Official Dispatch No. 3158/TCT-PCCS of August 25, 2006, On documents for accounting of administration expenses of parent companies

To: Provincial/municipal Tax Departments

The General Department of Taxation has received a number of requests for guidance on documents for accounting of administration expenses allocated by foreign companies to their permanent establishments in Vietnam. Concerning this matter, the General Department of Taxation would like to provide the following guidance:

Point 13, Section III, Part B of the Ministry of Finance’s Circular No. 128/2003/TT-BTC of December 22, 2003, guiding business income tax (BIT), stipulates: When determining its income liable to BIT, a Vietnam-based permanent establishment may account as its expenditure business administration expenses allocated to it by its foreign parent company according to the ratio of its turnover to the total turnover of the foreign company, including turnovers of permanent establishments in other countries. Vietnam-based permanent establishments of foreign companies that have not yet applied the regulations on accounting, invoices and accounting documents and pay BIT by the declaration method may not account as their reasonable expenditures business administration expenses allocated by their foreign patent companies.

Point 4, Section I, Part A of Circular No. 128/2003/TT-BTC stipulates: Permanent establishments means business establishments through which foreign companies conduct part or the whole of their income-earning business operation in Vietnam, mainly in the forms specified at this Point.

Under the above guidance, foreign-invested enterprises operating in Vietnam are independent legal entities and not regarded as permanent establishments of foreign companies. Therefore, business administration expenses allocated by foreign parent companies to Vietnam-based foreign-invested enterprises shall not be accounted as reasonable expenditures for determination of those enterprises’ incomes liable to BIT.

For cases where business administration expenses allocated by a foreign parent company to its Vietnam-based permanent establishment (defined at Point 4, Section I, Part A of Circular No. 128/2003/TT-BTC), this Vietnam-based permanent establishment must produce dossiers and documents to prove the reasonability of those expenses which have been identified according to regulations, including:

- The foreign company’s financial statement already audited by an independent audit company, clearly indicating its turnover and its Vietnam-based permanent establishment’s turnover, its administration expenses and administration expenses allocated by the parent company to its Vietnam-based permanent establishment.

- The foreign company’s written regulation on the mechanism of allocation of administration expenses to its permanent establishments in other countries.

- The foreign company’s written certification of or notice on the allocation of administration expenses to its Vietnam-based permanent establishment.

The General Department of Taxation would like to give the above guidance to provincial/municipal Tax Departments for information and compliance.