CIRCULAR

GUIDING THE DISTRIBUTION OF AFTER-TAX PROFITS AND MANAGEMENT OF FUNDS IN STATE ENTERPRISES

Pursuant to the Government’s Decree No. 59/CP of October 3, 1996 issuing the Regulation on financial management and business cost-accounting at State enterprises and Decree No. 27/1999/ND-CP of April 20, 1999 on amendments and supplements to the above-said Decree No. 59/CP;
The Ministry of Finance hereby guides the distribution of after-enterprise income tax profits and management of funds in State enterprises as follows:

I. OBJECTS AND SCOPE OF APPLICATION

This Circular shall apply to State enterprises engaged in business activities, including corporations, economic cost-accounting member enterprises of corporations and centrally- or locally-run independent enterprises of all economic sectors.

State enterprises engaged in public-utility activities and established under the Government’s Decree No.56/CP of October 2, 1996; as well as enterprises attached to training and research institutions, and established under the Prime Minister’s Decision No.68/1998/QD-TTg of March 27, 1998 shall comply with separate profit distribution regime and not be governed by this Circular.

II. DETAILED GUIDANCES

A. ENTERPRISES’ PROFITS

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a/ Profits from business activities: is the difference between the total revenue from and the total cost of products and services, which have been sold in a fiscal year of the enterprise.

b/ Profits from other activities shall include:

- Profits from financial activities, which means the revenue therefrom is bigger than the expenditure thereon, including asset leasing; securities trading; foreign currency trading; interests on bank deposits being business capital; interests on capital loans; stock dividends and shared profits from capital contributions to joint-venture(s) or business cooperation; reimbursement of the balance of the reserve for securities investment devaluation.

- Profits from irregular activities, which means the revenue therefrom is bigger than the expenditure thereon, including: payable amounts, which cannot be paid due to the creditors’ faults; bad debts which have been approved for cancellation but now recovered; profits generated from the ownership right or the right to use assets; revenue from redundant supplies and assets, after making up for losses; difference arising from the liquidation and sale of assets; profits accumulated from the previous years and detected in the current year; reimbursement of balances of the reserves for reduction of unsold goods’ prices and for bad debts; deductions for product warranty, which remain after the warranty duration has expired.

2. The State leaves the after-enterprise income tax profits to the enterprises so that the latter may supplement their business capital, set up financial reserve funds to partly make up for risks and, at the same time, care for material interests of laborers working at the enterprises.

B. DISTRIBUTION OF AFTER-TAX PROFIT

After transferring losses according to Article 22 of the Law on Enterprise Income Tax and paying income tax as prescribed by law, an enterprise shall distribute its remaining profit according to the following order:

1. To offset the previous years’ losses, which cannot be accounted into the pre-tax profits;

2. To pay a fee for the use of the State budget capital according to the current regulations;

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4. To cover the actual expenses, which cannot be accounted into the reasonable expenses when determining the taxable income;

5. To share interests to the capital contributors according to the business cooperation contracts (if any);

6. The profit amount remaining after the deductions (mentioned in Points 1, 2, 3, 4 and 5) have been made, shall be distributed as follows:

6.1. 10%- for the financial reserve fund. When this fund’s balance is equal to 25% of the enterprise’s charter capital, the deduction shall no longer be made;

6.2. At least 50%- for the development investment fund;

6.3. 5%- for the severance allowance reserve fund; when the fund balance is equal to the actual 6-month salary payment by the enterprise, the deduction shall no longer be made;

6.4. For a number of particular branches (such as commercial banks, insurance…) where the establishment of special funds with after-tax profit is required by law, the enterprise shall set up such funds according to the provisions of law;

6.5. For dividend distribution in case of issuing shares;

6.6. The profit amount left after the establishment of the funds (mentioned in Points 6.1, 6.2, 6.3, 6.4 and 6.5) shall be deducted for the establishment of the reward fund and the welfare fund. The maximum deduction level for both funds shall be, based on the profit proportion against the State capital (the State capital referred here is the arithmetical mean of the State capital balance by January 1st and that available by the end of every quarter of a year) and made as follows:

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- The enterprise’s above-said profit proportion of the current year is equal to or higher than that of the preceding year.

- The enterprise invests in technological renovation or business expansion during the enterprise income tax exemption period under the Law on Domestic Investment Promotion, provided that its profit proportion is lower that that of the pre-investment year.

b/ The actual 2-month salary amount, if the profit proportion of the current year is lower than that of the preceding year.

The enterprise’s Managing Board or director (for enterprises without managing boards) shall, after consulting the trade union’s executive committee, decide the deduction level for each fund.

The profit amount left after deductions have been made for the establishment of the reward fund and the welfare fund as mentioned above shall be fully added to the development investment fund.

7. Procedures and time for the fund establishment deduction:

7.1. On the basis of the quarterly financial reports on the actual profits, the enterprise shall declare and pay the enterprise income tax as prescribed by law; the remaining profit shall be temporarily deducted into the funds stipulated in Section II above, provided that the temporary deduction amount for each fund shall not exceed 70% of the total after-tax profit of that quarter.

7.2. After publicizing its yearly financial report under the guidance of the Ministry of Finance, the enterprise shall be entitled to distribute all the after-tax profit of the year according to the stipulations in Section B, this Circular.

C. PURPOSES OF THE USE OF THE ENTERPRISE�S FUNDS

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1.1 Supplement the State’s business capital:

- To invest in the business expansion and renovation of technologies, equipment and working conditions of the enterprise;

- To contribute capital to joint venture(s), purchase shares and/or contribute stocks according to the current regulations;

- For State enterprises performing tasks of buying and processing agricultural, forestry and aquatic products, they shall be entitled to use this fund to make direct investment in the development of raw material areas or lend capital to other economic sectors for the development of areas of raw materials to be supplied to the enterprises.

Basing themselves on the investment demand and the fund capacity, the managing board or the director (for enterprises without managing boards) shall decide the investment form and measures according to the principle of efficiency, capital preservation and development.

1.2. Make deductions for remittance to the development investment fund of the State corporation (if the enterprise is a member of such corporation) according to the rate annually decided by the corporation’s managing board.

1.3. In case of necessity, the State may mobilize part of the development investment fund of an enterprise for the development investment in another State enterprise. The Ministry of Finance shall, after consulting the agency that has decided the establishment of the enterprise, decide such mobilization.

2. The financial reserve fund is used to:

2.1. Make up for the remaining asset losses or damage incurred by the enterprise during the course of its business, after it has been compensated for by the loss- or damage-causing organization(s) and/or individual(s) and the concerned insurance organization.

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3. The reserve fund for severance allowances is used to:

3.1. Provide financial support for laborers, who have worked at the enterprise for one year or more and who now temporarily lose their jobs, according to the regulations of the State; spend on the professional and technical retraining of laborers as required by the change in the enterprise’s technology or organizational structure, especially the training of reserve jobs for female laborers of the enterprise. This fund is used only to support laborers who lose their jobs due to objective causes such as: the redundancy of laborers due to technological change, joint venture or change in organizational structure and during the time when the new jobs have not been arranged for such laborers or the job discontinuation procedures have not been completed for them yet.

3.2. For enterprises being members of a State corporation which, under its own financial regulation, takes charge of giving allowances for laborers who lose their jobs, such member enterprises shall make deductions to set up the corporation’s reserve fund for severance allowances according to the rates annually decided by the corporation’s managing board.

The allowance level for each specific case shall be decided by the enterprise’s director after consulting the president of the enterprise’s trade union.

4. The welfare fund is used for:

4.1. Investing in building or repairing or supplement capital for building public-welfare facilities of the enterprise; contribute capital to the construction of public welfare facilities which shall be used by the entire branch or shared with other units under contracts.

4.2. Financing sports, cultural and public welfare activities of the collective of workers and employees of the enterprise.

4.3. Making contribution to the social welfare fund (charity and social public welfare activities’).

4.4. Providing regular and irregular allowance for the enterprise’s laborers, who meet with difficulties in their daily life.

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4.6. Deductions to set up the concentrated welfare fund of the corporation (if the enterprise is a member unit of that corporation), according to the rate decide by the corporation’s managing board.

The enterprise’s director shall coordinate with the enterprise’s trade union executive committee in managing and using this fund.

5. The reward fund is used for:

5.1. Making year-end or periodical rewards to workers and employees in the enterprise. The reward levels shall be decided by the enterprise’s director after consulting the trade union and on the basis of the labor productivity and the work performance by each worker or employee in the enterprise.

5.2. Rewarding individuals and units outside the enterprise that have economic relations with the enterprise and have fulfilled well the terms of the economic contracts signed with the enterprise, thus efficiently contributing to the enterprise’s business activities. The reward level shall be decided by the enterprise’s director.

5.3. Deduction to set up the concentrated reward fund of the corporation (if the enterprise is a member unit of that corporation) according to the rate set by the corporation’s managing board.

D. RESPONSIBILITIES OF ENTERPRISES AND STATE FINANCIAL MANAGEMENT AGENCIES

1. The managing board chairmen and the directors (for enterprises without managing boards) shall have to accurately determine their respective enterprises profits, distribute and use the after-tax profits in strict compliance with the provisions of this Circular.

The deduction for the establishment of enterprises’ funds and the use thereof must be publicized before the State management agencies and collectives of laborers of such enterprises.

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Any enterprises that are found having wrongly implemented the regulations shall be requested to correct them. If committing violations, they shall, depending on the seriousness of their violations, be subject to appropriate forms of sanction: administrative sanctions, material compensation or reduction of the welfare fund and the reward fund according to the current provisions of law.

III. IMPLEMENTATION PROVISIONS

This Circular shall apply to the after-profit distribution from the 1999 fiscal year and replace Circular No.70-TC/TCDN of November 5, 1996 of the Finance Ministry.

The agencies managing enterprises and State enterprises shall have to implement this Circular.

THE MINISTRY OF FINANCE




Tran Van Ta