In Vietnam, there are two important concepts related to taxation: “taxable income” and “assessable income.” Here are the basic differences between these two concepts:
• This is the amount on which an individual or business is required to pay taxes. It serves as the basis for determining assessable income.
• Taxable income includes all legitimate sources of income, such as salaries, business profits, bank interest, rental income, bonuses, inheritance, and other forms of income.
• Based on the taxable income, individuals or businesses will calculate the tax to be paid according to the prescribed tax rates. According to Article 2 of Circular 111/2013/TT-BTC, taxable income includes income from wages, salaries; business operations; capital investment; capital transfer; real estate transfer; lottery winnings; copyrights; trademarks; inheritance; and gifts.
• Calculating the amount of tax to be paid is the process of determining the actual amount to be paid based on the taxable income.
• When calculating taxes, there are certain exemptions, deductions, and allowances applied to reduce the amount of tax payable. The most common examples are social insurance, health insurance, and professional liability insurance that businesses must contribute to for employees or self-employed individuals.
• Exemptions and deductions can include personal allowances, dependents, tax deductions for businesses such as investments, operating expenses, and other special incentive policies as prescribed by tax laws.
It is important to note that voluntary health insurance purchased by employees themselves is not deductible from taxable personal income, and if a business contributes to insurance for employees exceeding the legal limit of 21.5%, it is welcomed but the excess amount will not be considered for deductions when calculating assessable income.
In essence, taxable income is the total income considered for tax calculation, while assessable income is the taxable income after applying exemptions, deductions, and other allowances. Taxes are calculated based on assessable income.
The formulas for determining assessable income for different individuals depend on whether they are resident or non-resident individuals and the type of taxable income.
The formula relating taxable income to assessable income is: Assessable income = Taxable income – Deductions and exemptions from taxable income.