The obligation to contribute a portion of each individual’s income to the state budget is a duty of every citizen. Therefore, the Law on Personal Income Tax comes into existence to ensure the rights and responsibilities of each person.
BASIC PRINCIPLES OF PERSONAL INCOME TAX
Personal income tax is understood as the tax levied on the income received from various sources (must be taxable income in accordance with the law) of individuals and is one of important tax in Vietnam’s tax system. Personal income tax is based on three principles:
- Benefits
- Fairness
- Ability to pay taxes
In detail,
- The principle of “benefit”: Everyone in the society enjoys the country’s development achievements in terms of legal institutions, infrastructure, social welfare, security and order. Thus, everybody is obliged to contribute a portion of their income to society through tax payment.
- The principles of “fairness” and “ability to pay tax” are reflected in the fact that: people with higher income pay higher tax; people with similar income but in difficult circumstances pay lower tax; and people with low income don’t have to pay tax.
Accordingly, although individuals have different sources of incomes, not all kinds of incomes are governed by the Law on Personal Income Tax. Personal income tax only adjusts the taxable incomes. Every income system, whether levied on the basis of each type of income or total income, will be calculated on net income to accurately reflect the economic well-being of taxpayers.
Therefore, taxable incomes are determined on the basis of received incomes after deducting some of the expenses of taxpayers. In addition, personal income tax is levied on the progressive basis, i.e. the tax rate increases as the taxable amount increases. Progressive tax rates are considered as the most effective method for levying individuals according to their “ability to pay taxes”.
CALCULATION OF PERSONAL INCOME TAX
The tax calculation for individuals residing in Vietnam shall be conducted in three steps as follows:
Step 1: Determining taxable incomes
- Incomes from salaries and wages:
Taxable income = Total income received
- Incomes from capital investment:
Taxable income = Total earnings received
- Incomes from capital transfer:
Taxable Income = Sales Price – (Purchase Price + Costs)
Step 2: Determining taxable incomes
- Regular and stable income:
Assessable income = Taxable incomes – (Reduction based on family circumstances + Charity contribution + Compulsory insurance)
- Irregular, unstable income:
Assessable income = Taxable incomes
Step 3: Determining the personal income tax amount:
- Regular and stable income:
Personal Income Tax = Assessable income x partially progressive tariff (partially progressive tariff is regulated in Article 22 of the Personal Income Tax Law 2007, which was amended and supplemented in 2012)
- Irregular, unstable income:
Personal income tax = Assessable income x whole income tariff (the whole income tariff is regulated in Article 23 of the Personal Income Tax Law 2007, which was amended and supplemented in 2012).
According to Clause 4, Article 1 of Law No. 26/2012/QH13 amending and supplementing several articles of Personal Income Tax Law, reduction based on family circumstances means a sum of money deductible from pre-tax income from business, salary or wage of a resident taxpayer. Reduction based on family circumstances consists of the following two parts: reduction for the taxpayer, which is VND 9 million/ month; and reduction for each dependant of the taxpayer, which is VND 3.6 million/ month.
In Vietnam nowadays, the income gap between high-income groups and low-income groups tends to increase. Therefore, the application of personal income tax in accordance with the above principles will contribute to ensuring the rationality, fairness and efficiency of the tax policy system and limiting the widening of the gap between population classes.
PHAN LAW VIETNAM
Hotline: 1900.599.995 – 0794.80.88888
Email: info@phan.vn
