The year 2007 was marked by a number of prominent and positive
developments in Vietnam. The most important milestone was the accession
to the World Trade Organisation ("WTO"). As a consequence, tariffs are
gradually being reduced and a number of sectors previously not
accessible to foreign investment are' gradually opening up. Amongst the
highlights are new regulations allowing, and setting out the guidelines
for, 100% foreign-owned banks and insurance companies, as well as
reforms allowing the implementation of Vietnam's commitments with
respect to trading and distribution activities.

Reducing the restrictions on foreign investment in certain sectors
signals the continued efforts of the Vietnamese government to encourage
increased foreign investment and to create an equal playing field with
local enterprises. In turn, local companies are expected to develop
competitive advantages to compete with foreign-invested entities in
Vietnam and to strengthen their capacity to expand into international
markets.

During 2007, a number of important tax laws and regulations were passed,
including the Law on Tax Administration ("L T A"), the Personal Income
Tax ("PIT') Law, Decree 24/2007-ND-CP ("Decree 24") and Circular
134/2007/TT-BTC ("Circular 134") on Business Income Tax ("BIT'), and
Circular 32/2007/TT-BTC ("Circular 32") on Value Added Tax ("VAT').
These laws and regulations have wide ranging implications. Certain
significant changes are summarised below.

The Law on Tax Administration

The L T A came into effect on July 1, 2007 and introduces various
administrative reforms and makes further progress towards full
implementation of a self assessment system, a practice adopted by many
tax jurisdictions internationally..

There are clearer distinctions made between penalties for different
categories of non-compliance. For instance, penalties relating to tax
under-declaration are now separated from penalties for tax evasion.
However, it remains unclear how the tax authorities will distinguish
between "tax evasion" and "under-declaration"?

The L T A provides a statute of limitations for the imposition of
penalties, but is silent with respect to the time limitation for tax
authorities to reassess unpaid taxes. As a result, the taxpayer may bear
ongoing tax risks and exposures for an unlimited period.

The extension of the annual PIT finalisation deadline from February 28
to March 31 is a welcome relief for taxpayers and will make the filing
of returns more manageable. The longer timeline will also enable
taxpayers to better understand and adjust to the new PIT Law, when it
comes into effect on January 1, 2009.

Decree 24 and Circular 134 on Business Income Tax (BIT)

Circular 134 was issued late in the year (November 23, 2007), but
applies for the whole of 2007.

With respect to deductible expenses, Circular 134 deviates from previous
regulations by providing a list of non-deductible expenses, as opposed
to the previous list of deductible expenses. This is a welcome change.

Taxpayers have expressed concerns with the changes to the cap on
advertising and promotion (" A&P") expenses. Compared with Official
Letter 1766/TCT -DTNN ("OL 1766") dated May 19,2006 certain expenses,
for instance, agent commissions and conference costs are now required to
be included in the 10% A&P cap, whilst it was previously not so under OL
1766. These changes will significantly impact taxpayers with
considerable A&P expenditure.

The new regulations now allow certain categories of business expenses to
be tax deductible, for instance, educational donation and depreciation
associated with facilities used by employees.

Circular 134 removes the tax loss registration requirement, thereby
easing the administrative and reporting burden on taxpayers. Whilst the
tax loss carried forward registration requirement had been removed,
taxpayers should still note that they can only carry forward their tax
losses up to a five-year period.

Merger and acquisition ("M&A") activities continue to become more common
in Vietnam. Under Circular 134, in certain types of deals, the
regulation allows the entity, after M&A activities, to continue enjoying
the BIT incentives that are previously granted for the remaining
incentives period, subject that the entity still meets the entitlement
to the investment incentive conditions.

The capital gain is now taxed on a transactional level, rather than
included as part of the taxable income in the periodic BIT returns.
Unfortunately, capital assignment losses cannot be offset against income
from other business activities and also cannot be offset against capital
gain from other transactions nor carried forward to offset future
capital assignment gains.

Circular 32 on VAT

Previously, promotional goods were not subject to VAT. Circular 32
issued in April 2007 now requires taxpayers to declare output VAT for
promotional goods. This new requirement significantly affects taxpayers
operating in the fast moving consumer goods industry and trading
sectors, where it is common for goods to be given away for promotional
purposes. In addition to the financial ramifications of this change,
administrative difficulties have been experienced by taxpayers.

Exported services generally can qualify for VAT zero-rating if the
services are directly provided to organisations or individuals abroad
and where the services are "also consumed" abroad. There remains no
clear definition of the term "consumption", and taxpayers will be hoping
for clarification on this issue from the tax authorities.

New Personal Income Tax Law (PIT)

After much public consultation and discussion, on November 20, 2007, the
Vietnamese National Assembly passed Vietnam's first ever PIT law,
previously the highest PIT regulation was an ordinance, passed by the
Standing Committee of the National Assembly.

As the effective implementation date is January 1,2009, taxpayers have
time to consider its implications and prepare accordingly. The new PIT
law provides a framework for subsequent implementing PIT regulations
(for example, decrees and circulars), which are currently in draft form.
Significant changes in the new PIT law compared with the current
ordinance include:

Common progressive tax rates for foreign and Vietnamese individuals.

Reductions in the top PIT rate for tax residents from 40% to 35%, as
well as in the PIT rate applicable to non-tax residents from 25% to 20%.

A broader definition of tax residents to include those having a
permanent residence (e.g. rented house) in Vietnam and the removal of
Vietnamese nationality as a criteria for determination of tax residency.

Non-employment income, such as gains from selling securities or real
estate, interest (except bank interest) and dividends will be taxable
for the first time.

The implementing PIT regulations are expected to provide further
guidance and allow taxpayers to fully prepare for implementation of this
new law.

Decision 106 outlining new import tariffs

The Ministry of Finance introduced the new import tariff, which applies
for all imports from January 1, 2008. It provides a reduction (averaging
1-6%) in import duty rates for approximately 1,700 tariff lines. This
comes on top of reductions to approximately 1,000 different tariff lines
in 2007.

Expected development in 2008

With the increasing levels of foreign direct and indirect investment,
equitisation and M&A activities, as well as local companies expanding
abroad, business transactions will become more complex.

Through continuous public consultation and efforts by the Vietnamese
government, it is hoped that this reform and development of the tax
regime will continue, including clarification certain of ambiguities
which still remain, as well as improved guidance on the taxation of
complex business transactions.

Anticipated new regulations in 2008 include amended BIT and VAT Laws.
Taxpayers should also play an active role to keep abreast of new
regulations that may impact their operations, in order to ensure proper
tax compliance.[VIR]

Oliver Massmann
International Attorney at Law

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