According to Vietnamese regulations, software is an industry that is encouraged for business development; therefore, the government has issued preferential tax policies for software.
While the software industry benefits from tax incentives for software, applying these incentives carries significant risks that could lead to serious consequences. To clarify and confidently apply these tax incentives for software, the following issues need to be understood.
1. Differentiation: Software production and software services
Concept: Software product
Software products are software and accompanying documentation that are produced and presented or stored in any tangible form, and can be bought, sold, or transferred to other parties for exploitation and use.
Concept: Software services
Software services are activities that directly support and facilitate the production, installation, exploitation, use, upgrading, warranty, maintenance of software, and other similar software-related activities. www.expertis.vn
2. Differentiating between Software Product Manufacturing and Software Services Business
Software or software products (SPPM) are a set of statements or instructions written in one or more programming languages in a specific order, and related data or documentation, intended to perform certain tasks or functions or solve a specific problem.
Software products such as system software, application software, utility software, etc., are defined in the Software Product Catalog issued herewith. Circular 09_2013_TT_BTTTT List of software products April 8, 2013, by the Minister of Information and Communications.
The production of software products that meets the correct process refers to the activities of organizations, businesses, or individuals who are qualified according to the law, participating in one or more stages in the software product production process to create new products or upgrade, modify, or improve software products.
How to determine software product manufacturing activities
Circular 16_2014_TT_BTTTT regulates the determination of software product manufacturing activities. Regulations governing the determination of software product manufacturing stipulate:
"Article 5. Software product manufacturing process
The software product manufacturing process includes the following seven stages:
1. Identify the requirements, This includes tasks such as: surveying customer requirements, business analysis; gathering and developing requirements; advising on process adjustments; agreeing on requirements, and reviewing requirements.
2. Analysis and design, including tasks such as: requirements specification; problem formulation; data modeling; functional modeling; information flow modeling; software solution identification; software system design; design of software units and modules.
3. Programming, writing code, including tasks such as: writing software programs; programming software units and modules; editing, customizing, and fine-tuning software; integrating software units; integrating software systems.
4. Software testing and verification, including tasks such as: developing test scenarios, testing software units and modules; software testing; software system testing; software functional testing; software quality assessment; error assessment; determining customer satisfaction; and software acceptance.
5. Completing and packaging the software, including tasks such as: creating software description documents, installation and usage manuals; packaging the software; registering design codes; and registering intellectual property rights.
6. Software installation, transfer, user training, maintenance, and warranty, including one of the following tasks: software installation guidance; software deployment; user training and guidance; post-delivery software testing; post-delivery software bug fixing; post-delivery support and warranty; software maintenance.
7. Software product publishing and distribution, including activities such as: marketing, promotion, sales, and distribution of software products; software product publishing.
Article 6. Identifying software product manufacturing activities
1. General requirements for organizations, businesses, and individuals producing software products:
a) For organizations and businesses: possess a business registration certificate, investment certificate, or a document specifying their functions and duties issued by a competent authority. For individuals: possess a personal tax identification number; have a tax declaration clearly stating the income derived from software production activities;
b) Software products produced by individuals, organizations, or businesses that fall under one of the software product categories specified in the List of Software Products issued under Circular No. 09/2013/TT-BTTTT dated April 8, 2013, of the Minister of Information and Communications.
2. The activities of organizations, businesses, and individuals are defined as software product manufacturing activities and comply with the process when the organization, business, or individual meets the requirements in Clause 1 of this Article, and the activity falls under one or more of the following cases:
a) Activities belonging to one or more stages in stages 2 to 4 of the software product manufacturing process as stipulated in Clauses 2, 3, and 4 of Article 5 of this Circular, for the software product mentioned in Point b, Clause 1 of this Article.
b) Activities mentioned in stages 1 and 5 of the software product manufacturing process as stipulated in Clauses 1 and 5 of Article 5 of this Circular, when the organization, enterprise, or individual has activities that satisfy the provisions of Point a, this Clause, for the same software product.
c) Activities belonging to stage 6 of the software product manufacturing process as stipulated in Clause 6, Article 5 of this Circular, when the organization, enterprise, or individual has activities belonging to all 5 stages from 1 to 5 of the software product manufacturing process as stipulated in Clauses 1 to 5, Article 5 of this Circular for the same software product.”
How to identify Software Services
Software services are activities that directly support and facilitate the production, installation, exploitation, use, upgrading, warranty, maintenance of software, and other similar software-related activities.
Software development services only support and facilitate software-related activities and do not create, upgrade, modify, or refine software products, including:
- Services for managing, guaranteeing, and maintaining the operation of software and information systems;
- Software quality consulting, evaluation, and assessment services;
- Consulting services, software project development, etc.
3. Tax incentives applicable to software businesses
Businesses producing SPPM (Specialized Products and Services) enjoy preferential treatment in land use; preferential tax exemption and reduction periods, and preferential corporate income tax rates; and are exempt from import duties on raw materials and supplies directly used in SPPM production that are not produced domestically.
Regarding Value Added Tax
Software and software services for domestic consumer software production businesses are exempt from VAT; businesses are not required to calculate and pay VAT on these products and services, but are not entitled to deduct or claim a refund of input VAT on goods and services used in the production of VAT-exempt software products and services.
Points to note at this point:
- Bill: When issuing invoices, the VAT rate section should be crossed out.
- Tax filing: Input VAT used jointly and specifically for software business must be declared and allocated.
- Accountant: Separate accounting must be performed corresponding to the calculation of value-added tax.
Regarding corporate income tax
Article 19. Preferential tax rates
1. A preferential tax rate of 10% for a period of fifteen (15) years applies to:
a) Income of enterprises from implementing new investment projects in: areas with particularly difficult socio-economic conditions as stipulated in the Appendix attached to Decree No. 218/2013/ND-CP; Economic zones, high-tech zones including concentrated information technology zones established by Decision of the Prime Minister.
b) Income of enterprises from implementing new investment projects in the following fields: scientific research and technological development; application of high technology belonging to the list of high technologies prioritized for investment and development as stipulated in the Law on High Technology; high technology incubation, high technology enterprise incubation; venture capital for the development of high technology belonging to the list of high technologies prioritized for development as stipulated in the law on high technology; investment in the construction and operation of high technology incubation facilities, high technology enterprise incubation; investment in the development of water treatment plants, power plants, water supply and drainage systems; bridges, roads, railways; airports, seaports, river ports; airfields, railway stations and other particularly important infrastructure projects as decided by the Prime Minister; software product manufacturingProduction of composite materials, lightweight building materials, and rare earth materials; production of renewable energy, clean energy, and energy from waste disposal; and development of biotechnology.
Article 20. Preferential treatment regarding tax exemption and reduction periods.
1. Tax exemption for four years, followed by a 50% reduction in tax payable for the next nine years, applies to:
a) Income of the enterprise from implementing new investment projects as stipulated in Clause 1, Article 19 of this Circular.
Corporate Income Tax Incentive Declaration: Revenue from software production and other activities (software services and software sales) must be declared separately because these other activities are not eligible for the aforementioned incentives.
Accounting: Revenue from software product manufacturing and other activities (software services and software sales) must be accounted for separately because these other activities are not eligible for the aforementioned incentives.
4. Common errors when declaring tax incentives for software.
- Since there is no clear distinction, both revenue from software services and revenue from software sales should be included in the declaration for eligibility for incentives.
- No allocation of VAT-taxable and VAT-exempt revenue ratios.
- Failure to separately account for revenue and expenses to determine tax-exempt profit results in not being eligible for tax exemptions or tax incentives.
