Vietnam Tax Alert - 22 June 2009

By Richard Buchanan, Thomas McClelland and Tuan Bui

On 19 June 2009, Vietnam’s National Assembly voted in favor of a bold stimulus package that includes an exemption from Personal Income Tax (PIT) for 2009. As a result of the measure, most expatriates and Vietnamese nationals living in Vietnam will be exempt from PIT on their salary and wages and certain other income between 1 January 2009 and 30 June 2009, but will be subject to PIT as from 1 July 2009.

Overview of exemption

There are two PIT exemption periods, the first running from 1 January 2009 to 30 June 2009 and the second from 1 July 2009 to 31 December 2009. Eligibility for the exemption depends on the applicable period, residence status (both Vietnamese nationals and expatriates may be tax resident) and the type of income.

For both periods, resident and nonresident individuals (NRIs) are exempt from tax on dividends and interest, gains from the disposal of securities and other assets, and all royalties and franchise fees. Resident individuals also are exempt from PIT on salary and wages (including allowances and fringe benefits paid by employers) and private business income (including net rents), but only for the first period (i.e. the period ending 30 June 2009). NRIs, however, are not exempt from tax on either of these two categories for either period.

Notably, the exemption does not apply to gains from the disposal of land use rights (LURs) or real property, gambling winnings or prizes, and income from gifts or inheritances. Nor does it apply to foreigners earning Vietnam-source income who complete their work assignment and leave Vietnam before 30 June 2009.

The table below sets out when the exemption applies:

Comments

As a result of the new measure, employers and other income payors are exempt from PIT withholding until 1 July 2009 and individuals who file PIT directly with the Vietnamese tax authorities can retain their full gross income until 1 July 2009. Employers may wish to pay bonuses and other employee income entitlements before 1 July 2009.

Expatriates working in Vietnam as from 1 January 2009, who may otherwise leave Vietnam in June 2009, may wish to extend their work in Vietnam until after 1 July 2009 to qualify for the PIT income available for the first period.

The exemption is likely to raise a number of questions among taxpayers and their employers. The most commonly anticipated questions and their answers are addressed below.

Question: Who is eligible for the PIT exemption and what income is PIT exempt?

Answer: As stated above, residence is a primary factor. Vietnamese tax-resident individuals (including qualifying expatriates in Vietnam) who are physically present in Vietnam for the six-month period ending 30 June 2009 will benefit from the PIT exemption on income from private business activities, rents, salaries and wages (including employer-provided allowances and fringe benefits), capital investments and transfers (including securities trading, but not LUR gains), and royalties and franchising fees. NRIs are entitled to the PIT exemption only on Vietnam-source income from capital investments and transfers (other than LURs), royalties and franchising fees. Foreigners earning Vietnam-source income who complete their work assignment and leave Vietnam before 30 June 2009 are treated as nonresident for purposes of the PIT exemption.

Question: Where an individual is employed under a net-of-tax employment contract, must the employer pay the employee the PIT savings arising from this exemption?

Answer: No, but if the employer pays the PIT savings or some portion thereof to the employee before 1 July 2009, the additional amount of income is PIT exempt.

Question: Is it possible for an employer to pay post-June 2009 salary and wages prior to 1 July 2009 and treat the advance income as PIT exempt?

Answer: Under current PIT law and regulations, PIT is calculated and declared based on an as-received basis. Therefore, if an employer pays advance salary and has no right of redress if the employee leaves, in our opinion, the amounts received are PIT exempt. If the employee is still required to be in the employer’s service, no exemption should apply. Further, if an employee is entitled to semi-annual or quarterly bonuses for performance during the period ending 30 June 2009, those entitlements may be paid before 1 July 2009 and be PIT exempt (however, see below on how the authorities will determine 2009 PIT on a taxpayer’s salary and wages).

Question: May expatriates who complete their work assignments in Vietnam and leave the country before 30 June 2009 still be eligible for the PIT exemption?

Answer: An expatriate working in Vietnam, who is currently a tax resident under the PIT Law and leaves Vietnam before 30 June 2009, will be considered nonresident for this specific PIT deferral and exemption. Thus, the employment income is not subject to the PIT exemption. However, if the expatriate can extend his/her stay in Vietnam after 1 July 2009, he/she would be eligible for the exemption. The extended stay can be either through a formal extension of the labor contract/assignment in Vietnam or through a mere extension of physical presence. Expatriates who are nationals of countries that have concluded a tax treaty with Vietnam that contains a nondiscrimination clause are potentially exempt.

Question: If a Vietnamese-resident expatriate switches employers in Vietnam during the period between 1 January 2009 and 1 July 2009, and the first employer assumes the expatriate left Vietnam before 30 June 2009, is the first employer obliged to withhold PIT on income from 1 January 2009 to the employment end date?

Answer: Yes, the first employer must withhold and continue to withhold. However, the (former) employee may, after 30 June 2009, furnish a certified copy of his/her passport and an acknowledgement from the new employer that he/she was continuously working in Vietnam until 30 June 2009. Once proof is furnished, the first employer is obliged to refund the PIT withheld to the former employee if the contract of employment is a gross salary and wage income contract.

Question: How will the Vietnamese tax authorities determine 2009 PIT on a taxpayer’s salary and wages?

Answer: The National Assembly has decided to exempt PIT on any salary and wage income received during the period 1 January 2009 to 30 June 2009. Thus, it would appear that, an individual who is a resident should include in his/her 2009 PIT return all salary and wage income (including employer-provided fringe benefits) received during this period to calculate PIT and deduct from the total PIT liabilities the PIT amount the employer(s) reported for the period 1 January 2009 to 30 June 2009 (the eligible period is from January to June 2009, while the reporting deadline for June 2009 is 20 July 2009).

The clear intent of the National Assembly appears to be that the exemption will apply to income received before 1 July rather than, for example, an averaging of income over the 2009 tax year and application of the exemption to the first six months. However, it is possible that when detailed guidance is issued, after internal consultation amongst the tax authorities, the mechanics for implementing the exemption may be modified.

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