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THRESHOLD DETERMINATION- SIMPLIFICATION PROVISIONS

General Department of Taxation (GDT), S.R. Vietnam

INTERNATIONAL TAX DIALOGUE CONFERRENCE

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CONTENT

I. Overview of MSMEs in Vietnam.

1. Micro and small businesses segmentation

2. Tax administration

3. Accounting for Business households and small Incorporated Businesses

II. VAT calculation methods.

III. Challenges of VAT Administration.

IV. Recommendations on simplifying VAT policy.

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There are approximately 300,000 SMEs, including private enterprises, cooperatives and around 3 million business households.

1. Micro and small businesses segmentation

According to the law, SMEs are divided into 3 levels: micro, small and medium- sized levels in accordance with the size of total liabilities (total liabilities are equivalent to total assets as specified in the Balance Sheets of business establishments) or the average number of labor (total liabilities is preferential criteria). Detail is as follows:

I. OVERVIEW OF MSMEs IN VIETNAM

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I. OVERVIEW OF MSMEs IN VIETNAM

Size

Sector

Micro-sized

Enterprises

Small-sized Enterprises Medium-Sized Enterprises

The number

of employees

Total capital

(assets)

The number of

employees

Total capital

(assets)

The number

of employees

I. Agriculture,

Forestry and

Aquaculture

Less than 10

employees

Less than 20

billion VND

From more than

10 to 200

employees

From more than

20 to 100

billion VND

From more

than 200 to

300

employees

II. Industry and

Construction

Less than 10

employeesLess than 20

billion VND

From more than

10 to 200

employees

From more than

20 to 100

billion VND

From more

than 200 to

300

employees

III. Trade and

Service

Less than 10

employees

Less than 10

billion VND

From more than

10 to 50

employees

From more than

10 to 50 billion

VND

From more

than 50 to 100

employees

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2. Tax administration  As for tax administration, Vietnam Tax Authority is administering

1.4 million business households (unincorporated businesses) and about more than 300,000 non-state businesses (incorporated).

There are more than 700 district tax office in 63 provinces and cities, which are responsible for tax administration of SMEs and business households. Tax administration is moved from tax instruments-based administration to function-based administration.

The small business households paying presumptive VAT are assigned to communes, who collect taxes. In doing so, the Tax Authority can focus resources on administering big business households.

I. OVERVIEW OF MSMEs IN VIETNAM

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3. Accounting for Business households and Small Incorporated Businesses

For Business households

(i) The business household accounting regime as regulated by the MoF Decision is based on accrual accounting principle instead of cash accounting.

(ii) The tax laws (both PIT and VAT) offer a rather favorable tax treatment for businesses with no bookkeeping.

For Incorporated Businesses

(i) Accounting is too complex (26 standards, 7 books)(ii) Preparing detailed explanatory notes and sub items

I. OVERVIEW OF MSMEs IN VIETNAM

II. VAT CACULATION METHODS

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II. VAT CACULATION METHODS

Legal form Bookkeeping level VAT method- Corporations,-Sole proprietors,- Partnerships

With regular books Credit method

Business households/ Individual entrepreneurs

Books/ full accounting Credit method

Books covering sales and expenses

Direct method on value added(subtraction)

Basic records on sales Turnover rate multiplied by fixed ratio to estimate value added and tax liability

No books Turnover imposed by GDT, presumptive rate applied.

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Firstly, the application of VAT calculation by direct method on value added is an unique characteristics of Vietnam tax system, because of the cascading effect.

Secondly, the efficiency in VAT administration is low.

Thirdly, the form of payment among business households themselves and consumers is mainly in cash. Moreover, compliance level of households is not high, thus, the tax authority has faced huge challenges in determining their turnover and taxable income as the basis for tax calculation.

Fourthly, the tax presumption method based on the range subjectively issued by MOF has created a preferential tax regime for business households and discourage business households to maintain proper accounting books as well as incorporation of businesses.

III. CHALLENGES OF VAT ADMINISTRATION

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1. To establish and turnover-based threshold for VAT exemption;

2. To establish an turnover-based threshold for VAT registration;

3. To segment taxpayers to reduce the filing frequency;4. To move towards a single positive VAT rate and reduce the

items exempt from VAT;5. To introduce the simplified accounting and bookkeeping

regimes for Business households and SMEs;6. To conduct a taxpayers outreach and training campaign.

IV. RECOMMENDATIONS ON SIMPLIFYING VAT

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For VAT exemption: Business households with turnover below this turnover level are not liable for VAT. It is calculated that this VAT exempt turnover level is 50 million VND (2,600 USD) per year.

For VAT Registration: It is calculated that this turnover-based threshold is about

2.5 bill VND (about 130,000 USD). All businesses with turnover above the VAT registration

threshold must pay VAT under the only one method, which is the credit method.

Apply country average instead of regional- specific rate, distinguish between trade and service. It is calculated that this percentage rates could be from 2% to 6%.

To establish an turnover-based threshold for VAT exemption and registration;

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Businesses with annual turnover from more than 20 bill VND (1.1 mill USD) will file VAT on a monthly basis.

Businesses with annual turnover from 10 bill VND (550,000 USD) to less than 20 bill VND will file VAT on a quarterly basis.

Businesses with annual turnover from 2.5 bill VND (130,000 USD) to less than 10 bill VND will file VAT on a six-monthly basis.

Micro businesses, business households with annual turnover from more than 50 mil VND (2,600 USD) to less than 2.5 bill VND (130,000 USD) will file VAT on an annual basis.

To segment taxpayers to reduce the filing frequency

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It is proposed to move towards one positive VAT rate – estimated to be about 8%;

Reducing the number of VAT exempt items from 26 groups to about 15 groups.

To move towards a single positive VAT rate, reduce the items exempt from VAT

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To introduce the simplified accounting and bookkeeping regimes for MSEs

Businesses Accounting / Bookkeeping

Medium sized enterprises above VAT registration threshold

→ Simplified accrual accounting. In particular: preparation of financial statements in abridged, simple, or condensed form. No need to prepare detailed explanatory notes and sub items.

Small enterprises below VAT registration threshold

→ Cash book plus preparation of simple financial statements

Micro enterprises → Simple cash records

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