7 June 2010 (Official Letter No. 7250/BTC-TCT (OL 7250)) that clarifies the calculation of the 2009 corporate income tax liability. However, because OL 7250 was issued after the 31 March 2010 deadline for finalizing the 2009 corporate income tax liability, liabilities already declared in a return could be subject to changes (positive or negative) that may result in tax administrative penalties in connection with an amended corporate income tax return.

In general, OL 7250 provides more detailed and transparent guidance on the tax treatment of certain income and deductible expenses in comparison with earlier guidance. In particular:

- Loan interest paid in the period may be set off against interest income from deposits and loans. Net interest income is considered "other income" subject to the standard corporate income tax rate of 25%. Net interest expense is included in operating costs and deducted from income subject to the applicable incentive tax rate (if any).

- Realized foreign exchange gains and unrealized foreign exchange gains from the revaluation of accounts payable and foreign currency loans at the year-end can be offset by losses of the same items. The resulting gain or loss is subject to the same rules as apply to interest income.

- Losses incurred as from 2009 must be carried forward consecutively in full to offset taxable income of the five subsequent years.

- Losses incurred in 2008 and prior years should be carried forward in accordance with the regulations applying at that time. Such losses may be offset against taxable income of 2009 as follows: losses from a business activity may carried forward to offset taxable income from the same activity if the losses can be specifically allocated to a specific activity; otherwise, the total amount of losses must be prorated for each activity based on the ratio of revenue/income generated from the activity.

The tax treatment of losses incurred by a taxpayer enjoying an exemption from corporate income tax remains unclear. If losses must be carried forward consecutively to years where an exemption applies, the utilization of such losses will be forfeited, whereas they should provide a benefit to the enterprise. This issue could have critical consequences because, under the previous regulations, loss carryforwards could be timed by either utilizing them on a carryforward basis over five years or allocating them to specific years within the five-year period.