LOGO THRESHOLD DETERMINATION- SIMPLIFICATION PROVISIONS General Department of Taxation (GDT), S.R. Vietnam INTERNATIONAL TAX DIALOGUE CONFERRENCE

Company Logo CONTENT I. Overview of MSMEs in Vietnam. 1.Micro and small businesses segmentation 2.Tax administration 3.Accounting for Business households and small Incorporated Businesses II. VAT calculation methods. III. Challenges of VAT Administration. IV. Recommendations on simplifying VAT policy.

Company Logo  There are approximately 300,000 SMEs, including private enterprises, cooperatives and around 3 million business households. 1. Micro and small businesses segmentation  According to the law, SMEs are divided into 3 levels: micro, small and medium- sized levels in accordance with the size of total liabilities (total liabilities are equivalent to total assets as specified in the Balance Sheets of business establishments) or the average number of labor (total liabilities is preferential criteria). Detail is as follows: I. OVERVIEW OF MSMEs IN VIETNAM

Company Logo I. OVERVIEW OF MSMEs IN VIETNAM Size Sector Micro-sized Enterprises Small-sized EnterprisesMedium-Sized Enterprises The number of employees Total capital (assets) The number of employees Total capital (assets) The number of employees I. Agriculture, Forestry and Aquaculture Less than 10 employees Less than 20 billion VND From more than 10 to 200 employees From more than 20 to 100 billion VND From more than 200 to 300 employees II. Industry and Construction Less than 10 employees Less than 20 billion VND From more than 10 to 200 employees From more than 20 to 100 billion VND From more than 200 to 300 employees III. Trade and Service Less than 10 employees Less than 10 billion VND From more than 10 to 50 employees From more than 10 to 50 billion VND From more than 50 to 100 employees

Company Logo 2. Tax administration  As for tax administration, Vietnam Tax Authority is administering 1.4 million business households (unincorporated businesses) and about more than 300,000 non-state businesses (incorporated).  There are more than 700 district tax office in 63 provinces and cities, which are responsible for tax administration of SMEs and business households. Tax administration is moved from tax instruments-based administration to function-based administration.  The small business households paying presumptive VAT are assigned to communes, who collect taxes. In doing so, the Tax Authority can focus resources on administering big business households. I. OVERVIEW OF MSMEs IN VIETNAM

Company Logo 3. Accounting for Business households and Small Incorporated Businesses  For Business households (i) The business household accounting regime as regulated by the MoF Decision is based on accrual accounting principle instead of cash accounting. (ii) The tax laws (both PIT and VAT) offer a rather favorable tax treatment for businesses with no bookkeeping.  For Incorporated Businesses (i) Accounting is too complex (26 standards, 7 books) (ii) Preparing detailed explanatory notes and sub items I. OVERVIEW OF MSMEs IN VIETNAM

II. VAT CACULATION METHODS Credit method Direct method Direct calculation on value added Declared turnover multiplied by fixed ratio to estimate value added and tax liability Inposed turnover multiplied by fixed ratio to estimate value added and tax liability

Company Logo II. VAT CACULATION METHODS Legal formBookkeeping levelVAT method - Corporations, -Sole proprietors, - Partnerships With regular booksCredit method Business households/ Individual entrepreneurs Books/ full accountingCredit method Books covering sales and expenses Direct method on value added (subtraction) Basic records on salesTurnover rate multiplied by fixed ratio to estimate value added and tax liability No booksTurnover imposed by GDT, presumptive rate applied.

Company Logo Firstly, the application of VAT calculation by direct method on value added is an unique characteristics of Vietnam tax system, because of the cascading effect. Secondly, the efficiency in VAT administration is low. Thirdly, the form of payment among business households themselves and consumers is mainly in cash. Moreover, compliance level of households is not high, thus, the tax authority has faced huge challenges in determining their turnover and taxable income as the basis for tax calculation. Fourthly, the tax presumption method based on the range subjectively issued by MOF has created a preferential tax regime for business households and discourage business households to maintain proper accounting books as well as incorporation of businesses. III. CHALLENGES OF VAT ADMINISTRATION

Company Logo 1.To establish and turnover-based threshold for VAT exemption; 2.To establish an turnover-based threshold for VAT registration; 3.To segment taxpayers to reduce the filing frequency; 4.To move towards a single positive VAT rate and reduce the items exempt from VAT; 5.To introduce the simplified accounting and bookkeeping regimes for Business households and SMEs; 6.To conduct a taxpayers outreach and training campaign. IV. RECOMMENDATIONS ON SIMPLIFYING VAT

Company Logo  For VAT exemption : Business households with turnover below this turnover level are not liable for VAT. It is calculated that this VAT exempt turnover level is 50 million VND (2,600 USD) per year.  For VAT Registration : It is calculated that this turnover-based threshold is about 2.5 bill VND (about 130,000 USD). All businesses with turnover above the VAT registration threshold must pay VAT under the only one method, which is the credit method. Apply country average instead of regional- specific rate, distinguish between trade and service. It is calculated that this percentage rates could be from 2% to 6%. To establish an turnover-based threshold for VAT exemption and registration;

Company Logo  Businesses with annual turnover from more than 20 bill VND (1.1 mill USD) will file VAT on a monthly basis.  Businesses with annual turnover from 10 bill VND (550,000 USD) to less than 20 bill VND will file VAT on a quarterly basis.  Businesses with annual turnover from 2.5 bill VND (130,000 USD) to less than 10 bill VND will file VAT on a six-monthly basis.  Micro businesses, business households with annual turnover from more than 50 mil VND (2,600 USD) to less than 2.5 bill VND (130,000 USD) will file VAT on an annual basis. To segment taxpayers to reduce the filing frequency

Company Logo  It is proposed to move towards one positive VAT rate – estimated to be about 8%;  Reducing the number of VAT exempt items from 26 groups to about 15 groups. To move towards a single positive VAT rate, reduce the items exempt from VAT

Company Logo To introduce the simplified accounting and bookkeeping regimes for MSEs BusinessesAccounting / Bookkeeping Medium sized enterprises above VAT registration threshold → Simplified accrual accounting. In particular: preparation of financial statements in abridged, simple, or condensed form. No need to prepare detailed explanatory notes and sub items. Small enterprises below VAT registration threshold → Cash book plus preparation of simple financial statements Micro enterprises→ Simple cash records

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