The software industry benefits from tax incentives for software, which is advantageous for business operations. However, the application methods and policies vary for each type of business activity, therefore, applying these incentives requires thorough understanding.
Below is a detailed guide on how to determine tax incentives for the software industry.
Vietnam's tax incentive policy for the software industry.
The software industry in Vietnam is receiving strong support from the government through various tax incentives. These policies aim to promote the development and competitiveness of the software industry, creating favorable conditions for businesses to invest and expand their operations. Specific tax incentives include:
- Corporate income tax exemptions and reductions: Newly established software companies may be exempt from corporate income tax for a certain period (usually the first 4 years) and then receive a tax reduction in subsequent years (50% for the next 9 years).
- Value Added Tax (VAT) incentives: Computer software, including software products and software services as defined in regulations, is exempt from value-added tax.
- Export incentives: Software products and software services exported are subject to a value-added tax rate of 0%.
How to apply tax incentives to software
Software businesses determine which type of business they operate in: software trading, software manufacturing, or software services. Here's how to determine which category your business falls under:
How to determine which software production activities are eligible for tax incentives.
Click on each item to view the following instructions:
Base: Applying Circular 16/2014/TT-BTTTT regulating the determination of software production activities.:
Step 1: Understand the Software Product Development Process
According to Article 5 of Circular 16/2014/TT-BTTT, the software product manufacturing process includes the following seven stages:
1. Identify requirementsThis 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 DesignThis includes tasks such as: requirements specification; problem setting; data modeling; functional modeling; information flow modeling; software solution identification; software system design; and software unit/module design.
3. Programming, writing codeThis includes tasks such as: writing software programs; programming software units and modules; editing, customizing, and fine-tuning software; integrating software units; and integrating software systems.
4. Software testing and verificationThis includes tasks such as: building 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. Finalize and package the software.This includes tasks such as: creating software description documents, installation and usage manuals; packaging software; registering design codes; and registering intellectual property rights.
6. Software installation, transfer, user training, maintenance, and warranty.This includes tasks such as: guiding software installation; deploying software installation; training and instructing users; testing software after delivery; fixing software bugs after delivery; post-delivery support, software warranty; and software maintenance.
7. Software product release and distributionThis includes activities such as: marketing, promoting, selling, and distributing software products; and releasing software products.
Step 2: Define the software product development activities for each specific case.
According to the provisions of Article 6, Circular 16/2014/TT-BTTT Then, cases that meet the following conditions are accepted as software product manufacturing:
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.
Step 1: Understand the Software Product Development Process
According to Article 3 of Circular 13/2020/TT-BTTT, the stages in the software product manufacturing process include the following:
1. Identify requirementsThis includes one or more tasks such as: generating or refining ideas for software product development; describing product characteristics (requirements) and product use contexts; proposing, surveying, and clarifying requirements for the software product; conducting business analysis; developing complete requirements for the software product; advising on process adjustments; agreeing on requirements, reviewing requirements, assessing control capabilities, and establishing the basis for verifying product compliance.
2. Analysis and DesignThis includes one or more tasks such as: requirements specification (functional and non-functional requirements, problems to be solved); problem setting; appropriate techniques implemented to optimize the solution, analysis of software correctness and testability, analysis of the impact of software requirements on the operating environment, prioritizing, approving, and updating requirements as needed; data modeling; functional modeling; information flow modeling; software solution identification; solution design, software system design; data design, software architecture design, design of software components and modules; security design, information safety design for the software; customer experience interface design.
3. Programming, writing codeThis includes one or more tasks such as: writing software programs; programming software units and modules; editing, customizing, and fine-tuning software; integrating software units; and integrating software systems.
4. Software testing and verificationThis includes one or more tasks such as: building test scenarios, testing software units and modules; software testing; software system testing; software functional testing; software quality assessment; error assessment; software security and information safety testing; determining customer requirements satisfaction; and software acceptance.
5. Finalize and package the software product. This includes one or more tasks such as: creating software product descriptions, installation guides (in the case of a complete product delivery), software user manuals (for users or service tenants); packaging the software product; registering design; and registering intellectual property rights.
6. Installation, transfer, user training, maintenance, and warranty of software products. This includes one or more operations such as: transfer (of a complete product package or the right to use the product in the form of a lease); instruction on software product installation (in the case of a complete product package transfer); deployment and installation of the software product (on the customer's system in the case of a complete package transfer or on the service provider's system in the case of software product leasing); training and guidance (for users or service lessees); testing the software product after transfer or on the service provider's system; fixing software product errors after transfer or on the service provider's system; post-transfer support during the service leasing period; product warranty after transfer or during the service leasing period; software product maintenance (on the customer's system or on the service provider's system).
7. Software product release and distributionThis includes one or more activities such as selling, leasing, distributing, or publishing self-produced software products.
Step 2: Identify software product manufacturing activities that meet the process requirements.
Applying Article 4 of Circular 13/2020/TT-BTTT:
Article 4. Determining whether software product manufacturing activities meet the process requirements.
1. The production of a software product by an organization or enterprise as stipulated in Article 3 of this Circular is determined to be a software product production activity that meets the process requirements when, for that product, the organization or enterprise performs at least one of the two stages: Requirements definition, analysis, and design. as stipulated in Clauses 1 and 2 of Article 3 of this Circular.
2. Software product manufacturing activities that meet the procedures stipulated in Clause 1 of this Article shall be demonstrated by one or more of the following documents, corresponding to each operation within the stages performed by the organization or enterprise:
a) Documentation proving each operation of the Requirements Definition stage: Description of the product development methodology; description of product characteristics (requirements), product usage contexts; description of proposals, survey results, clarification results, and requirements refinement for the product; detailed business analysis description; description of the completed product requirements; description of process adjustment consultation content; minutes of requirements agreement, requirements review, description of controllability and basis for confirming product compliance with requirements; or documents with similar content.
b) Documentation demonstrating each operation of the Analysis and Design phase: Description of requirements; description of the development problem; description of appropriate techniques implemented to optimize the solution; analysis of the software's correctness and testability; analysis of the impact of software requirements on the operating environment; list of prioritized, approved, and updated requirements; description of data models, functional models, and information flow models; description of the software solution; solution design, software system design, data design, architectural design, design of software units and component modules; security and information safety design for the software; customer experience interface design; or documents with similar content.
c) Documentation proving the operational aspects of the Programming and Code Writing process: Several key source code snippets demonstrating that the company wrote the software code; descriptions of the integrated software system; or documents with similar content.
d) Documentation proving each operation of the software testing and verification process: Test and verification scenarios for software units and modules; descriptions of software test results, software system test results, software functional test results, software quality assessment results; descriptions of error potential assessments; descriptions of security and information safety test results for the software; confirmation that the software meets customer requirements; software acceptance reports; or documents with similar content.
e) Documentation proving each operation of the product completion and packaging stage: A full introduction to the software product; installation instructions (in the case of a complete product delivery package), instructions for using the product or service (for users or service tenants); a copy of the design registration certificate (if any); a copy of the intellectual property registration certificate (if any); or documents with similar content.
f) Documentation proving each operation of the Installation, Transfer, User Training, Warranty, and Maintenance stages of the product: Minutes or contract of transfer (for the entire product or the right to use the product in the form of a lease); instructions for installing the software product (in the case of a complete product transfer); description of the results of installing the software product (on the customer's system in the case of a complete transfer or on the service provider's system in the case of a software product lease); training and instruction content (for the user or service lessee); description of software product testing activities after handover or software product testing on the service provider's system; description of software product debugging activities after handover or software product testing on the service provider's system; description of post-handover support activities during the service lease; description of product warranty activities after handover or during the service lease; Describes software product maintenance activities (on customer systems or on service provider systems).
Not all types of income from software production activities are eligible for tax incentives; the following types of income are exempt from tax: Income of the enterprise from implement new investment projects belongs to the field: Software product manufacturing.
Therefore, it is necessary to clarify "What constitutes a new investment project?"
a) New investment projects eligible for corporate income tax incentives as stipulated in Articles 15 and 16 of Decree No. 218/2013/ND-CP are:
– The project was granted its first Investment Certificate on January 1, 2014, and generated revenue from the date the Investment Certificate was issued.
– Domestic investment projects involving the establishment of new businesses with investment capital under 15 billion Vietnamese Dong and not included in the List of Conditional Investment Sectors are eligible for a Business Registration Certificate from January 1, 2014.
– Investment projects that were granted an Investment License or Investment Certificate before January 1, 2014, but are still in the investment process, have not yet commenced operations, have not generated revenue, and have been granted an amended Investment License or Investment Certificate from January 1, 2014, for that project.
– An investment project independent of an existing business project (including projects with investment capital under VND 15 billion and not included in the List of Conditional Investment Sectors) that has an Investment Certificate issued from January 1, 2014, to implement this independent investment project.
b) In cases where an enterprise amends or supplements the Investment License or Investment Certificate of a project that has already commenced operations without changing the conditions for enjoying incentives, the income from the amended or supplemented activities will continue to enjoy the incentives of the project before the amendment or supplementation for the remaining period, or the incentives under the expanded investment category if the incentive conditions are met as prescribed.
c) New investment projects eligible for corporate income tax incentives under the new investment category do not include the following cases:
– Investment projects formed from: division, separation, merger, consolidation, or conversion of business form in accordance with the law;
– Investment projects formed from a change of ownership (including cases where a new investment project is undertaken but still inherits the assets, business location, and business lines of the old enterprise to continue production and business operations, or acquires an existing investment project).
Businesses established or those with investment projects resulting from changes in business type, ownership transfer, division, separation, merger, or consolidation are entitled to inherit the corporate income tax incentives of the business or investment project before the change, division, separation, merger, or consolidation for the remaining period, provided they continue to meet the conditions for corporate income tax incentives.
d) For businesses currently enjoying corporate income tax incentives as newly established businesses from investment projects, these incentives only apply to income from production and business activities that meet the investment incentive conditions stated in the business's initial business registration certificate. For businesses already in operation, if there is a change to the business registration certificate but that change does not affect the fulfillment of the tax incentive conditions as prescribed, the business will continue to enjoy the tax incentives for the remaining period.
How to determine which software service activities are eligible for tax incentives.
According to Clause 12, Article 4 of the 2006 Law on Information Technology: "Software is a computer program described using a system of symbols, codes, or languages to control a digital device to perform a specific function."
According to Clause 10, Article 3 of Decree 71/2007/ND-CP: "Software services are activities that directly support and facilitate the production, installation, exploitation, use, upgrading, warranty, maintenance of software, and other similar activities related to software."
According to Clause 3, Article 9 of Decree 71/2007/ND-CP:
3. Types of software services include:
a) Services for managing, guaranteeing, and maintaining the operation of software and information systems;
b) Software quality consulting, evaluation, and assessment services;
c) Software project consulting and development services;
d) Software valuation consulting services;
e) Software technology transfer services;
f) System integration services;
g) Services to ensure the safety and security of software products and information systems;
h) Software product distribution and supply services;
i) Other software services.”
- If the company provides software services as stipulated in Article 9 of Decree 71/2007/ND-CP, it is exempt from Value Added Tax (VAT) as prescribed in Article 4 of Circular 219/2013/TT-BTC.
- If the company provides services that do not meet the conditions in Article 9 of Decree 71/2007/ND-CP, it is subject to a 10% VAT rate as stipulated in Article 11 of Circular 219/2013/TT-BTC.
The procedure required to qualify for tax incentives for software businesses.
To take advantage of these tax incentives, software companies need to take the following steps:
- Check to qualify for the offer: Ensure your business qualifies for tax incentives. This includes checking current regulations and determining if your business sector meets the eligibility criteria.
- Prepare the necessary documents: Gather and prepare the necessary documents and records to submit to the tax authorities. This includes the business registration certificate and documents related to the software business operations.
- Update the accounting system: Adjusting the company's accounting system to appropriately reflect accounting requirements for software business operations, such as separately managing taxable/non-taxable activities, separately managing activities with normal tax rates/software exports with 0% tax rate, etc., is mandatory when presenting reports to qualify for tax incentives and helps the company easily track and report taxes monthly/quarterly/annually.
Frequently Asked Questions about Tax Incentives for Software
Question:
My company was established in October 2020, with its main business being computer programming. Our primary activities include data modeling and creating entity-relationship diagrams that describe data structures and relationships in graphical form; providing key program examples; and providing test scripts. Based on Circular No. 13/2020/TT-BTTTT dated July 3, 2020, issued by the Ministry of Information and Communications, which regulates the determination of software production activities that meet process requirements, I understand that the above activities fall under the analysis and design, programming, coding, and testing stages of software. Therefore, these activities are considered software product production activities that meet process requirements. Is my understanding correct? To prove these activities, does my company need to provide all the corresponding documents for each stage, or only some of the documents mentioned?
Reply:
The Ministry of Information and Communications responded to this issue as follows: Clause 1, Article 4 of Circular No. 13/2020/TT-BTTTT dated July 3, 2020, issued by the Ministry of Information and Communications, stipulates the determination of software product manufacturing activities that meet the prescribed process: “The manufacturing activity of a software product by an organization or enterprise as stipulated in Article 3 of this Circular is determined to be a software product manufacturing activity that meets the prescribed process when, for that product, the organization or enterprise performs at least one of the two stages: Requirements definition, Analysis and design as stipulated in Clauses 1 and 2 of Article 3 of this Circular, respectively.”
Based on this regulation, businesses must perform at least one of the two stages: Requirements definition, or Analysis and design.
Article 2 of Circular No. 13/2020/TT-BTTTT stipulates: “This Circular applies to management agencies, organizations and enterprises involved in the production of software products listed in the Software Product Catalog as prescribed by the Ministry of Information and Communications.”
Based on this regulation, the enterprise's software products must be included in the list specified in Circular No. 09/2013/TT-BTTTT dated April 8, 2013, issued by the Ministry of Information and Communications, which promulgates the List of Software and Hardware/Electronic Products.
To demonstrate that software product manufacturing activities meet process requirements, businesses need to prepare documentation corresponding to each operation within the stages they have performed to prove their software manufacturing activities.
The documents to be prepared are specifically stipulated in Points a, b, c, d, e, and f of Clause 2, Article 4 of Circular No. 13/2020/TT-BTTTT.
For example, in the Analysis and Design phase, if a business performs the "data modeling" operation, then the business needs to create a document describing the "data modeling" operation.
In the document/record, the enterprise clearly states/classifies its software products according to the Software Product Catalog as stipulated in Circular No. 09/2013/TT-BTTTT.
For example: If a business produces accounting software, it needs to clearly state that its software product is Accounting Software with serial number 1.2.2.03 in Appendix 01 of Circular No. 09/2013/TT-BTTTT.
Therefore, the response from the Government Information Portal is consistent with the regulation in Circular 13/2020/TT-BTTTT, which states that "businesses must perform at least one of the two stages: Requirements definition, Analysis and design."
Circular No. 16/2014/TT-BTTTT and Circular No. 13/2020/TT-BTTTT have set out criteria and methods for determining software production activities. The circulars do not require information and communication agencies to issue certifications regarding software production activities.
The higher-level document that served as the basis for the above Circulars issued by the Ministry of Information and Communications, Decree No. 218/2013/ND-CP, also does not stipulate that information and communication agencies must issue this confirmation.
2. The above circular from the Ministry of Information and Communications stipulates that organizations, businesses, and individuals participating in software production activities "are solely responsible for the accuracy of the information in the relevant declaration documents as well as for determining their software product production activities."
Therefore, accountability for software production activities rests with the businesses. The tax authorities base their verification of business records on the Circulars of the Ministry of Information and Communications.
To explain its software production activities to the tax authorities, the company relies on the two aforementioned circulars.
It depends on the situation!
Following the regulations outlined above, if website programming activities meet the three conditions for software production, they are considered software production.
The Ministry of Information and Communications' circular stipulates that businesses are solely responsible for the accuracy of the information in their tax incentive application for software production activities and for determining whether their software production activities meet the required procedures.
Are not !
Even if the contract signed with the client is a "Software Production Contract," if the actual work does not meet the three conditions mentioned above, it will still not be considered software production.
Please refer to the Government Newspaper's response on this issue for further information.
Complying with regulations and following proper procedures not only helps you avoid legal risks but also contributes to the transparency and financial health of your business.
Implementing the above is not easy for businesses; the effective solution is to use professional services: Collaborate with financial, accounting, and tax experts to ensure you follow the correct procedures and comply with legal regulations.
See detailed information about our services in the article.