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  Banking Finance

Corporate income tax needs more guidance

Businesses pay a premium for certainty. Investments that promise high returns at little risk will always demand a higher price. Countries like Viet Nam, which hope to attract as much investment as possible from both foreign and domestic business, should do their best to draft legal systems that both reflect a stable investment environment and help to instill legal certainty.

The Corporate Income Tax (CIT) Law makes some enormous strides toward streamlining Viet Nam’s complicated tax system for foreign real estate developers, but falls short of providing the kind of black-and-white legal certainty that investors really need.

The new law, which came into effect on January 1, levies a tax of 28 per cent on the profits made from transferring the land use rights for residential real estate developed by a foreign invested enterprises (FIE). Remember, since land in Viet Nam is collectively owned, land use rights are "transferred" instead of sold.

The new CIT Law aims at replacing a complicated corporate income tax system that applied a series of different tax rates to real estate profits. Under Decree 71, which was issued in October 2001 and helped to guide the old CIT Law, tax rates could be 10, 15, 20 or 25 per cent depending on the type of structure built, the location or State development incentives.

By imposing one tax across the board, the new CIT Law may help clear up some of the old ambiguity for real estate development FIE’s – but not without creating some problems of its own. Where the CIT Law is the most lucid is also, paradoxically, where it may cause the most confusion.

The CIT Law states that the old CIT regulations that conflict with the new CIT Law shall be abrogated. Meanwhile, Article 50 of Decree 164 (which guides the new law’s implementation) includes a list of those abrogated Decrees. But Decree 71 is not on that list.

This is quite a common problem for the Vietnamese legal system. The implementation of any law passed by the National Assembly requires a multitude of Decrees from the Government and Circulars from various relevant ministries.

If the law is not amended, confusion could ensue. Particularly, businessmen don’t know whether Decree 71 is still valid or not.

Luckily, clearing up the legal differences between the Laws, Decrees and Circulars is not without precedent. For example, Decree 152 from the Government and Circular 88 issued by the Ministry of Finance have helped to manage similar confusion surrounding foreign enterprises building in

Investing and Processing Zones. Without such measures, the legal differences between these two documents could cause some very messy law suits or rough arbitration hearings between foreign companies and the State.

Vietnam Economic review - (28/10/2004)

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