Businesses engaged in software production are entitled to tax incentives. Therefore, work business manufacturing While tax incentives may be beneficial for software, applying them to software with inherent risks could lead to significant consequences.
To clarify and ensure the application of tax incentives for software, here is a guide on how to fully define what constitutes software production activity.
Principles for determining software production activities aimed at receiving tax incentives.
The term "software production" is commonly used to refer to the activity of producing software. However, within the legal framework, the term "SOFTWARE PRODUCT PRODUCTION" is applied. In this article, the terms "software production" and "software product production" are understood interchangeably.
To determine whether a business's software-related activity constitutes software product manufacturing and is therefore eligible for tax incentives, the activity must meet certain criteria. all 3 conditions are met. The following:
Condition 1: General conditions for business registration of software production organizations
Software manufacturing businesses must have a business registration certificate; in the case of establishment under investment law, an investment registration certificate is required.
Businesses must have appropriate business lines for software product manufacturing activities according to the national business registration industry code system.
Condition 2: The software product must be included in the List of Software Products as prescribed by the Ministry of Information and Communications.
Software products must be manufactured in accordance with the List of Software Products as stipulated by the Ministry of Information and Communications.
Condition 3: The software production process must satisfy the regulations regarding the number of stages to be performed.
A complete software development process includes the following seven stages:
- Step 1: Identifying requirements
- Step 2: Analysis and Design
- Step 3: Programming, writing code
- Step 4: Software testing and verification
- Step 5: Finalizing and packaging the software product.
- Step 6: Installation, transfer, user training, maintenance, and warranty of the software product.
- Step 7: Software product release and distribution
Determining whether an activity constitutes software production requires applying the regulations in effect at the specific time, which stipulate the minimum steps that must be performed for an activity to be legally considered "software product production."
How to define software production activities
- Prior to August 18, 2020, the regulations in Circular No. 16/2014/TT-BTTTT applied: The requirement for stages in software product manufacturing is that the activity belongs to one or more stages within stages 2 to 4 of the software product manufacturing process (2. Analysis and design; 3. Programming, writing code; 4. Software testing and verification).
- From August 19, 2020 to the present, Circular No. 13/2020/TT-BTTTT has been in effect: The requirement for software product manufacturing is that businesses must perform at least one of two stages: Requirements definition, or Analysis and design.
For detailed cases, please see 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 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: This 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 code: This 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 verification: This includes tasks such as: building test scenarios, testing software units and modules; software testing; software system testing; software functional testing; software quality assurance; 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 distribution: This 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 the requirements: This 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 design: This 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 units and modules; security design, information safety design for software; customer experience interface design.
3. Programming, writing code: This 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 verification: This 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 services for 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 distribution: This includes one or more operations 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).
FAQ - Frequently Asked Questions
Businesses need to prepare the following necessary information:
- A business registration certificate or equivalent business license proves that the business's operations are legal.
- Clearly indicate to the tax authorities that the product manufactured by the enterprise falls under the category of software products as specified in Circular 09/2013/TT-BTTTT.
- Provide information and evidence to explain the software production activities of the enterprise in accordance with the guidelines of Circular 16/2014/TT-BTTTT (issued before August 18, 2020) or Circular 13/2020/TT-BTTTT (issued from August 19, 2020).
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.
Please refer to the Government Newspaper's response on this issue for further information.
Software outsourcing, if it fully meets the conditions and processes for software production, is also entitled to VAT and corporate income tax incentives in accordance with regulations.
Businesses need to determine if their outsourcing activities meet the conditions for being classified as software production activities as outlined above in order to qualify for tax incentives.
Software leasing is renting computer software licenses This is not a software service as defined by regulations, therefore this activity falls under the category of Subject to VAT at a rate of 10%.
Refer to document 10684/CT-TTHT
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GENERAL TAXES |
SOCIAL REPUBLIC OF VIETNAM |
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Number: 10684/CT-TTHT |
Hanoi, date 20 month 03 year 2018 |
Dear: CMC Technology Group Joint Stock Company
(Address: 17th Floor, CMC Tower, 11 Duy Tan Street, Dich Vong Hau Ward, Cau Giay District, Hanoi City – Tax Code: 0100244112)
In response to công văn (official letter) No. 33/CV-CMC dated March 8, 2018, from CMC Technology Group Joint Stock Company (hereinafter referred to as the Company) inquiring about tax policies, the Hanoi City Tax Department has the following opinion:
– Based on Government Decree 71/2007/ND-CP dated May 3, 2007, which details and guides the implementation of some articles of the Law on Information Technology concerning the information technology industry:
Article 3 stipulates the following:
“Article 3. Interpretation of terms
In this Decree, the following terms are understood as follows:
1. 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.
...
10. 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.
… '
Article 9 specifies the types of software products and software services as follows:
2. Types of software products include:
a) System software;
b) Application software;
c) Utility software;
d) Tool software.
d) Other software.
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;
e) Software project consulting and development services;
d) Software valuation consulting services;
d) Software technology transfer services;
e) 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.”
– Based on Circular 219/2013/TT-BTC dated March 31, 2013 of the Ministry of Finance guiding the implementation of the Value Added Tax Law and Decree No. 209/2013/ND-CP dated December 18, 2013 of the Government detailing and guiding the implementation of a number of articles of the Value Added Tax Law:
+ Clause 21 of Article 4 stipulates the subjects not subject to tax, including:
"...
Computer software includes software products and software services as defined by law.
+ Article 11 stipulates the VAT rate of 10% as follows:
Article 11. Tax rate of 10%
A 10% tax rate applies to goods and services not specified in Articles 4, 9, and 10 of this Circular.
... "
Based on the above regulations, and since the unit has not provided specific documents, the Hanoi City Tax Department responds in principle as follows:
– In the case where the Company sells software products and software services as stipulated in Articles 3 and 9 of Government Decree 71/2007/ND-CP dated May 3, 2007, if the software products and software services are computer software as defined by law, they are exempt from Value Added Tax (VAT).
– In the case where a company leases computer software licenses, and this is not considered a software service as defined in Clause 3, Article 9 of Government Decree 71/2007/ND-CP dated May 3, 2007, then this activity is subject to Value Added Tax (VAT) at a rate of 10%.
The company is requested to base its actions on the actual situation at its unit, comparing it with the regulations in Government Decree 71/2007/ND-CP dated May 3, 2007, to ensure compliance with the law. If any further issues arise, the company is requested to contact Tax Inspection Department No. 4 – Hanoi City Tax Department for clarification.
The Hanoi City Tax Department has responded to the company for their information and action./.
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Acting Director |
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.
The two aforementioned circulars from the Ministry of Information and Communications stipulate that organizations, businesses, and individuals participating in software production activities "are solely responsible for the accuracy of the information in their related declaration documents as well as for determining the nature of 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.
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 specified 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 prescribed 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."
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.
Legal regulations related to determining software production.
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.
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