Vietnam adopted its first Law on VAT in 2008 (as a replacement of its turnover tax). The law went into effect on January 1 2009, and specified which items were subject to VAT as follows:
"Goods and services used for manufacturing, business and consumption in Vietnam shall be the objects subject to value added tax, except for the objects stipulated in article 5 of this Law."
Article 5 states that the following goods and services shall not be subject to VAT: "…Credit services; securities business activities; assignment of capital; and derivative financial services including interest rate swaps, forward contracts, futures contracts, options, foreign currency sales and other derivative financial services as stipulated by law…'
Various government decrees issued as guidance for the implementation of the law confirmed that interest is not subject to VAT. However, the MOF's circulars, which detailed the law and its decrees, limited its interpretation, specifying that only interest on loans made by financial institutions or credit institutions as per Vietnamese law would not be subject to VAT. This was legally understood to mean that for non-credit institutions, any interest on loans made would be subject to VAT, although in practice, no tax authorities or taxpayers followed this interpretation.
However recently, to mitigate tax evasion through transfer pricing, Vietnamese tax authorities have conducted many audits, especially of foreign-owned enterprises. Shareholder loans have been one of the main points of interest. As a result, certain regulators and tax authorities have raised the issue as to whether the loan interest of non-credit institutions should be subject to VAT as per the MOF's circulars. To answer this, the MOF sought an opinion from the State Bank of Vietnam on "not-subject-to-VAT credit activities", including loans (and the interest generated by these) made by non-credit institutions. However, there was no agreement with the SBV, since from the SBV's perspective, credit activities (for example loans) can only be provided by credit institutions under Vietnam's Law on Credit Institutions (LOCI); loans made by non-credit institutions are not covered under the LOCI, and thus cannot be considered as "credit activities". As a result, the MOF issued Circular 6, which indicated that loan interest received by non-credit institutions is subject to VAT at the rate of 10%.
This new MOF clarification caught the attention of taxpayers, especially foreign-owned enterprises that have a shareholder loan structure already in place. As an indirect tax, it is not an actual cost to the lender, but cash flow could be an issue. Also, from a legal perspective, whether a particular good or service is subject to VAT should not be dependent on who sells or provides it. In principle, the subject of the VAT is the good or service, not the enterprise providing that good or service. A credit institution is also an enterprise doing business for profit. From a commercial perspective, loans made by both credit institutions and non-credit institutions have the same nature. A different treatment for VAT would not be reasonable and is unfair to taxpayers.
Given these facts, the MOF sought further instructions from the prime minister in August-2012. The prime minister agreed in principle that loan interest received by non-credit institutions is not subject to VAT (see Ruling 1551/TTg-KTTH dated September 26 2012). This is legally in line with the VAT law and Vietnam's Civil Code, which allows property loan transactions between parties. Article 471 of the Civil Code 2005 on contracts for property loans reads as below:
"A contract for property loan is an agreement between the parties whereby the lender transfers the property to the borrower; when the loan is due, the borrower must return to the lender the property of the same type in the same quantity and of the same quality, and shall have to pay the interest only if so agreed upon or provided for by law."
As such, loans made by non-credit institutions should be treated in the same way as those of credit institutions. Given this, the MOF has issued official letter 17164/BTC-TCT (dated December 11 2012) to tax departments for guidance on the prime minister's ruling. However, it is still unclear as to whether the ruling will be retroactive to March 1 2012. Regardless, one sure thing is that shareholder loans for most foreign-owned enterprises in Vietnam will now be subject to 5% withholding tax only (income tax portion).
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