Closing fund without receiving payment
Although the end of 2017 is the time of terminating some securities investment funds as stipulated in their establishment certificates issued by the State Securities Commission, many foreign investors have not yet been paid for their investments. It is expected that until the end of January or February, 2018, the payment of principals and interests will remain oustanding if the taxation authority does not provide guidelines on the tax rates imposed on investors in member funds. Once the payment is made, including the initial principals and arising interest amounts during the fund’s operation, investors’ tax obligations will arise and they must make their tax returns and pay taxes within the time limit. However, what are the tax rates and will they be imposed on revenues or profits? Fearing noncompliance with legal regulations and latent risks of violating tax procedures because of failure to declare, pay taxes promptly, the investors settle for anxiously awaiting to get back their money.
Paying taxes based on official letters rather than legal normative documents
Formerly, on 26 September 2012, the Department of Taxation of Ho Chi Minh City (“HCMC”) issued Official Letter No. 7280/CT-TTHT guiding the application of tax rate of 0.1% over the total payment for foreign investors as entities when dissolving investment fund pursuant to Circular No. 60/2012/TT-BTC dated 12 April 2012 of the Ministry of Finance guiding the performance of tax obligations applicable to foreign organizations, individuals doing business or earning income in Vietnam (“Circular 60”).
After that, on 13 September 2013, the Department of Taxation of HCMC issued the official letter No. 6754/CT-TTHT guiding the application of tax rate of 5% over any dividend contributed to investors as foreign entities when dissolving fund also on a legal basis of Circular 60. Official letter in 2013 clearly added that it replaces Official Letter 7280/CT-TTHT in 2012 by the Department of Taxation of HCMC without explaining the reason for any change and the basis for new tax rate, new calculation method despite citation of Circular 60 by both official letters.
The tax rate of 5% according to the ratio table (%) of Corporate Income Tax (“CIT”) calculated on the taxable revenue as stipulated in Circular 60 can be only applied to either service business or loan interest, but obviously foreign investors do not lend in this case. Consequently, does the tax authority think that foreign investors have been providing services in Vietnam??? The conception of “service” may be applied too widely without considering the particular nature of a particular business operation – the operation of a securities investment fund. Another noteworthy point is that withholding tax is calculated according to the second method determined on revenue rather than profits, that is to say, 5% on dividends as instructed by the Department of Taxation of HCMC.
Will be there any other possible instruction 5 years later?
Let’s return to the story of the said foreign investors. Different from the case where investors in the two public funds obtained guidelines on tax policies by the Department of Taxation HCMC when dissolving fund, this is that of the investors establishing member fund. The member fund is characterized as “closed” because the maximum number of participating investors is 30 and only institutional investors can join this fund. Because there is a difference in nature, investors cannot bluntly apply the tax rate of 5% on distributed dividends as instructed by the Department of Taxation of HCMC pursuant to the official letter No. 6754/CT-TTHT in 2013.
It should be added that Circular 60 was replaced by Circular 103/2014/TT-BTC issued by the Ministry of Finance on 06 August 2014 (“Circular 103”), but the tax rate of Corporate Income Tax on taxable revenue with respect to services; securities transfer, deposit certificates; loan interests, which is very likely to apply to foreign investors in investment fund, remain unchanged at 2%, 0,1% and 5% respectively. Therefore, basically the application of Circular 60 or Circular 103 does not lead to any difference in tax rate if applying to the same income generating business, services in Vietnam. The matter key is what are the operations of securities investment member fund by foreign investor? What business operations make it possible for investors to receive the monies including initial investment capital and gains from revenue or profit when dissolving fund?
Foreign investors still believe that the most lawful and appropriate tax rate applied to the dissolution of securities investment fund is 0.1% on revenue whether under Circular 60 or Circular 103, because investment fund is established in this case for doing business, trading, transferring securities. In reality, foreign investors gain arising income from securities transfer, although the trading of securities is executed by fund management company rather than foreign investors directly carrying out. In case of applying the method of tax calculation of 0.1% on taxable revenue, foreign investors still need the tax management authorities’ detailed guidelines on the method of determining taxable revenue in this case. The amounts distributed to foreign investors when dissolving member fund is the remaining money of the member fund after deducting the costs and payables, so in essence, it is not the revenue from securities transfer.
Although there is no official guidance from the Department of Taxation of HCMC, through the discussion with tax experts, foreign investors are facing the possibility of paying CIT at the rate of 2% on the received total amount when dissolving the member fund. This tax rate applies to other business activities according to the ratio (%) table of CIT calculated on taxable revenue as stipulated in Circular 103. If this tax rate is applied according to the official guidance of the Department of Taxation of HCMC, it can be seen that the tax authority did not consider the source of the monetary amount received by the investors, including the initial capital that the investor paid for the purpose of securities business and the investment return resulting from business operations, securities transfer.
There may be an explanation that during joint investment in a member fund, for domestic investors in that fund, the return amount when dissolving fund will be determined as other income that is included in the taxable revenue of an enterprise and suffers CIT rate of 20%, while foreign investors only suffer 0.1% on turnover form securities transfer, it is an unfair treatment among investors.
From the perspective of a taxpayer rather than a tax policy maker, foreign investors just desire to comply with the Vietnamese law on the basis of a correct understanding and application of relevant tax law. Foreign investors will feel inadequate if due to the lack of legal provisions that leads them to suffer a higher tax rate simply because of the inconsistent views of the tax authorities and the interpretation in favor of the State and domestic investors rather than based on the laws. That is the unfair treatment that foreign investors are likely to suffer in this situation.
How long does it take for foreign investors to await?
Since 2012, the State Securities Commission of Vietnam has cooperated with the Tax Policy Department under the Ministry of Finance to build a circular guiding the tax policy in the securities field that is expected by market members. Because if it was promulgated based on the opinion collection of investors and experts, this circular not only deals with the problem of tax rates applicable to foreign investors who have invested in the said member fund but also solve other complications, which help taxpayers avoid seeking the guidance from local tax authorities when needed.
More than five years later, the story has still not come to its end because the circular has yet to be promulgated. Investors and the securities market desperately need a common document applied uniformly in this field throughout all localities instead of falling into the current uncertainty.
