The Ministry of Finance has initiated the eight-year old corporate income tax (CIT) law amendment process after discovering several shortcomings.

The ministry said the amendment is expected to bring the law closer to international practice and make Vietnam’s business environment more attractive while increasing the state budget.

The currently CIT law, which replaced the turnover tax, became effective as of January 1, 1999. It was previously amended in 2004 to minimize discriminatory treatment of both foreign and domestic investment.

Analysts say the CIT law has played a significant role in Vietnam’s current market success. The investment environment has been rapidly improving in recent years and it is expected that investment capital will make up 40% of GDP this year.

But Associate Prof Bach Thi Minh Huyen, a consultant, asserts the law has revealed some shortcomings in its eight years.

First of all, according to Mrs. Huyen, the current CIT law tax incentives are too ‘generous.’ Some enterprises can enjoy exemptions for the first four years of operation and 50% tax reduction for the next nine or enjoy a preferential tax rate of 10% for 15 years.

Mrs Huyen said the incentives prompt investors to take advantage by shutting down their businesses after some years and setting up new entities that are back at step 1 on the incentive timetable.

53 sectors are currently eligible for tax incentives as well as 55 out of 64 provinces. Meanwhile, Mrs Huyen has found that the incentives make no sense because no investor wants to establish a business in remote areas, regardless of the benefits.

Mrs Huyen says it is necessary to support enterprises in several specific fields and special areas but thinks the Government should provide support through financial aid or staff training assistance, rather than tax incentives

Regarding the possible amendments, Vu Hong Loan, Deputy Head of the Financial Department of Enterprises under the Ministry of Finance, said drafters are considering lowering the tax rate from 28% to 25%.

“If Vietnam does not lower its tax rate, its business environment will be less attractive,” said Mrs Loan.

She also mentioned possible changes to maximum advertisement and promotion activities spending regulations. Currently, enterprises must not spend over 10% of total expenses on these activities, which is considered too low when compared to the actual expenses. Fiercer competition has forced enterprises to pay more for advertisements.

The CIT law also sets fixed amortization rates, which experts say does not encourage enterprises to update technology and equipment, thus weakening Vietnamese enterprises’ competitiveness. Mrs Loan said that it would be better to let enterprises decide amortization rates.

It is expected that CIT Law amendments will be passed in the first half of 2008.

Source: VIR.