CIRCULAR

GUIDING THE IMPLEMENTATION OF THE VALUE ADDED TAX (VAT) ON CREDIT AND BANKING ACTIVITIES

Pursuant to Law on Value Added Tax No. 02/1997/QH9 of May 10, 1997;
Pursuant to the Government's Decree No. 28/1998/ND-CP of May 11, 1998 detailing the implementation of the Law on Value Added Tax;
Pursuant to the Ministry of Finance's Circular No. 89/1998/TT-BCT of June 27, 1998 guiding the implementation of the Government's Decree No. 28/1998/ND-CP of May 11, 1998 detailing the implementation of the Law on Value Added Tax; and
Depending on the business particularities of credit and banking organizations;
The Ministry of Finance provides guidance for the implementation of Value Added Tax on activities of credit and banking organization as follows:

I. SUBJECTS LIABLE AND NOT LIABLE TO VAT AND THE VAT PAYERS

1. Liable to VAT are the following business activities:

- Banking, credit and treasury services, which include:

+ Opening of accounts;

+ Services of discounting trade bills and other valuable papers (including rediscounting and pledging of trade bills and valuable papers).

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+ Payment services, which include;

* Provision of means of payment;

* Performance of payment services for clients;

* Performance of international payment services;

* Performance of services of collection encashment, payment encashment, remittance and remittance of foreign currencies by overseas Vietnamese; and

* Performance of other payment services

+ Commission and agency transactions in the forms of commission, acting as commissioned agencies in those fields related to banking activities, including management of property and investment funds of organizations and individuals under contracts.

+ Services related to banking activities such as keeping of valuable exhibits, valuable papers; leasing out safes, pawning, and

+ Other service activities

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- Trading in gold, silver and gems

2. Subjects not liable to VAT vis-a-vis the stipulated taxation are capital leading and financial leasing by banking, credit, financial companies, investment funds and lawful capital transfer activities.

3. VAT payers are organizations and individuals licensed to carry out credit and banking activities in conformity with the stipulations of the Law on Credit Institutions and other organizations carrying out similar activities, hereafter referred collectively to as credit institutions.

II. METHODS OF CALCULATING VALUE ADDED TAX

1. Methods of tax deduction: The method of tax deduction shall be applied to banking service activities (except for trading in foreign currencies, gold, silver and gems, etc.)

Payable VAT = Output VAT (1) - The deductible input VAT (2)

In which:

(1) The output VAT shall be determined by multiplying (x) the tax calculation prices with the 10% VAT tax - rate. The tax calculation prices shall be the untaxed ones inscribed on the value added invoices.

Credit organizations when providing services shall issue value added invoices which indicate clearly the untaxed service prices, the Value Added Tax and the total sum which buyers shall pay. Where more than one service is rendered for one client in a month, a following- up list shall be drawn up so that one value added invoice may be issued at the end of the month.

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For units that have turnovers of goods and services liable to VAT (banking service turnovers) and turnovers of goods and services not liable to VAT (turnovers from loan interests collection), they will make separate accounting of the input VAT of the goods and services used for taxable activities in order to determine the deductible input VAT. Where such a separate accounting is impossible, the method of allocation of the total turnover-based input tax shall be applied. The total turnover shall comprise turnovers from banking services, turnovers from loan and deposit interests and the differences from trading in foreign currencies, gold, silver and gems.

Example 1: Commercial Bank A in a taxation period presents the following data:

- Revenue from loan and deposit interests (turnovers from non- taxable services) VND 17,000 million

- Differences from trading in foreign currencies, gold and silver (these turnovers are not liable to tax by deduction method) VND 1,000 million

- Revenues from banking services (turnovers from taxable services) VND 2,000 million

- Output VAT on banking services (10%) VND 200 million

- Input VAT applied to activities liable and not liable to tax VND 1,800 million

Supposing that the Bank is unable to make separate accounting of the input VAT of activities liable and not liable to tax, the deductible input VAT o n the activities liable to tax shall be calculated in accordance with the above stipulations as follows:

+ Determination of proportion of the service turnovers liable to VAT on the total service turnovers liable and not liable to tax:

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x100 = 10%

(VND 17,000 million + VND 1,000 million + VND 2,000 million)

+ The deductible input VAT:

VND 1,800 million x 10% = VND 180 million

+ The payable VAT on banking services shall be:

VND 200 million – VND 180million = VND 20 million

Where part of the VAT on the goods, services and fixed assets purchased during the period of separate accounting is used for taxable services, part for non - taxable services and the remaining part of the input VAT is used commonly for both taxable and non - taxable services, the input VAT on taxable services shall be determined by the input tax on purchased goods and services used directly for the taxable service activities plus (+) the input tax used jointly, which is allocated as mentioned above.

Example 2: Continued from example 1, supposing that of the total input VAT of VND 1,800 million on the purchased goods and services can be accounted separately by the bank as follows:

- The part used for taxable services is VND20 million

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- The part used jointly for the two services mentioned above is VND1,680 million.

According to the aforesaid stipulations, the taxable input VAT and the payable tax of banking services shall be determined as follows:

+ The VAT accounted separately for taxable services is VND20 million

+ The jointly accounted part of the VAT allocated to the taxable services

VND 1,680 million x 10%= VND 168million

+ The deductible input VAT of the taxable services:

VND 168 million + VND20 million = VND 188million

+ The payable VAT of banking services:

VND 200 million - VND 188 million = VND 12 million.

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For credit organizations that carry out both credit activities and banking services and trading in gold, silver, gems, foreign currencies and other goods and services, the VAT payable for the trading in gold, silver, gems and foreign currencies shall be calculated separately according to the method of direct calculating of tax over the Added Value.

The VAT payable for the trading in gold, silver, gems and foreign currencies shall be determined by multiplying (x) the Added Value with the tax - rate, in which:

Added Value

=

The sale turnovers of gold, silver, gems and foreign currencies (A)

-

The corresponding purchase turnovers of the gold, silvers, gems, foreign currencies (B)

The VAT rate for trading in gold, silver and gems is 20 per cent and for trading in foreign currencies is 10 per cent.

a. For foreign currency business: Foreign currency business activities are those of buying and selling foreign currencies. The units shall make separate declarations for tax calculation of these activities by the method of direct calculation on the Added Value. The Added Value of foreign currency business activities = (A) - (B), in which:

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(B)

The corresponding purchase turnover

=

The amount of foreign currencies sold

x

The average actual buying rate

(1)

(1) =

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+

Purchase turnove during the period

Amount of foreign currencies at the beginning of the period

+

Amount of foreign currencies bought during the period

Every month, the units shall open books to make detailed accounting for the actual buying and selling prices and the buying and selling quantity of each kind of foreign currencies. Where currencies are sold in advance, the determination of the corresponding purchase turnovers shall be based on the average actual buying rates of the month in question; if such rates are not available, such determination shall be based on the average actual buying rates of the previous month.

Where the difference between the turnovers from sales of foreign currencies and the corresponding purchase turnovers if a negative figure, the negative difference shall be carried forward to the next month for deduction to the added value of that month. Such balancing shall be made only for the months of the same year (calculating by the solar year or the permitted fiscal year).

For example: In a taxation period at a bank conducting foreign currency business, (supposing that it can make separate accounting for that business), the following data are presented:

- Cash balance US$ 100,000 converted into VND = VND 130 million

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- Sale during the period US$ 80,000 collected in VND = VND 115 million

The payable VAT shall be determined as follows:

+ The turnover of foreign currencies bought in corresponding to US$ 80,000 sold out is US$ 80,000 bought in; if calculated by the average prices of the foreign currency balance bought in during the period, it will be:

VND 130 million. + VND 70 million

x  US $ 80,000 = VND 106 million

US $ 100,000 + US $ 50,000

The payable VAT:

(VND 115 million - VND 106 million) x 10% = VND 0.9 million

b) For gold, silver and gem business:

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Where credit business establishments engage in processing gold, silver and gems and if it is possible to make separate accounting of these processing activities, calculation of tax by deduction method shall be applied and the 10%- VAT rate shall be levied. If separate accounting is impossible, these activities shall be calculated as trading business activities by the method of direct calculation of tax on the Added Value at the rate of 20%.

III. DECLARATIONS FOR VAT PAYMENT

Credit institutions licensed to operate in accordance with the provisions of law, that conduct business in goods and services liable to VAT shall be subject to declarations and payment of such tax, concretely:

1. Credit institutions licensed to conduct independent business shall make declarations and payment of VAT in the localities where their head offices are located (localities herein are provinces and cities).

2. Where the above-said credit institutions open their branches and dependent units in provinces and cities, such branches and dependent units shall make VAT declarations and payment at Tax Departments in provinces and cities where their head offices are located. Branches and dependent units of credit institutions in provinces and cities shall have to make general declarations and payment of VAT for their subordinate dependent units (i.e. transaction counters, transaction chambers, etc.).

For example: The X credit institution has 3 branches A, B and C, in Y province, these 3 branches shall make declarations and payment of tax at the Tax Department of Y province. If branch A opens a, b, c dependent units, then a, b, c shall be liable for drawing up output and input tax lists to forward to branch A and the latter shall have to make general declarations and payment of VAT for the entire goods and services traded in the period (including a, b, c units).

The subjects liable for making declarations to pay VAT listed herein shall have to declare the payment of VAT on the taxable goods and services traded in by their subordinate units in accordance with forms No.1/TD, 1a, 1b and 1c (not attached herewith).

Where branches and dependent units of credit institutions have their subordinate dependent units, the latter will only draw up forms 1a, 1b and 1c in duplicate, one shall be kept as record at the units and another shall be sent to the superior branches and units within the first five days of the following months.

The declarations according to forms 1/TD, 1a, 1b and 1c referred to above shall be made on a monthly basis at credit institutions, branches and dependent units of credit organizations and shall be forwarded to tax offices within the first ten days at the latest of the following month. With regard to those branches and dependent units that have subordinate units, they shall make declarations according to form 1a, 1b and 1c for the goods and services traded in the branches and shall collect data from the subordinate dependent units to make declarations by form 1/TD.

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Invoices and vouchers relating to the trading of gold, silver and gems shall ply with the stipulations in Section IV of Circular No. 89/1998/TT-BTC of June 27, 1998 of the Ministry of Finance.

1. For the sale of foreign currencies: When selling foreign currencies, units shall issue sale invoices. Where foreign currencies are sold by transfer transactions, the units shall make detailed lists to follow up the sale turnover of each kind of foreign currencies and shall issue invoices at the end of the month to serve as the basis for determination of the amount of foreign currencies sold.

2. For business in banking services: When collecting service charges, the units shall issue the added value invoices. Where current payment vouchers are used and supplemented by tax codes, the amount of service charges, the VAT and the total payment, they shall be considered added value invoices.

3. For business establishments buying goods which are gold, silver, gems and foreign currencies from non-business individuals, if without prescribed invoices, they shall draw up lists of purchased goods in form 04/GTGT promulgated together with the Ministry of Finance's Circular No.89/1998/TT/BTC mentioned above. In this case, goods bought in shall be calculated into the purchase turnover in order to calculate the Added Value and the VAT by the direct method.

4. For transactions of buying and selling foreign currencies that arise within the country, the invoices for sales of foreign currencies must be made as prescribed. Where the purchase of foreign currencies arises in foreign countries, banks must open books to make separate accounting of buying prices and keep original vouchers through transactions with the foreign parties for record in accordance with the stipulations of the Ordinance on Accounting and Statistics and the current Accounting System .

V. ORGANIZATION OF IMPLEMENTATION

1. This Circular takes effect from January 1, 1999. Other matters not referred to in this Circular shall comply with the Ministry of Finance's Circular No.89/1998/TT-BTC of June 27, 1998 guiding the implementation of the Government's Decree No.28/1998/ND-CP of May 11, 1998 detailing the implementation of the Law on Value Added Tax.

2. The banks and credit institutions that have subordinate units shall have to guide such subordinate units to make declarations for calculation and payment of the VAT in accordance with the guidance hereof.

The units shall report to the Ministry of Finance any difficulties that arise in the course of implementation of this Circular for consideration and resolution.

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FOR THE MINISTER OF FINANCE
VICE MINISTER




Pham Van Trong