CIRCULAR

Providing guidance on implementation of Decree No. 102/1998/ND-CP dated 21 December 1998 amending and supplementing to a number of articles of Decree No. 28/1998/ND-CP dated 11 May 1998 of the Government regulating in details the implementation of the Law on Value Added Tax
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Pursuant to the Law on Value Added Tax; Decree No. 28 /1998/ND-CP dated 11 May 1998 of the Government regulating in details the implementation of the Law on Value Added Tax;

Pursuant to Decree No. 102/198/ND-CP dated 21 December 1998 of the Government amending and supplementing a number of articles of Decree No. 28/1998/ND-CP dated 11 May 1998 of the Government;

The Ministry of Finance hereby provides guidance on the amendment of and supplement to a number of articles in Circular No. 89/1998/TT/BTC dated 27 June 1998 of the Ministry of Finance guiding the implementation of Decree No. 28/1998/ND-CP dated 11 May 1998 of the Government as follows:

I. With regard to VAT exempt goods and services as stipulated in Part A, Section II

1. Addition to point 4: VAT is not imposed on the lease of air craft, oil rigs, ships from overseas, for the purposes of production and business, where local production is not available.

• For lease of air craft, there is no difference between forms of lease (dry-lease or wet lease).
• For oil rig lease, it is not including the value of materials used for drilling operations.
• For ship lease, it is necessary to prove that such facilities are not available in Vietnam by the Ministry of Transportation or the Ministry in charge.

2. Addition to point 7: Credit activities which are VAT exempt are loan activities where, in principle, principals are to be repaid under the laws.

With regard to bank guarantee services, if the guarantor repays the loan on behalf of the client who is in default, then the client commits to repay the debt to the guarantor, this service is also considered as a credit activity which is VAT exempt.

II. With regard to the tax base of goods and services as stipulated at Section I, Part B

1. Addition to point 3: Taxable price of goods and services used for exchange, internal consumption, donation and gift.

- Goods given away to customers by establishments are subject to VAT in the same manner as sales. Goods used for promotion, marketing, advertising purposes are not subject to VAT, and the input VAT on these goods can be credited in proportion to the amount of promotion, marketing, advertising expenses allowed under the regulations of the Business Income Tax which is a percentage (%) of the total deductible expenses.

Example: An electronic establishment has a promotion program by giving a motor-bike and some other prizes. In 1999, total expenses is 120 billion, of which 12 billion is Other expenses, input VAT on promotion, advertising is 0.8 billion.

If Other expenses is limited to 5% of the total expenses, i.e. 6 billion (120 billion x 5%), then the maximum deductible input VAT shall be within 6 billion instead of 0,8 billion.

- Goods moved from a warehouse to a warehouse, goods issued to continue the production process by a trading and manufacturing establishment shall not be subject to VAT.

2. Addition to point 8: Taxable price of commission earned by purchases and sales agents

- For agents who buy and sell goods at a pre-determined price from a goods owner for a commission, the agents are not liable to VAT if commission payments are charged to the owner's expenses. The goods owner will pay VAT on his sales.

- For agents who carry on purchases or import services, when delivering goods to a goods owner, the agents must issue VAT invoices, and charge the same amounts of VAT which they pay on purchases or imports (if any).

- For agents who carry on export services, the agents must forward a copy of custom declaration forms verifying the actual exported goods to a goods owner for the latter to declare his output VAT on goods exported.

For branches, stores and agents selling goods subject to Special Sales Tax at a pre-determined price of a manufacturer, they are not liable to pay VAT on sales of these goods and on commission earned, if the manufacturer has already paid VAT on the selling price of these branches, stores and agents.

Agents who make profits on purchases and sales of goods are liable to pay VAT on purchases and sales of goods.

3. Addition to point 7:

For a construction work which is carried out by a department as a separate entity of an establishment, that department is liable to pay VAT. Otherwise, the department is not. Input VAT on a construction project shall be offset with the output VAT on the sales of goods and services of that establishment which is under the deduction method.

For agricultural production enterprises which have separate records for the construction work and the business activities, the agricultural products produce during the construction stage shall not be subject to VAT, and thus neither output VAT will be charged nor input VAT will be claimed or refunded.

4. Addition to taxable price of a certain goods and services stated at point 10:

For tourist services under the form of travel agents, where under an agreement, selling price is a package price, such package shall be considered as a VAT included price, thus VAT and selling price before VAT will be calculated. Where a package includes other services which are VAT exempt such as air tickets for tourists from overseas to Vietnam or from Vietnam to overseas, meals, lodging and sight seeing tours in foreign countries (provided that legal documentation available), these services related amounts shall be taken off from the selling price for VAT calculation.

Example 1: The Ho Chi Minh City Tourist Company enters a tourist contract with a Thai company at a package price of USD 32,000 for 50 tourists visiting 5 days in Vietnam. The Vietnamese side shall take care of all the expenses incurred in Vietnam such as air tickets, meals, lodging and sight seeing tours as agreed; in particular, round-trip tickets from Thailand to Vietnam are USD 10,000. Output VAT of this contract is determined as follows:

Revenue subject to VAT: USD 32,000 - USD 10,000 = USD 22,000

Output VAT: (using 50% reduced rate): [ USD 22,000/(1 + 10%)] x10% = USD 2,000

Net revenue before VAT: USD 32,000 - USD 2,000 = USD 30,000

Deductible input VAT will be determined as usual.

Example 2: The Hanoi Tourist Company carries out a contract to take tourists from Vietnam to China at a package price of USD 400/person for a five-day trip. The Hanoi Tourist Company pays USD 300/person to a Chinese Tourist Company. The taxable price o f the Hanoi Tourist Company under this contract is USD 100/person (USD 400 - USD 300).

For pawn services, the taxable price is the amounts received from the loan activities which include the interest and the different amounts from the proceeds of sales [proceeds of sales of pawned stuff less (-) the portion payable to clients (if any) less (-) the loan].

This revenue is considered as a VAT-included revenue to be used as a basis for calculation of the output VAT and the net revenue of the business.

Example: A pawn shop earns a revenue of VND 110 million from pawn services in a tax period.

Output VAT is determined as follows: [ VND 110 million/(1 + 10%)] x 10% = VND 10 million

Net revenue from pawn services the business: VND 110 million - VND 10 million = VND 100 million

For newspapers, books and magazines, if they are sold at the published price (net price) in compliance with the provisions of the Law on Publishing, such price shall be considered as the VAT-included price to be used as a basis for calculation of output VAT and net sales of the publishing house (types subject to VAT). Where net price is not used in distribution, output VAT will be calculated on selling price.

Example: The Literature Publisher sells literature books to a book distribution company at VND 6,300 per book net (price after VAT), allows a distribution fee of 25%, or VND1,575 per book. The taxable price of this transaction is determined as follows:

Taxable price of the publishing house: (VND 6,300 - VND 1,575)/(1 + 5%) = VND 4,500 per book

Output VAT: VND 4,500 x 5% = VND 225 per book.

Total payment received: VND 4,500 + VND225 = VND 4,275 per book

Taxable price of the distribution company: VND 6,300/(1 + 5%) = VND 6,000 per book

Output VAT:  VND 6,000 x 5% = VND 300 per book

VAT payable: VND 300 - VND 225 = VND 75 per book

(Assuming no other input VAT)

5. Tax rates of a number of goods and services:

• For accounting, auditing, survey and design services: 10%
• For labour export services such as preparation of procedures and
• documentation, performance of physical examination and recruitment: 10%
• For sales of disposed assets, scrap materials and spoiled products: VAT rates of such goods shall be applicable
• For Internet content provision: 10%
• 0% VAT rate shall not apply to exported goods which are not subject to VAT.

Example: Goods subject to SST directly exported by a manufacturer, or unprocessed agricultural products directly exported by a manufacturer.

III. Additional guidance on the tax calculation methods as stipulated at Section III, Part B of Circular No. 89/1998/TT-BTC

1. Additions to Point 1 on deductible input VAT

- Manufacturing establishments subject to VAT deduction method shall be allowed to claim input VAT at a flat rate in the following circumstances:

• Establishment specializing in iron and steel production purchases metal scrap as raw materials for the production are allowed to deduct 5% of the scrap purchases. In case where the production establishment has its dependent branches or outlets to purchase scrap, deduction will be claimed at the production establishment level. Bases used for claiming deduction are schedules of metal scrap purchases. For a company having different independent subsidiaries which are in charge of supply of metal scrap to other subsidiaries in charge of production at the price defined by the company, the purchasing units are allowed to claim a flat rate of their input VAT on the purchases of scrap for the production units. When selling metal scrap to the production subsidiaries, the purchasing unit must issue VAT invoices, with taxable price reduced in proportion to the reduced VAT claimable.
• For establishments specializing in production and processing of marine products purchased from fishermen, a flat 5% VAT deduction on the purchases of marine products is allowed.
• Insurance companies are allowed to deduct a flat 5% input VAT on the actual compensation amounts paid to their clients with regard to taxable categories of insurance. (compensation amounts paid for exempt categories of insurance and compensation paid in the form of reimbursement of expenses by organisations and individuals for goods or services with documents are not allowed to claim a flat input VAT mentioned above).
• Trading companies, when purchasing goods subject to SST from manufacturing establishments, are allowed to deduct a flat 3% input VAT on purchases.

- The deduction of input tax mentioned above shall not apply to the following circumstances:

• Manufacturing establishments which purchase these goods as raw materials for production and processing for export;
• Trading establishments purchases goods subject to SST from manufacturing establishments for the purpose of export or for restaurant business; goods subject to SST purchased from trading companies;
• Insurance company compensations paid for non-taxable categories of insurance.

Example 1: During a tax period, a steel manufacturing company has a sales revenue of VND 100 million, output VAT of VND10 million.

The total value of materials purchased during the period is VND 60 million, of which VND30 million with VAT invoices showing VND 3 million input VAT and VND 30 million of metal scrap purchases without VAT invoices.

The VAT liability is determined as follows:

• Deductible input VAT on metal scrap purchases:  VND 30 million x 5% = VND 1.5 million
• VAT payable: VND10 million - (3 million + 1.5 million) = VND 5.5 million
• Net cost of purchases of metal scrap goes to profit and loss account: VND 30 million - VND 1.5 million = VND 28.5 million

Example 2 : Insurance Company A declares its revenues from insurance in a tax period as follows:

• Taxable insurance premium, VND 100 million; output VAT, VND 10 million.
• Non-taxable insurance premium, VND 150 million.
• Total purchases, VND 100 million; input VAT, VND 10 million (which is not separately kept for taxable insurance services and non-taxable insurance services.
• Total compensation payments, VND 60 million (including payments related to taxable insurance services, VND 40 million).

VAT liability is determined as follows:

• Deductible input VAT associated with compensation payments to taxable insurance categories: VND 40 million x 5% = VND 2 million.
• Deductible input VAT on purchases of goods and services in proportion to the percentage of taxable sales over total sales: [VND 100 million/(100 million + 150 million )] x 10 million = 4 million .
• VAT payable:  VND 10 million - (2 million + 4 million) = VND 4 million

Establishments entitled to a flat rate of deduction of input VAT must prepare schedules of purchases as currently regulated; or schedules of compensation payments with supporting documents for insurance companies.

2. Additions to the end of Section III

In respect to business establishments following deduction method additionally engaged in trading gold, silver, precious stones and foreign currencies, they are required to keep separate records for VAT payable of each activity and different methods of tax calculation.

Where the business establishment cannot specify input VAT on purchases of goods and services for each activity, the deductible input VAT shall be apportioned in accordance with the percentage of revenues from sales of each activities. Based on the determination of VAT payable under each tax method, the establishment shall declare its aggregate amount of VAT payable in the form attached to this Circular.

Business establishments following direct application method on value added shall not be allowed to add the value of fixed assets purchased, invested, and constructed to the total purchases goods and services for computation of value added.

3. Addition to point 5, Section III on purchase and sale invoices and documents of goods and services

In the event that business establishments purchase goods and services from a non-business individual or organisation without having invoices and documents in accordance with the regulations on invoices and documents, they have to make out a schedule of purchases in accordance with form 4/GTGT attached to Circular 89/1998/TT-BTC of Ministry of Finance (this form could be amended to fit the categories of goods purchased).

IV. Additional guidance on VAT registration, declaration and payment as stipulated at Part C, Circular 89/1998-TT-BTC of the Ministry of Finance

1. Business establishments must register, declare and pay VAT at the location where their operations are performed (location means province and city under the central government)

2. Organisations and individuals carrying on consulting, design and survey services are required to register, declare and pay tax to the tax authority where their head office is located.

3. Construction companies having construction sites at localities different from their head office, shall have to declare and pay VAT to the local tax authority where their work is performed. If the subsidiary of a construction company cannot declare its tax liability, then the construction company shall have to declare and pay VAT in accordance with the VAT notice issued by the tax authority, combine this tax in the company's finalisation report. If the company cannot determine its input and output VAT of the construction work, and makes false declaration, the tax authorities shall make an arbitrary assessment and notify the amount of VAT payable.

4. For administration bodies and other organisations such as : radio stations, television stations, schools, institutes, armed forces carrying on production and business of taxable goods and services, they have to register, declare, and pay VAT and Business Income Tax (BIT) as regulated. If they do not maintain proper accounting books and keep separate records for expenses, output VAT of goods and services subject to VAT and BIT, they shall have to pay VAT and BIT on the basis of turnover and percentage of value added, and the percentage (%) of margin determined by the tax authorities. When invoicing, they have to issue VAT invoices specifying selling price before VAT and VAT.

V. WITH REGARD TO VAT REFUND AS STIPULATED IN PART D, SECTION I

To amend and add to Paragraph 1:

Business establishments applying tax deduction method shall be considered for a VAT refund if the deductible input VAT is larger than the output VAT in three continuous months. Exporters having exports on a seasonal or periodical basis in large quantity , shall be considered for a VAT refund for each time of export if the deductible input VAT on exports is larger than the output VAT.

The procedures for VAT refunds shall be followed in accordance with the provisions of Circular 89/1998/TT-BTC.

VI. WITH REGARD TO VAT REDUCTION AS STIPULATED IN PART H, SECTION II

1. Amendment of and addition to Paragraphs 1 and 2 on business establishments qualifying for VAT reduction and on amount VAT reduced:

- Business establishments engaged in manufacturing, construction, transportation, trading, tourism, services, food and drinks services shall be considered for a VAT reduction if they suffer from losses during the first years of VAT implementation due to the amount of VAT paid is larger than the amount of Turnover Tax p aid under the old system.

- The rate of VAT reduction to be considered for each business entity shall correspond with the loss incurred due to the above reasons, but the maximum amount of VAT reduced shall not exceed the VAT amount payable by such entity for the year of reduction.

Example: Trading company A has a 1998 inventory of VND 5 billion to be carried forward to 1999. Goods purchased in 1999 value at VND 53 billion, including VND 4 billion input VAT. Total sales in 1999 is VND 62 billion, and output VAT is VND 6.2 billion. Cost of goods sold and operating expenses in 1999 is VND 63 billion.

VAT payable in 1999 is determined as follows:

• VAT payable: VND 6.2 billion - VND 4 billion = VND 2.2 billion
• Operating loss: VND 62 billion - VND 63 billion = - VND 1 billion .

Determination of loss due to tax changes:

• Hypothetical Turnover tax payable under the old Turnover Tax law (assuming that goods sold are subject to 2% Turnover tax on taxable sale price): (VND 62 billion + VND 6.2 billion) x 2% = VND 1.364 billion.
• Difference between VAT payable and Turnover Tax payable:VND 2.2 billion - VND 1.364 billion = VND 0.836 billion.

Accordingly, company A shall be entitled to a consideration for a VAT reduction, and the VAT reduction amount to be considered under this example shall be VND 0.836 billion (corresponding to the losses caused by higher VAT as compared with the old Turnover Tax).

2. Business establishments engaged in trading the following goods and services shall be entitled to a 50% VAT reduction of the standard rate.

• Coal;
• Plough excavators, tractors, water pumps, machine tools, dynamic machines;
• Soda (NaOH), Natrihypocloxit (Na (OCl)), Calxihypocloxit (Ca(OCl)2),
• Aluminum hydroxide (Al(OH) 3), Acid Chlohydric (HCl), liquid chlor and gas chlor (Cl2), Natri Silicate (Na2SiO3));
• Goods subject to special sales tax which are traded by a trading company applying a deduction method;
• Hotels, tourism, food and drinks services;
• Software services and products (currently subject to 10% VAT rate, now reduced by 50%).

Trading companies of the above goods and services are required to indicate the VAT rate charged to goods and services at the reduced rate on their VAT invoices when selling goods and services.

Example 1: Mechanical Company A sells a tractor at VND 20 million, calculates VAT and issues a VAT invoice as follows:

• Reduced VAT is determined as follows: VND 20,000,000 x 10% = VND 2,000,000.
• Reduced by 50%, thus VAT payable is VND 1,000,000.

A VAT invoice should be written as follows:

• Selling price before VAT: VND 20,000,000
• VAT: VND 1,000,000
• Selling price after VAT: VND 21,000,000

In respect of tourism, hotel, food and drinks services industries, the 50% reduction shall be applied to goods and services which are subject to 20% VAT rate; other goods and services provided by these industries which are subject to 10% VAT rate, shall not be entitled to 50% tax reduction specified in this Circular.

Example 2: Hanoi Hotel provides room services and sells souvenirs. The tax rate applied to room service is 20%, and this rate is entitled to a 50% reduction (which equals 10% VAT rate), while souvenirs sales shall be still subject to the tax rates provided for in the law for each category of goods and services.

Example 3: A trading company buys cigarettes from a manufacturer which are subject to SST for resale. When calculating the VAT payable, the company must charge the actual 50% VAT reduced from the regulated tax rate, and claim a flat 3% deductible VAT on the purchases from the manufacturer (besides other input VAT on transport and other services with VAT invoices).

• Buying price of cigarettes from a manufacturer (for 1,000 cartons) is VND 5,800,000.
• Selling price of the Company is VND 6,000,000.
• 10% VAT on the selling price at 50% reduction: VND 6,000,000 x 5% = VND 300,000
• Selling price including VAT: VND 6,000,000 + VND 300,000 = VND 6,300,000
• Flat 3% deductible input tax: VND 5,800,000 x 3% = VND 174,000
• VAT payable: VND 300,000 - VND 174,000 = VND 126,000

(The net VAT payable may be lower than VND 126,000 if other deductible input VAT on purchases of goods and services exists).

Accordingly, enterprises may adjust their selling prices, based on the market price, the market and the amount of VAT payable of each circumstance.

VII. GUIDANCE ON VAT DECLARATION AND PAYMENT AS STIPULATED IN PARAGRAPH 1, SECTION II, PART C, CIRCULAR NO. 89/1998/TT-BTC

Business establishments are to prepare schedules of goods and services purchased and sold to attach to their monthly tax returns. However, in certain circumstances, this principle can be applied as follows:

- Goods and services retailed to end-consumers such as electricity, water, post office services, hotel services, food and drinks services, are not required to be listed invoice by invoice, but a summary of retails is sufficient.

- Goods and services purchased from retailers are permitted to be summarized on a schedule of purchases, not necessary to be listed invoice by invoice.

VIII. TO ADD TO THE END OF SECTION II, PART H OF CIRCULAR 89/1998/TT-BTC

State-owned business entities engaged in manufacturing and trading goods and services such as: lottery, electricity, cement, post and telecommunication and some other goods and services which earn higher income due to lower VAT payment as compared with the old Turnover Tax, shall have to pay BIT and additional BIT in accordance with the Law on BIT. Where net profit after BIT is still high due to lower VAT payment as compared with the old Turnover Tax payment, the business establishment shall have to pay another additional BIT to the State Budget which is calculated on the following percentage (%) of the after-tax profit:

• National lottery companies: 90%;
• Cement companies, post and telecommunication companies, sea shipping agencies: 80%;
• Other companies: 70%.

Example: The operating result of HT Cement Company shows a taxable profit of VND 40 billion, partly due to VND 10 billion lower VAT payment as compared with the old Turnover Tax (which is equal to 25% of the total taxable profit). The Company's share holders' equity is VND 120 billion.

• BIT payable under the BIT law: VND 40 billion x 32% = VND 12.8 billion
• Net profit after BIT: VND 40 billion - VND 12.8 billion = VND 27.2 billion

To determine the taxable profit subject to additional BIT, take the after-tax profit and compare with 12% of the shareholders' equity:

• Income corresponding to 12% of the shareholders' equity: VND 120 billion x 12% = VND 14.4 billion
• Additional BIT payable: (VND 27.2 billion - VND 14.4 billion) x 25% = VND 3.2 billion
• Income after BIT and additional BIT: VND 40 billion - (VND 12.8 billion + VND 3.2 billion) = VND 24 billion. Of which, the increase of profit due to the change in tax law: VND 24 billion x 25% = VND 6 billion.
• Extra-additional BIT payable: VND 6 billion x 8% = VND 4.8 billion.

Total BIT payable (BIT + Additional BIT + Extra-additional BIT) to the State Budget:

VND 12.8 billion + VND 3.2 billion + VND 4.8 billion = VND 20.8 billion.

The determination and collection of additional BIT shall be carried out at the annual tax finalization stage. In order to make a provisional tax collection, local tax offices shall base on the annual estimated profit of enterprises to determine a quarterly provisional additional BIT payment together with the payment BIT.

Pursuant to Paragraph 6, Article 1, Decree 102/1998/ND-CP issued by the Government, should a manufacturing and a trading company in the fields of fertilizers, pesticides and some other goods having inventories held as requested by the Government, and the se inventories as at 31 December 1998 are be carried forward to 1999, and should these inventories create an impact on the operating results of the company, it shall be entitled to a reduction of VAT payable on the sales of inventories to an extent that corresponds to the excess of VAT payments over the old Turnover Tax payments.

To determined a basis for VAT reduction, business establishments are required to report the inventories as at 31 December 1998 in terms of category of goods, quantity, amount, including the inventories held at the request of the Government, actual sale amount, VAT payable on the sales of inventories, and the amount of VAT to be considered for a reduction to the local tax office. Provincial and municipal tax authorities are required to check, determine and report to the Ministry of Finance for a consideration and resolution of each particular case.

In respect of business establishments that maintain large inventories in 1998 (including materials, raw materials, semi-finished products, merchandise and work in progress) to be used for production and business activities from the 1st January 1999, should they suffer losses due to the VAT payable on these inventories is higher than the old Turnover Tax, they shall be considered for a VAT reduction in accordance with Article 28 of the Law on Value Added Tax and the guidelines in Section VI of this Circular.

IX. ENFORCEMENT

This Circular will come into force from 1 January 1999, replace and add to the respective provisions specified in Circular 89.1998/TT-BTC issued by the Ministry of Finance on 27 June 1998 providing guidelines for the implementation of Decree 28/1998/ND-C P issued by the Government on 11 May 1998 regulating in details the implementation of the Law on Value Added Tax.

Should any difficulties or problems arise during the process of implementation, they should be timely reported to the Ministry of Finance for consideration and further guidance.

For the Minister of Finance

Vice Minister

Pham Van Trong

(signed and sealed)

./.