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Personal income tax is a very special type of tax in Vietnam. This tax is mostly ignored by the entire population of Vietnam as they are not subject to it. Rather, it is only the rich class in society that has a headache over it. So, what are the notes on personal income tax in Vietnam?
Personal income tax in Vietnam
Personal income tax (PIT) is the amount of money that income earners have to deduct from their salary, or from other sources of revenue, into the state budget after deductions have been made.
Personal income tax is not levied on low-income individuals, so this revenue will be fair to all beneficiaries, contributing to reducing the disparity between classes in society.
There are 2 subjects to pay personal income tax: Individuals residing and individuals not residing in Vietnam with taxable income. Specifically:
- For resident individuals: Taxable income is the amount arising inside and outside the territory of Vietnam (regardless of where the income is paid).
- For non-resident individuals: Taxable income is income generated in Vietnam (regardless of where the income is paid and received).
The role of personal income tax
Personal income tax plays an important role not only in the state budget but also in social justice as this tax contributes to the efforts to equalize society in Vietnam.
Increase revenue for the state budget
Tax is the main source of state budget revenue. This includes Corporate income tax (CIT), Value Added Tax (VAT), Personal income tax (PIT), Import and Export Tax, Environmental protection tax, Special consumption tax (SCT), Business registration tax, etc.
Accordingly, contributing PIT tax is also a way to help the country have more budget to invest in infrastructure, improving the social life of citizens, etc.
As the economy is growing, personal income tax also has a rapid increase, proportional to the per capita income.
Contributing to the implementation of social justice
Not just in Vietnam but in every country in the world, the gap between rich and poor is clearer than ever.
This creates a phenomenon, an idea of social injustice in the world.
To solve this problem, personal income tax plays the key role as it is the most obvious way to reduce the gap between poor and rich due to the fact that poor, normal citizens won’t have to pay this amount of tax.
Citizens with moderate or low incomes that has barely enough to provide for themselves and their families won’t have to think about personal income tax.
On the other hand, the personal income tax system won’t be too unjust to the rich class as their fortune is not made out of scrap and the government understands that.
Accordingly, although the PIT exists, the rich classes won’t be affected too much to the point of unfairness and leading to damage to the economy.
Therefore, although personal income tax has not yet brought a large source of revenue to the State budget, it plays an important role in contributing to the implementation of social justice policies.
Macro-regulation of the economy
Personal income tax is considered a tool to help regulate the macroeconomy, stimulate savings and investment in the direction of improving social efficiency.
By reducing the income of high-income citizens, and redistributing it to lower-income citizens, personal income tax makes an important contribution to increasing social welfare regimes.
Detect and prevent illegal income in Vietnam
In reality, the rich class has many ways to avoid paying taxes and other payable that aim to equalize the gap between rich and poor.
It’s almost a guarantee that every major enterprise in Vietnam and in the world has found some methods, both legally and illegally, to minimize the taxes that they have to pay.
The avoiding and detection and prevention is a never-ending circle in the market and the economy.
However, through the compulsory payment of taxes such as personal income tax, authority offices will have the chance to detect and prevent the act of gaining illegal income through illegal sources such as bribery, embezzlement, trading in banned national goods, tax evasion, property fraud, etc.
The calculation of personal income tax in Vietnam
As mentioned above, there are 2 main subjects to pay personal income tax: resident individuals and non-resident individuals in Vietnam with taxable income.
So, how do you calculate the personal income tax payable for these subjects?
The calculation of personal income tax for resident individuals
Resident individual means an individual in the following cases:
+) Being present in Vietnam for 183 days or more in a calendar year or for 12 consecutive months from the first day of presence in Vietnam, in which the arrival and departure dates are counted as 1 day.
+) Having a regular place of residence in Vietnam in one of two cases:
- Having a rented house to live in Vietnam according to the provisions of the law on housing, with the term of the lease contract from 183 days or more in the tax year.
- Having a regular place of residence in accordance with the law on residence.
For individuals residing with a permanent place of residence in Vietnam who sign a labor contract of 3 months or more:
Payable personal income tax = Assessable income x Tax rate.
The Assessable income = Taxable Income – Deductions.
While working, the employees might get some incomes that are not taxable as part of the personal income tax.
Tax-free incomes from wages and salaries include:
- Night and overtime wages are paid higher than daytime and overtime wages as prescribed by law;
- Incomes from salaries and wages of Vietnamese seafarers working for foreign shipping lines or Vietnamese shipping lines for international transportation.
The deductions include:
- Family circumstances deduction for the taxpayer themselves: 11 million VND/month (132 million VND/year);
- Family circumstance deduction for each dependent: 4.4 million VND/month.
Tax rates from wages and salaries for individuals who sign labor contracts of 3 months or more are applied on a progressive basis according to regulations.
Regarding the taxable salary, individuals without dependents must pay income tax when the total income from salary and wages is over 11 million VND/month (This income has deducted the compulsory insurance contributions as prescribed and other contributions such as charity, humanitarian, etc.)
The above income is income from salary and wages minus the following: Insurance premiums, voluntary retirement fund, charitable contributions, study promotion, humanitarian; Income that is exempt from personal income tax, etc.
These deductions are part of the government’s policies to advocate the support of citizens for social activities.
For employees who do not sign a labor contract or sign a labor contract of fewer than 3 months:
According to Article 25 of Circular 111/2013/TT-BTC, residents who sign a labor contract of fewer than 3 months or do not sign a labor contract, if their total income is paid at 2 million VND/time or more, the tax must be deducted at the rate of 10% on the income (deduct before paying).
The payable tax amount is calculated according to the formula: Personal income tax payable = 10% x Total income before payment.
The calculation of personal income tax for non-resident individuals
A non-resident individual is a foreigner who does not fully meet the conditions of a resident individual according to the regulations of the law.
Non-resident individuals are not included in the deduction for family circumstances, so as long as they have taxable income, they will have to pay income tax.
In other words, the non-resident individuals will be taxed if they have income, wages that are subjected to taxable incomes.
As for resident individuals who are subjected to pay personal income tax in Vietnam, non-resident individuals will also have deductions in the amount needed to pay if they have made charitable contributions, study promotion, humanitarian contributions, insurance contributions, voluntary retirement funds, etc.
Clause 1, Article 18 of Circular 111/2013/TT-BTC stipulates that income tax for non-resident individuals is calculated according to the following formula:
Personal income tax payable = 20% x Taxable income
Taxable income is determined by the total salary, remuneration, wages, and other incomes of the nature of wages and salaries received by the taxpayer in the tax period.
In which, the taxable income of non-resident individuals is determined as prescribed in taxable income from salaries and wages of resident individuals.
ASL LAW is the top-tier Vietnam law firm for tax law consulting service. If you need any advice, please contact us for further information or collaboration.
