THE MINISTRY OF FINANCE

CIRCULAR No. 74-TC/TCT OF OCTOBER 20, 1997 GUIDING THE IMPLEMEN-TATION OF TAX PROVISIONS APPLICABLE TO THE INVESTMENT FORMS UNDER THE LAW ON FOREIGN INVESTMENT IN VIETNAM

- Pursuant to the Law on Foreign Investment in Vietnam adopted by the National Assembly of the Socialist Republic of Vietnam on November 12, 1996;

- Pursuant to the current tax laws and ordinances of the Socialist Republic of Vietnam and the Government decrees detailing the implementation of the tax laws and ordinances;

- Pursuant to Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam;

- Pursuant to the Regulation on branches of foreign banks and joint venture banks operating in Vietnam, issued together with Decree No. 189-HDBT of June 15, 1991 of the Council of Ministers (now the Government) of the Socialist Republic of Vietnam;

- Pursuant to Decree No. 36-CP of April 24, 1997 of the Government issuing the Regulation on industrial zones, export processing zones and high-tech zones;

The Ministry of Finance provides the following guidance for the implementation of tax provisions applicable to the investment forms under the Law on Foreign Investment in Vietnam:

PART I
GENERAL PROVISIONS

I. SCOPE OF APPLICATION:

1. This Circular shall apply to:

- Joint venture enterprises and enterprises with 100% foreign-invested capital established under the Law on Foreign Investment in Vietnam.

- Joint venture banks of Vietnamese and foreign banks; branches of foreign banks operating in Vietnam.

- Joint venture enterprises established under the agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments. If an agreement contains provisions regarding the tax obligations of joint venture enterprises which vary with the guidance in this Circular, such provisions of the agreement shall apply

- Foreign parties to business cooperation contracts (or foreign business cooperation parties for short) under the Law on Foreign Investment in Vietnam.

Particularly for the parties to build-operate-transfer (BOT) contracts, build-transfer-operate (BTO) contracts and build-transfer (BT) contracts, if the operation regulation issued by the Government contains provisions regarding tax obligations of these parties which vary with the guidances in this Circular, such provisions of the regulation shall apply.

2. This Circular provides guidance for the various taxes prescribed in the Law on Foreign Investment in Vietnam and other taxes and financial obligations such as turnover tax, special consumption tax, license tax, natural resources tax, land, water and sea surface rents, etc., applicable to foreign invested enterprises and foreign business cooperation parties in accordance with the legal documents currently in force of the Socialist Republic of Vietnam.

II. TERMS AND EXPRESSIONS USED IN THIS CIRCULAR ARE CONSTRUED AS FOLLOWS:

The terms and expressions used in this Circular are construed as the same as those already defined in the Law on Foreign Investment in Vietnam and Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam. Other terms and expressions in this Circular are construed as follows:

- "Tax year" is the calendar year starting on January 1st and ending on December 31st every year. In case a foreign invested enterprise or business cooperation party is allowed by the Ministry of Finance to apply a twelve-month fiscal year other than the calendar year, the tax year shall be the fiscal year that the foreign invested enterprise or business cooperation party is allowed to apply.

- The "first year of profitable business" is the first fiscal year during which profit is made without offsetting losses carried forward from previous years.

- A "market price-free transaction or trading contract " is a transaction or trading contract that is influenced by unusual commercial relationship such as transaction between associated companies...

- "Associated companies":

Two companies shall be regarded as associated companies in the following cases:

(i) One company contributes to the prescribed capital or stock capital of the other;

(ii) Both companies are subject to direct or indirect control by another company, or both companies receive share capital contributed by another company.

PART II

GUIDANCE FOR THE IMPLEMENTATION OF TAX PROVISIONS

I. PROFIT TAX:

1, Taxable subjects:

All profits from any economic activity of foreign invested enterprises, foreign business cooperation parties, joint venture banks or branches of foreign banks in Vietnam shall be subject to profit tax, including:

- Profits from business activities.

- Profits from other activities.

2. Taxpayers:

Foreign invested enterprises, foreign business cooperation parties, joint venture banks, and branches of foreign banks in Vietnam shall pay profit tax.

In case a foreign company invests at the same time in many enterprises or business cooperation contracts, profit tax shall be calculated separately for each enterprise or each business cooperation contract (each enterprise or each business cooperation contract is a tax payer).

3. Determination of taxable profit:

Taxable Total Total valid

profit of = income - and reasonable + Other profits

the tax of the expenditures

year year of the year

For foreign invested enterprises, the taxable profit may be reduced by the losses that can be carried forward under Article 61 of Decree No. 12-CP of February 18, 1997 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam.

The carry-forward of losses is made by carrying forward all losses of any tax year to the profitable year subsequent to the year of loss, and these losses may be offset by the profits of subsequent years, or losses of one year may be divided evenly to subsequent years of profit expected by the enterprise. Upon the commencement of its production and business activities an enterprise must register with the tax agency its method of loss carry-forward and follow through this registered loss carry-forward method and time.

The period of loss carry-forward shall not exceed 5 years.

a/ Total income of the year:

The total income of a foreign invested enterprise or a foreign business cooperation party includes all incomes from the sale of products, the provision of services and other incomes of the enterprise or foreign business cooperation party in the tax year. The tax office shall have the right to re-determine the incomes if the enterprises fail to declare fully their incomes or the incomes have not been determined on the basis of trading or transaction contracts according to the market price.

With regard to business cooperation contracts in the form of production sharing, the income from the sale of products shall be determined as follows:

- If the shared products are sold on the Vietnamese market, the income shall be determined according to the selling price of the products sold on the Vietnamese market.

- If the shared products are exported, the income shall be determined on the basis of the FOB export price at Vietnamese ports.

If the foreign party fails to provide the sale price or the sale of products is carried out not according to the principle of market price-based transaction and trading, the income shall be determined according to the anti-price transfer principles stipulated in Section IV, Part III of this Circular.

b/ Reasonable and valid expenditures of the year:

The expenditures related to the generation of the taxable profit of the tax calculation period earned by a foreign invested enterprise or foreign business cooperation party, regardless of the accounting system in use, shall include the following:

b1- Costs of raw materials, materials, energy, fuel and goods actually used in the production or business process or the provision of services.

b2- Salaries, wages and payments having the nature of salaries and wages, mid-shift meals and allowances paid to Vietnamese and foreign employees under labor contracts and/or collective labor agreements in accordance with the labor legislation applicable to foreign invested enterprises

b3- Depreciation of fixed assets used in the production or business process and the provision of services and expenses on their repair. Depreciation of fixed assets shall be determined at a fixed rate for the whole duration the fixed assets are used and in accordance with the provisions of Decision No. 1062-TC/QD/CSTC of November 14, 1996 of the Minister of Finance.

Fixed asset depreciation amounts which are in excess of the rates stipulated by the Ministry of Finance, depreciation amounts of fixed assets already fully depreciated, depreciation amounts of fixed assets not being used in the production or business process such as fixed assets to be liquidated or transferred for the establishment of a new joint venture, etc., shall not be included in the expenditures for determining the taxable profit.

In case a Vietnamese party contributes the value of its land use right to the prescribed capital or to the business cooperation capital with, the depreciation of the fixed assets being the value of such land use right shall be effected for a period from the time the enterprise or business cooperation parties start production and business operations to the end of the period of the capital contribution by the Vietnamese party.

Example: Enterprise A received its investment license on January 3, 1995 for an operating duration of 30 years. The Vietnamese party contributed its capital by the value of its land use right for 30 years from the date the investment license is granted. Enterprise A started its operation on July 3, 1997. Thus the period for depreciation of the land use right value contributed to the joint venture shall be 27 years and 6 months.

b4- Expenses on scientific and technological research, innovations and technological modification.

b5- Bank fees, payments of loan interests within the limit of the ceiling lending interest rate announced by the State Bank of Vietnam for domestic loans, bank fees and interest payments under credit contracts already approved by the State Bank of Vietnam with regard to overseas loans. If a credit contract has not yet been approved by the State Bank of Vietnam, the interest rate and bank fees shall be determined by the actual payments consistent with the provisions of the credit contract but not in excess of the ceiling lending interest rate announced by the State Bank of Vietnam.

For branches of foreign banks and joint venture banks, they are reasonable interest payments and discounts paid for deposits, loans or other financial instruments

Interests paid for loans related to the prescribed capital, statutory capital, or allocated capital (for banking activities) shall not be included in reasonable and valid expenditures for calculating the taxable profit.

b6- Expenses directly related to the circulation and sale of products or the provision of services, such as maintenance expenses, packaging expenses, loading and unloading expenses, transportation costs.

b7- Payments to social and medial insurance funds for employees as the obligation of the enterprise.

b8- Expenses for insurance over responsibilities and assets under the insurance policies signed with Vietnamese insurance companies or other insurance companies licensed to operate legally in Vietnam (hereafter referred to as insurance enterprises). With regard to voluntary insurance transactions for which, according to international practice, an enterprise seeking for insurance may choose where to buy it, or if, at the time the insurance need arises, which the insurance enterprises cannot satisfy, then the to-be-insured enterprise may get insured at a foreign insurance company. Insurance expenses shall be included in the expenditures for determination of the taxable profit.

The Ministry of Finance may require, in case of necessity, insured enterprises to prove that the insurance enterprises are not able to meet the insurance need or the international practice related to insurance. Any insurance expenses paid by an insured enterprise to a foreign insurance company which are not in accordance with the provisions of Vietnamese law shall not be included in the expenditures for determination of the taxable profit.

b9- Mailing charges, printing costs, warehouse, office and laboratory maintenance expenses, labor safety and environmental protection costs; recruitment and training expenses; security guard, fire prevention and fight expenses.

b10- Expenses on the procurement or use of technical documentation and services. Expenses for the transfer of technology, copyright, patents, trademarks under technology transfer contracts and license contracts already approved by the Ministry of Science, Technology and Environment or other competent agencies.

b11- Expenses on meetings of the Managing Board of a joint venture enterprise in compliance with its Statute and/or resolutions of the Managing Board.

b12- House and land rentals. If an enterprise makes advance payments for house and land rents for many years, these rentals shall be amortized throughout the use duration.

b13- Payments for lease of assets, machinery and equipment. In a long-term lease, the rental shall be amortized throughout the use duration.

b14- Expenses paid to management companies under management-hiring contracts already approved by the Ministry of Planning and Investment.

b15- Other expenses not yet specified above such as those for advertising, marketing and sale promotion directly related to the production and business activities of the enterprise, and brokerage. The total expenses shall not exceed 5% of the total reasonable and valid expenditure already mentioned for determination of the taxable profit. For enterprises operating in the trade sector, the total allowable expenditure shall not include the purchase costs of the goods sold.

b16- Payments of taxes, fees and charges having the nature of tax (except for profit tax and profit remittance tax).

All the above expenses must be supported by valid vouchers, any expense without valid vouchers shall not be included in the allowable expenditure for determination of taxable profit.

c/ Other profits

Other profits of foreign invested enterprises and foreign business cooperation parties include:

c1- Interests on bank deposits, loan interests (excluding enterprises engaged in credit business), difference between foreign exchange sale and purchase, securities acquisition and sale difference, exchange rate difference (except for exchange rate difference resulting from revaluation of the cash balance, deposits, cash in transit, debts recoverable and payable originating from a foreign currency other than the currency permitted for accounting purpose shall not be included in other profits).

c2- Profit earned from the right to own and use the enterprise�s assets including profit (or loss) from liquidation of assets. In case of losses and damages caused to the enterprise�s assets by subjective reasons, losses related to these assets shall not be accounted into other profits or other losses, and the wrongdoer(s) must be identified so that compensation shall be made in accordance with the regulations .

c3- Incomes recovered from bad debts that have been already written off from accounting records; from payable debts of which the creditors cannot be identified; incomes discovered from the production and business operations in previous years that had been omitted.

c4- Profits from an enterprise�s contributed capital

Profits earned from overseas business activities shall be accounted into other profits for determination of taxable profit. With regard to profits earned from business activities carried out in the countries that have signed agreements on avoidance of double taxation with Vietnam, the provisions of such agreements shall apply.

After-profit tax profits earned from the transfer of the enterprise�s contributed capital and from joint venture or cooperation activities with local enterprises shall not be accounted into other profits for determination of taxable profit.

c5- Other profits

d/ With regard to enterprises operating in the field of property leasing such as house or office leasing or infrastructure businesses receiving advance rent payments for a number of years, the taxable profit shall be determined as follows:

Taxable Taxable profit Taxable profit

profit of = derived from + derived from

the year (A) advance payment other activities

of which:

B = Total advance payment turnover - Turnover tax payable on advance payment turnover - Expenses related to the generation of taxable turnover (D)

Expenses related to the generation of taxable turnover (D) are determined for each of the following activities:

d1- Costs for infrastructure construction or construction of houses and offices by enterprises engaged in house- or office-leasing or infrastructure businesses;

For enterprises engaged in house- or office-leasing or infrastructure businesses, these are the costs for construction of infrastructure or houses and offices directly related to the area for rent with rental to be collected in a lump sum. If the rental is collected in advance and the leasing period is shorter than the minimum use time specified in the use bracket for the use of fixed assets stipulated in Appendix 1 issued together with Decision No. 1062-TC/QD/CSTC of November 14, 1996 of the Ministry of Finance, construction costs shall be amortized throughout the actual leasing period. Enterprises may register the time for the use of fixed assets in accordance with the provision in Point b3 above.

tion cost = ------------------------------- x 10 years = 500,000$

25 years

- For turnover from leasing office to Enterprises C and D, the amortized construction cost for determination of taxable profit shall be:

In the above example, in addition to the turnover earned from leasing offices to Enterprises B, C and D in 1996, Enterprise A also gained an amount of 500,000 $ from other activities. The total expenses arising in the year is 300,000 $ excluding construction cost and turnover tax. Assuming that Enterprise A is entitled to profit tax exemption for 2 years from the first profitable year and to 50% reduction of profit tax for the two subsequent years, that the enterprise was granted an investment license in 1993 for an operating duration of 40 years and did not make any profit until 1996. The taxable profit of Enterprise A shall be determined as follows:

* Taxable profit on the advance payment turnover

+ For turnover from leasing office to Enterprise B:

- Total advance payment turnover is 1,000,000 $

- Armotized cost of construction is 500,000 $

Other 300,000 $

costs = ------------------- x 1,000,000 $ = 40,000$

armotized 7,500,000 $

- Tax payable on the advance payment turnover: 1,000,000 $ x 4% = 40,000 $

- The number of years in which Enterprise A is entitled to tax exemption is: 2 years + (2 years x 50%) = 3 years

The

remaining 1,000,000$ - 540,000$ - 40,000$

taxable = ------------------------------------------ x (10years-3years)

profit 10 years

= 294,000 $

- The amount of tax-free profit is 126,000 $

+ For turnover from leasing office to Enterprises C and D:

- Total advance payment turnover is 6,000,000 $

- Amortized cost of construction is 2,500,000 $

Other 300,000 $

costs = -------------------- x 6,000,000 $ = 240,000 $

amortized 7,500,000 $

- Tax payable on the advance payment turnover:

6,000,000 $ x 4% = 240,000 $

+ The number of years in which Enterprise A is entitled to tax exemption: 2 years + (2 years x 50%) = 3 years

The

remaining 6 mil.$ - 2,740,000$ - 240,000$

taxable = --------------------------------------- x (30years-3years)

profit 30 years

= 2,718,000 $

- The amount of tax-free profit: 302,000 $

* Taxable profit on other turnover:

- Other turnover of Enterprise A: 500,000 $

- Payable turnover tax: 20,000 $

- Amortized costs = 300,000 $ - 40,000 $ - 240,000 $ = 20,000 $

- Taxable profit = 500,000 $ - 20,000 $ - 20,000 $ = 460,000 $

In 1996, all these profits are not subject to profit tax.

Hence, in 1996 Enterprise A must pay a profit tax amount of 3,012,000 $ on the total taxable profit; is entitled to a profit tax exemption amount of 888,000 $.

The above-mentioned method of profit tax determination shall be used for tax settlement in previous fiscal years for enterprises engaged in export processing zone and industrial park infrastructure business, in house and office leasing (excluding enterprises in the hotel industry). The industrial park infrastructure enterprises which have completed tax settlement in previous years in accordance with Circular No. 27-TC/CSTC of May 25, 1996 of the Ministry of Finance, shall not have to adjust such settlement. Any differences between the tax settlement report data and the data determined by the above-mentioned method shall be adjusted in the financial statement of 1997.

4. Determination of tax payable:

The amount of

profit tax payable = Taxable profit x Profit tax rate for the tax year

of which:

- Taxable profit shall be determined in accordance with Point 3 above.

- Profit tax rate is specified in the investment license. In case the investment license does not specify the profit tax rate, a profit tax rate of 25% shall apply.

In the course of operation, if a foreign invested enterprise or a foreign business cooperation party fails to meet the criteria for enjoying preferential profit tax rates and profit tax exemption or reduction as prescribed in Articles 54 and 56 of Decree No. 12-CP of February 18, 1997 of the Government, the local tax agency shall immediately report the case to the General Department of Taxation and the investment license granting agency for readjustment according to the tax rate and preferential treatments stated in the investment license.

5. Procedure for profit tax payment

Profit tax shall be temporarily collected every 3 months starting from the first day of the tax year, at the end of the tax year or upon the termination of the contract, the profit tax shall be collected on the basis of the actual settlement of accounts.

With regard to business cooperation contracts with a duration of under one year, profit tax shall be paid in two installments, with the first installment temporarily paid in the middle of the contract duration and the other to be paid on the basis of the actual settlement of accounts at the termination of the contract.

With regard to business cooperation contracts for which the investment license granted by an investment license granting agency prescribes specifies the method of determination of business results or a particular method of calculation of profit tax, the calculation of tax shall be based on the provisions in the investment license.

- Within 5 days from the end of the above-mentioned tax payment period, the foreign invested enterprise or foreign business cooperation party shall make a profit tax declaration and submit it to the tax agency of the locality where its head office is located and pay the tax amount specified in the tax notice of the tax agency to the State Treasury. Within 5 days from the date of receipt of the declaration, the tax agency shall issue to the taxpayer a notice of the tax amount to be paid .

In case the enterprise or foreign business cooperation party fails to submit a tax declaration within the prescribed time limit for submission, the tax agency shall have the power to determine the provisional tax amount to be paid, issue a tax notice and impose an overdue declaration penalty.

Within 5 (working) days from the date of receipt of the tax notice from the tax agency, the foreign invested enterprise or foreign business cooperation party shall have to pay in full the tax amount specified in the tax notice to the State Treasury designated by the tax agency.

- Within 90 days from the end of the fiscal year, the foreign invested enterprise or foreign business cooperation party shall submit the profit tax declaration for the whole year together with an accounting report already audited by an independent auditing organization licensed to operate in Vietnam to the tax agency of the locality where its head office is located and, at the same time, pay the outstanding profit tax (if any) to the State budget according to the tax notice of the tax agency.

6. Refunding reinvestment profit tax:

a/ A foreign investor who uses his/her shared profit for reinvestment in foreign invested enterprises of which the investment licenses determine the application of the preferential profit tax rates of 10%, 15% or 20% for a period of time or for the whole project duration shall be refunded by the Ministry of Finance part or all of the already paid profit tax related to the reinvestment profit, if he/she satisfies the conditions prescribed in Clause 1, Article 59 of Decree No. 12 of February 18, 1997 of the Government. The rates of reinvestment profit tax refund shall be as follows:

- 100% for reinvestment in projects subject to a profit tax rate of 10% .

- 75% for reinvestment in projects subject to a profit tax rate of 15%.

- 50% for reinvestment in projects subject to a profit tax rate of 20%.

In case a foreign investor uses his/her shared profit for reinvestment in projects that are licensed before November 23, 1996, the rates of reinvestment profit tax refund shall be as follows:

- 100% for reinvestment in projects subject to profit tax rates up to 14%.

- 75% for reinvestment in projects subject to profit tax rates from 15% to 20% .

- 50% for reinvestment in projects subject to profit tax rates from 21% to under 25%.

In case a foreign investor uses his/her shared profit of the years before 1996 for three or more year reinvestments to which amended investment licenses had been granted, or which had been approved by the Ministry of Planning and Investment before November 23, 1996, the profit tax refund rate shall be 100%.

b/ The amount of profit tax refundable for the reinvested profit shall be determined as follows:

L

Th. = ---------------- x S x T

100% - S

of which:

Th. is the profit tax amount refundable

L is the shared profit (after profit tax) reinvested

S is the profit tax rate stated in the investment license

T is the percentage of profit tax refundable as stipulated above

c/ Procedures for refunding profit tax on reinvestment profit.

To be refunded the profit tax already paid on reinvestment profits, a foreign investor or his/her authorized person shall have to produce the following documents to the tax agency of the locality where the head office of the enterprise is located:

- A written request or application for the refund of reinvested profit tax. The application must clearly state the name, address and bank account number of the enterprise that receives the to-be-refunded profit tax for reinvestment.

- The foreign investor�s commitment to use such profit for three or more years reinvestment.

- The investment license (a notarized copy) or a amended investment license granted by an investment license granting agency, clearly stipulating that the investor is allowed to use his/her shared profit for reinvestment and he/she satisfies all conditions for the refund of reinvested profit tax.

- A written certification (the original or notarized copy) of the Managing Board, for joint venture enterprises, or of an auditing organization, for enterprises with 100% foreign invested capital or foreign business cooperation parties, that the foreign party has fully contributed its share to the prescribed capital .

- A declaration of reinvested profit

- Copies of documents on tax payments by the enterprise and the State Treasury�s certification of the profit tax amount already paid by the enterprise.

Upon full receipt of the above-mentioned documents, the local tax agency shall examine the documents, determine the amount of profit tax already paid by the enterprise and calculate the amount of profit tax to be refunded to the investor, forward the profit tax refund application dossier to the Ministry of Finance (Department of Budget) for consideration and decision on a refund to the investor.

Within 30 days from the date of receipt of the full dossier, the Ministry of Finance shall notify the investor of its decision.

Where the investor fails to make the reinvestment, he/she shall have to return the refunded profit tax, with interest thereon calculated from the date he/she receives the refund to the time when he/she returns such refund to the budget (based on the bank deposit interest rate) and shall be handled in accordance with law.

II. PROFIT REMITTANCE TAX

1. Taxable subjects:

Profits earned by foreign economic organizations or foreign individuals from their investment in any of the forms prescribed in the Law on Foreign Investment in Vietnam, including the refunded profit tax on reinvested profits and profits from the transfer of capital, shall be subject to profit remittance tax upon remittance out of Vietnamese territory or being retained outside Vietnam.

Where a foreign party uses its shared profits to pay debts of the parent company, or to fund expenses of the parent company�s representative office in Vietnam, these transactions shall be considered a remittance of profits abroad, and the foreign party shall have to pay profit remittance tax thereon.

Foreign economic organizations or foreign individuals shall, upon remittance of profits abroad, declare and pay profit remittance tax.

2. Determination of tax payable:

The profit remittance tax payable shall be determined on the basis of the amount of profits remitted or considered being remitted abroad, or retained by the investor outside the Vietnamese territory, multiplied (x) by the profit remittance tax rate stipulated in the investment license granted by an investment license granting agency, In case the profit remittance tax rate is not prescribed in the granted investment license, it shall be determined according to Article 57 of Decree No. 12-CP of February 18, 1997 of the Government.

3. Procedures for payment of tax:

Profit remittance tax shall be collected upon each remittance of profits abroad. If an enterprise retains profits outside Vietnam, tax declaration and payment shall be made on a monthly basis.

Prior to a remittance of profits abroad or not later than the fifth day of the following month in cases where the profits are used for purposes deemed to be a remittance of profits abroad, profits retained outside Vietnam, a foreign economic organization or foreign individual shall submit a tax declaration to the tax agency directly managing the enterprise in which the foreign economic organization or individual has invested and, at the same time, pay the declared tax amount to the State Treasury. Within 5 days from the date of receipt of the tax declaration, the tax agency shall examine the declaration, calculate the tax payable, and, in cases of discovery of any errors in the tax declaration, issue a tax notice to the foreign investor regarding the tax payable. The foreign investor shall have to pay the outstanding tax amount to the State Treasury.

In case the enterprise or the foreign business cooperation party fails to submit a tax declaration within the prescribed time limit, the tax agency shall have the power to determine the tax amount to be temporarily paid, issue a tax notice and impose a late tax declaration penalty.

Within 5 (working) days from the date of receipt of the tax notice, the foreign invested enterprise or foreign business cooperation party shall pay fully the profit remittance tax specified in the tax notice to the State Treasury designated by the tax agency.

The State Treasury shall issue to the taxpayer a receipt of the profit remittance tax payment so that the latter may complete the procedure for the transfer of money abroad.

Every year, within 90 days from the end of the fiscal year, the foreign investors shall report to the tax agency(ies) directly managing the enterprises their shared profits, the use of profits and the payment of profit remittance tax with regard to the shared profits of previous years. Where a foreign investor has paid profit remittance tax but later fails to remit the profit abroad and does not use it for purposes deemed to be a remittance of profits abroad, he/she shall be refunded the paid tax from the State budget. The dossier applying for a refund of the paid tax includes:

- An application for a refund of the paid tax. The application must clearly state reasons for tax refund, the name, address and bank account number of the applicant.

- A list of the paid tax amounts accompanied with vouchers (copies) of the payments to the State Treasury.

- The State Treasury�s certification of the paid tax amounts (stating clearly the chapter, category, clause and item of the budget content where the tax has been paid to).

- The tax agency�s certification of the tax amount paid in excess and its request to deal with this excess amount.

The tax refund application dossier shall be submitted to the Ministry of Finance (Department of Budget) for examination and decision on a refund of the paid tax.

III. CAPITAL TRANSFER TAX

Foreign-invested enterprises which transfer their capital within their respective joint venture enterprises; foreign parties to joint venture enterprises, enterprises with 100% foreign invested capital or foreign business cooperation parties which transfer their capital in accordance with Article 34 of the Law on Foreign Investment in Vietnam shall pay tax on the transfer of capital in accordance with the provisions in this Circular.

Vietnamese parties to joint venture enterprises conducting a transfer of capital shall pay tax as guided in Circular No. 96-TC/TCT of December 30, 1995 of the Ministry of Finance.

Tax on transfer of capital shall includes profit tax and profit remittance tax. Specifically:

1. Profit tax: Profits earned from capital transfer activities shall be subject to profit tax under the Law on Foreign Investment in Vietnam

Profit Profit tax rate

tax = Taxable profit x for capital

payable transfer

1.1 Taxable profit: Profit from a transfer of capital shall be determined as follows:

Taxable Transfer Initial value Transfer

profit - value - of the transferred - expenses

capital

of which:

+ The transfer value shall be determined as the total actual value that the transferor receives under the transfer contract. If the transfer contract does not specify the payment price or the payment value or the value is not determined according to the principle of market price-based transactions between the transferor and the transferee, the tax agency shall be entitled to examine and determine the payment value of the contract on the basis of the market price and similar transfer contracts.

+ The initial value of the transferred capital shall be determined on the basis of accounting books and vouchers on the investor�s contributed capital at the time of transfer which is confirmed by the Managing Board of the joint venture enterprise, with regard to joint venture enterprises, or the auditing results from auditing organizations, with regard to enterprises with 100% foreign invested capital and business cooperation parties in accordance with the Vietnamese laws currently in force.

In case the subsequent investors transfer their contributed capital, the initial value of the transferred capital in each subsequent transfer shall be determined as the value of the immediate previous transfer contract plus the actual value of any additional capital contributed (if any) determined on the principle stated in this Clause.

+ Transfer expenses are actual expenses directly related to the transfer, based on the original vouchers recognized by the tax agency. In case transfer expenses arise overseas, such original vouchers must be certified by a public notary or an independent auditing agency of the country where the expenses arise.

Transfer expenses include expenses for the completion of legal procedures necessary for the transfer, expenses and fees payable upon the completion of the transfer procedures; expenses related to public relation, negotiations and signing of transfer contracts... supported by valid vouchers.

1.2. Profit tax rate:

- The rate of profit tax on capital transfer shall be 25%.

- In case a foreign investor transfers capital to a Vietnamese State enterprise or to an enterprise in which the State holds a prevailing share, he/she shall be exempt from profit tax on the transfer of capital. Exemption of profit tax on a transfer of capital shall be approved by a competent agency in the written approval of the transfer of capital.

- If a foreign investor transfers capital to a Vietnamese enterprise other than those mentioned above, he/she shall be subject to profit tax on the transfer of capital at the rate of 10%.

1.3. Declaration and payment of profit tax on transfer of capital:

Within 5 working days from the date of receipt of the approval of the capital transfer by a competent agency, the transferor or his/her mandatory (including cases where the transferor is entitled to exemption from profit tax on transfer of capital) shall submit a declaration of profit tax on the transfer of capital to the tax agency managing the enterprise in which the transferor invests capital, accompanied with the transfer contract, the competent agency�s decision to approve the transfer, a copy of the decision on the establishment of the enterprise to which the capital is transferred (in cases where such enterprise is a Vietnamese enterprise), certification of capital contribution and original expense vouchers, and, at the same time, pay in full the tax payable to the State Treasury and forward a copy of the tax payment voucher to the agency which has approved the transfer of capital.

In case of discovery of inaccurate tax declaration or calculation, the tax agency shall, within 10 (working) days from the date of receipt of the declaration, notify the taxpayer of the tax amount to be paid or request the taxpayer to provide the necessary documents for an accurate calculation of such tax amount.

IV. EXPORT AND IMPORT DUTIES

All goods which foreign invested enterprises and foreign business cooperation parties are permitted to export or import across Vietnamese borders, including goods from the Vietnamese market sold into export processing zones and goods from enterprises in export processing zones sold into the Vietnamese market, shall be subject to export and import duties in accordance with the Law on Import and Export Duties.

1. Export and/or import duty exemption or relief:

In addition to the cases of exemption and relief provided for in the Law on Export and Import Duties, foreign invested enterprises and business cooperation parties shall be entitled to tax exemption or relief under Article 63 of Decree No. 12-CP of February 18, 1997 of the Government. The agency competent to consider duty exemption for cases prescribed in under Article 63 of Decree No. 12-CP shall be as follows:

- Based on the investment license and the technical and economic report of each project, the Ministry of Trade shall consider and approve the list of duty-free imports specified in Article 63 of Decree No. 12-CP of February 18, 1997 for each enterprise.

- Based on the list of duty-free imports issued by the Ministry of Trade, the Customs Departments of the provinces and cities directly under the Central Government shall supervise the import activities of enterprises. Quarterly, they shall report to the Ministry of Finance and the General Department of Customs on the export and import values and the volumes of the major exported and imported commodities of foreign invested enterprises

2. Declaration and collection of export and import duty arrears:

- If the exported or imported goods of foreign invested enterprises and foreign business cooperation parties which are exempt from export or import duties as mentioned above, are used for purposes other than that approved for export or import duty exemption or sold on the Vietnamese market, they shall require permission from the Ministry of Trade and be subject to the payment of export or import duties previously exempted.

With regard to goods which were imported at the time when the Law on Special Consumption Tax was not effective and which were exempt from import duties but were used for purposes other than the original purpose or sold on the Vietnamese market after the Law on Special Consumption Tax has taken effect, foreign invested enterprises and foreign business cooperation parties shall pay, in addition to import duties (at the rate of duty effective at the time of payment), special consumption tax thereon.

- Within 2 days from the date the imported goods are used for purposes other than the purpose for which they are exempt from import duty or for sale, the foreign invested enterprises or business cooperation parties shall have to submit a declaration thereof to the customs office of the province or city where the head office of the enterprise is located, or the customs office of the place where such goods were sold, or the customs office of the locality where the enterprise registers the import declaration, Past this time limit if no declaration is submitted, the enterprise or business cooperation party shall be subject to sanctions under the Law on Import and Export Duties and the Law on Special Consumption Tax.

- The outstanding import duty shall be determined on the basis of tax calculation elements, including the rate of duty, exchange rates, the dutiable price at the time of sale under the provisions of the Law on Import and Export Duties and the Law on Special Consumption Tax currently in force.

- In the management of the taxation of foreign invested enterprises and business cooperation parties, the tax agency managing the taxation of an enterprise shall have to supervise the use of duty-free import and export goods and, upon discovery of a sale of such duty-free goods, the director of the provincial/municipal tax department, besides collecting turnover tax in accordance with the Law on Turnover Tax, shall have the power to issue a decision on the collection of import duty arrears and impose a fine thereon in accordance with the Law on Import and Export Duties. The amounts of duty arrears and fines shall be used as follows:

+ 100% of the import duty and special consumption tax (if any) arrears shall be paid to the central budget.

+ 100% of the fines and confiscated goods shall be paid to the local budget (provincial/municipal budget) in accordance with Circular No. 09-TC/TCT of January 24, 1995 of the Ministry of Finance.

PART III
SETTLEMENT OF TAX OBLIGATIONS AND EXAMINATION OF TAX PAYMENT BY ENTERPRISES

I. ANNUAL TAX SETTLEMENT

At the end of each fiscal year, foreign invested enterprises and foreign business cooperation parties shall calculate and fulfill their tax obligations, and submit reports of tax settlement to the tax agency. The annual tax settlement shall be carried out in accordance with the following provisions:

1. Within 90 days after the end of the fiscal year, foreign invested enterprises and foreign business cooperation parties shall submit their reports on production and business activities, reports on audited accounts and reports on tax settlement to the tax agency where they register their tax payment and, at the same time, pay the outstanding amounts (if any) according to the tax settlement reports to the State Treasury.

In an annual tax settlement, an overpayment of one tax shall not be permitted to be used to compensate the underpayment of another tax.

2. Basing itself on the report on business and production activities and financial statements of enterprises, the tax agency shall re-calculate payable amounts of each tax in the fiscal year and, at the same time, compare these amounts with those in the tax declarations periodically submitted during the year in order to determine the accuracy of these declarations and tax settlement reports. For inaccurate tax settlement reports, the tax agency shall examine the tax payment by the enterprise.

II. EXAMINATION OF TAX PAYMENT BY ENTERPRISES

In the management of taxation of foreign invested enterprises and foreign business cooperation parties, the taxation department of the provinces and cities directly under the Central Government shall be responsible for regular examinations or irregular examinations at enterprises if necessary. They shall, at least once a year, examine the tax payment by the following:

- Enterprises which, according to their financial settlement reports, see no profits and are in the period of tax exemption or reduction.

- Enterprises which have large a turnover.

- Enterprises which have inaccurate or unclear tax settlement reports, or their tax settlement reports do not fully cover the indice for tax calculation.

- Enterprises which do not submit tax settlement reports or submit them belatedly.

- Enterprises which see highly fluctuant financial status in the tax year as compared to the previous years.

For the other enterprises, the provincial/municipal taxation departments shall examine at least once every three years.

Before examining foreign invested enterprises or foreign business cooperation parties, the tax agency shall have to issue an examination decision clearly stating the contents and duration of the examination. The examination decision shall be sent to the foreign invested enterprise or the representative of the foreign business cooperation party 3 days before the examination begins. When it deems necessary to examine contents other than those stated in the examination decision or to prolong the examination time limit , the tax agency shall issue an additional decision.

The results of examination shall be made in a record signed by the authorized representative of the enterprise or business cooperation party and the representative of the tax agency conducting the examination. The tax agency shall have to submit this record to the Ministry of Finance (the General Department of Taxation) together with the accounting report (copy) of the enterprise.

If the foreign invested enterprise or the business cooperation party disagrees with the conclusion of the tax agency in the record of examination, it has the right to make a complaint to the General Department of Taxation and the Ministry of Finance. Pending the settlement of the complaint, the enterprise or the foreign business cooperation party shall have to strictly comply with the conclusion of the tax agency.

III. TAX SETTLEMENT UPON EXPIRY OF OPERATING DURATION OR DISSOLUTION OF FOREIGN INVESTED ENTERPRISES OR FOREIGN BUSINESS COOPERATION PARTIES

Upon the termination of a business cooperation contract by the parties thereto, or the expiry of the operating duration or upon the dissolution of a foreign invested enterprise under the Law on Foreign Investment in Vietnam,, the foreign invested enterprise or the business cooperation parties shall have to make its/their financial report(s) and the tax settlement report(s) then submit them to the tax agency at the place where they register their tax payment. The tax agency shall proceed immediately with the following:

1. Examination of the tax settlement reports according to the procedures applied to the annual tax settlements described in Section 1 above;

2. Determination of the rights and obligations of each party to the foreign invested enterprise or the business cooperation contract with the following main contents:

- Determination of the invested amounts of capital of the investors on the accounts of the enterprise, including capital in cash, fixed assets, supplies and commodities... Confirmation of the invested capital amount that the foreign investor is allowed to remit abroad.

- Determination of profits or losses, and the rights and responsibilities of the investors related to such profits or losses. Confirmation of the profits that the foreign investor is lalowed to remit abroad. Calculation and determination of the amount of profit remittance tax on the profits to be remitted abroad. The profit remittance tax shall immediately be collected for the State Treasury, except where the foreign investor produces documents proving that such profits will not be remitted abroad for one of the following reasons:

+ Using the profits for reinvestment in Vietnam under a decision of an investment license granting agency.

+ Using the profits for personal spending needs in Vietnam, in addition to other incomes already declared.

+ Using the profits for other purposes in Vietnam.

IV. MEASURES AGAINST THE CHANGE OF PRICE

To guarantee the correct determination of tax obligations of enterprises, during the periodical examination or examination of tax settlement reports of enterprises, upon discovery of any irrationality in prices or profits ratio in the transactions among associated companies, the tax agency shall take the following measures to prevent the change of price and to determine the exact taxable profits of enterprises:

1. Free-market price comparison method:

The tax agency may use the free-market prices of goods, products or services to determine the price of the goods, products or services exchanged or sold internally among associated companies. The conditions for the application of this method are:

(i) There is no difference between the two compared business transactions, which affects the transaction price, such as quality of goods, trademarks, delivery conditions, terms of payment or

(ii) In case of differences, calculation methods may be applied to exclude the factors affecting the transaction price.

Example: A British lubricant company sells to Vietnam-based enterprise A, a joint venture between a British company and another Vietnamese company, 1,200 liters of lubricant for 1,500 USD, to be paid after 6 months. At the same time, the British company sells to enterprise B, which is an independent enterprise in Vietnam 1,000 liters of lubricant for 1,000 USD, payable immediately, Assuming that the commercial credit interest rate for 6-month loans is 10% in the determination of the profits of joint venture enterprise A, the Vietnamese tax agency may re-determine the price of lubricant in this contract on the basis of price comparison with the contract with enterprise B as follows:

Price of 1 liter of lubricant, on the basis of payment after 6 months:

1,000 $ + 1,000 $ x 10%

--------------------------------- = 1.1 $/liter

1,000 liters

The determined price for the contract between the joint venture company and the British company:

1,200 liters x 1.1 $/liter = 1,320 $

2. The method of using the selling price to determine the purchase price

In case a trade unit purchases all its supplies from an overseas associated company and it is impossible to determine the actual price on the free market, the tax agency may base itself on the selling price of the trade unit to determine the purchase price according to the following formula:

Selling price to { Selling price to The average }

independent { independent aggregate }

Purchase = enterprise - { enterprises x profit margin }

price (excluding { (excluding of the trade }

import duty { import duty, service }

if any) { if any) }

The average aggregate profit margin of the trade service may be determined on the basis of the aggregate profit margin of the unit�s other goods purchased from independent enterprises and sold to independent enterprises, or the aggregate profit margin of all other independent trade units. The aggregate profit margin shall be determined according to the following formula:

Aggregate Net turnover - cost of goods sold

profit = ------------------------------------------ x 100%

margin Net turnover

(The data shall be based on the reports on business profits/losses of enterprises)

The method of using the selling price to determine the purchase price shall not apply to the following cases:

- Where the goods and products, before being sold, were processed, assembled, transformed or value added;

- Where the goods and products, before being sold, were affixed with a trade mark trade name of high value on the market.

- The period between purchase and sale exceeded one year and, during that period the market witnessed a great price fluctuation.

Example: Enterprise A in Vietnam has 100% of its capital invested by Company B which produces wine in France. Enterprise A has the exclusive right to sell Company B�s products in Vietnam. In 1995, Enterprise A imported from Company B 10,000 liters of wine, paid 75,000 USD as import duty determined by customs, and sold all the wine for 185,000 USD within the year. At the end of 1995, the tax agency determined the purchase price of the wine by Enterprise A as follows:

Net turnover = Sale turnover - Import duty

= 185,000 $ - 75,000 $ = 110,000 $

Selling price 110,000 USD

(less import duty) = -------------------------- = 11 $/liter

10,000 liters

Assuming that the average aggregate profit margin for trading in wine is 10%

3. The method of using total production cost to determine the taxable profit

In case a production unit manufactures and processes semi-products and delivers all to an associated enterprise, with no sales on the free market. To determine the comparative price, the tax agency may base itself on the accounting records of the units� expenditures to determine the profits of that unit according to the following formula:

Determined profit = Total cost of production x Average net profit percentage of the manufacturing industry

Total cost of production for the period = Costs of goods delivered in the period + Delivery expenses in the period + Common management expenses in the period

The average net profit percentage of the manufacturing industry may be determined on the basis of the net profit percentages of various independent manufacturing enterprises.

The net profit percentage shall be determined according to the following formula:

Net Net profit before profit tax

profit = -------------------------------------------------------------------

per- Costs of Common

centage goods + Sales expenses + management

sold expenses

(The data shall be based on the reports on business profits/losses of the enterprise)

Example: Garment enterprise A in Vietnam is a joint venture between a Korean company and a company in Vietnam. Enterprise A manufactures under a processing contract apparel articles for delivery exclusively to Company B in the Republic of Korea. Assuming that in 1995 Enterprise A delivered to Company B 10,000 items at a set price of 10 USD/item. The accounting records of Enterprise A for 1995 contain the following data:

Cost of goods sold 80,000 $

Delivery expenses 6,000 $

Common management expenses 12,000 $

Total cost of production 98,000 $

Enterprise A and Company B in Vietnam are two associated enterprises, the tax agency may determine the taxable profit as follows:

Assuming that the tax agency determines the average net profit percentage of the garment industry is 10%

The set profit shall be: 98,000 $ x 10%

In case where price irrationality is discovered but there are no conditions for the application of the above methods, the tax agency shall ask the enterprise to produce the relevant documents and request it to attest in writing the legality of the documents produced. Copies of the relevant documents shall be forwarded to the General Department of Taxation for an exchange of information with the tax agencies of other countries.

PART IV

TAX PAYMENT CURRENCY AND OTHER GUIDELINES

I. Tax payment currency

Foreign invested enterprises and foreign business cooperation parties that have payable tax amounts as prescribed in Part II of this Circular shall pay tax in Vietnam Dong or in a foreign currency approved by the Ministry of Finance.

The conversion of a foreign currency into Vietnam Dong or vice versa shall be made at the rate of exchange announced by the State Bank of Vietnam at the time of tax payment.

All revenues for the budget from foreign invested enterprises shall be included in the budget contents in accordance with regulations currently in force.

II. Responsibilities of foreign invested enter-prises and foreign business cooperation parties

1. Within 5 days at the latest from the commencement of the investment licenses, dissolution, change of goods items or change of the head office�s address, an enterprise, its dependent business units or a foreign business cooperation party shall have to complete registration procedures at the provincial/municipal tax agency of the locality where the head office of the enterprise is located.

2. To comply with all the regulations on tax declaration in the course of business and production.

3. To present full accounting records and necessary documents related to tax calculation and settlement at the request of the tax agency.

4. To pay in full taxes within the prescribed time limit.

III. Responsibilities and powers of the tax agency

1. To provide guidance for taxpayers to complete tax registration and declaration as prescribed.

2.- To inspect tax declaration forms, accounting records and necessary documents for tax calculation. To be entitled to request taxpayers to clarify issues related to tax calculation.

3. To calculate tax and notify tax payers of tax amounts to be paid. To be entitled to set payable tax amounts if the tax payer deliberately fail to make tax declarations in a given time limit or make incorrect tax declarations.

4. To make records and deal with tax violations within its competence as prescribed by law.

5. To strictly enforce the tax legislation, ensuring truthfulness, accuracy and objectiveness of its operations.

6. To inspect the registration of accounting systems by enterprises and inspect the implementation of the registered accounting systems.

7. To certify the tax amounts already paid by foreign investors at the request of foreign investors.

IV. HANDLING OF VIOLATIONS AND SETTLEMENTS OF COMPLAINTS

1. Any violations of the tax legislation shall be handled as follows:

- Failure to comply with the provisions on tax registration prescribed in Point 1, Section II, Part IV of this Circular shall be subject to sanctions defined in the Decree No. 22-CP of April 17, 1996 of the Government on Sanctions against Administrative Violations in Taxation.

- Failure to comply with the regulations on tax payment declarations shall be subject to fines prescribed in the Ordinance on Sanctions against Administrative Violations, Decree No. 22-CP of the Government and guiding documents currently in force.

- False declarations and tax evasion shall be subject to fines of up to 5 times the tax amount evaded.

- Belated payment of tax shall be subject to a fine of 0.2% (two thousandths) of the payment for each day in arrears.

2. Competence to deal with violations and complaints

- Violations of tax regulations shall be handled by the tax agency directly managing the tax collection.

- Complaints of taxpayers related to taxation shall be examined and settled by the tax agency directly collecting taxes. In case a taxpayer disagrees with the settlement, he/she shall be entitled to lodge a complaint to the higher-level tax agency or the Ministry of Finance. The settlement decision of the Minister of Finance shall be the final. Pending a settlement of a complaint, the complainant shall have to strictly comply with the decision of the tax agency.

V. ORGANIZATION OF IMPLEMENTATION

The provincial/municipal tax departments shall be responsible for providing guidance to foreign invested enterprises and foreign business cooperation parties for the strict implementation of the provisions of this Circular.

They shall assign a contingent of full-time officials to manage the collection of taxes from foreign invested enterprises and foreign business cooperation parties. These officials shall have to submit monthly, quarterly and year-end reports to the Ministry of Finance (the General Department of Taxation) on the situation of tax collection and other reports in service of the general management of foreign invested enterprises and foreign business cooperation parties in the localities for which they are responsible.

This Circular shall replace Circular No. 51-TC/TCT of July 3, 1993, Circular No. 90-TC/TCT of November 10, 1993 and relevant provisions in Circulars No. 96-TC/TCT of December 30, 1995 and No. 27-TC/CSTS of May 25, 1996 of the Ministry of Finance. All earlier regulations of the Ministry of Finance which are contrary to this Circular are now annulled. This Circular takes effect 15 days after its signing and shall apply to the determination of profit tax payable in fiscal year 1997.

For the Minister of Finance

Vice Minister

VU MONG GIAO