CURRENT VIETNAMESE REGULATIONS ON
AN OVERVIEW OF CIT INCENTIVES REGULATIONS IN
To clarify CIT incentives, it is essential to address the term "tax incentives," which is commonly used in both domestic tax systems and academic research However, there is no universally accepted definition of this term, nor is there specific legislation regarding it in Vietnam.
Tax incentives, as defined by Black's Law, are government enticements that provide tax benefits to encourage specific activities However, this definition may not fully encompass the broader intent of government, which also aims to support certain categories of taxpayers The term "tax benefit" can create confusion regarding the various forms of tax incentives The United Nations Conference on Trade and Development (UNCTAD) highlights that tax incentives are designed to reduce the tax burden on enterprises, motivating them to invest in specific projects or sectors Furthermore, tax incentives can take various forms, including special exclusions, exemptions, deductions, credits, preferential tax rates, and deferrals of tax liability.
The diverse definitions of tax incentives have led to the introduction of various approaches to corporate income tax (CIT) incentives Scholars typically focus on the purposes of these incentives to establish a clear definition, while taxation law systems often struggle to achieve a legal consensus on the term.
5 Bryan A.Garner (1998), Black‘s Law Dictionary - 8 th edition, West Publishing, pp.1502
6 Stephen Barkoczy (2010), Foundation of Taxation Law, Wolters Kluwer Business Publishing, ả28.2, pp.633
Fiscal incentives are strategically designed to alleviate the overall tax burden on businesses, promoting a more favorable investment climate According to Jeremiah Johnson (2003) in his WTO Working Paper, these incentives play a crucial role in liberalizing investment by regulating tax policies effectively.
8 United Nations Conference on Trade and Development (UNCTAD), 2000, Tax Incentives and Foreign Direct Investment: A Global Survey, United Nations Publication, pp.12
9 Alex Easson and Eric M Zolt (2002), Tax incentives, World Bank research paper, pp.3
In this study, we define corporate income tax (CIT) incentives as measures that reduce the income tax burden on corporations, serving as government enticements to fulfill policy objectives Due to the absence of a universally accepted definition, we adopt a previous approach that views these incentives as a combination of investment incentives, tax breaks, tax credits, and R&D incentives, which are often described in a fragmented manner.
CIT incentives are government-driven enticements designed to encourage taxpayers to engage in policy-oriented activities This fundamental characteristic distinguishes them from other CIT regulations that may merely reduce income tax burdens, such as deductions for qualified expenditures While these deductions lower tax liability, they do not qualify as tax incentives because they lack the specific policy-driven purpose that defines CIT incentives.
CIT incentives significantly reduce the income tax burden on corporations, making them unique compared to other financial and fiscal incentives This reduction in tax burden encompasses not only lower tax payments but also concessions such as tax deferment Unlike other incentives, such as Value Added Tax (VAT) incentives or import/export tax incentives, CIT incentives provide a broader scope of tax relief, highlighting their distinctive role in corporate taxation.
In Vietnam, corporate income tax (CIT) incentives primarily benefit corporate taxpayers, but the tax liability extends to various entities beyond corporations, including cooperatives, non-business units, and other organizations.
It is essential to highlight that the term "CIT incentives" used in this study differs significantly from the statutory term "Enterprise Income Tax Incentives" as defined in Vietnamese taxation legislation The former represents an academic concept rather than a legal definition.
10 Deductible expenses are subtracted directly from taxable income because this kind of expenditure, in nature, could not be considered as an income, instead a cost incurred to derive income
11 Deferment of tax is ―the postponement of tax payments from the current year to a later year‖ (OECD Glossary of Tax Terms)
12 Article 2 Law on Enterprise Income Tax No.14/2008/QH12
13 See Chapter III: Enterprise Income Tax Incentives, Law on Enterprise Income Tax, no.14/2008/QH12, amending and supplementing by Law Amending and Supplementing a Number of Articles of the Law on
7 and has a broader scope while the latter represents a group of particular provisions in income tax legislation which grants tax incentives for corporations
CIT incentives are typically not consolidated in a single source; instead, they are dispersed across various laws and legal documents As a result, companies must navigate a fragmented landscape to identify potential incentives available to them.
Vietnam's legislative history reveals a complex framework governing Corporate Income Tax (CIT) incentives, encompassing various laws such as the Law on Enterprise Income Tax, the Law on Foreign Investment in Vietnam (2000), the Law on Domestic Investment Promotion (1998), and the Law on Investment (2005) This intricate legal structure is further supported by numerous guiding decrees, circulars, and decisions from the Prime Minister, establishing a comprehensive regulatory environment for taxation.
Since 2007, the pressure of WTO commitments and rapid globalization has led to the gradual refinement of CIT incentives through straightforward language and systematic approaches Notably, the Law on Enterprise Income Tax No 14/2008/QH12 has been amended and supplemented by Law No 32/2013/QH13.
The amendments to the Law on Enterprise Income Tax and Law No 71/2014/QH13 serve as the primary source of Corporate Income Tax (CIT) incentives, alongside provisions from other legal documents, such as the Law on Environmental Protection and Circular 212/2015/TT-BTC Additionally, the government's draft of the Law on Assistance to Small and Medium-sized Enterprises (SMEs) aims to integrate tax incentives specifically for SMEs If enacted, this law will further diversify the CIT incentives available beyond those currently established.
CIT incentives can take various forms, with the most common being lower tax rates, such as tax holidays and preferential tax rates Additionally, these incentives can reduce the taxable income of corporations through exempted incomes and favorable deductions Another form of CIT incentive is tax credits, which directly reduce the overall tax liability.
Enterprise Income Tax, no 32/2013/QH13
14 Draft Law on Assistance to Small and Medium-sized Enterprises – 4 th version on 30 May 2016
15 Tax credit is ―allowance of deduction from or a direct offset against the amount of tax due as opposed to an
The government may occasionally offer tax deferment, which does not decrease the statutory tax amount but postpones the payment obligation Below is a table outlining various common forms of Corporate Income Tax (CIT) incentives.
• Exemption for certain kinds of incomes
• Favorable deductions for certain kinds of expenditures (including depreciation of fixed assets)
TPP COMMITMENTS ON CIT INCENTIVES REGULATIONS
1.2.1 The rationale for TPP commitments on CIT incentives
1.2.1.1 State sovereignty versus liberalization on trade and investment
Every country holds absolute sovereignty over its taxation legislation, which is a fundamental principle of governance This sovereignty empowers the state to manage and regulate its own affairs, encompassing legislative, executive, and judicial powers In the context of Corporate Income Tax (CIT) incentives, state sovereignty is evident in the various forms, degrees, and conditions under which these incentives are offered to beneficiaries.
CIT incentives are commonly employed as policy tools to influence economic behavior, particularly in attracting investments Investors consider various factors when making decisions, including not only tax incentives but also macroeconomic conditions, political stability, internal market dynamics, infrastructure quality, public administration, and workforce capabilities In many countries, especially in the developing world, tax incentives are favored because they do not require immediate government spending and are a cost-effective way to attract investment compared to enhancing the broader economic or political environment Therefore, it is essential to provide a sound rationale for any limitations on state sovereignty in taxation, particularly regarding CIT incentives, as sovereignty remains a significant concern that impacts tax models and hinders the establishment of uniform international tax regulations.
As global trade and investment continue to evolve and liberalize, there is growing concern regarding the implications for states engaging in international relations This development has led to various factors influencing countries' participation in the global market.
19 Turki Althunayan (2010), Dealing with the Fragmented International Legal Environment: WTO, International Tax and Internal Tax Regulations,Springer-Verlag Berlin Heidelberg, pp.96
20 United Nations Conference on Trade and Development (UNCTAD), 2000, Tax Incentives and Foreign
Direct Investment: A Global Survey, United Nations Publication, pp.12
Economic integration involves countries committing to a variety of international agreements, including Free Trade Agreements (FTAs), International Investment Agreements (IIAs), Bilateral Investment Treaties (BITs), and Double Tax Agreements (DTAs), which aim to balance individual sovereignty with mutual interests However, CIT incentives, like other domestic measures, can sometimes conflict with these mutual interests Consequently, such incentives may fall under the purview of FTAs, leading to various justifications for restrictions, which can be categorized into three main groups.
Due to the increasing competitive pressure from imported goods and services, CIT incentives are often employed by Member States as protectionist measures to shield their economies These incentives frequently align with the "infant industry" policy, aimed at boosting the competitive capabilities of domestic companies that face significant competition from established industries in other countries However, such incentives can create trade barriers that ultimately undermine the overarching goal of trade liberalization.
Secondly, giving discipline on CIT incentives policies of Members also ensure the stable and predictable environment for global trade and investment
Empiricism indicates that excessive use of CIT incentives can hinder foreign countries' access to domestic markets, acting as a barrier to cross-border trade Additionally, a less controllable domestic framework leads to a less appealing investment environment.
CIT incentives may not face protectionist challenges; however, they can be limited by international economic interests Competitive pressure often leads to better consumer choices, resulting in lower prices and higher quality products Additionally, host states may seek international regulations on CIT incentives, as tax policymakers might prioritize short-term gains over long-term benefits.
To sum up, under increasing inducement of FTAs, government attention
22 Peter Van Den Bossche (2005), The Law and Policy of the World Trade Organization: Text, Cases and
Materials, Cambridge University Press, pp.25
23 See also United Nations Conference on Trade and Development (UNCTAD), 2000, Tax Incentives and Foreign Direct Investment: A Global Survey, United Nations Publication, pp.15
24 Peter Van Den Bossche (2005), The Law and Policy of the World Trade Organization: Text, Cases and
Materials, Cambridge University Press, pp.36
12 nowadays has been drawn in the multilateral apart from unilateral manner In other words, the more liberalization we boost, the less autonomous tax policy reserves
1.2.1.2 Liberalization commitments on CIT incentives: A brief history of WTO agreements, NAFTA and the case of TPP
Regulating Corporate Income Tax (CIT) incentives requires an understanding of the significant impact of WTO agreements Recent studies indicate that taxation is increasingly scrutinized by the WTO, acknowledging its crucial influence on international trade and investment flows This recognition is evident in various WTO agreements, which establish rules governing the domestic tax laws of member countries and impose primary restrictions on the use of CIT incentives.
The US-FSC case serves as a prime example, prompting involved parties and numerous other countries to eliminate their WTO-inconsistent incentive policies following the final ruling.
The World Trade Organization (WTO), while instrumental in facilitating global trade and investment, faces scrutiny regarding its ability to address the diverse goals of both developing and developed nations Critics argue that the wide range of member interests has led to dissatisfaction with WTO rules on trade integration Consequently, WTO members are actively pursuing alternative mechanisms to regulate domestic tax policies, particularly concerning corporate income tax incentives.
North America Free Trade Agreement (NAFTA)
As mentioned above, multilateral commitments are not sole instruments in order to govern CIT incentives policy of members, instead subsequent regional
25 See Michael Daly (2005), pp.2 and (2016), Is the WTO a World Tax Organization? A Primer on WTO Rules for Tax Policymakers, research paper advising the IMF Fiscal Affairs Department, pp.2 See also
Jennifer E Farrell (2013), The Interface of International Trade Law and Taxation: Defining the Role of the
The key agreements shaping global trade include the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Investment Measures (TRIMs), and the Agreement on Subsidies and Countervailing Measures (SCM).
27 See the case United States – Tax Treatment for ―Foreign Sales Corporations‖, 1997, WT/DS108
28 Bernard Hoekman and Michel Kostecki (2001), The Political Economy of the World Trading System: WTO and Beyond – 2 nd edition, Oxford University Press, pp.366
The degree of integration within regional agreements like NAFTA (North America Free Trade Agreement) often facilitates easier negotiations among member countries, allowing them to relinquish certain sovereign rights in pursuit of greater collective benefits Implemented on January 1, 1994, NAFTA established principles for Corporate Income Tax (CIT) incentives that closely mirrored those of the World Trade Organization (WTO) However, NAFTA's regional focus provided more flexibility for member negotiations, resulting in a deeper level of liberalization compared to the broader WTO agreements.
Trans-Pacific Partnership Agreement (TPP)
The Trans-Pacific Partnership (TPP) has drawn upon key corporate income tax (CIT) incentives from NAFTA, despite some differences, highlighting its role as a regional regime alongside the World Trade Organization (WTO) The introduction of CIT incentive rules in TPP raises questions about its divergence from WTO achievements However, deeper regional integration under TPP is seen as a means to expand trade and investment markets, particularly benefiting developed countries and encouraging reforms and foreign investment in developing nations Similar to NAFTA, TPP incorporates an Investor-State Dispute Settlement (ISDS) mechanism to ensure effective enforcement of investment commitments This combination of liberalization and robust enforcement is expected to enhance the discipline of international commitments among TPP member states.
29 See Alexia Kardachaki (2012), Tax Aspects of International Non-Tax Agreements, International Fiscal Association research paper, pp.15
30 See equivalent articles of NAFTA: Article 301 (National Treatment [trade in goods]), Article 1106 (Performance Requirements), Article 1202 (National Treatment [trade in services]), Article 2103 (Taxation)
32 See Section B - Investor-State Dispute Settlement, Chapter 9 (Investment) of TPP
14 individual using of CIT incentives
1.2.2 An overview of taxation issue in TPP
Understanding the distinction between border taxes and taxation measures in the context of the TPP is crucial due to their specific commitments Border taxes refer to duties levied at the border, such as customs and export duties In contrast, taxation measures, as defined in Article 29.4.1 of the TPP, encompass internal taxes that include both direct and indirect taxes.
CIT incentives, the subject of this study, can be viewed in nature as a direct tax measures and consequently fall within the scope of ―taxation measures‖ of
TPP 35 As being this kind of taxes, CIT incentives are also implicitly subjected to TPP commitments It also important to note that such commitments do not directly applied to CIT incentives, but indirectly under the context of Article 29.4 TPP (Taxation) Such commitments, according to the survey, include:
- National Treatment on Trade in Goods (Article 2.3 TPP)
- National Treatment on Trade in Services (Article 10.3 TPP)
- Rules on voluntary Performance Requirements (Article 9.10.2 TPP)
THE EFFECT OF TPP COMMITMENTS ON CIT INCENTIVES
1.3.1 Pre-TPP accession: CIT incentives regulations under WTO commitments
Since 2001, the Vietnamese legal system, particularly tax laws, has undergone significant constraints during the WTO negotiation process, culminating in its official accession in 2007 As a result, regulations regarding Corporate Income Tax (CIT) incentives have been refined in their language and structure, while also facing limitations due to WTO commitments These commitments are often seen as precursors to those of the Trans-Pacific Partnership (TPP), suggesting that current CIT incentives may align with TPP obligations in certain instances This relationship is further illustrated in the accompanying table.
Table 1.3: A comparison between TPP and WTO commitments on CIT incentives regulations
Article 9.10.3 and Article 9.10.5 shall apply to taxation measures‖ See also Andrew Newcombe and Lluís Paradell (2009), Law and Practice of Investment Treaties: Standards of Treatment, Kluwer Law
National Treatment on Trade in
National Treatment on Internal Taxation and Regulation
National Treatment on Trade in
(subparagraph (a) paragraph 1 Annex – Illustrative List of TRIMs)
(subparagraph (b) paragraph 1 Annex – Illustrative List of TRIMs)
1.3.2 TPP accession: New challenges for CIT incentives regulations
The deeper degree of TPP liberalization necessitates enhanced requirements for Corporate Income Tax (CIT) incentives policies For instance, while the General Agreement on Trade in Services (GATS) specifies national treatment commitments only for listed service sectors, the TPP mandates broader national treatment commitments This means that TPP members must provide no less favorable treatment to each other across all service sectors, with only a few specific exclusions Consequently, CIT incentives must expand their national treatment to encompass a wider range of service sectors and subsectors.
The Trans-Pacific Partnership (TPP) seeks to achieve comprehensive and deep market access by focusing on the elimination and reduction of tariffs and indirect taxes, addressing the significant pressure resulting from the curtailment of tax sovereignty.
56 Cockfield, A J., and Arnold, B J., What Can Trade Teach Tax? Examining Reform Options for Art 24
The OECD Model's principle of non-discrimination, discussed in the World Tax Journal (Vol 2, No 2, 2010, pp 139-153), emphasizes the importance of fair tax practices among nations This concept is further explored in Sokolianskyi Georgii's 2013 work, which examines the prohibition of discriminatory income tax measures under WTO Law, highlighting the need for equitable treatment in international taxation.
The Ministry of Finance reports that nearly all tariffs will be reduced, with 65.8% reaching zero immediately upon the implementation of the TPP, and 97.8% after 11 years In addition to tariff reductions, indirect taxes such as VAT, excise tax, and land use taxes are subject to TPP obligations like Most-Favoured Nation and National Treatment While Corporate Income Tax (CIT) incentives still have some flexibility, they are expected to align with various governmental objectives Consequently, there is a growing concern about potential violations of TPP commitments regarding domestic policies on CIT incentives.
International integration creates significant pressure for tax policymakers as they respond to heightened competitive demands Foreign nations increasingly seek favorable or equitable treatment for their products, services, and companies, while domestic firms urge the government for greater support This situation presents a notable challenge for tax policymakers, who must carefully navigate their incentive policies to balance these competing interests.
Vietnamese reservations with TPP commitments
TPP reservations are categorized as "Non-conforming measures," outlined in individual country annexes, which indicate the level of liberalization Vietnam, in particular, has greater flexibility to provide benefits to its domestic companies through Corporate Income Tax (CIT) incentives as specified in Annex II-TPP, despite TPP regulations These reservations aim to protect sensitive sectors within each TPP member country while allowing for adaptable compliance with TPP commitments This approach was recently highlighted in Resolution No 1052/NQ-UBTVQH13, which addresses various orientations and solutions for enhancing international economic integration Furthermore, some Vietnamese scholars are already discussing implications related to TPP accession.
The Department of International Cooperation at the Ministry of Finance outlines key tariff commitments in the Trans-Pacific Partnership (TPP) For a detailed summary of these important tariff agreements, please refer to the official document available at the Ministry's website This resource provides insights into the implications of TPP on international trade and economic cooperation.
59 See Resolution No 1052/NQ-UBTVQH13 on several Orientations, Missions and Solutions Promoting International Economic Integration, Article 2
27 addressed their suggestion that the government should, simultaneous, obey WTO strict commitments and flexibly chase for individual goals 60
Nguyễn Xuân Trinh và Lê Xuân Sang (2007) đã nghiên cứu về việc điều chỉnh chính sách thuế và trợ cấp sau khi Việt Nam gia nhập Tổ chức Thương mại Thế giới, đưa ra các cơ sở lý luận, kinh nghiệm quốc tế và định hướng phù hợp cho Việt Nam Nghiên cứu này nhấn mạnh tầm quan trọng của việc cải cách chính sách thuế và trợ cấp nhằm thích ứng với môi trường thương mại toàn cầu, đồng thời đề xuất các biện pháp cụ thể để nâng cao khả năng cạnh tranh của nền kinh tế Việt Nam.
―Modify Tax Policy and Subsidies Policy under the World Trade Organization‘s Accession – Theoretical Basis, International Experiences and Orientation for Vietnam], pp 145, 157-158
Chapter 1 reaches these following conclusions:
The term "corporate income tax incentive" differs significantly from the legal term "enterprise income tax incentive" as defined by legislation The provisions regarding corporate income tax incentives are primarily outlined in the Law on Enterprise Income Tax, presenting the content in a fragmented manner.
CIT incentives can potentially hinder trade and investment liberalization, as they are bound by international commitments, including those outlined in the TPP Specifically, TPP regulations impose disciplines on CIT incentives for member countries, which include: (i) National Treatment on Trade in Goods as stated in Article 2.3, (ii) National Treatment on Trade in Services as per Article 10.3, and (iii) Rules on Performance Requirements detailed in Article 9.10.2 (b).
In comparison to WTO commitments, certain provisions of the TPP align with the regulations on CIT incentives Consequently, Vietnam's legislation, which has already been aligned with WTO standards, is also consistent with TPP requirements in many instances.
The evaluation of TPP-consistency encounters significant challenges due to the extensive commitments involved, the substantial reduction of tax sovereignty, heightened competitive pressures, and a robust enforcement mechanism.
TPP-CONSISTENCY ASSESSMENT OF CURRENT
CONSISTENCY ASSESSMENT OF NATIONAL TREATMENT ON
Under the light of the TPP commitment of National Treatment on Trade in Goods, a complained CIT incentive will be brought into the challenge test:
Step 1: Affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products of any contracting party
Step 2: Accorded treatment no less favourable than that accorded to like products of national origin
Step 3: Fall outside the exceptions
2.1.1.1 Affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products of any contracting party
Corporate income tax is a direct tax levied on the incomes of enterprises and is not applied to goods, leading some to argue that it does not discriminate against imported products However, all types of taxes can significantly influence the economic behaviors of taxpayers Consequently, the sale and purchase of imported goods in a particular market can be affected by the host country's income tax incentives.
In turn, the word ―affecting‖ becomes too important to require a plain interpretation
Certain Corporate Income Tax (CIT) incentives may fall outside the scope of National Treatment if they do not impact the internal sale, purchase, or use of products from any contracting party For instance, if State A provides tax incentives for income generated from agricultural product sales, local enterprises can reduce their CIT liability, potentially lowering product prices Similarly, incentives aimed at specific sectors, like hi-tech manufacturing, may also lead to reduced prices for domestic products compared to imports The applicability of these incentives under the National Treatment principle is increasingly significant, especially as countries like Vietnam implement similar programs.
Looking through the case law of GATT, there is a relevant suggestion that:
The term "affecting" suggests that the Article's drafters aimed to include not only laws and regulations directly regulating sales conditions but also those that could negatively impact competition between domestic and imported products in the internal market.
Scholars propose addressing the issue through the "aim-and-effects" test, introduced by WTO Dispute Bodies to evaluate the WTO-consistency of contested measures This test examines whether the government's intent behind the measure is to protect domestic products from imports It serves as a guideline to ensure that the resulting effects do not lead to discriminatory protection of domestic goods.
2.1.1.2 Accorded treatment no less favourable for imported products than that accorded to like products of national origin
The term "like products" is frequently mentioned in GATT and various WTO agreements, highlighting its significance in international commercial law rather than in tax law.
Secondly, the element ―no less favourable than‖ has been traditionally explained as
The term emphasizes the need for equal opportunities for imported products In simpler terms, it suggests that if domestic products are favored over similar imported ones due to certain incentives, it could lead to a non-tariff inconsistency in trade practices.
To clarify, the case law of WTO relating to implementation of National Treatment suggested that there were little cases in which CIT incentives potentially constitute violations:
CIT incentives for certain income from the sale of domestic goods
To qualify for Corporate Income Tax (CIT) incentives, enterprises must generate income from the sale of domestic products These incentives may include reduced tax rates, tax exemptions, or tax reductions.
61 Panel Report, Italian agricultural machinery case 1958, (BISD 7S/60), para.12
62 Turki Althuhayan (2013), supra note 19 at 158-159
63 Turki Althuhayan (2013), supra note 19 at 159
64 Further about ―like products‖, see Peter Van Den Bossche (2005), The Law and Policy of the World Trade
Organization: Text, Cases and Materials, Cambridge University Press, pp 334-338
65 GATT Panel Report, US – Section 337, para 5.11
- Turkey – Taxation on Foreign Films Revenue 1996 66
Incentives for certain income relating the using of domestically- produced inputs
Production companies can receive CIT incentives through tax-exempt income generated from the sale of final products that utilize domestically produced inputs This requirement is often regarded as a local content mandate Within the context of WTO National Treatment implementation, various disputes have arisen, notably the significant US - FSC case.
Incentives for expenses incurred to purchase or consumption domestic goods
Incentives can manifest as direct credits or favorable deductions for expenses, such as the NT-inconsistency CIT incentive, which is commonly utilized to encourage automobile production among member companies.
A provided expenditure incurred to purchase autos inputs will be granted 200%-deduction incentive However, the incentive program only applies to domestically-produced inputs and not extends to imported inputs
TPP also sets out little exceptions for National Treatment principle in Trade on Goods, including:
- General exceptions: Article 29.1.1 TPP linking to Article XX of GATT
1994 (general exceptions) relating to non-commercial value reservation
2.1.2 Consistency Assessment on current CIT incentives in Vietnam
Not as far as the commitment of National Treatment of TPP agreement was
In the WTO case Turkey – Taxation on Foreign Films Revenue (1996), Turkey imposes a 25% municipality tax on box office receipts from foreign films, while exempting domestic films from this tax This discrepancy raises concerns about Turkey's compliance with its GATT 1994 obligations, particularly Article III, which mandates equal treatment for domestic and foreign products.
The report WT/DS/108R, dated October 8, 1999, discusses the tax treatment for Foreign Sales Corporations in the United States, specifically noting that the complained Corporate Income Tax (CIT) incentive requires that no more than 50 percent of the fair market value be linked to articles imported into the U.S.
Since Vietnam's accession to the WTO in 2007, the country has adhered to the principles of the GATT and TRIMs Agreements, ensuring that its CIT incentives policy remains free from protectionism against imported goods This commitment, rooted in a long-standing principle since 1995, has necessitated compliance with National Treatment, leading to the gradual phasing out of certain incentives during the negotiation period that began in 2001.
Vietnam's current Corporate Income Tax (CIT) incentive policy emphasizes non-discriminatory development, aligning with international standards The country has eliminated certain incentives that previously violated the National Treatment principle of GATT Additionally, Vietnam's accession to the Trans-Pacific Partnership (TPP) has strengthened its commitment to fostering a level playing field for goods, regardless of their origin.
Certain incentives do not influence the internal sale of products and therefore do not violate the National Treatment principle In Vietnam, these incentives often focus on labor-intensive sectors, female employment, and the location of investment projects Additionally, Vietnam, like many other countries, has implemented Corporate Income Tax (CIT) incentives for specific income-generating sectors such as agriculture, aquaculture, and marine fishing These incentives are not considered discriminatory against National Treatment; rather, they align with the "aim-and-effects" approach, which views them as legitimate measures to achieve domestic objectives rather than protectionist policies.
Tax policymakers must prioritize National Treatment (NT) when aiming to support specific manufacturing sectors In an era of heightened competition due to liberalization, it is crucial for tax policies to employ legitimate and effective strategies that promote economic growth rather than relying on partial or trade-distorting measures For example, a draft regulation currently under consideration presents an NT-inconsistent incentive for domestic companies, which will be evaluated in the forthcoming challenge test.
Legal source Clause 6 Article 27 Draft Law on Assistance to Small and
Medium-sized Enterprises – 4 th version on 30 May 2016
Measure Reduction of 50% corporate income tax rates of enterprise which used goods/services inputs of other enterprises in
COMMITMENT OF PERFORMANCE REQUIREMENTS
Under the light of the TPP commitment of Performance Requirements, a complained CIT incentive will be brought into the challenge test:
Step 1: Fall within at least one of four prohibited-PRs
Step 2: Fall outside the exclusions
Step 3: Fall outside the exceptions
82 Annex II-VIETNAM of TPP, page 7
2.3.1.1 Fall within at least one of four prohibited-PRs
CIT incentives will be prohibited if they impose minimum thresholds on domestically-produced products or maximum thresholds on imported products This common threshold can be further defined for clarity.
The ―domestic content‖ value on total manufacture costs, total revenue of enterprise, etc;
For example: Full exemption for taxed income of enterprises which incur at least 50% total manufacture costs for domestically-produced inputs
The domestic inputs (materials, raw materials) ratio of total inputs;
For example: Reduce 50% corporate income tax rate for enterprises which have at least 50% total inputs were domestic source inputs
The domestic inputs (materials, raw materials) ratio of final products;
For example: The income generating from sale of products which have at least 70% domestic raw materials, materials
Quite different from the first one, CIT incentives contingent upon import substitution can take following forms:
Using the domestically-produced products relating to generate incomes (whether being input products or not);
Example: Turkey – Foreign Films Revenue 83
Purchase the domestically-produced products (whether being input products or not);
Example: Italian - Italian agricultural machinery case 1958 84
To be illustrated, State A could not grant tax exemption for income generating from transport services supply with the compulsory condition that suppliers must use domestically- produced transport vehicles
In 1952, the Italian Government established a revolving fund to support the Ministry of Agriculture and Forestry in providing special credit terms for the purchase of Italian agricultural machinery This fund receives annual budgetary allocations of 25 billion lire for five fiscal years, with 7.5 billion lire specifically designated for agricultural machinery purchases, subject to adjustments by Italian authorities.
Or, any kind of preferable treatment for domestically-produced products than imported ones
CIT incentives contingent upon trade-balancing were traditionally described as:
De jure: relate in any way the volume or value of imports to the volume or value of exports
De facto: relate in any way the volume or value of imports to the amount of foreign exchange inflows associated with the investment
CIT incentives will be banned if they impose minimum export thresholds or maximum sales thresholds in the domestic market This prohibition applies not only to goods but also to services The term "threshold" can be further defined for clarity.
De jure: contingent upon exportation/internal sale
• Proportion of exported products on total products;
• Having a stable export market for the previous three consecutive years;
De facto: contingent upon foreign earnings
These excluded-PRs are listed by subparagraph (a) of Article 9.10.3 TPP and may be described with the Table 2.2 below:
Table 2.2 Excluded-PRs of TPP rules on voluntary PRs
Non-exhaustive illustrations (regarding to CIT incentives)
Reducing tax rate for investment in less-developed areas, specific economic zones
Supply a service Exempted income generating from supply certain services such as technical, social services
Train or employ workers Reducing tax rate for investment using large local workforce
Reducing tax amount based on employment of certain employers such as female, disable, vulnerable people Exempted income relating to employer training Construct or expand particular facilities
Tax holidays Reducing tax rate Carry out research and development
Exempted income Reducing tax rate Direct deduction
Member States can offer Corporate Income Tax (CIT) incentives that are contingent upon certain prohibited performance requirements (PRs) as outlined in Article 9.10.3 of the TPP These incentives must ensure that the PRs are not applied in an arbitrary or unjustifiable manner and do not create disguised restrictions on international trade or investment Additionally, the PRs must meet at least one of the specified conditions mentioned in subparagraph (d).
In addition, under the light of TPP context, the prohibited PRs attached to CIT incentives are also escaped from PRs rules in follow circumstances:
- Export promotion and foreign aid program (subparagraph (e) Article 9.10.3)
- Relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas (subparagraph (g) Article 9.10.3)
An exception to the commitment regarding non-conforming measures is outlined in Annex II-VIETNAM, which permits tax incentives for corporations despite the existing commitments of PRs.
2.3.2 Consistency Assessment on current CIT incentives in Vietnam
The implementation of the SCM and TRIMs Agreement has led to the exclusion of CIT incentives from certain prohibited practices under TPP rules However, the government's recent efforts to support SMEs have raised concerns, as the TPP permits only "non-conforming measures" outlined in individual-country Annex-II According to Vietnam's Annex-II, there is no flexibility for CIT incentives designed to assist SMEs, limiting the government's ability to provide necessary support.
To ensure adherence to laws and regulations aligned with this Agreement, it is essential to protect human, animal, or plant life and health, as well as to focus on the conservation of both living and non-living exhaustible natural resources.
45 below which provided under the Draft Law on Assistance to Small and Medium- sized Enterprises will potentially constitute a TPP commitments breach in case of TPP entry into force
Legal source Clause 6 Article 27 Draft Law on Assistance to Small and
Medium-sized Enterprises – 4 th version on 30 May 2016
To qualify for a 50% reduction in corporate income tax rates, enterprises must utilize goods and services from associated clusters, achieving a minimum value ratio of 70% However, this benefit is contingent upon passing a challenge test, which requires compliance with at least one of four prohibited practices.
This incentive mandates that at least 70% of the total input value must be produced or supplied by domestic enterprises to qualify for a reduction in tax rates Essentially, this requirement is seen as promoting "domestic content," which raises concerns about potential violations of commitments under the PRs.
Step 2: Fall outside the exclusions
Because the concerning incentive contingents upon domestic content, it completely fall outside the exclusion listed in Article 9.10.3 (a) of TPP
Step 3: Fall outside the exceptions
With regard to assistance to SMEs, Vietnam did not preclude tax incentives from the commitment on PRs
Chapter 2 reaches these following conclusions:
Firstly, to assess TPP-consistency of particular CIT incentive, a challenge test would be provided basing on TPP legal text, case law or even academic viewpoints
In case of all meet the criteria as described by the test, certain CIT incentive could constitutes a violation of TPP commitments
In the context of reserved commitments, particular emphasis should be placed on National Treatment on Trade in Services (Article 10.3 TPP) and Rules on Performance Requirements (Article 9.10.2 TPP), as they necessitate a closer examination of "Non-conforming Measures," which will exempt corresponding obligations.
The implementation of WTO commitments has led to Vietnam's current Corporate Income Tax (CIT) incentives generally aligning with TPP commitments; however, some regulations may breach TPP obligations Specifically, certain incentives do not meet the National Treatment challenge in Trade in Services due to the deeper commitments required, and those outlined in the Draft Law on SMEs fall outside the scope of Vietnam's non-conforming measures, potentially resulting in inconsistencies with TPP commitments regarding National Treatment on Trade in Goods, National Treatment on Trade in Services, and Rules on PRs To prevent disputes, the government should review these regulations if the TPP is enacted.
CIT incentives are influenced by TPP language, yet there remains ambiguity regarding which incentives align with TPP standards This assessment of consistency is crucial, as it helps Vietnam harmonize its policies while allowing for flexible application of TPP commitments to serve internal interests The TPP Agreement is expected to enhance cross-border trade and investment among member countries, leading to increased scrutiny of CIT incentive policies Consequently, current CIT laws must consider a wide range of interests when granting tax incentives, prioritizing mutual benefits over exclusive domestic interests Ultimately, effective CIT incentives will maximize the advantages of Vietnam's TPP membership while mitigating potential negative impacts.
1 Law on Amending and Supplementing a Number of Articles of the Law on
Enterprise Income Tax (Law No 32/2013/QH13) dated June 19 th , 2013
2 Law on Environmental Protection (Law No 55/2014/QH13) dated June 23, 2014
3 Law on Corporate Income Tax Law (No 57/1997/L-CTN) dated May 10 th , 1997
4 Law on Enterprise Income Tax (Law No 14/2008/QH12) dated June 3 rd , 2008
5 Law on Enterprise Income Tax (Law No 09/2003/QH11) dated June 17 th , 2003
6 Law on Enterprises (Law No 68/2014/QH13) dated November 26 th , 2014
7 Law on Investment 2005 (Law No 59/2005/QH11) dated December 12, 2005
8 Law on Investment 2014 (Law No 67/2014/QH13) dated November 26, 2014
9 Resolution on several Orientations, Missions and Solutions Promoting International Economic Integration (Resolution No 1052/NQ-UBTVQH13) dated October 24 th ,
10 Decree No 111/2015/ND-CP of the Government dated November 03, 2015 on development of supporting industries
11 Decree No 12/2015/ND-CP of the Government dated February 12, 2015 on guidelines for the Law on amendments to Laws on taxation and amendments to Degrees on taxation;
12 Decree No 218/2013/ND-CP of the Government dated December 26, 2013 detailing and guiding the implementation of the Law on Enterprise Income Tax
13 Decree No 91/2014/ND-CP of the Government dated October 01, 2014 amending, supplementing a number of Articles under the Decree regulating on Tax
14 Decree No 92/2013/ND-CP of the Government dated August 13, 2013, detailing a number of articles, which take effect on July 1, 2013, of the Law Amending and Supplementing a Number of Articles of the Law on Enterprise Income Tax and the Law Amending and Supplementing a Number of Articles of the Law on Value- Added Tax
15 Circular No 78/2014/TT-BTC of The Ministry of Finance dated June 18, 2014 guiding the implementation of the Government‘s Decree No.218/2013/ND-CP Of December 26, 2013 ii
16 Circular No 103/2014/TT-BTC of the Ministry of Finance dated August 06, 2014 guiding the performance of tax obligations of foreign organizations and individuals doing business in Vietnam or earning income in Vietnam
17 Circular No 141/2013/TT-BTC of the Ministry of Finance dated October 16, 2013, guiding the implementation of the Government‘s Decree No 92/2013/ND-CP August 13, 2013
18 Circular No 21/2016/TT-BTC of the Ministry of Finance dated February 05, 2016 guiding on declaration of value added tax and priorities of enterprise income tax as stipulated under the Decree No 111/2015/ND-CP dated November 03, 2015 on development of supporting industries
19 Circular No 212/2015/TT-BTC of the Ministry of Finance dated December 31,
2015 guiding the corporate income tax policies for environmental protection activities regulated at the Decree No 19/2015/ND-CP dated February, 2015 of the Government
20 Circular No 45/2013/TT-BTC of The Ministry of Finance dated April 25, 2013, guiding the management, use and depreciation of fixed assets
21 Circular No 96/2015/TT-BTC of the Ministry of Finance dated June 22, 2015 guiding the Enterprise Income Tax in the Decree No 12/2015/ND-CP dated
22 North American Free Trade Agreement, 1994
24 World Trade Organization, General Agreement on Tariffs and Trade, 1948
25 World Trade Organization, General Agreement on Trade in Services, 1995
26 World Trade Organization, Subsidies and Countervailing Measures, 1995
27 World Trade Organization, Subsidies and Countervailing Measures, 1995
28 World Trade Organization, Trade-Related Investment Measures, 1995
1 Bộ Công thương, 2015, Tóm tắt Hiệp định Đối tác xuyên Thái Bình Dương
2 Bộ Tài Chính, 2009, Chính sách ưu đãi thuế nhằm ngăn chặn suy giảm kinh tế: Văn bản pháp luật, Hà Nội: Nxb.Tài chính iii