While the decision to defer personal income tax (“PIT”) payments has been applauded, it has resulted in some interesting legal dynamics.

On February 6, 2009 the Ministry of Finance (“MoF”) issued Circular No.27/2009/TT-BTC on the deferment of personal income tax payments (“Circular 27”) and on February 18, 2009, Official Letter No.1823 /BTC-TCT further guiding the implementation of the deferment (“Letter 1823”). Their positive meanings aim to serve the government’s policies to stimulate consumption and support people hurt by the current economic slowdown. However, from a legal point of view, such documents contain some of questionable provisions. Below are two points that we would like to discuss.

Firstly, the subjects entitled to the PIT payment deferment:

It is stipulated in Circular 27 that taxpayers entitled to PIT payment deferment comprise:

-    Resident individuals who have taxable income from business, salary and wages, capital investments, capital transfers (including transfer of securities), copyright or from franchises; and
-    Non-resident individuals having taxable income from capital investments, capital transfers (including transfer of securities), income from copyright, or income from franchises.

Taxpayers not entitled to deferments are:

-    Resident individuals who have income from real property transfers, winnings or prizes, inheritances, or receipt of gifts; and
-    Non-resident individuals (including those who do not have a presence in Vietnam or who will depart from Vietnam prior to June 30, 2009) who have income from business, salary and wages, real property transfers, winnings or prizes, inheritances or from receipt of gifts.

The questionable point comes from the extension information, i.e. “non-resident individuals including those do not have a presence in Vietnam or depart from Vietnam prior to 30 June 2009.”

As defined in Clause 2, Article 1 of Decree No.100/2008/ND-CP, dated 8 September 2008 detailing implementation of the PIT Law (“Decree 100”), “resident individual” means a person satisfying one of the following conditions:

-     Being present in Vietnam for a period of 183 days or more within one calendar year or for 12 consecutive months from the first date on which such individual is in Vietnam; or
-     Having either a residential location for which permanent residence has been registered pursuant to the law on residence or a leased residence to stay in Vietnam pursuant to the law on residential housing, where the lease contract has a term of 90 days or more within the tax calculation year.

And “non-resident individual” means a person not satisfying any of the conditions stipulated above.

So, according to the Circular 27, can a resident tax payer who satisfied the second condition as provided by Decree No.100 (i.e. by having a lease contract of at least 90 days) and who “depart[ed] from Vietnam prior to June 30, 2009”, be entitled to PIT payment deferment? If yes, the extension information as put in the brackets above should not be necessary to include in the Circular 27. If no, how would that tax payer be defined? Can he/ she be turned into non-resident individual? If that is the case, it is clear that the extension information put in the brackets above is not compatible with—and in fact seems contrary to— the provisions of the PIT Law and Decree 100 on residential tax payers.

Besides, those “who do not have the presence in Vietnam” is repetitious and should not be necessary to include into the Circular 27 to explain more about the non-resident tax payer.

To be clear and consistent in implementation, and notwithstanding the provisions as given in the Circular 27, all resident tax payers including those who will depart from Vietnam prior to June 30, 2009 should be entitled to the PIT payment deferment, in accordance with the Circular 27.

Secondly, there will be problems associated with the obligations of taxpayers and related parties after May 31, 2009 if the PIT payment exemption is not approved by the National Assembly:

Pursuant to the Circular 27, tax payers entitled to PIT payment deferment will have the right to hold the payable PIT during the period from January 1, 2009 to May 31, 2009 inclusive. However, such deferment does not mean a type of tax exemption nor tax deduction granted to taxpayers. The settlement thereof, i.e. to repay or be exempted, as clearly mentioned in the Circular 27, shall be finally subject to the decision made by the National Assembly, proposed in May 2009, upon the proposal from the government. The question is who will bear the obligation to repay the deferred PIT to the state budget? With respect to the tax payers who register, declare and pay PIT directly to the state budget, the response seems clear. But how can the obligation be defined where the PIT is registered, declared and paid indirectly through organizations paying the taxable income? Logically, tax payers shall carry that obligation, not their income paying organizations.

Though the tax payers are entitled to hold the payable PIT during the period from January 1, 2009 to May 31, 2009, at the same time Circular 27 still requires the income paying organizations to calculate the payable but deferred PIT amount when paying incomes to the PIT deferment-entitled tax payers.  As usual, the taxable PIT report must be submitted to the tax authority on a monthly basis for management of deferred PIT payments.

The obligation of holding, deduction and payment of PIT, due to the tax authority each time income arises, is widely known to belong to the income paying organization, which shall be subject to penalty if it fails to satisfy its obligation.  So in addition to the above question of who will bear the obligation to repay the deferred PIT during the period from January 1, 2009 to May 31, 2009, the next question to ask is whether or not the income paying organizations will bear any related obligation? Logically, the income paying organizations should bear no obligation, while they may have the right to claim for any compensation if the non-payment of the deferred PIT by the tax payers causes a loss, damage to their reputation or so forth. When necessary, they may have the right to deduct from the income payable to the tax payers after May 31, 2009, to fully repay for the deferred PIT, subject to further specific guidance from the MoF.

As provided by Circular 27, in cases where the income paying organizations have deducted PIT but not yet paid the state budget before the issuance of Circular 27, they shall be responsible for returning the deducted PIT to tax payers.  The deadline for doing this, as guided by the Letter 1823, shall be the last working day of February 2009 (February 27, 2009 at the latest). Since the Circular 27 shall be effective after 45 days from its issuance date, and shall not be effective on February 27, 2009, the question is can that provision of the Letter 1823 be enforceable— and if yes, on which legal ground?

For the foregoing questionable points, we think that clarifications on MoF guidelines should be made to ensure the smooth and correct implementation of the largely-welcome and expected PIT incentives.