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NEWS UPDATES 16 May 2010

Vietnam: Tax on foreign businesses to rise in June

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Foreign investors in Vietnam are set to be rocked by a higher foreign contractor tax on interest derived from bonds and certificates of deposit, reported VietNamNet Bridge.

Under Circular 64/2010/TT-BTC on tax obligations applicable to foreigners doing business or earning income in Vietnam, effective from June 7, 2010, interest a foreign organisation receives from bonds, except government bonds, and certificates of deposit (CDs) will be taxed at 10 per cent. Circular 64 amends Circular 134/2008/TT-BTC dated December 31, 2008.

Previously, under Circular 134, interest from bonds was subject to a much lower effective tax rate of 0.1 per cent times the face value of the bond plus interest. Do Thu Ha, a tax partner of KPMG Vietnam, said the new 10 per cent rate would “significantly raise tax costs” in comparison with Circular 134.

“Under Circular 134, the tax implications on interest received from bonds and CDs were unclear, leading to inconsistent interpretations on the interest. Circular 64 has clarified this issue. Transfer of bonds and CDs are now treated the same as transfer of securities and subject to tax at 0.1 per cent the total transfer’s value,” Ha told VIR.

Hoang Gia Hiep, deputy general director of Vinashin Finance Company (VFC), called Circular 64 “a shock for the local bond market” because the bond market had desired government moves to lure back foreign indirect investment capital sources to recover.

Hiep said the negative influences on foreign investors and Vietnam’s bond market were certain as the tax difference level would be 50 times greater. “Ordinarily, the principal and interest from bonds will be two times higher than the principal. Therefore, the tax rate of 10 per cent on interest will be 50 times higher than the old rate of 0.1 per cent on the principal and interest,” Hiep said.

Deloitte Vietnam tax partner Tom McClelland said the withholding tax on interest should be reduced or eliminated rather than increased. “I have been lobbying for this for some time. As Chair of the Eurocham Tax Committee I included a request for exemption from withholding tax in the tax paper in the 2009 Eurocham White Book,” said McClelland.

“We note that the major cost of infrastructure projects is the funding cost. In this regard the interest withholding tax is a significant issue and can determine whether a project is viable or not.

The non-resident lender will often exploit the inequality of bargaining power so as to force the borrower to bear the cost of the withholding tax thus increasing the cost of borrowing,” said the white book.


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