|By Ta Hong Thai – Partner, head of Corporate Tax KPMG Vietnam|
The prime minister’s view is not just his desire as the leader of the government but is also an expectation of enterprises when almost all of us feel disappointment after a statement was made elsewhere that Vietnamese enterprises “are not competent enough to produce screws”.
The Ministry of Science and Technology (MoST) has proposed several initiatives aiming to improve the legal system in terms of mechanisms and policies for promoting science and technology activities and innovation, including investment regulations, public investment, state budget, and tax regulations.
Specifically, it requested to make the Science and Technology Development Fund an obstacle-free source of capital towards investment in innovation in technology. It is requested that the Ministry of Finance (MoF) promptly amend the joint Circular No.12/2016/TTLT-BKH&CNBTC guiding on the spending content and management of the fund.
Many enterprises have not been aware of the fund nor understand its benefits. In a way, the attempt to reach the businesses and bring these regulations into force have not been very effective.
The Law on Science and Technology was passed in Vietnam in 2000. It is a set of codes that specify the state’s policies to ensure that science and technology development constitutes a primary national policy.
The state encourages the establishment of such a fund on a national, local, and organisational scale. At the same time, the state commits to provide tax incentives in accordance with the regulations to enterprises that engage in the innovation and improvement of technologies. Therefore, businesses can benefit from tax incentives when participating in the activities of technology innovation and enhancement through the science and technology development fund.
The spirit of the laws is clear, but what about the tax regulations? According to the Law on Corporate Income Tax (CIT), enterprises can provide up to 10 per cent of their annual income before tax to establish the science and technology fund.
With this provision, the CIT law provided further details to implement the Law on Science and Technology and allowed enterprises to spare their taxable incomes for establishing the fund, meaning the enterprises do not have to pay tax supposed to be levied on the amount spared for this fund. At prima facie, this regulation seems to give great benefit to enterprises when they do not have to pay CIT and enjoy the tax saving amount, but this is not actually the case.
The CIT law also stipulates that enterprises are not allowed to claim expenditures spent from their science and technology funds as deductible operating expenses when determining taxable incomes during the period that the expenses incurred.
The reality is that when the enterprise incurs technology research and development (R&D) expenses, and if the expenses are spent from the fund, these expenses are not considered as deductible when calculating CIT liability. The government’s encouragement seems to be a temporary deferral of tax when contributing to the fund, the enterprise will pay back tax to the government later by not claiming deductible expenses when they actually incur science and technology development expenses.
It seems illogical if an enterprise is enjoying incentives like tax exemptions and reductions as result from investment in industrial parks, economic zones, or funding in difficult areas or encouraged industries.
In addition, the CIT law also stipulates that within five years from the starting date of the fund, if an enterprise does not utilise it, utilise less than 70 per cent, or utilise it for inappropriate purposes, it will be subjected to the collection of CIT, which is calculated based on the actual amount contributed to the fund plus interests on such collected amount. Obviously, the time period for enterprises to enjoy the benefit of tax deferral as a cash advance for this fund is not much.
The MoF has issued very strict regulations on the use of the fund under joint Circular 12 regarding the organising, managing, registering, reporting, and other necessary internal procedures for project approval, expenses approval, and fund transferring to other affiliated enterprises. This could reasonably be a mandatory requirement applicable to state-owned enterprises while for the remaining private enterprises, it should not be acceptable as there are many complications hindering flexibility in using internal resources with the benefit are not clear and not significant, as mentioned above.
It is prominent that the incentive policies through the mechanism of setting up and using the fund is not appropriate or practical. Therefore, for many years, these policies have not been widely applied by enterprises.
Not only Vietnam, other countries also have strong focus on science and technology development and providing incentives for the R&D activities of enterprises.
Many governments encourage enterprises to invest in the R&D activities with a range of support, especially tax policies like tax credit mechanism, double expense deduction, or super tax deduction.
For the tax credit mechanism, if an enterprise incurs R&D expenses, this enterprise has the right to use a percentage of the expenses to directly offset against their payable tax amount when declaring annual tax.
In Taiwan, for example, businesses can deduct from 10-15 per cent of their total R&D expenses against their annual income tax payable amount, although the government restricts the deduction to be no more than 30 per cent of the tax payable in the year. However, this is the actual amount of funds that businesses can be subsidised by the state. Japan, South Korea, New Zealand, Australia, and many other markets also apply the same policy.
Malaysia allows a deduction up to 200 per cent, which means that for one dollar expense incurred, two dollars of taxable income will be deducted. The state then subsidises the tax amount associated with the additional deductible expenses. Singapore even gives a deduction for up to 250 per cent, and China 175 per cent.
Tax incentives are an effective instrument when one government implements policies to encourage science and technology development. In fact, the current tax laws have provided tax incentives for high-tech businesses, businesses applying high-tech, software manufacturing businesses, and supporting product manufacturing businesses, etc.
However, R&D costs are incurred at many different stages of different businesses at different scales, and more importantly, these costs are significantly important when reviewing the objective of the laws on science and technology which is to improve the national scientific and technological capability.
In Vietnam, the limited state budget makes it challenging to provide effective support as in other countries. Nonetheless, given the reality of practice that enterprises are not interested in the policies despite availability for many years, it is essential to review these policies and consider amendments.